4 call money market

8/9/2019 4 Call Money Market

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CALL MONEY MARKET


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Call Money Market is the most sensitive segment offinancial system.Call money is the money borrowed or lent on demand for a

short period.When money is borrowed or lent for a day, it is known ascall (overnight) money. When money is borrowed or lent formore than a day or upto 14 days, it is !otice "oney#.


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Features of Call Money Market

Part of the national money market.Day-to day surplus funds mainly of banks are traded.Short term in nature.Maturity of these loans vary from 1 to 15 days.

Lent for 1 day: Call money.Lent for more than 1 day but less than 15 days: oti!emoney.Convenient interest rate."i#hly li$uid loan repayable on demand.%n %ndia& CMM provides fa!ilities for inter-bank lendin#.Surplus suppliers of funds: '(%& S)%& L%C.


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4. Call !otice money market is becoming a pure inter/ bank market.

0. oth the borrowers and the lenders are re'uired tohave current accounts with the - so thattransactions in call market are very speedy and

efficient.2. -nterest rates in Call !otice money market are fully

market determined.

3. enders with steady inflow of funds can deploy fundson short/term basis in call market.


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Call Money Market Parti!ipants

* (hose permitted to operate both as lenders andborro+ers of !all loans:

, S!heduled and non-s!heduled Commer!ial)anks& orei#n banks Co-operative )anks/state& distri!t and urban0 D "% S(C% Primarydealers.

* (hose permitted to operate only lenders:

, D "%& S(C%& L%C '(% %C %D)% 2)23D


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CALL MONEY MARKET IN INDIA

* Commen!ed in %ndia after the %st 4orld 4ar.* arlier the si6e +as small& fe+ parti!ipants from

%ndian banks and forei#n e7!han#e banks.%ndian banks started their operations in 1859.

* Market broadened in 18 ; as L%C and '(% +ithhu#e resour!es +ere permitted to operate in !allmarkets.

* %n

* Si6e of the !all market broadened in re!entyears only.


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Working in Call Money Market Transa!tions int"is #arket in!lu$es

* Call loans %et&een s!"e$ule$' uns!"e$ule$' !o(o)erati*e an$ foreign %anks+

* Borro&ing an$ len$ing %y Dis!ount an$ Finan!e,ouse of In$ia Lt$+ -DF,I. an$ /e!urities Tra$ingCor)oration of In$ia -/TCI.+

* Len$ing %y LIC' 0TI' 1IC' IDBI an$ NABARD -onlylen$ers.+

* Call loans to t"e %ill #arket+

* Call loans for $ealing in sto!k e2!"anges an$ t"e%ullion #arket+* Call loans to in$i*i$uals of *ery "ig" status for tra$e

)ur)oses+


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3olatility in Call Money Market

Reasons

* Lar#e borro+in#s by banks on reportin# ridays to meetC33 re$uirements raise demand for li$uid resour!es and!all rates move up.

* 4hen banks e7tend their !redit operations beyond their o+nresour!es& they approa!h !all money market for meetin#market dise$uilibrium.

* 4hen institutional lenders are short of li$uidity and insteadof lendin# they start sellin# se!urities for meetin# their loanrepayment or maturity of their instruments.

* Durin# the $uarter ends +hen advan!e ta7 be!omespayable by !ompanies by !ompanies and other institutes&there is a spurt in !all rates.


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* 4hen sto!k market is buoyant& !all rates #oes up andvi!e versa.

* 4hen subs!ription to #overnment loans opens& thedemand for loans #o up and !all rates in!reases. 4hense!urities matures and are en!ashed by the publi! andprivate institutions& supply of !all loans in!reases andtherefore !all rates !ome do+n.

