A market for short terms financial assets that are close substitute for money, facilitates the exchange of money in primary and secondary market.

• 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 maturities are traded.

• It doesn’t actually deal in cash or money but deals with substitute of cash like trade bills, promissory notes & government papers which can converted into cash without any loss at low transaction cost.

• The most active part of the money market is the market for overnight call and term money between banks and institutions and repo transactions

• It includes all individual, institution and intermediaries.

Money Market PlayersPlayers Role

Central Bank Intermediary/Regulator

Government Borrower/Issuer

Banks Borrowers/Issuers

FI’s Borrowers/Issuers

FII’s Investors

Dealers Intermediaries

Corporate Issuers

Classification of Money market Instruments(on the basis of type of Issuer and the

requirements they meet)

• Government and Quasi-government Securities• Banking sector Securities• Private sector securities

I. Government and Quasi-government Securities:-

TREASURY BILLS

GOVERNMENT DATED SECURITIES/GILT-EDGE SECURITIES

FEATURES OF TREASURY BILLSTreasury Bills are short-term, rupee denominations

issued by Reserve bank of India(RBI)on behalf of the government of India. T-bills are issued in the form of promissory notes or finance bills by government to tide over short-term liquidity shortfalls

Distinct FeaturesZero default riskAssured yieldNegligible capital depreciationInclusion in (SLR)

INVESTORS

Primary dealersFinancial institutionsInsurance companiesProvident fundsNon-Banking Finance CompaniesForeign Institutional InvestorsState governments

TYPES OF TREASURY BILLS

• At present Government of India issues 3 types of treasury bills viz, 91-days, 182-days and 364-days.

Ad Hoc Treasury Bills – Purposes

– Replenish cash balance of central government– To provide a medium of investment for state gov, semi-gov

department and foreign central banks.

Ways and Means AdvancesOn Tap Treasury BillsAuctioned Treasury Bills

TREASURY BILLS IN INTERNATIONAL MARKETS

T-bills are important market instrument in US, where the minimum denomination is$10000 and in multiple of$5000 thereof. The American T-bills are mainly classified as regular series T-bills and irregular-series T-bills

Regular-series of 13-weeks, 26-week and 52-weeks maturities are issued weekly or monthly while irregular-series are issued for special cash need of the Treasury.

The US T-bills are sold in auctions and issued at a discount to face value.

GILT-EDGED SECURITIES MARKETGovernment of India securities include debt obligations of

central, state governments & other financial institutions owned by central & state governments. As the repayment of principal as well as interest is secured by government these instrument are usually referred to as ‘Gilt-edged Securities’.

The minimum amount of investment for a investor is Rs 10,000 and in multiples thereof.

The maturity period is up to 20 yrs and based on the maturity these securities are classified as Short-dated (<5), Medium-dated (5-10) and Long-dated (>10)

INVESTORSIndividuals, firms, companies, corporate bodies,

institutions, state government, provident funds & trusts.Commercial banks, insurance companies and NBFC’s are

major buyers of gilt in the market.

PURPOSE• Open Market Operation• Help Government in its Fiscal policy• Used by Commercial banks, NBFC’s,

Insurance company etc to meet their statutory requirements

Banking Sector Securities

CALL/NOTICE MONEY MARKET

TERM MONEY MARKET

CERTIFICFATES OF DEPOSITS

PARTICIPATION CERTIFICATES

Call/Notice Money Market

• The call money market is a part of money market and refers to the overweight funds lent and borrowed mostly by Banks for daily liquidity management.

• It is borrowed or lent for very short period.

• Notice Money(2-14 days)• Call Money( for overnight)• Term Money(14 to 365 days)

• The Indian call Money Market deals only with Call Money.

• The Call loans are highly liquid as they are repayable on due date.

• Also referred as INTERBANK MARKET.

Participants

• All scheduled commercial banks (Private sector , Public sector , Cooperative sector),primary Dealers(PDs),Development finance institutions, selected insurance companies and select mutual funds operate in call/notice marks.

• Intermediaries like Discount and Finance House of India Limited(DFHI), Securities Trading Corporation of India Ltd(STCI) and Primary Dealers(PDs) are the participants in the local call money markets.

