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MONEY MARKET

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The money market is a market for financial assets that are closesubstitutes for money .It is a market for overnight to short term funds andthe debt instruments are having maturity period of one day to one year. Itis not a physical location (like stock market), but an activity that is

conducted over the telephone.

it is a wholesale market

the volumes are very high

the major players are : RBI , Discount and Finance House

of India (DFHI), Banks, NBFCs ,Mutual Funds, Corporate

Investors, Securities Trading Corporation of India (STCI)

State Governments, Provident Funds, Primary

Dealers, PSUs, NRIs

MM centres in India are : Mumbai , Delhi , Kolkata

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FUNCTIONS OF MONEY MARKET

To provide

a balancing mechanism

the focal point for central bank

reasonable access to short-term funds

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Utility Facilitates the conduct of monetary policy

Helps RBI to influence liquidity and level ofinterest rates

Facilitates government market borrowing

Provides a stable source of funds to banks

Helps the organizations in meeting temporaryshort term surpluses and deficits

Well functioning of the MM facilitates thedevelopment of a market for long-term securities.The interest rates of short term use of moneyserve as a benchmark for longer-term financialinstrument.

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Reforms in the Indian MM

Introduction of new instruments

Entry to new participants

Change in the operating procedures of monetary policy

Fine tuning of liquidity management operations

Technological infrastructure

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MM Instruments

1. Treasury Bills (T-bills)

2. Commercial Paper (CPs)

3. Certificate of Deposits (CDs)

4. Commercial Bills

5. Call/Notice money market

6. CBLO

T-bills, Call Money Market and Certificate of Deposit provide liquidity forgovtandbanks

Commercial Paper and Commercial Bills provide liquidity for the commercialsectorand the financial intermediaries.

Salient features of MM instruments:

Liquidity

Minimum transaction cost

Minimum risk

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Treasury Bills [T-bills]

Issued by RBI on behalf of Central Government to raise

short-term funds

Issued for 91 days,182-days ,364 days

Issued at discount and repaid at par on maturity

They are not issued in scrip form. The purchases and salesare effected through the Subsidiary General Ledger (SGL)

account.

Negotiable security

Can be rediscounted with banks , thus highly liquid

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No default risk

Assured yield

Minimum amount Rs 25,000 or in multiples thereof

Participants : RBI, banks , mutual funds , FIs , primary dealers, PFs ,corporates ,foreign banks , FIIs.

Types: Auctioned T-bills At present RBI issues T-bills of threematurities : 91 days,182-days ,364 days.

Importance of T-bills

** cash mgt of the govt.** short-term benchmark

** preferred tool of central bank

The development of the T-bill market is a pre-condition for effective

open market operation.

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SALE OF T-BILLS

Auction method is adopted.

Competitive bids are submitted by participants andRBI decides the cutoff price/yield.

Primary Dealers, Banks, Corporates, MFs

:Competitive Bidding State Government : Non Competitive bidding

Non competitive bidders are allotted T-Bills at aweighted average price determined in competitive

bidding

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TYPES OF AUCTIONS

Multiple Price Auction

Uniform Price Auction

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MULTIPLE PRICE AUCTION

RBI invites bids by price.

RBI decides the cutoff price.

Bids above the cutoff price allotted securities.

Each successful bidder pays the price it bids.

RBI obtains the maximum price each

participant is willing to pay

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UNIFORM PRICE AUCTION

RBI invites bids in descending order and

accept those that fully absorb the issue

amount.

Each winning bidder pays the same pricedecided by RBI.

91 Day T-Bills.

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IMPLICIT YIELD OF T-BILLS

The difference between the sale price and

redemption value is the rate of return .

Yield is the rate of return on a particular

instrument. Implicit yield is the yield on an instrument if it

is held till maturity.

