study material on money market

8/18/2019 Study Material on Money Market

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STUDY MATERIAL

MONEY MARKET



Financial System

An institutional framework existing in a country to

enable financial transactions

Three main parts inancial assets !loans" #eposits" bon#s" e$uities" etc%&

inancial institutions !banks" mutual fun#s" insurance

companies" etc%&

inancial markets !money market" capital market" forex

market" etc%& Regulation is another aspect of the financial system

!R'(" )E'(" (R*A" M+&



Financial assets/instruments

Enable channelising fun#s from surplus units to

#eficit units

There are instruments for sa,ers such as #eposits"

e$uities" mutual fun# units" etc% There are instruments for borrowers such as loans"

o,er#rafts" etc%

-ike businesses" go,ernments too raise fun#s

through issuing of bon#s" Treasury bills" etc%

(nstruments like .." K/." etc% are a,ailable to

sa,ers who wish to len# money to the go,ernment



Financial Institutions

(nclu#es institutions an# mechanisms which Affect generation of sa,ings by the community

Mobilisation of sa,ings

Effecti,e #istribution of sa,ings

(nstitutions are banks" insurance companies"

mutual fun#s0 promote1mobilise sa,ings

(n#i,i#ual in,estors" in#ustrial an# tra#ing

companies0 borrowers



Financial Markets

Money Market0 for short0term fun#s !lessthan a year& Organise# !'anks& 2norganise# !money len#ers" chit fun#s" etc%&

+apital Market0 for long0term fun#s

.rimary (ssues Market )tock Market 'on# Market



Organised Money Market

+all money market

'ill Market

Treasury bills +ommercial bills

'ank loans !short0term&

Organise# money market comprises R'("banks !commercial an# co0operati,e&



ur!ose o" t#e money market

'anks borrow in the money market to3 ill the gaps or temporary mismatch of fun#s To meet the +RR an# )-R man#atory

re$uirements as stipulate# by the central bank To meet su##en #eman# for fun#s arising out of

large outflows !like a#,ance tax payments&

+all money market ser,es the role ofe$uilibrating the short0term li$ui#ity position ofthe banks



$all money market %&'

(s an integral part of the (n#ian money marketwhere #ay0to0#ay surplus fun#s !mostly ofbanks& are tra#e#%

The loans are of short0term #uration !4 to 45#ays&% Money lent for one #ay is calle# 6callmoney78 if it excee#s 4 #ay but is less than 49#ays it is calle# 6notice money7% Money lent formore than 49 #ays is 6term money7

The borrowing is exclusi,ely limite# to banks"who are temporarily short of fun#s%



$all money market %('

+all loans are generally ma#e on a clean basis0 i%e%

no collateral is re$uire#

The main function of the call money market is to

re#istribute the pool of #ay0to0#ay surplus fun#s ofbanks among other banks in temporary #eficit of

fun#s

The call market helps banks economise their cash

an# yet impro,e their li$ui#ity

(t is a highly competiti,e an# sensiti,e market

(t acts as a goo# in#icator of the li$ui#ity position



$all Money Market artici!ants

Those who can both borrow an# len# in themarket : R'( !through -A&" banks an#primary #ealers

Once upon a time" select financial institutions,i;%" (*'(" 2T(" Mutual fun#s were allowe# inthe call money market only on the len#er7ssi#e

These were phase# out an# call moneymarket is now a pure inter0bank market !since

August <==9&



*ill Market

Treasury 'ill market0 Also calle# the T0'ill market These bills are short0term liabilities !>40#ay" 4?<0#ay" @50

#ay& of the Bo,ernment of (n#ia (t is an (O2 of the go,ernment" a promise to pay the state#

amount after expiry of the state# perio# from the #ate ofissue

They are issue# at #iscount to the face ,alue an# at the en#of maturity the face ,alue is pai#

The rate of #iscount an# the correspon#ing issue price are#etermine# at each auction

R'( auctions >40#ay T0'ills on a weekly basis" 4?<0#ay T0'ills an# @50#ay T0'ills on a fortnightly basis on behalf ofthe central go,ernment



Money Market Instruments %&'

Money market instruments are those which

ha,e maturity perio# of less than one year%

The most acti,e part of the money market isthe market for o,ernight call an# term money

between banks an# institutions an# repo

transactions

+all money1repo are ,ery short0term moneymarket pro#ucts



Money Market Instruments%('

+ertificates of *eposit

+ommercial .aper

(nter0bank participation certificates

(nter0bank term money

Treasury 'ills! C(-- 'E *()+2))E*&

'ill re#iscounting

+all1notice1term money +'-O

Market Repo



$erti"icates o" De!osit

+*s are short0term borrowings in the form of 2.N issue# by allsche#ule# banks an# are freely transferable by en#orsement an##eli,ery%

