Money Market Final

8/4/2019 Money Market Final

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In this chapter…



Money Market…

• It is a market for financialassets that are closesubstitute for money.

• It is a market forovernight to short termfunds and instrumentshaving a maturity periodof one or less than oneyear.



• Money market is a market for short-termfinancial assets which are near substitutes formoney.

• Money market instruments are liquid and can beturned over quickly at low costs.

• Money market instruments are for short duration,

generally defined as less than one year.



Definition

• “The money market is the collective name given tothe various firms and institutions that deal in thevarious grades of near money.”-Geottery Crowther

• “A market for short term financial assets that areclose substitutes for money, facilitates the exchangeof money for new financial claims in the primarymarket as also for financial claims, already issued in

the secondary market.-RBI



Characteristics of MoneyMarket…

• Not a single market butcollection of markets forseveral instruments.

• Wholesale market of shortterm debt instruments.

• Its principal feature ishonour where thecreditworthiness of the

participant is important.• Need based market.

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Conti…….

• It is the market for short term funds with maturityranging from overnight to one year

• Provides an avenue for the central bank

intervention in influencing both quantum andliquidity in the financial system.

• The central bank strives to align money marketrates with the key policy rate.

• Money market influences the effectiveness ofmonetary policy.



Functions of the MoneyMarket…

• Provide a balancing mechanism to even out the demandfor and supply of short term funds.

• Provide a focal point for central bank intervention for

influencing liquidity and general level of interest rates inthe economy.

• Provide reasonable assess to suppliers and users ofshort term funds to fulfill their borrowings and investmentrequirements at an efficient market clearing price.

• Facilitates the development of a market for longer termsecurities.

• The interest rates for extremely short term use of moneyserve as a benchmark for long term financial instruments.

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Benefits of an efficient MoneyMarket…

• Provides a stable source offunds to banks.

• Encourage development ofnon bank entities.

• Facilitates Govt. marketborrowings.

• Makes effective monetarypolicy action.

• Helps in pricing differentfloating interest products.



The Indian Money Market…

• The average turnover of Indian MoneyMarket is over Rs.

40,000 crores daily.• 2% of the annual

GDP of India gatestraded in the moneymarket in just oneday.



Role of RBI in theMoney Market…

• To ensure that liquidity and short terminterest rates are maintained at levelsconsistent with the monetary policy

objectives of maintaining price stability;• To ensure an adequate flow of creditto the productive sector of theeconomy;

• It influences liquidity and interest ratesthrough a number of operatinginstruments – cash reserverequirements of banks, conduct ofopen market operations, repos,

change in bank rates.

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Link Between the Money Marketand the Monetary Policy in India…

• The Monetary Policy represents policies,objectives and instruments directed towardsregulating money supply and the cost andavailability of credit in the economy.

• Money market provides a balancingmechanism to even out the demand for andsupply of short term funds.

• The monetary policy in India is an adjunct of

the economic policy. The objectives of themonetary policy are not different from those ofthe economic policy.



Link Between the Money Marketand the Monetary Policy in India…

• Money market provides a focal point for central bankintervention for influencing liquidity and general levelof interest rates in the economy.

• In the monetary policy framework, broad objectives are

prescribed and an operating framework of policyinstruments to achieve them is formulated.

• Money market facilitates the development of a marketfor longer term securities.

• RBI uses multiple instruments to ensure thatappropriate liquidity is maintained in the system.



Different Money MarketInstruments…

• Treasury Bills.

• Commercial Papers.

• Commercial Bills.• Certificate of Deposit.

• Call/ Notice Money Market.



Classification of Money Market

• Call money market

• Gilt edge market

• Capital market• Collateral loan market

• Acceptance market

• Bill market-Commercial bill and treasurybill



Commercial Bill

• A Bill of exchange contains a written orderfrom the creditor to the debtor, to pay acertain sum, to a certain person, after a

certain period

• It is for short period ranging between 2months and 6 months.



TYPES OF BILLS

• Demand and Usance/time bills

• Clean bills and documentary bills-railwayreceipts, lottery receits etc.

• Inland and foreign bills

• Export bills and import bills

• Indigenous bills• Accommodation bills and supply bills



ACCEPTANCE MARKET

• The Acceptance Market refers to the Marketwhere short genuine Trade Bills are accepted byfinancial intermediaries.

• In London, there are specialist firms calledMarket Acceptance House which accept billsdrawn by trader and impart greater marketabilityto such bills.

• In India, there are no Acceptance Houses butThe Commercial Banks undertake this businessto some extent.



TREASURY BILLS MARKET

• Treasury Bills represent short term borrowing ofthe Government. Treasury Bills Market refers tothe Market where these bills are bought and

sold.• A Treasury Bill is nothing but a promissory note

issued by the Government under discount for aspecified period stated therein. It is purely a

finance bill since it does not arise out of anytrade transaction.



• Treasury Bills are issued only by the RBI

on behalf of the Government.

• It is lowest one in the entire structure of

interest rates in the country because ofshort term maturity and high degree ofliquidity and security.



TYPES OF TREASURY BILLS

1. Ordinary or Regular :

Ordinary Treasury Bills are issued to the public andother financial institutions for meeting the short termfinancial requirements of the Central Government.

2. Adhoc :

Adhoc Bills are always issued by favor of RBI only.They are not sold through tender or auction. Theyare purchased by the RBI on tap with authority to

issue currency notes against them.



Organized Money Market

• RBI

• Commercial bank

• Development bank• Financial institutions like LIC,UTI and

general insurance

• Co-operative institutions• Non banking companies



Unorganized Money Market

• Indigenous bankers

• Money lenders

• Nidhis• Chit fund



conclusion

• Since 1990s, the money market hasudergone a significant transformation interms of instruments, participants, and

technological infrastructure.

Documents

Money Market Final