* Li$uidity !risis also result in soarin# !all rates.* (he market e7perien!es some re#ular seasonal

!han#es it is normally ti#hter durin# the busy season/

September0. %t is mu!h ti#hter in 2pril.* )y its nature& the !all money rate is hi#hly volatile& in188;-81+as ; and =5 in 1881-8>& 1885-89


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Measures for re$u!ing *olatility of Call Rates

* )y allo+in# lar#e number of parti!ipants& si6e of !all moneymarket in!reases& ne+ instruments have been introdu!edresultin# in better !ompetition in the market.

* Settin# up of D "% as market maker and S(C% for tradin# inse!urities have played an important role in redu!in#

flu!tuations in !all rates.* %ntervention of 3)% in !ontrollin# spe!ulation by pumpin# in

money +hen re$uired daily durin# re!ession.* 3)% also provides refinan!e fa!ility to banks in !all market.

* 3)% also advises !ommer!ial banks a#ainst usin# !all loanmoney in normal bankin# operations.* Cash 3eserve ratio /C330 is an important tool +ith 3)%& +hi!h

has often been used for influen!in# li$uidity in the finan!ialsystem. %f C33 in!reases !redit s$uee6e and redu!esli$uidity& thus raisin# !all money rates and vi!e versa.


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Treasury Bills Market


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(reasury )ills or (-)ills are the promissory notes or a kind of finan!ebill issued by the #overnment under dis!ount for a fi7ed period& note7tendin# beyond one year& +ith a promise to pay the amount statedtherein to the bearer of the instrument. (-bills have 81-day& 1=>-day or1> month maturities.

Dis!ountingDis!ounti ng 4hen an investor pays less for the se!urity than it +illbe +orth +hen it matures& and the in!rease in pri!e provides a return.(his is !ommon to short-term se!urities be!ause they often mature

before the issuer !an mail out interest !he!ks.For example: ?ou pay 3s. 8=5; for a 81-day (-bill. %t is +orth 3s.

1;&;;; at maturity. 4hat is its annuali6ed yield@

i yt

=F − P

P×

365

n

i yt

=$10,000 − $9,850

$9,850×

365

91= 0.0611 = 6.11%


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Features of T(Bills

* ,ig"ly li4ui$ be!ause money !an be realised any time by theinvestor.

* Sin!e ()s are issued by the 3)% and on the behalf of the !entralovernment there is absolutely no risk of $efault .

* Rea$y A*aila%ility : on any day& !ommer!ial bank or other institutions!an invest their temporary surpluses in ()s.

* (he transa!tion !ost is mainly e$ual to the differen!e bet+een buyin#and sellin# rates of D "%.

* Dis!ount rate of ()s does not flu!tuate mu!h. Durin# 1885-89 and thefirst half of 1889-8 & the yield of ()s remained at around 1>-1Aper!ent.

* or measurin# Statutory Lendin# 3atio /SL30 of !ommer!ial banks.(hese are an eli#ible se!urity.

* Balue of a finan!ial instrument depends on its li$uidity& safety andyield. ()s are not only hi#hly li$uid and hi#hly safe& but the yield on()s also varies +ithin a very narro+ ran#e. 2s a result& there is verylittle s!ope of !apital depre!iation in !ase of ()s.


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5arti!i)ants of TB Market

* (he 3eserve )ank of %ndia.

* (he State )ank of %ndia.* Commer!ial )anks.* State overnments and other approved bodies.* Dis!ount and inan!e "ouse of %ndia /D "%0.

* (he Se!urities (radin# Corporation of %ndia /S(C%0.*


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Ty)es of Treasury Bills

* Or$inary T( Bills(hese are issued to publi!& banks and other institutions forenablin# the !entral bank to raise resour!es for its short termfinan!ial needs.

* A$ ,o! T(Bills

(hese are issued in favour of 3)% only. (hese are not soldthrou#h tenders or au!tions. (he 3)% is authorised to issue!urren!y notes a#ainst it. (hese are not marketable in %ndiabut the investor !an sell them ba!k to 3)%. (he purposebehind it is: , 3eplenish !ash balan!e of the Central overnment. , Provide an investment outlet for the state #overnment&

semi #overnment departments and forei#n !entral bank. , Dis!ount 3ate lu!tuations !aused by state #overnment

intervention are avoided.