(ntro#uce# in 4>?>

Maturity of not less than D #ays an# maximum up to a year% (sare allowe# to issue +*s for a perio# between 4 year an# up to @years

)ubect to payment of stamp #uty un#er the (n#ian )tamp Act"4?>>

(ssue# to in#i,i#uals" corporations" trusts" fun#s an# associations They are issue# at a #iscount rate freely #etermine# by the

market1in,estors



$ommercial a!ers

)hort0term borrowings by corporates" financial institutions"primary #ealers from the money market

+an be issue# in the physical form !2sance .romissory Note& or#emat form

(ntro#uce# in 4>>= Chen issue# in physical form are negotiable by en#orsement

an# #eli,ery an# hence" highly flexible (ssue# subect to minimum of Rs% 9 lacs an# in the multiple of

Rs% 9 lacs after that

Maturity is D #ays to 4 year 2nsecure# an# backe# by cre#it rating of the issuing company (ssue# at #iscount to the face ,alue



Market Re!os

Repo !repurchase agreement& instruments enablecollateralise# short0term borrowing through theselling of #ebt instruments

A security is sol# with an agreement to repurchase itat a pre0#etermine# #ate an# rate

Re,erse repo is a mirror image of repo an# reflectsthe ac$uisition of a security with a simultaneouscommitment to resell

A,erage #aily turno,er of repo transactions !otherthan the Reser,e 'ank& increase# from Rs%44"@44crore #uring April <==4 to Rs% 5<"<9< crore in Fune<==



$ollateralised *orro+ing and

Lending O,ligation %$*LO'

Operationalise# as money market instruments bythe ++(- in <==@

ollows an anonymous" or#er0#ri,en an# online

tra#ing system On the len#ers si#e main participants are mutual

fun#s" insurance companies% Maor borrowers are nationalise# banks" .*s an#

non0financial companies The a,erage #aily turno,er in the +'-O segment

increase# from Rs% 949 crore !<==@0=5& to Rs% @<"@>= crore !<==0=D&



SARFAESI Act Enables setting up of Asset Management +ompanies to

ac$uire N.As of any bank or ( !)A)" AR+(- areexamples&

N.As are ac$uire# by issuing #ebentures" bon#s or any

other security As a secon# cre#itor can ser,e notice to the #efaulting

borrower to #ischarge his1her liabilities in = #ays ailing which the company can take possession of assets"

takeo,er the management of assets an# appoint any

person to manage the secure# assets 'orrowers ha,e the right to appeal to the *ebts Tribunal

after #epositing D9G of the amount claime# by the secon#cre#itor



T#e Indian $a!ital Market %&'

Market for long0term capital% *eman# comes

from the in#ustrial" ser,ice sector an#

go,ernment

)upply comes from in#i,i#uals" corporates"

banks" financial institutions" etc%

+an be classifie# into3 Bilt0e#ge# market

(n#ustrial securities market !new issues an# stock

market&



T#e Indian $a!ital Market %('

*e,elopment inancial (nstitutions (n#ustrial inance +orporation of (n#ia !(+(&

)tate inance +orporations !)+s&

(n#ustrial *e,elopment inance +orporation !(*+& inancial (nterme#iaries Merchant 'anks

Mutual un#s

-easing +ompanies /enture +apital +ompanies



Financial Intermediaries %&'

Mutual un#s0 .romote sa,ings an# mobilise fun#swhich are in,este# in the stock market an# bon#market

(n#irect source of finance to companies .ool fun#s of sa,ers an# in,est in the stock

market1bon# market Their instruments at sa,er7s en# are calle# units

Offer many types of schemes3 growth fun#" incomefun#" balance# fun#

Regulate# by )E'(



Financial Intermediaries %('

Merchant banking0 manage an# un#erwrite new

issues" un#ertake syn#ication of cre#it" a#,ise

corporate clients on fun# raising

)ubect to regulation by )E'( an# R'( )E'( regulates them on issue acti,ity an# portfolio

management of their business%

R'( super,ises those merchant banks which are

subsi#iaries or affiliates of commercial banks

Ha,e to a#opt stipulate# capital a#e$uacy norms

an# abi#e by a co#e of con#uct



$onclusion

There are other financial interme#iaries such

as N'+s" /enture +apital un#s" Hire an#

-easing +ompanies" etc%

(n#ia7s financial system is $uite huge an#

caters to e,ery kin# of #eman# for fun#s

'anks are at the core of our financial system

an# therefore" there is greater expectationfrom them in terms of reaching out to the ,ast

populace as well as being competiti,e%



Thank you

study material on money market

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