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Yield Calculation

The yield of a Treasury Bill is calculated asper the following formula

Y = (100-P)*365*100----------------------

P*D

Y = Discounted yield

P= Auction Price

D= Days to maturity

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Commercial Paper [CP]

is an unsecured short-term promissory noteissued by creditworthy

corporates and all Indian financial institutions

primary dealers and satellite dealers were also permitted to issue CP toaccess greater volumes of funds to help increase their activities in thesecondary mkt.

issued for minimum period of 7 days and maximum of 1 year from thedate of issue

issued in denominations of Rs 5 lac and multiples thereof

can be issued at a discount by the highly rated corporates to meet theirworking capital requirements.

it is negotiable and transferable by endorsement and delivery with a

fixed maturity period

U ll h d b i di id l b k t i t d

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Usually purchased by individuals , banks , corporates , unincorporatedbodies

NRIs can be issued CP only on a nontransferable and non-repatriablebasis.

FIIs are eligible to invest in CP within the limits set by Sebi.

Banks are not allowed to underwrite or co-accept the issue of CP.

CP is usually privately placed with investors, either through merchantbankers or banks.

A specified credit rating of P2 of Crisil or its equivalent is to beobtained from a credit rating agency.

The paper is usually priced between the lending rate of the scheduledbank and a representative MM rate.

The other names are finance paper, industrial paper or corporate

paper.

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PROCESS OF ISSUE OF CP

A resolution has to be passed with BoDs.

CP issue has to be rated by a credit ratng

agency.

Company has to select an IPA.

IPA verifies documents

Company has to arrange for dealers such

merchant bankers, brokers and banks forplacement of CPs.

Reported to RBI through IPA.

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GUIDELINES FOR ISSUANCE OF

COMMERCIAL PAPERS (October 2000)

Eligibility: Corporates, Primary Dealers andAll Indian Institutions.

Corporate should have a networth of Rs.4 cr.

Rating requirement: P2 of CRISIL or suchequivalent rating.

Maturity: 7 days to 1 year from the date of

issue. Denominations:Rs.5 lakhs and multiples

thereof.

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Factors Inhibiting Growth of CP Market

Mini size of investment leaves little scope for retail investor

Issue involves administrative difficulties and complex procedural

formalities

Minimum maturity limit of 7 days

LIC , GIC etc do not make bulk purchases in this mkt

There is no active secondary market for CPs.

Certificate of Deposit [CD]

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Certificate of Deposit [CD] CDs are unsecured, short term time-depositsissued by scheduled

commercial banks and financial institutions.

They are interest bearing ,maturity dated obligations of banks .

Minimum issue of Rs 1 lac and additional amount in multiples thereof

The maturity period of CDs issued by banksshould be not less than 7

days and not more than 1 year.

FIscan issue CDs for a period not less than 1 yr and not exceeding 3yrs from the date of issue.

Can be issued on a discount to face value basis as well as on floatingrate method.

Banks have freedom to issue CDs depending on their requirements.

An FI may issue CDs within the overall umbrella limit fixed by RBI.

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They are in bearer form freely transferable by endorsement anddelivery and can be traded in secondary market.

Banks and FIs cannot issue loan against CDs.

They cannot buy back their own CDs before maturity.

Usually purchased by individuals, corporates , trusts , funds and NRIs.

Banks have to maintain the appropriate reserve requirements, i.e. CRRand SLR , on the issue price of CDs.

There is no lock in period for the CDs.

CDs are issued by banks during the period of tight liquidity, atrelatively high interest rates.

CDs are transferable and tradable while FDs are not.

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GUIDELINES FOR ISSUE OF CDs

Eligibilty: Issued by scheduled commercialbanks and select All India financialinstitutions.

Aggregate Amount: Banks have thefreedom to issue CDs according to theirrequirements.

An FI can issue CD within the overall

umbrella limit fixed by RBI. Issue of CDsalong with other instruments should notexceed 100% of Net owned Fund

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Minimum size: Should be Rs.1 lakh and inthe multiples of Rs.1 lakh.

Investment in CDs: Individuals,

Corporations, Companies, Trusts, Funds andAssociations.