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5erio$i!ity of T(Bills

* %nitially to+ards irst 4orld 4ar& (-)ills of A&9&8 and 1> months.* 2fter the !ommen!ement of 3)% in 18A5& > types of )ills +ere there:-

(2P )ills and %ntermediate bills& both of 81 days maturity.* %n ov. 18=9& Chakraborthy Committee re!ommended 1=> days (-

)ills be!ause 81 days (-)ills failed to yield.

* %n May 188 & 3)% introdu!ed 1 days (-)ills.* = days (-)ills +ere introdu!ed.* Durin# 1889-8 & 3)% dis!ounted 81 days 2d "o! (-)ills issued on the

behalf of 3)%.* 1 & 81& 1=> and A9 days (- )ills are issued on +eekly and fortni#htly

au!tion basis 1=> (-)ills on 4ednesday pre!edin# non-reportin#riday and A9 on 4ednesday pre!edin# reportin# riday.

* rom 2pril 1& 188=& all (-bills are issued on a fi7ed notified amount by3)%.


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5ro!e$ure of issuing T(Bills

* 3)% issues 81 days (-)ills on tap basis throu#hout the +eek. 2ll the other(-)ills are au!tioned on fortni#htly basis.

* 3)% notifies it +ith the help of Press 3eleases in ne+spapers mentionin#the date of au!tion and the last date of submission of tenders.

* %nvestors are permitted to submit more than one bid throu#h separatetenders.

* 4ithin > hrs. of announ!ement& the su!!essful bidders are e7pe!ted to!olle!t letter of a!!eptan!e from 3)% and deposit ba!k +ith a !he$ue on3)%.

* Commer!ial )anks !an also deals on the behalf of investor !lients.* Pur!hases and sales of ()s take pla!e throu#h the subsidary eneral

Led#er /S L0 2!!ount maintained by 3)% for investors like Commer!ial)anks& D "%& S(C% and other finan!ial institutions. %nvestors +ho do noten oy S L a!!ount fa!ility& buy and sell ()s throu#h D "%.

* Pur!haser of () from D "% tenders at the D "% !ounters& a!he$ue isdra+n on 3)% for the pur!hase pri!e. %n return he !olle!ts a duly si#nedES L (ransfer ormF from D "%.


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* %n !ase of sale to D "%& the seller tenders at D "% !ounter aduly !ompleted and si#ned GS L (ransfer ormH as transferor.%n return he !olle!ts from D "% a !he$ue dra+n on 3)%.

Yiel$ on T( Bill or T(Bill Rates%t is the rate of dis!ount at +hi!h (-)ills are sold by the 3)%.

)e!ause of hi#h li$uidity and hi#h safety& treasury bill rate is

#enerally the lo+est rate of interest in the entire interest ratestru!ture in the !ountry. (he effe!tive yield depends on:* (he rate of dis!ount.* Differen!e bet+een the pri!e at +hi!h they are sold and their

redemption value* (ime period of maturity.


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I#)ortan!e of T(BillsI#)ortan!e to t"e Issuer 6 1o*ern#ent* or raisin# short , term funds for meetin# temporary bud#et defi!its.* ovt. !an mop up e7!ess li$uidity in the e!onomy throu#h issue of ()s.* %ts issuan!e !anHt be monetorised I their issue does not lead to inflationary pressure.I#)ortan!e to t"e 5ur!"aser 6 In*estor * Li$uidity at short noti!e be!ause D "% offers daily t+o,+ay $uotes& they !an be

dis!ounted from 3)%.* %nvestments are kept in non-earnin# !ash to the minimum and supplementin# it +ith

()s +hi!h earn a return.* li#ible se!urities for determinin# statutory li$uidity re$uirement /SL30 of banks. Mostinvestments in ()s is by !ommer!ial banks.