• The Non-Bank institutions are given specific permission to operate in call/notice money markets can, and operate as lenders only.

• The banks and Primary Dealers can borrow and lend money but mutual funds and select Corporate can participate in lending only

• The participant under the category of banks can be divided into two types :-

Predominant lenders(mostly PSUs)Predominant borrowers(foreign and private sector

banks)

• Based on the committee report on banking sector reforms 1998:-

RBI carried out basic restructuring of call money market to make it a pure interbank market and no new Non-bank institutions are permitted to operate w.e.f 5th May,2001.

• RBI decided to phase out Non –Banking participants from Call Money w.e.f. 6thAugust2005.

Eligibility for transactions in Call/Notice Money Market

Borrowing Lending

Scheduled commercial banks (excluding RRBs)

Co-operative Banks

Primary Dealers(PDs)

Scheduled commercial banks Cooperative BanksPrimary Dealers(PDs) Select all-India Financial Institutions Select Insurance Companies Select Mutual Funds

Purpose

• In India, Call Money market is lent to cater the following purposes:

Firstly , The short term mismatches due to variation in maturities.

Secondly, To meet CRR requirements.

Thirdly , To discount Commercial Bills.

Call Rates

• The Interest paid on Call Loans is known as the Call Rates.

• These rates are calculated on daily Basis and vary from day to day and Hour to hour within a day.

• High Rates indicates a tight Liquidity and low rates shows easy liquidity in the market.

• There are influenced by the forces of supply and demand for funds.

Location

• In India , Call Money Markets are mainly located in main Commercial and big Industrial centers such as Mumbai, Kolkata, Chennai, Delhi and Ahmedabad.

Term Money

• Short term funds having a maturity of 15 days to one year are borrowed and lent without a collateral

• Requires to bring greater stability in Banks short term deficits.

• Funds are borrowed on the forecasted requirements by banks.

• Introduced in 1989

• An Unsecured Promissory notes

• CDs are short term funds having maturity of 7 days to 1 year

• Issued to individuals/Corporates/institutions etc at discount to face value

• Subject to payment of stamp duty under the Indian Stamp Act, 1899

Certificates of Deposits

• Negotiable Instrument

• Issued at a discount to face value

• They form part of deposits and hence attract reserve requirements.

• Financial Institutions can issue CDs for a period not less than a year and not exceeding 3 years.

Certificates of Deposits

• One of the main activity of Bank is Credit Accommodation.

• So two types of Inter-Bank Participations (IBPs) were introduced, one on risk sharing basis and the other without risk sharing

• To ease the liquidity position , Banks have option to share their credit assets with other banks by issuing participation notes.

• Also called Inter Bank Participations(IBPs)

• Rate at which PCs are issued can be Negotiable depending upon interest rate scenarios subject to a minimum 14.0 per cent per annum

Participation Certificates

• strictly inter-bank instruments confined to scheduled commercial banks excluding regional rural banks.

• The IBP with risk sharing can be issued for 91-180 days and without risk sharing is a money market instrument with a tenure not exceeding 90 days

Participation Certificates

Private Sector Securities

COMMERCIAL PAPERS

BILLS OF EXCHANGE

INTER CORPORATE DEPOSITS

MONEY MARKET MUTUAL FUNDS

BONDS/DEBENTURES BY THE CORPORATE.

COMMERCIAL PAPERS

• Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note.

• It was introduced in India in 1990 with a view to enabling highly rated corporate borrowers ( Private and public sector Companies , Primary dealers , All India Financial Institutions) for the financing of Working capital Requirements, pay taxes and other short term commitments after satisfying the eligibility criterion by RBI

• Commercial Papers are generally issued in multiples of INR 5 Lakhs for a period ranging from a minimum of 15 days to a maximum of 1 year

• Commercial paper is not usually backed by any form of collateral, so only firms with high-quality debt ratings will easily find buyers without having to offer a substantial discount (higher cost) for the debt issue.

