fm (money market)

8/3/2019 FM (Money Market)

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Recent

Development

Features

Objective

Importance

Composition

InstrumentsStructure

Disadvantage

Characteristic

Features

What


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As per RBI definitions A market for short termsfinancial assets that are close substitute for money,facilitates the exchange of money in primary andsecondary market

The money market is a mechanism that deals with thelending and borrowing of short term funds (less than oneyear)

A segment of the financial market in which financial

instruments with high liquidity and very short maturitiesare traded


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Transaction have to be conducted without the helpof brokers

It is not a single homogeneous market, it comprisesof several submarket like call money market,

acceptance & bill market

The component of Money Market are the commercialbanks, acceptance houses & NBFC (Non-bankingfinancial companies)

In Money Market transaction can not take placeformal like stock exchange, only through oralcommunication, relevant document and writtencommunication transaction can be done


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To provide a reasonable access to users of short-term

funds to meet their requirement quickly, adequately at

reasonable cost

To provide a parking place to employ short term

surplus funds


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Development of trade & industry

Development of capital market

Smooth functioning of commercial banks

Effective central bank control

Formulation of suitable monetary policy

Non inflationary source of finance to government


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CallMoney

CommercialBills

AcceptanceMarket

Treasury

Bill


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Treasury bills CommercialBills

Money at callPromissory

notes

A variety of instrument are available in a developedmoney market

In India till 1986, only a few instrument were available


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Some new instruments are:

MoneyMarket

CommercialPapers

Certificateof deposit

Repoinstrument

RepurchaseAgreement

Banker'sAcceptance

Mutual Fund


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It is a short term unsecured loan issued by acorporation typically financing day to day operation

It is very safe investment because the financial

situation of a company can easily be predicted over afew months

Only company with high credit rating issues CPs


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(T-bills) are the most marketable money market security

They are issued with three-month, six-month and one-year maturities

T-bills are purchased for a price that is less than theirpar(face) value; when they mature, the government paysthe holder the full par value

T-Bills are so popular among money market instrumentsbecause of affordability to the individual investors


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A CD is a time deposit with a bank

Like most time deposit, funds can not withdrawnbefore maturity without paying a penalty

CDs have specific maturity date, interest rate and itcan be issued in any denomination

The main advantage of CD

is their safety

Anyone can earn more than a saving accountinterest


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Repo is a form of overnight borrowing and is used by

those who deal in government securities

They are usually very short term repurchases

agreement, from overnight to 30 days of more

The short term maturity and government backing

usually mean that Repos provide lenders with extremely

low risk

Repos are safe collateral for loans


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A bankers acceptance (BA) is a short-term creditinvestment created by a non-financial firm

BAs are guaranteed by a bank to make payment

Acceptances are traded at discounts from face value inthe secondary market

BA acts as a negotiable time draft for financingimports, exports or other transactions in goods

This is especially useful when the credit worthiness ofa foreign trade partner is unknown


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Call Money Market

The call money market is an integral part of the

Indian Money Market, where the day-to-day

surplus funds (mostly of banks) are traded.

The loans are of short-term duration varying from1 to 14 days. The money that is lent for one day in

this market is known as "Call Money", and if it

exceeds one day (but less than 15 days) it is

referred to as "Notice Money".

Term Money refers to Money lent for 15 days ormore in the InterBank Market.


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Banks borrow in this money market for the

following purpose:

To fill the gaps or temporary mismatches in funds

To meet the CRR & SLR mandatory requirements

as stipulated by the Central bank

To meet sudden demand for funds arising out of

large outflows.

Thus call money usually serves the role of

equilibrating the short-term liquidity position ofbanks


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Call Money Market Participants :

1.Those who can both borrow as well as

lend in the market - RBI (through LAF)

Banks, PDs

2.Those who can only lend Financial

institutions-LIC, UTI, GIC, IDBI,

NABARD, ICICI and mutual funds etc.


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ORGANISEDSTRUCTURE

RBI DFHI(Discountand Financehouse of India

Commercialbanks

Developmentbank

Public Sectorbanks

SBI with 7subsidiaries

Co-Operativebanks

20 nationalizedbanks

Private banks

Indian banks Foreign banks

CO-OPERATIVE

SECTOR

UNORGANISEDSECTOR


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UNORGANISED SECTOR

Indigenousbanks

Money lenders Nidhis Chits

CO-OPERATIVE

SECTOR

Statecooperative

Centralcooperative

banks

Primary Agricredit societies

Primary urbanbanks

State Landdevelopment

banks

Central landdevelopment

banks

Primary landdevelopment

banks


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Purchasing power of your money goes down, in case of up ininflation

Its loosely integrated

Irrational structure of interest rates

Highly volatile market

Seasonal stringency of loan able funds

Lack of funds in the money market

Inadequate banking facilities


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Highly organized banking system

Presence of central bank

Availability of proper credit instrument

Existence of sub-market

Ample resources

Existence of secondary market

Demand and supply of fund


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Integration of unorganized sector with the organizedsector

Widening of call Money market

Introduction of innovative instrumentOffering of Market rates of interest

Promotion of bill culture

Entry of Money market mutual funds

Setting up of credit rating agencies

Adoption of suitable monetary policyEstablishment of DFHI

Setting up of security trading corporation of India ltd.(STCI)

fm (money market)

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