MONEY MARKET

Money Market Money market is a place for trading in money and short

term financial assets that are close substitutes of money.

Provides an opportunity for balancing the short term surplus funds of investors with short term requirements of borrowers.

Market for short term loans i.e. less than one year.

Do not deal in money but near money assets.

Money market is not a place but an activity.

The transactions are carried out by telephone, mail etc. among people who may have never met one other.

Example: Bombay money market, New York money market

The centre for dealings, mainly short term character, in monetary assets; it meets the short term requirements of borrowers and provide liquidity and cash to the lenders.

Characteristics of Money Market

RBI occupies an important position in the money market.

Provides short term funds to various borrowers.

Efficient mechanism for cost control, credit control.

Enables businessmen to invest their temporary surplus

Characteristics of a developed money Market

Developed commercial banking system

Presence of a central bank

Availability of ample resources

Near money assets

Sub markets

Players in Indian Money Market RBI Commercial banks Financial institutions Brokers Corporate units Discount and finance house of India

Functions Of Money Market

1. Economic development of the country: Provide short term funds

Ensures regular supply of funds through its sub- markets and instruments

Helps in economic development by providing financial assistance to trade, commerce and industry.

2. Profitable investment: o Helps commercial banks to use their excess reserves in

profitable investments. Maximize profits by investing their excess reserves.

o Excess reserves are invested in near money assets which are highly liquid and can be easily converted into cash.

3. Help to government: Borrows short term funds at very low interest rates.

4. Help to commercial Bank: the banks with deficit of funds can raise funds from money market at a low rate of interest.

5. Encouragement to Savings and investment: it encourages saving and investment by transferring funds from one sector to another sector.

Money Market

Components

Institutions

Instruments

Components

Call money Market

Collateral loan Market

Acceptance Market

Bill Market

1. Call Money Market It is the market for very short term funds, also called money at

call and short notice.

These loans are given for a very short period not exceeding 7 days.

More often from day to day or for overnight only i.e. 24 hours.

Highly liquid market

Loans are unsecured

2. Collateral loan market Backed by the securities, stocks and bonds.

Collateral securities may be in the form of some valuable say govt. bonds which are easily marketable and do not fluctuate much in prices.

The collateral is returned to the borrower when the loan is repaid

Once the borrower is unable to repay the loan, the collateral becomes the property of the lender.

These loans are given for few months.

3. Acceptance Market Bankers’ acceptance is a draft drawn by an individual or a

firm upon a bank and accepted by the bank whereby it is ordered to pay to the order of a designated party or to bearer a certain sum of money at a specified time in future.

The market where the bankers’ acceptance are easily sold and discounted is known as acceptance market.

A banker’s acceptance can be easily discounted in the money market because they carry signature of the bankers.

4. Bill Market It is a market in which short term papers or bills

are bought and sold.

A bill of exchange is a written unconditional order which is signed by the drawer requiring the drawee to pay on demand or at fixed future time, a definite sum of money.

Treasury bills are government papers securities for a short period usually of 91 days duration.

Treasury bills are promissory notes of the government to pay a specified sum after a specified period.

MONEY

MARKET

INSTITUTIONS

1. Commercial Banks These are the backbone of the money market.

These banks use their short term deposits for financing trade and commerce for short period.

They invest their surplus funds in discounting bills of exchange.

Commercial banks put their excess reserves in different forms or channels of investments which satisfy their liquidity and profitability needs.

2. Central bank Plays a vital role

Monetary authority

Acts as an apex institution

Lender of last resort

Controller and guardian of money market

Raises or reduces the money supply and credit to ensure economic stability in the economy.

3. Acceptance Houses Functions as intermediaries between importers and

exporters and between lenders and borrowers in the short period.

Specialize in acceptance of commercial bills/trade bills.

4. Non-banking financial intermediaries Resort to lending and borrowing of short term funds

in the money market.

E.g. Insurance companies, investment houses, provident funds etc.

Money

market

instruments

Instruments

Treasury bills

Call and

short notice money marketCertific

ate of deposit

s

Commercial

Paper

REPO

Commercial Bills

1. Commercial bills Written instrument containing an unconditional order Signed by the drawer Directing a certain person to pay a certain sum of

money only to, or order of a certain person, or to bearer of an instrument at a fixed time in future or on demand

Bill drawn when goods are sold on credit Buyer accepts the bill and return to seller The seller may either retain the bill or get it

discounted

2. Treasury Bills It is a short term government security

Usually of 91 days, 180 days or 365 days duration

Sold by central bank on behalf of government

No fixed rate of interest payable

Sold on basis of competitive bidding

3. Call and short notice money Call money refers to money given for very short period

Taken for a day or overnight but not exceeding seven days in any circumstances.

Notice money refers to a money given for upto 14 days

If the loan is given for 1 day – Money at call

If loan cannot be called back on demand and will require notice of atleast 3 days – Money at short notice

4. Certificate of deposit These are marketable receipts in bearer or registered form

of funds deposited in a bank for a specified period at specified rate of interest

Freely transferable

Liquid and riskless in terms of default of payment of interest and principal.

5. Commercial Papers These are short term usance promissory notes

Issued by reputed companies with good credit rating and having sufficient tangible assets

Negotiable by endorsement and delivery

Normally issued by banks, public utilities, insurance and finance companies.

6. REPO Under REPO, holder of securities sells them to an

investor with an agreement to repurchase at predetermined date and rate.

Also called ready forward transaction as it involves selling a security on spot basis and repurchasing the same on forward basis.

Defects in Indian money market

•Existence of unorganized money market

•Seasonal diversity of money market

•Lack of integration

•Disparity in interest rates

•Lack of very well organized banking system

Reforms in Indian Money Market

Development of

money market

instruments

Deregulation of interest

rates

Institutional

development

Permission to foreign

institutional investors