* %nstrument of meetin# mismat!h bet+een realisation of assets and payments ona!!ount of liabilities.

* Provides !omplete safety re#ardin# the payment of interest I the repayment of

prin!ipal.* ()s are available on tap basis as +ell as fortni#htly au!tions& they fa!ilitate properspread of asset mi7 +ith different maturities.

* 2 hed#e a#ainst volatility of !all loan market and interest ate flu!tuations.* (he yield on A9 -day ()s is a ben!hmark for several floatin# rate bond issues that

have been made by various publi! se!tor undertakin#s.


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COMMERCIAL BILL/ MARKET :- 2 bills of e7!han#e is a +ritten instrument!ontainin# as un!onditional order& si#ned by the maker /!alled dra+er0&dire!tin# a !ertain person /!alled dra+ee0 to pay a !ertain sum of moneyspe!ified in the instrument& only to& or to the order of& a !ertain person /!alledpayee0& or to the bearer of the instrument on demand or at the e7piry of thespe!ified period. %t is a ne#otiable instrument. %ts li$uidity is ne7t to !ash& !allloans and treasury bills.

Characteristics of Bills of Exchange* Lar#e number of transa!tions supported by #enuine trade bills.* 4ell established and +ell spread market.* )oth borro+ers and lenders must sub e!t them to stri!t finan!ial

dis!iplines.* Commer!ial banks may use )ills of e7!han#e for providin# !redit to their

!ustomers.* Market have abundant fa!ilities for redis!ountin# the bills.

* )ills are dis!ounted and redis!ounted lar#e number of times.* Central bank should be ready to redis!ount the bill throu#hout the year.* %ntermediaries to operate +ith fine mar#in and help in smooth fun!tionin#

of bills market.* ffi!ient !redit investi#atin# a#en!ies to investi#ate the !redit+orthiness

of various parties.


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Ty)es of Bills of E2!"ange1. Demand )ill or Si#ht )ills , (hese are the bills +hi!h are immediately

payable on presentation to the dra+ee.>. 'san!e bill or time bill , )ills payable on the date spe!ified on the bill or

immediately after the e7piry of time period mentioned on the bills.A. Clean )ills , %n !ase do!uments a!!ompanyin# the bill are to be delivered

a#ainst a!!eptan!e of the bill by the dra+ee& it is a !lean bill.. Do!umentary )ill , )ills a!!ompanied by do!uments of the title of the bill

su!h as rail+ay re!eipt& bill of ladin#& et!.5. %nland )ills , (hese bills are dra+n or made in %ndia and are payable in %ndia

and dra+n on any person +ho is resident in %ndia.9. orei#n )ills , %t in!ludes bills dra+n outside %ndia and payable in %ndia by a

party outside %ndia& dra+n outside %ndia and payable outside %ndia by aresident or non resident of %ndia and bill dra+n in %ndia but made payableoutside %ndia.

. 7port )ill , )ills dra+n by e7porters on a party outside %ndia.=. %mport )ill , )ills dra+n on importers in %ndia by the e7porters outside %ndia.8. "undis , %ndi#enous bills of e7!han#e and promissory notes for finan!in#

a#ri!ulture and inland trade.1;. enuine (rade )ill , )ills of e7!han#e by #enuine trade or !ommer!ial

transa!tions of pur!hase and sale.


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5ro!ess of Bill &riting an$ Dis!ounting

* 2 #enuine trade bill !omes into e7istan!e +hen a seller sells

#oods to buyer.* (he seller needs money on !ompletion of the sale and buyer

+ould like to pay out of the earnin#s of his pur!hase.* (o satisfy the re$uirement of both parties& the seller dra+s a bill

of a#reed maturity on buyer +ho a!!epts the bill& thusa!kno+led#in# his liability to pay on due date.* (he seller !an take the a!!epted bill to the bank for dis!ountin#

+ithin his san!tioned limit& or to an ) C for outside !onsortiumdis!ountin# and re!eives ready !ash in return.

