basics of indian money market

8/8/2019 Basics of Indian Money Market

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Presented by:

AmarishA. Agashe (02)

Mayur K. Bawankar (04)

Amey D. Bhagat (05)

AmrutaV. Tirodkar (37)

PrachiV. Khochare (56)

GROWTH OF MONEY MARKET INGROWTH OF MONEY MARKET IN

INDIA.INDIA.


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Money Markety Money market is a mechanism which deals with lending and

borrowing of short term funds.

y Banks and other financial institutions are the major players ofthe money market with important sectors like the industry,services and agriculture as their customers.

y The money market is under the control of the Reserve Bank

of India.

y The major function of the money market is to provideliquidity.


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Money Market

y Post reforms period in India has witnessed tremendous

growth of the Indian money markets with Decision of the

government to allow the private sector banks to operate

y Money market denotes inter-bank market where the banks

borrow and lend among themselves to meet the short term

credit and deposit needs of the economy

y Market forces generally indicate the need for borrowing or

liquidity and the money market adjusts itself to such calls


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Money Market

y To overcome the liquidity crunch in the Indian money

market, the RBI has released more than Rs 75,000 crore with

two back-to-back reductions in the CRR in 2008-09

y The money market has now also linked with the FOREX

market, through the process of covered interest arbitrage


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Mutual Funds

y Mutual Fund is an instrument of investing money that pools

money from investors and invests it in stocks, bonds, short-

term money market instruments and other securities

y Money market mutual funds (mmmfs) were introduced in

April 1991 to provide an additional short-term avenue for

investment and bring money market investment within the

reach of individuals


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Advantages

y An investors money is invested by the mutual fund in a

variety of shares, bonds and other securities

y It is less expensive to invest in a mutual fund

yInvestors get regular information on the value of yourinvestment in addition to disclosure on the specific

investments made by your scheme and the fund manager's

investment strategy and outlook.

y

Mutual fund allows investors to liquidate their holdings asand when they want.


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Disadvantages

y The mutual fund industries charge extra cost under layers of

jargon

y Funds have small holdings across different companies, high

returns from a few investments often dont make muchdifference on the overall return.

y Sometimes may gain less than if had invested directly in a

single security


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Call money market.

y A new concept of Call Money Market had been included by

Sukhumoy Chakravarty Committee, which was set up in

1982 to review the working of the monetary system.

y

Call and notice money market refers to the market forshort -term funds ranging from overnight funds to funds for

a maximum tenor of 14 days.

y The size of the market for these funds in India is between Rs

60,000 million to Rs 70,000 million, of which public sectorbanks account for 80% of borrowings and foreign

banks/private sector banks account for the balance 20%.


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Call Money Market

y Non-bank financial institutions like IDBI, LIC, and GIC etc

participate only as lenders in this market

y The participants in the call markets increased in the 1990s

yThen from 1991 onwards, corporates were allowed to lendin the call markets

y In 1996, PDs apart from DFHI and STCI were allowed to

lend and borrow directly in the call markets

y The minimum amount corporates had to lend was reducedfrom Rs. 20 crore, in a phased manner to Rs. 3 crore in 1998


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Recommendations to CMM

y The Chakravarty Committee recommended that additional

non-bank participants may be allowed to participate in call

money market.


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Participants in the CMMy As lenders & borrowers-

y Banks and institutions such as commercial banks, both Indian andforeign, SBI, Cooperative Banks,DFHL and Securities TradingCorporation of India (STCI).

y As lenders-y LIC, UTI, General Insurance Corporation (GIC), IDBI,NABARD,

specified institutions already operating in bills rediscounting market,and entities/corporates/mutual funds.

y RBI withdrew the permission of non banking institution to play inmoney market wef 6th Aug 2005

y The corporates which were allowed to route their transactionsthrough PDs, were phased out by end June 2001.


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No ofparticipants in CMM

y As stated in the report of the Technical Group on Phasing

Out ofNon-banks from Call/Notice Money Market, March

2001--

Category Bank PD FI MF Corporate Total

I. Borrower 154 19 - - - 173

II. Lender 154 19 20 35 50 277


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Factors influencingCMM rates

y On the supply side--

y The call deposit mobilization of banks, capital flows, and banks

reserve requirements

y

on the demand side--y Call rates are influenced by tax outflows, government

borrowing programme, seasonal fluctuations in credit off take.


