Indian Money Market - Basic

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The India money market is a monetary system that involves the lending and borrowing of short-term funds. India money market has seen exponential growth just after the globalization initiative in 1992.

Text of Indian Money Market - Basic


WHAT IS IT?y Subsection of fixed income market having maturity less then year? y Money Market investment is also called cash investment because y y y y y

of short maturity. Securities issued by government, large corporation and financial institution. These securities are consider extraordinary safe but have low return. It is traded on very high denominations. It is dealer market which means firms buy and sell securities in their own account at their own risks. Lack of central trading exchange, deal on phone or other electronic system.

Indian Money marketThe India money market is a monetary system that involves the lending and borrowing of short-term funds. India money market has seen exponential growth just after the globalization initiative in 1992. The performance of the India money market has been outstanding in the past 20 years. The Reserve Bank of India (RBI) is playing the major role in regulating and controlling the India money market.y Indian money market is not a developed money market. y it is a leading money market among the developing countries.

Sub Markets of Indian Money MarketTo understand the Indian money market, it is necessary to understand various components or sub markets within it. They are explained below.Call Money Market Commercial Bill Market Treasury Bill Market Certificate of Deposits (CDs) Commercial Papers (CPs) Short Term Loan Market Banker's Acceptance Repos

Call Money MarketIt is also known as money at call and money at short notice. It is also called inter bank loan market. Duration Few hours to 14 days. These transactions help stock brokers and dealers to fulfill their financial requirements. call rate - The rate at which money is made available is called as a call rate. Rate is fixed by the market forces such as the demand for and supply of money.

Commercial Bill MarketIt is a market for the short term, self liquidating and negotiable money market instrument. Commercial bills are used to finance the movement and storage of agriculture and industrial goods in domestic and foreign markets. he commercial bill market in India is still underdeveloped. It may be a demand bill or a usance bill.

Treasury Bills (T-Bills)Treasury Bills which are promissory notes or financial bills issued by the RBI on behalf of the Government of India T-bills are short-term securities that mature in one year or less from their issue date. They are issued with three-month, six-month and one-year maturities. Maturity of T Bill varies from 14 days to 364 days. T-Bills are purchase less then per value (face value), when mature government pay full value. Amount of interest difference between buying and selling value. It is issued through competitive bidding process at auction It is affordable for individual investor.

Certificate of deposit (CD)CD is time deposit with Bank. Issued by commercial bank but they can be brought through brokerages. The funds may not be withdrawn on demand Bear specific maturity date (3months 5 years) Amount of interest depend on various factorCurrent interest rate Amount you invest Length of time Bank you chose

Advantage - safer investment, get more then saving account. Disadvantage low return, you will not get the amount before the maturity period.

Certificate of deposit conty Fundamental concept on buying CD

Annual Percentage Yield (APY) and annual percentage rate (APR). APY is the total amount of interest you earn in one year taking compound interest into account. APR is simply the stated interest you earn in one year, without taking compounding into account.

Commercial Paper (CP)Commercial paper is an unsecured, short-term loan issued by a corporation, typically for financing accounts receivable and inventories. It is usually issued at discount, reflecting current market rates. Maturity less then nine months. Avg. 1- 2 months High credit worth company issued CP. Small investor can also invest in CP.

Short Term Loan MarketIt is a market where the short term loan requirements of corporates are met by the Commercial banks. Banks provide short term loans to corporates in the form of cash credit or in the form of overdraft. Cash credit is given to industrialists and overdraft is given to businessmen.

Banker's Acceptance (BA)y A bankers' acceptance (BA) is a short-term credit investment

y y y y

created by a non-financial firm and guaranteed by a bank to make payment. Acceptances are traded at discounts from face value in the secondary market. For corporations, a BA acts as a negotiable time draft for financing imports, exports or other transactions in goods. Acceptances sell at a discount from the face value. it does not need to be held until maturity.

ReposRepo is short for repurchase agreement. A dealer or other holder of government securities sells the securities to a lender and agrees to repurchase them at an agreed future date at an agreed price. Repo virtually eliminate credit problems. variations on standard repos: y Reverse Repo - The reverse repo is the complete opposite of a repo. In this case, a dealer buys government securities from an investor and then sells them back at a later date for a higher pricey Term Repo - exactly the same as a repo except the term of the loan is greater

than 30 days.y

Features or characteristics1. 2.


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Dichotomic Structure : It has a simultaneous existence of both the organized money market as well as unorganised money markets. Seasonality : The demand for money in Indian money market is of a seasonal nature. India being an agriculture predominant economy, the demand for money is generated from the agricultural operations. Multiplicity of Interest Rates : In Indian money market, we have many levels of interest rates. They differ from bank to bank from period to period and even from borrower to borrower. Lack of Organized Bill Market : In the Indian money market, the organized bill market is not prevalent. Absence of Integration : At the same time it is divided among several segments or sections which are loosely connected with each other. There is a lack of coordination among these different components of the money market. High Volatility in Call Money Market : The call money market is a market for very short term money. Here money is demanded at the call rate.

Drawbacks of Indian Money Markety y y y

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Absence of Integration : The Indian money market is broadly divided into the Organized and Unorganized Sectors. There is lack of proper integration between these two segments. Multiple rate of interest : In the Indian money market, especially the banks, there exists too many rates of interests. These rates vary for lending, borrowing, government activities, etc. Insufficient Funds or Resources : The Indian economy with its seasonal structure faces frequent shortage of financial recourse. Shortage of Investment Instruments : Various investment instruments such as Treasury Bills, Commercial Bills, Certificate of Deposits, Commercial Papers, etc. are used. But taking into account the size of the population and market these instruments are inadequate. Shortage of Commercial Bill : In India, as many banks keep large funds for liquidity purpose, the use of the commercial bills is very limited. Lack of Organized Banking System : In India even through we have a big network of commercial banks, still the banking system suffers from major weaknesses such as the NPA, huge losses, poor efficiency. Less number of Dealers : There are poor number of dealers in the short-term assets who can act as mediators between the government and the banking system.

Conclusiony y y y y y y y y y y y

The money market specializes in debt securities that mature in less than one year. Money market securities are very liquid, and are considered very safe. As a result, they offer a lower return than other securities. The easiest way for individuals to gain access to the money market is through a money market mutual fund. T-bills are short-term government securities that mature in one year or less from their issue date. T-bills are considered to be one of the safest investments - they don't provide a great return. A certificate of deposit (CD) is a time deposit with a bank. Annual percentage yield (APY) takes into account compound interest, annual percentage rate (APR) does not. CDs are safe, but the returns aren't great, and your money is tied up for the length of the CD. Commercial paper is an unsecured, short-term loan issued by a corporation. Returns are higher than T-bills because of the higher default risk. Banker's acceptances (BA)are negotiable time draft for financing transactions in goods. BAs are used frequently in international trade and are generally only available to individuals through money market funds. Repurchase agreements (repos) are a form of overnight borrowing backed by government securities.