indian money market b.v.raghunandan
DESCRIPTION
explains the various segments of Indian Money market including the money market instruments and their featuresTRANSCRIPT
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Indian Money MarketB.V.Raghunandan, SVS College, Bantwal
PG Department of Economics,
St.Aloysius College,
Mangalore.
October 4, 2010
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Financial Market
• A market where the funds are borrowed and lent
• Two Components: Money Market and Capital Market
• Money Market: Market where funds are borrowed for 364 days and less
• Capital Market: Market where funds are borrowed for a period of one year and more
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Study of a Market
• Players in the market• Institutions involved• Intermediaries• Instruments• Mechanism• Role and its importance• Basic Terminology
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Basic Terminology
• Instrument: A loan document executed by a single borrower simultaneously to thousands or lakhs of lenders
• Security: When the instrument has a ready market. it is called a security
• Primary Market: A market where the funds are borrowed directly from the lender
• Secondary Market: A market where the securities are traded among investors
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Money Market: Definition
• Praveen N. Shroff ,
”institutions such as discount houses, merchant banks, and sometimes even the government’s central bank , which deal in very short-term loans, such as treasury bills, bills of exchange, commercial paper, certificates of deposits etc.,”.
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Money Market: Features
• Market for Short-term Funds
• Tenure of Instruments• Wholesale Market• Direct Market• Daily Settlement• Huge Volumes
• Large Size Transaction
• RBI Regulation• Administered Interest
Rates• Credit Control
Measures• Telephone Market• Many Players
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Players in the Money Market
• Central Government• Public Sector Undertakings• Insurance Companies• Mutual Funds• Banks• Corporates• Others: PFs, Pension Funds, NBFCs,
Primary Dealers, Discount Houses etc
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Money Market Instruments
• Treasury Bill• Liquidity Adjustment Facility: Repurchase
Option (Repo) & Reverse Repo• Call Money• Collateralised Borrowing & Lending
Obligation(CBLO)• Certificate of Deposit• Commercial Paper• Commercial Bills (Bill Market)
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Treasury Bill
• Borrower: the central government. The RBI issues the TBs
• Investors: banks, insurance companies like LIC, GIC etc., NABARD and UTI, corporates and (FII).
• Tenure: 14 days, 91 days, 182 days or 364 days.
• Mode of sale: The RBI sells the TBs by auction to banks and others.
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Mode of Operation
Banks maintain two types of accounts with the RBI: Current a/c for cash operations and Subsidiary General Ledger A/c (SGL) for securities. While selling securities to banks, RBI debits the current a/c of the concerned bank and credits its SGL A/c. While buying the securities, the RBI credits the current A/c of the bank and debits the SGL A/c.
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Importance of TBs
• eligible securities for maintenance of Statutory Liquidity Ratio of banks.
• used for the Repo operation of the central bank. • Corporates also park their funds in TBs because there is
no risk of default • a high level of liquidity in terms of refinance from SBI-
DFHI • a ready market in National Stock Exchange.• discount rate on 91-Day TB is the benchmark interest
rate for money market, risk-free interest rate for investment analysis and pricing of futures contract
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Liquidity Adjustment Facility
• Introduced in 2000, it brought under its fold the already existing two instruments
• The instruments are:
-Repurchase Option (REPO)
-Reverse REPO• Rates on these instruments were intended
to form the interest rate corridor for the short-term funds
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REPO
• An instrument to increase the liquidity of a day• For simplicity, lending by RBI to banks• In reality, buying securities from the banks and
squaring up the transaction by selling the securities back to them
• In 1992, one-day and two-day repo• In 1993, 14-day repo• Participants are commercial banks, financial
institutions, primary dealers, SBI-DFHI and Securities Trading Corporation
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Reverse Repo
• For draining the liquidity from the market• Simple meaning, borrowing by RBI from
banks• In reality, selling securities to banks and
buying them back from them subsequently• Introduced in 1994-95• Increased the profitability of bankers by
borrowing from CBLO and lending in Reverse Repo
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Call Money
• money lent for an extremely short-period, generally not exceeding one day.
• In India, money borrowed by one bank from another for a day
• Banks have to maintain the cash reserve ratio. When they run short of cash, they borrow from other banks. When they have surplus, they lend
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Participating Institutions in Call Money Market
• Commercial Banks• Co-operative Banks• Foreign Banks• SBI-DFHI• Securities Trading Corporation of India• Primary Dealers• In addition to the above, UTI, LIC, GIC,
IDBI, NABARD etc., are allowed to lend in the call money market.
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Lending Mechanism
-Conveying the Intention to SBI-DFH
intention to lend or borrow.
-Acceptance by SBI-DFHI
- minimum amount to be lent per transaction is Rs. 3 crore.
-Call Deposit Receipt issued to the lender on receiving the cheque
-Next day, the lender gets the money back by surrendering the Call Deposit Receipt
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Collateralised Borrowing & Lending Obligation (CBLO)
• Introduced by Clearing Corporation of India Ltd (CCIL) in 2003
• CBLO is a money market instrument of borrowing against securities held in custody by the CCIL.
• The tenure is generally one day, but can go upto 364 days.
• For CBLO, borrower should deposit Treasury bill or Govt. Securities with CCIL.
• participants can be banks, financial institutions, insurance companies, mutual funds, Primary Dealers, Non-Banking Finance Companies, and corporates.
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Certificate of Deposit
• Certificate of Deposit (CD) is a negotiable certificate issued by a bank on the receipt of a large deposit. CD is a negotiable certificate payable to bearer. CDs appeared in the U.S.A., in 1961.
• In India, the RBI permitted banks to issue CDs from June 1989.
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Features of CDs
• Borrower: Borrower is any scheduled bank other than RRBs
• Lenders: corporates, institutions, HNI, trust funds or NRIs
• Tenure: three months to one year. The common tenure is three months.
• Denomination: Rs. 25 lakh and in multiples of Rs. 5 lakh thereafter.
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Commercial Paper
• Commercial Paper (CP) is a short-term unsecured promissory note issued by well established corporates with the requisite credit rating.
• CP has been in existence in the US for more than 100 years
• In India, CP made its appearance from January 1990
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Features of Commercial Paper
Borrower: joint stock companies whose shares are listed on a recognized stock
exchange. • Lenders: other joint stock companies, public sector companies or corporations,
banks etc. Insurance Companies and Term-Lending institutions I• Networth of Issuing Company: The networth of the company (Capital+reserves)
should not be less than Rs. 4 crore. The working capital limit of the company should also be not less than Rs. 4 Crore.
• 4) Denomination of CPs: The minimum denomination for a single investor is Rs. 25 lakh. Thereafter, it should be in multiples of Rs 5 lakhs
• Tenure: CPs are issued for periods ranging between 15 days to 1 year. CPs of 3 months maturity are popular. CPs of 30 days are also gaining popularity.
• 7) Negotiability: CP is a negotiable instrument. It is freely transferable and payable to bearer. This feature is the added advantage of CP to the investor.
• 8) Credit Rating: Credit Rating from any of the credit rating agencies lmat: CPs can be issued in the form of a promissory note. It can also be issued in the dematerialized form. The demat form is convenient, when a large number of CPs are issued to many investors.
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Commercial Bills Market
• Arising out of trade• Most of them are documentary bills• Acceptance function has not become
popular• Only discounting• Secondary market is not developed• Mainly SBI-DFHI
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