Maturity:

Bank: Not less than 7 days and not more than

1 year. FIs: Not less than 1 year and not more than 3

years.

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Discunt/Coupon Rate: Issued at discount to theface value.

Banks/FIs can also issue floating rate CDs.

Reserve Requirement: Banks have to maintain

appropriate amount of reserves on the issue price ofCDs.

Transferability: Physical CDs are transferable byendorsement and delivery. Demat CDs can betransferred as per the procedure applicable to anydemat security. No lock in period for CDs.

Loans/Buybacks: Banks and FIs cannot grant loanagainst CDs. They cannot buyback their own CDsbefore maturity.

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Commercial Bills

According to the Indian Negotiable Instrument Act ,1881 the

bill of exchange is :

an instrument in writing containing an unconditional order ,

signed by the maker ,

directing a certain person to pay a certain sum of money

only to a particular person or to the bearer of theinstruments.

Important tool to finance credit sales.

These bills can be discounted by commercial banks.

Banks when in need of money, can get these bills re-discounted by FIs such as LIC ,GIC and RBI.

The maturity period of the bills varies from 30 days, 60days, 90 days depending on the credit extended in the

industry.

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Demand bill: payable on demand at sight or on presentationto the drawee

Usance bill : payable after a specified time

Clean bill :documents are enclosed and delivered againstacceptance by the drawee, after which it becomes clear

Documentary bill: documents are held by bank till bill is paid

Inland bills : (a) drawn or made in India and payable in India

(b) drawn upon any person resident in India.

Foreign bill: (a) drawn outside India and payable in India (b)drawn in India and made payable outside India.

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CALL / NOTICE Money Market

Predominantly an inter-bank market. Mostly used by commercial banks in

borrowing money from other banks to maintain cash balance known asCRR.

Minimum size of transaction Rs 3 cr

No collateral security is required to cover these transactions

Call- overnight & Notice

more than 1day upto 14 days

TERM Money Market

Maturity ranges between 3 months -1 year

IDBI, ICICI, SIDBI, EXIM Bank NHB can borrow for 3-6 months.

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FEATURES

ENABLES BANKS TO EVEN OUT DAY TO DAY

SURPLUSES AND DEFICITS.

COMMERCIAL BANKS, COOPERATIVE BANK

AND PRIMARY DEALERS ARE ALLOWED TOBORROW AND LEND.

SPECIFIED FIs, MUTUAL FUNDS ARE

ALLOWED AS LENDERS.

INTEREST RATE: MARKET DETERMINED. MINIMUM SIZE OF TRANSACTION-Rs. 3

crores.

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FEATURES

FOREIGN BANKS AND PRIVATE BANKS ARE

BORROWERS.

RBI PLAYS AN ACTIVE ROLE.

DISCOUNT AND FINANCE HOUSE OF INDIA(DFHI): PRIMARY DEALER

SBI: MAJOR LENDER

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LINK BETWEEN CALL MONEY MARKET

AND OTHER FINANCIAL MARKETS

Inverse relationship between call rates andrates on CP and CDs.

When call rates increase, banks raise morefunds through CDs.

When call rates are lower, many banks fundcommercial papers by buying from callmoney market.

A large issue of government securities alsoaffects bank rates. Call rates move up.

Increase in CRR also pushes the Call rate.

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CALL RATE

Interest rate paid on call loans: Call Rate.

Highly volatile rate.

Changes with change in demand and supply

of call loans.

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FACTORS INFLUENCING CALL MONEY

MARKET RATE

Liquidity conditions.

Reserve requirements

Structural factors

Volatility in forex market

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Tools for Managing Liquidity in the Money Market

Direct Instruments

Reserve Requirement :CRR [5%] - cash that banks need tokeep with RBI ; SLR[24%] mandatory investment in

government securities.

Indirect Instruments

Open Market Operations

Repos / Reverse Repos

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Thank you

Documents

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