Money Market

Introduction

As per RBI Definitions,

◦ “A market for short term financial assets that are

close substitutes for money, facilitates the

exchange of money in primary and secondary

markets”

The money market is a mechanism that deals

with the lending and borrowing of short term

funds.

A segment of the financial market in which

financial instruments with high liquidity and

very short term maturities are traded.

Functions of Money Market

Provide a balancing mechanism to even out

the demand for and supply of short-term funds

Provide a focal point for central bank

intervention for influeincing liquidity and

general level of interest rates in the economy.

Provide reasonable access to suppliers and

users of short-term funds to fulfill their

borrowings and investment requirments at an

efficient market claring price.

Money Market Instruments

Treasury Bills

Call/ Notice Money Market

Commercial Papers

Certificates of Deposits

Commercial Bills

Collateralized Borrowings and Lending

Obligations

Treasury Bills

Meaning

They are short term instruments issued by the

Reserve Bank on behalf of the government to

tide over the short-term liquidity shortfalls.

It is used by the governments to raise short

term funds to bridge seasonal or temporary

gaps between its receipts and expenditures.

They are repaid at par on maturity.

Features

Negotiable securities

Highly liquid

Absence of default risk

An assured risk, low transaction cost and are

eligible for inclusion in the securities for SLR

They are not issued in scrip form. The

purchases and sales are effected through the

Subsidiary General Ledger (SGL) account.

Who can invest in T-Bills?

Reserve Bank of India, mutual funds, financial

institutions, primary dealers, provident funds,

corporates, foreign banks and FIIs

Types of T-Bills

On-tap Bills◦ Discontinued form April 1, 1997.

Ad hoc Bills◦ Discontinued form April 1, 1997.

Auctioned Bills◦ First introduced in April 1992.

◦ The RBI receives bids in an auction from variousparticipants and issue the bills subject to somecut off limits.

◦ At present, RBI issues T-Bills of three maturities– 91 days

182 days

364 days

How T-Bills

are sold?

Sale of T-Bills

Competitive Bids

Participants submit their bids through

auction

Multiple-price auction

Each winning bidder pays the

price it bid

Uniform-price auction

Each winning bidder pays the uniform price

decided by the RBI

Non-competitive Bids

Participants are not allowed to bid

To Sum up…

Treasury Bills are available for a minimum amount

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

Treasury bills do not bear any coupon and

hence, issued at discount and redeemed at par.

The T-bills are issued by the RBI through auction

method. It declares auction calender at the starting

of the financial year, mentioning the amount of

issue, the day of the auction and the day of the

payment.

91-day T-bills are auctioned every week on

Wednesdays and payments are made on following

friday.

182-day and 364-day T-bills are auctioned every

alternate week on Wednesday and payments are

made on following friday.

Commercial Paper

Meaning

A commercial paper is an unsecured

short-term promissory note issued at a

discount by creditowrthy

corporates, primary dealers and all

India financial institutions.

It is also known as finance

paper, industrial paper, or corporate

paper.

Who can invest in Commercial

Papers? Individuals

Banks *

Corporates

NRIs

FIIs

The

process for

issuing a

CP

Company conducts internal check on its eligibility to issue CPs

Investor’s account is credited with the CPs a day after IPA gets clear funds in its account

Company gives investor details such as DP ID, client ID and allotted quantity to registrar and

transfer (R&T) / IPA credit to investor’s account the next day

Instruct depository to credit CPs to IPA’s CP allotment account; IPA issues CP certificates to

investors

Finalises allotment of CPs; Adjudicates on stamp duty on the jumbo CP certificate documentation

Decides issue size

Applies to CRISIL for rating of CP issue

Appoints issueing and paying agent

Gets quotes from investors along with their depository participant ID and Client ID

Prepares documents pertaining to CP issue

Issuer executes agreement with depository for issue of CPs in dematerialised form

Receives HV cheque from Investors

Funds cleared in HV clearing the next day

Guidelines for issuance of a

CP Eligibility

Rating requirement

Maturity

Denomination

Issuing and Paying Agent

Investment in a CP

Mode of issuance

Commercial Bills

Meaning

Commercial bills are negotiable

instruments drawn by the seller on the

buyer which are, in turn, accepted and

discounted by commercial banks.

Types

Demand Bill

Usace Bill

Clean Bill

Documentry Bill

Inland Bill

Foreign Bill

Hundi

Derivative Usance Promissory Note

Features:

It can be traded by offering the bills

for rediscounting.

Repayable on maturity of bill.

High degree of liuidity.

Certificate of Deposites

Meaning

They are short term tradable time

deposits issued by commercial banks

and financial institutions.

Guidelines for issue of CDs

Eligibility

Minimum size of issue and

denomination

Who can subscribe

Maturity

Discount rate

Buy-back

Factors limiting the growth of

CDs Limited participants

High interest rate

CDs are not listed.

Minimum level of investment is high

Stamp duty

Call / Notice Money

Meaning

Call Money Market

◦ Here, funds are transacted on overnight

basis.

Notice Money Market

◦ Funds are borrowed / lent for a period

between 2 to 14 days.

Importance

Without collateral

Flexibility to banks

Participants

Lenders

◦ DFHI, STCI, GIC, IDBI, NABARD, Mutual

Funds

Borrowers

◦ Brokers & dealers in the securities / bill

market

◦ Individuals of high financial status

Borrowers and Lenders

◦ Schedule and non-schedule commercial

banks

◦ Foreign banks, State, district and urban co

operative banks, DFHI