* (he differen!e bet+een bill value of the sale transa!tion and theamount re!eived by seller is kno+n as dis!ount !har#e +hi!h is!al!ulated at a rate per!ent per annum on the maturity value.


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I#)ortan!e of Co##er!ial Bill Market

* )ill finan!in# is the prevalent method of meetin# !redit needs

of trade and industry.* (hese are self li$uidatin# in !hara!ter be!ause they have a

fi7ed tenure.* (hese have hi#h level of li$uidity , ne7t only to !ash& !all

loans and treasury bills* %t imposes finan!ial dis!ipline on borro+ers as its paymentmust be made on the due date of the bill.

* )anks !an meet their short term li$uidity re$uirements byredis!ountin# these bills.

* 7isten!e of bill market enables banks and other institutionsto invest their surplus funds profitability by sele!tin#appropriate maturities.

* %mparts fle7ibility to money market by evenin# out li$uidity +ith

bankers.


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Yiel$ in Co##er!ial Bills Market


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(ypes of )ill market rates1. )a6ar )ill rate : the rate at +hi!h shroffs and other money lenders used to dis!ount

bills of small traders.

>. S)% hundi rate : S)% used to dis!ount hundis to indi#enous bankers.A. Commer!ial banksH bill finan!e rate : rate at +hi!h !ommer!ial banks !an #et bills

dis!ounted from ea!h other.. S)% dis!ount rate : 2t this rate S)% dis!ounts first !lass usan!e bills.

5. )ank rate : (he rate at +hi!h the 3)% redis!ounts eli#ible bills from !ommer!ial

banks.9. D "% rate : the rate at +hi!h the D "% buys and sells eli#ible bills from !ommer!ial

banks and other approved institutions. D "% $uotes both for buyin# and sellin#rates.


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Certifi!ates of De)osits


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Certifi!ates of Deposits /CD0

2 CD is a ne#otiable promissory note& se!ure and short term /upto a year0 in nature. 2CD is issued at a dis!ount to the fa!e value& the dis!ount rate bein# ne#otiated

bet+een the issuer and the investor. %t is a re!eipt #iven to the depositor by a bank orany other institution entitled to issue CD for funds deposited +ith it. CDs are issuedby )anks& +hen the deposit #ro+th is slu##ish and !redit demand is hi#h and ati#htenin# trend in !all rate is evident. CDs are #enerally !onsidered hi#h !ostliabilities and banks have re!ourse to them only under ti#ht li$uidity !onditions.

Features of CDs* CDs !an be issued to individuals& !orporations& !ompanies& trusts& funds& asso!iates&

et!.* 3%s !an subs!ribe to CDs on non-repatriable basis.* CDs attra!t stamp duty as appli!able to ne#otiable instruments.* )anks have to maintain SL3 and C33 on the issue pri!e of CDs. o !eilin# on the

amount to be issued.* (he minimum issue si6e of CDs is 3s.5 lakhs and multiples thereof.* CDs are transferable by endorsement and delivery.* (he minimum lo!k-in-period for CDs is 15 days.


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uidelines issued by 3eserve )ank of %ndia

1. (hese !an be issued by s!heduled !ommer!ial banks and spe!ified 2ll , %ndiainan!ial %nstitutions& namely& %D)%& %C%C%& % C%& S%D)%& %3D2& et!.

>. %t !an be issued to individuals& asso!iations& !ompanies& !orporations& trust funds&et!.

