Money Market

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Prof. Mahesh

5/28/12

Money market is a short term credit market or a market for short term funds. It deals in monetary assets whose period of maturity is less than or up to one year.

Prof. Mahesh

5/28/12

Characteristics
Dualistic

character Seasonal variations in business Insufficiently developed

Prof. Mahesh

5/28/12

Functions
Provide

a balancing mechanism to even out demand and supply of short term funds Provide a focal point for central bank intervention for influencing liquidity Provide access to suppliers and users of short term funds to fulfill their needs

Prof. Mahesh

5/28/12

Features of a developed money market

Highly

organised banking system Presence of a central bank Availability of proper credit instruments Ample resources Demand and supply of funds Existence of sub-markets

Prof. Mahesh

5/28/12

Benefits of efficient money market

It

provides a stable source of funds to banks in addition to deposits It encourages the development of non-bank intermediaries It helps for the development of government securities market

Prof. Mahesh

5/28/12

Efficient Money market helps financial system for

Development

of trade and industry Development of capital market Smooth functioning of commercial banks Effective central bank control Formulation of monetary policy Source of finance to government

Prof. Mahesh

5/28/12

Call Money Market

Is

an integral part of the Indian money market where day-to-day surplus funds (mostly of banks) are traded. The loans are of short-term duration (1 to 14 days). Money lent for one day is called call money; if it exceeds 1 day but is less than 15 days it is called notice money. Money lent for more than 15 days is term money The borrowing is exclusively limited to banks, who are temporarily short of funds.

Prof. Mahesh

5/28/12

 Call

loans are generally made on a clean basis- i.e. no collateral is required The main function of the call money market is to redistribute the pool of day-to-day surplus funds of banks among other banks in temporary deficit of funds The call market helps banks economise their cash and yet improve their liquidity It is a highly competitive and sensitive market It acts as a good indicator of the liquidity position
Prof. Mahesh 5/28/12

Participants in Call Money Market

Those

who can both borrow and lend in the market RBI , banks and primary dealers Once upon a time, select financial institutions viz., IDBI, UTI, Mutual funds were allowed in the call money market only on the lenders side These were phased out and call money market is now a pure inter-bank market (since August 2005)

Prof. Mahesh

5/28/12

Link between call money market and other financial markets Inverse relationship between call rates and
short-term money market instruments The large issue of government securities affects the call rate Rise in CRR affects the call money rate

Prof. Mahesh

5/28/12

Call Rate
MIBID/MIBOR

Prof. Mahesh

5/28/12

Bill Market

Treasury Bill market- Also called the T-Bill market

These bills are short-term liabilities (91-day, 182-day, 364-day) of the Government of India It is a promise to pay the stated amount after expiry of the stated period from the date of issue They are issued at discount to the face value and at the end of maturity the face value is paid The rate of discount and the corresponding issue price are determined at each auction RBI auctions 91-day T-Bills on a weekly basis, 182day T-Bills and 364-day T-Bills on a fortnightly basis on behalf of the central government

Prof. Mahesh

5/28/12

Features of T-Bills
Highly

liquid as they are of shorter tenure Eligible for inclusion in the securities for SLR purposes Any person in India including individuals, Firms, Companies, Corporate bodies, Trusts and Institutions can purchase Treasury Bills T bills are available for a minimum amount of Rs.25000 and in multiples thereof They are available in both Primary and Secondary market Treasury Bills are issued in the form of SGL entries in the books of RBI
Prof. Mahesh 5/28/12

Advantages
Tax Deducted at Source (TDS) Zero default risk as these are the liabilities of GOI Liquid money Market Instrument Active secondary market thereby enabling holder to meet immediate fund requirement
No

Prof. Mahesh

5/28/12

Commercial bills market

Market

for short term bills generally of 3 months duration Device for providing short term finance to trade and industry Used to finance the transactions in goods taking place between different firms Originate when goods are sold on credit

Prof. Mahesh

5/28/12

Commercial bills
Bills

of exchange are negotiable instruments, drawn by the seller (drawer) of the goods on the buyer (drawee) of the goods for the value of the goods delivered. These bills are known as trade bills. Trade bills are called commercial bills when they are accepted by commercial banks. Further commercial banks can rediscount the bill with other commercial banks

Prof. Mahesh

5/28/12

Classification
bill payable on demand Time bill payable after a definite period Inland bill Foreign bill -Export bills -Import bills
Demand

Prof. Mahesh

5/28/12

Certificate of Deposit(CD)
CDs

are negotiable short term instruments in bearer form issued by commercial banks and financial institutions. It has specific maturity similar to FDs. There is no ceiling on CDs issue. It attracts stamp duty. It can be issued to individuals, corporates, trusts, etc. and to NRIs. CDs are issued at discount to the face value. Banks cannot buyback the CD before maturity. Banks cannot issue loan Mahesh Prof. against CDs. 5/28/12

 Minimum

maturity period is 7 days. CDs should be issued in demat form. Minimum issue is for Rs.1Lakh

Prof. Mahesh

5/28/12

Commercial Paper
Commercial

paper is an unsecured promissory note issued with a fixed maturity by a company approved by RBI, issued in bearer form and issued at discount to the face value determined by the issuing company.

Prof. Mahesh

5/28/12

 Introduced

in 1990 provides short term source of finance to companies with good credit rating

Prof. Mahesh

5/28/12

Participants
Issuers

- Private sector and public sector companies, non banking co etc. Investors - Individuals, banks, corporates, NRIs etc.

Prof. Mahesh

5/28/12

Features
Issued

with a fixed maturity It is an unsecured corporate debt Normally issued at discount to the face value Freely transferrable Issuer promises to pay the buyer a fixed amount after a future period but pledges no assets, only liquidity and established earning power to guarantee that promise. It can be issued by a company to investors through banks or merchant bankers
Prof. Mahesh 5/28/12

Advantages
Simplicity

easy documentation Flexibility maturities can be determined by the issuing company Easy to raise long term capital High returns

Prof. Mahesh

5/28/12

Conditions
Min

networth: Rs.5 Cr Can be issued to 100% of working capital limit Maturity period: 7 days to 1 year Debt/equity ratio of not more than 1.5 Current ratio not more than 1.33 Company should be listed on any stock exchange Min amount Rs.5 Lacs and min issue size is Rs.1Crore
Prof. Mahesh 5/28/12

Procedure
A

resolution has to be passed by BoD approving CP issue Application to RBI together with a certificate from credit rating agency The company has to select an Issuing and Paying Agent(IPA) which would be a bank Every CP issue has to be reported to RBI through IPA Issue of commercial paper should be completed within 2 weeks from the date of approval of RBI Issue may be spread over 2 weeks on
Prof. Mahesh 5/28/12

Secondary market for CPs

Mutual

funds and banks are participants

Prof. Mahesh

5/28/12

Hurdles in the development of CP market in India institutional investors like Non-banking

LIC,GIC and UTI are not big buyers in this market There is no active secondary market Stamp duty levy make CPs less attractive Absence of RTGS

Prof. Mahesh

5/28/12