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Treasury Bills (T-Bills)y Treasury bills, commonly referred to as T-Bills are issued by

Government of India against their short term borrowing

requirements

y Treasury bills are short-term money market instrument that

mature in a year or less than that

y T-Bills are discounted securities and their purchase value is less than

the face value. The Purchase value is determined by a bidding

process, that too in auctions

y At maturity the government pays full face value to the investor


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Treasury Bills (T-Bills)

y At present, the Government of India issues three types of

treasury bills through auctions, namely, 91-day, 182-day and

364-day.

y There are no treasury bills issued by State Governments

y Treasury bills are available for a minimum amount of

Rs.25,000 and in multiples of Rs. 25,000


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Treasury Bills (T-Bills)

y Banks, Primary Dealers, State Governments, Provident

Funds, Financial Institutions, Insurance Companies,NRIs can

invest in T-Bills

y Treasury Bill is highly liquid money market instruments and

also it is one of the safest money market instruments with

very less market risk


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Commercial Paper

y Commercial Paper (CP) is an unsecured, negotiable money

market instrument issued in the form of a promissory note.

y It was introduced in India in 1990.

y Corporate, primary dealers (PDs) and the All-India FinancialInstitutions (FIs) are eligible to issue CP.

y CP can be issued for maturities between a minimum of 15

days and a maximum up to one year from the date of issue.

y CP can be issued in denominations of Rs.5 lakh or multiples

thereof.


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y Only a scheduled bank can act as an IPA for issuance of CP

y Individuals, banking companies, other corporate bodies

registered or incorporated in India and unincorporatedbodies,Non-Resident Indians (NRIs) and Foreign

Institutional Investors (FIIs) etc. can invest in CPs

y Commercial papers yield higher returns than T-bills


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Issuer:

y Every issuer must appoint an IPA for issuance of CP.

y The issuer should disclose to the potential investors its

financial position as per the standard market practice.y After the exchange of deal confirmation between the

investor and the issuer, issuing company shall issue physical

certificates to the investor or arrange for crediting the CP to

the investor's account with a depository.y Investors shall be given a copy of IPA certificate to the effect

that the issuer has a valid agreement with the IPA and

documents are in order (Schedule III).

Role and responsibilities of the Issuer/Issuing and

PayingAgent and Credit RatingAgency


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Issuing and Paying Agenty IPA would ensure that issuer has the minimum credit rating

as stipulated by the RBI and amount mobilized through

issuance of CP is within the quantum indicated by CRA for

the specified rating.y IPA has to verify all the documents submitted by the issuer

viz., copy of board resolution, signatures of authorized

executants (when CP in physical form) and issue a certificate

that documents are in order. It should also certify that it has avalid agreement with the issuer (Schedule III).

y Certified copies of original documents verified by the IPA

should be held in the custody of IPA.


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C

redit Rating Agencyy Code of Conduct prescribed by the SEBI for CRAs for

undertaking rating of capital market instruments shall beapplicable to them (CRAs) for rating CP.

y Further, the credit rating agency have the discretion to

determine the validity period of the rating depending upon itsperception about the strength of the issuer. Accordingly, CRAshall at the time of rating, clearly indicate the date when therating is due for review.

y

While the CRAs can decide the validity period of credit rating,CRAs would have to closely monitor the rating assigned toissuers vise-a-vise their track record at regular intervals andwould be required to make its revision in the ratings publicthrough its publications and website


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Growth of money market in Indiay Money Market is the mechanism which deals with lending &

borrowing of short term funds.

y Govt. allowed the private sectors banks to operate providing

healthy competition in market resulting in fair improvement

in their functioning.

y Money market denotes the interbank market where bankborrow & lend among themselves to meet short term credit

& deposit needs of the economy.

y Helps the banks tide over temporary mismatch of funds with

them.

y Provides the avenue to the players in the market to strike the

equilibrium between the surplus funds with lenders &

required funds from borrower.


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y Important function: Provide the focal point ofinterventions of RBI to influence the liquidity in financial

system & implement other monetary policy measures.y Depending on the economic situation & available market

trends i.e.

In liquidity crunch RBI has option to reduce cash reserve

ratioy The recent RBI has relesed Rs.75,000 Crore in theCRR.

y The corporate sectors issues fix deposits to public forshorter duration contributing to money market

mechanism selectively.y Money market is linked with foreign exchange market in

which forward premium act as bridge in betweendomestic & foreign rates.


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Diverse Functions:y Instead of ensuring the money market in India regulates

the flow of credit & credit rate, the mechanism hasemerged the important policy tool with govt & RBImonetary policy, money supply, credit creation &control, inflation & overall economic policy of state.

y

Monetary policy has long term perspective & aims atcorrecting the imbalance in economy.

y Credit policy & Monetary policy both complement eachother to achieve long term goals determined by govt.

y

Inflation is one of the serious economic problem. Moneymarket rate plays the important role in controlling theprices.

y Higher rates reduces liquidity & vice-versa.


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Future of open Market:y Financial openness is said to be a situation under which

residents of one country are in a position to trade theirassets with the resident of another country.

y In other words It is the financial integration of two ormore economies.

y The idea is not only to regulate economy & moneymarket for overall economic development but alsoattract more & more foreign capital in to the country.

y Foreign investment results in increased economicactivity, income & employment generation in the

economy.y It has the mixed effects, growth rates of country has

scored new high level around 20% where it is havingrelatively lesser growth of social sector.

basics of indian money market

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