A. (hese attra!t stamp duty as appli!able to ne#otiable instruments.. )anks have to maintain SL3 and C33 on issue pri!e if CDs. (here is no !eilin# on

the amount of CDs to be issued.5. (he minimum amount for +hi!h a CD +as permitted to be issued +as also

redu!ed from 3s. >5 lakhs to 3s. 5 lakhs.9. (hese !an be no+ transferred to any time after issue& follo+in# the pres!ribed

rules..

redu!ed from 3s. 1; lakhs to s. 5 lakhs. Cds above 3s. 5 lakhs !an be issued inmultiples of 3s. 1 lakh.

=. %nitially& the ma7imum amount for +hi!h a bank +as permitted to issue a CD +asfi7ed at 1J for its fortni#htly a##re#ate avera#e deposits. (his limit +as raised to1;J in 188> and +as subse$uently abolished.


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?ield on Commer!ial Deposits


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Commer!ial paper


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%ntrodu!tion

Commer!ial Paper /CP0 is an unse!ured money market instrument issued in the formof a promissory note. (hese are debt instruments issued by !orporate for raisin#

short-term resour!es from the money market. CP +as introdu!ed in %ndia in 188;+ith a vie+ to enablin# hi#hly rated !orporate borro+ers to diversify their sour!es ofshort-term borro+in#s and to provide an additional instrument to investors.

Parti!ipants in %ssue of !ommer!ial paper * "i#hly rated !orporate borro+ers& primary dealers /PDs0 and satellite dealers /SDs0

and all-%ndia finan!ial institutions / %s0 +hi!h have been permitted to raise resour!esthrou#h money market instruments under the umbrella limit fi7ed by 3eserve )ank of%ndia are eli#ible to issue CP.

* 2 !ompany shall be eli#ible to issue CP provided - /a0 the tan#ible net +orth of the!ompany& as per the latest audited balan!e sheet& is not less than 3s. !rore /b0 the+orkin# !apital /fund-based0 limit of the !ompany from the bankin# system is not lessthan 3s. !rore and /!0 the borro+al a!!ount of the !ompany is !lassified as aStandard 2sset by the finan!in# bankKs.

* CP may be issued to and held by individuals& bankin# !ompanies& other !orporatebodies re#istered or in!orporated in %ndia and unin!orporated bodies& on-3esident%ndians / 3%s0 and orei#n %nstitutional %nvestors / %%s0. "o+ever& investment by %%s+ould be +ithin the A; per !ent limit set for their investments in debt instruments.


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3atin# and issue re$uirement

* 2ll eli#ible parti!ipants should obtain the !redit ratin# for issuan!e ofCommer!ial Paper& from either the Credit 3atin# %nformation Servi!esof %ndia Ltd. /C3%S%L0 or the %nvestment %nformation and Credit3atin# 2#en!y of %ndia Ltd. /%C320 or the Credit 2nalysis and3esear!h Ltd. /C23 0 or the Duff I Phelps Credit 3atin# %ndia Pvt.Ltd. /DC3 %ndia0 or su!h other !redit ratin# a#en!y as may bespe!ified by the 3eserve )ank of %ndia from time to time& for thepurpose. (he minimum !redit ratin# shall be P-> of C3%S%L or su!he$uivalent ratin# by other a#en!ies. urther& the parti!ipants shallensure at the time of issuan!e of CP that the ratin# so obtained is!urrent and has not fallen due for revie+.

* CP !an be issued in denominations of 3s.5 lakh or multiples thereof.


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eatures of CP

* CP !an be issued for maturities bet+een a minimum of 15 days and ama7imum up to one year from the date of issue. %f the maturity date is aholiday& the !ompany +ould be liable to make payment on the immediatepre!edin# +orkin# day.

* CP !an be issued only in a demateriali6ed form throu#h any of thedepositories approved by and re#istered +ith S )%.CP !an be held only indemateriali6ed form.

* CP +ill be issued at a dis!ount to fa!e value as may be determined by theissuer.

* )anks and 2ll-%ndia finan!ial institutions are prohibited from under+ritin# or!o-a!!eptin# issues of Commer!ial Paper.

*


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T"e En$

4 call money market

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