• Commercial paper is usually sold at a discount from face value, and carries shorter repayment dates than bonds. The longer the maturity on a note, the higher the interest rate the issuing institution must pay. Interest rates fluctuate with market conditions, but are typically lower than banks' rates

BILLS OF EXCHANGE

A bill of exchange is playing an important part in the commercial life of the country. The need for it arises where the buyer of goods needs a period of credit before paying it, it is drawn by the creditor and is accepted by the debtor.

According to F.W Muller

A bill of exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is to pay on demand or at a fixed or determinable future time a sum certain in money to or the order of a certain person or to bearer.

CHARACTERISTICS OF BILLS OF EXCHANGE

• A bill of exchange must be in writing.

• It must contain an order to pay.

• The order to pay must be unconditional.

• If it is subject to the happening of some events, it will not be a bill of exchange.

Cont…..

• It must be signed by the drawer and properly stamped.

• The parties to the bill, the drawer and the drawee and payee must be certain and definite individuals.

• The amount payable must be certain.

• The payment must be made in money and not in kind.

INTER CORPORATE INVESTMENTS/DEPOSITS (ICDs)

• An Inter-Corporate Deposit (ICD) is an unsecured loan extended by one corporate to another.

• This market allows corporates with surplus funds to lend to other corporates. Also the better-rated corporates can borrow from the banking system and lend in this market.

• The cost of funds for a corporate is much higher than that for a bank.

• As ICDs are unsecured, the risk inherent is high and the risk premium is also built into the rates.

Characteristics of ICD’S

• The transaction is free from bureaucratic and legal hassles.

• The market of inter-corporate deposits maintains secrecy.

• The market of inter-corporate deposits depends crucially on personal contacts

WHAT IS MMMFs?

• A money market fund is a mutual fund that invests solely in cash/cash equivalent securities, which are also often referred to as money market instruments. These investments are short-term, very liquid investments with high credit quality

GENERALLY INCLUDES

• Certificates of deposit (CDs)• Commercial paper• U.S. Treasuries• Bankers' acceptances• Repurchase agreements

Securities and Exchange Commission (SEC) rules dictate that

the average maturity of money market fund securities must be 90 days. 

MONEY MARKET FUNDS ARE SPECIAL FOR 3 REASONS

• SAFETY By purchasing debt securities issued by banks, large

corporations and the government, money market funds carry a low default risk while still offering a reasonable return.

• LOW INITIAL INVESTMENT money market funds allow you to take advantage of the

safety related to a money market investment at low investment amounts

• ACCESSIBILITY Money market fund shares can be bought and sold at any

time and are not subject to market timing restrictions

BONDS/DEBENTURES• It is a certificate issued by Government, credit

institutions acknowledging indebtedness.• It is one of the source of raising long term funds by

Public, Private and Financial Institutions.• Bonds can be issued for short and long term.• Issuers of bonds are mainly government owned

Financial Institutions, Public Sector Units and Private Corporates.

Role of RBI in Indian Money Market

The primary aim of Central bank in the money market is:

• To maintain the liquidity

• Consistent short term interest rates

Monetary Policy

Monetary Policy may have an indirect impact on Money market

Changes in the CRRA Decrease in CRR Enhances loanable funds of banks .Hence less dependence upon

call and term money market.An Increase in CRR Create a need of Borrowing from market or to raise additional

deposits.

• Changes in SLRA decrease in the SLR Banks will have excess investment in the SLR securities

and Disinvestment will not be better to do as it will reduce down prices due to more sellers.

A Increase in SLR Reduce the liquidity of Banks as transfer of cash into

securities and increases the demand of it which will be available at higher prices.

Open Market Operations

Monetary Policy may have a Direct impact on Money market

• Bank RatePrime lending rate is dependent on bank rate.If the PLR is reduced the commercial paper and commercial

deposit rates will also get affected.

• Repo RateA cut in the repo rate will directly bring down call rates also

other term money rates.

References

• Financial Institutions and Markets By LM Bhole

• Financial Markets ,ICFAI• www.investopedia.com

Thank You

• Pranjul Srivastava FI-0829• Pravin Kumar Choudhary FI-0830• Sakshi Aggarwal FI-0838• Ridhi Aggarwal FI-0835• Priyanka Kapila FI-0833• Sachin Kapoor FI-0837• Siddharth Neri FI-0841• Sanjay Prajapati FI-0840