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Jaswinder Singh
FINANCIAL MARKET
Money Mkt.
Debt Mkt.
FOREX Mkt.
Capital Mkt.
deposits
Deposit
Commercial Papers
Debt Market
It includes Government Securities and Bonds.
Bonds includes
Foreign Investment Bonds
The Six Horses: Why, What, Who, Which, How and Where
Why : The Need What : The Definition
The Need
Need for short term funds by banks
The Definition
Money Market is the centre for dealings, mainly short
term character, in money assets. It meets the short term requirements of the borrowers & provides liquidity or cash to the lenders. Money Market refers to the market for short term assets that are close substitutes of money, usually with maturities of less than a year.
The Players
RBI
India & SBI Gilts in 2004) Commercial Banks, Cooperative Banks & Primary Dealers are allowed to borrow and lend. Specified All-India Financial Institutions, Mutual Funds and certain specified entities are allowed to access to Call/Notice money market only as lenders. Individuals, Firms, Companies, corporate bodies, trusts & institutions can purchase the treasury bills, commercial papers and certificate of deposits.
Bankers Acceptance
REPO
Promissory Notes having a maturity of not less than 15 days upto a maximum of 1 year.
Features Of CD
Can be issued by all scheduled commercial banks except
RRBs Minimum period 15 days, Maximum period 1 year NRIs can subscribe to CDs on non-repatriable basis. Minimum amount Rs.1 lac & in multiples of Rs.1 lac Transferable by endorsement & delivery. CRR & SLR are to be maintained. CDs are to be stamped.
Advantages
Enable high return on short term surpluses. Enhances liquidity & allows resale. For raising resources in times of need. To improve lending capacity of the bank.
Commercial Paper
CP is an unsecured money market instrument
Highly rated corporate borrowers, primary dealers (PDs) & satellite dealers (SDs) & allIndia financial institutions (FIs)
Features
Cheaper source of funds than limits set by banks.
Optimal combination of liquidity return. Highly liquid instrument. Transferable by endorsement & delivery. Backed by liquidity & earnings of issuer. Issued for a minimum period of 30 days and a maximum up
to one year Issued at a discount to face value Issued in demat form. (Compulsory demat from July '01).
Types of CP
Direct Papers :-
Rs.4 crore
Rating Requirement
All eligible participants should obtain the credit rating for issuance of CP through the following- Credit Rating Information Services Of India Ltd. (CRISIL)
DCR India
The minimum credit rating shall be P-2 of CRISIL or such equivalent
Maturity
Issued for maturities between a minimum of 30 days and
To whom Issued
CP is issued to and held by individuals, banking companies, other corporate bodies registered or incorporated in India, and unincorporated bodies, Non-Resident Indians (NRIs) and Foreign Institutional Investors (FIIs).
Banker's Acceptance
It is a short-term credit investment. It is guaranteed by a
bank to make payments. The Banker's Acceptance is traded in the Secondary market.
Repo
Meaning of Repo
Transaction in which 2 parties agree to sell & repurchase the
same security. Under such an agreement, the seller sells specified securities with an agreement to repurchase the same at a mutually decided future date and a price.
The Repo/Reverse repo transaction can only be done at
Mumbai between parties approved by RBI & in securities as approved by RBI (Treasury Bills, Central/State Govt. Securities).
Repo
Uses of Repo
Helps banks to invest surplus cash Helps investors achieve money market returns with sovereign risks. Raising funds by borrowers Adjusting SLR/CRR positions simultaneously. For liquidity adjustment in the system.
Recent changes
All Govt. Securities are eligible for repos. Primary dealers & non-bank participants allowed to
undertake such transactions. Minimum 3 days period, for inter-bank transactions has been removed.
day surplus funds (mostly of banks) are traded. The loans are of short term duration varying from 1 to 14 days.
Call Money, & if it exceeds 1 day (but less than 15 days), it is referred to as Notice Money.
hours, 7-15 days maturity. Recalled on demand or shortest possible notice. Normally, collaterals are not insisted upon. In India, CMM provides facilities for inter-bank tending. Surplus suppliers of funds: UTI, SBI, LIC
purpose: To fill the gaps in funds. To meet CRR & SLR mandatory requirements. To meet sudden demand for
funds
bonds & treasury bills issued by the Central and the State govt. These securities are normally referred to, as gilt-edged as repayments of principal as well as interest are totally secured by sovereign guarantee.
Features
These securities have a fixed coupon that is paid on
Available in primary and secondary market. High liquidity-securities can be sold in the secondary
of automatic credit of half yearly interest and the redemption proceeds on due date.
Recent Changes
During last few years, Government of India has issued
new instruments such as Zero Coupon Bonds, Floating Rates Bonds, Partly-paid Stocks, Capital Index Bonds, etc.
Treasury Bills
T-Bills are issued by Govt. of India against their
short term borrowing requirements with maturities ranging between 14 to 364 days.
eg: a T-Bill of Rs.100 face value issued for Rs.91.50 gets redeemed at the end of its tenure at Rs.100.
Features
Issued at a discount to face value.
Rs.25,000 and multiples thereof. Generally issued in the form of SGL (Subsidiary General Ledger) entries in the books of RBI & not as securities.
Provident Funds, Financial Institutions, Insurance Companies, NBFIs, FIIs (as per prescribed norms), NRIs can invest in T-Bills.
Credit Card
Instrument that enables the cardholder to obtain
goods & services without actual payment at the time of purchase a Pay Later card provided to a customer.
Features
Can be availed for a period of 30-45 days. Card carries a pre-determined limit upto which the
holder can spend. 2-3% interest p.m. charged on outstanding balance. Discounts on purchases on gaining additional points on regular use of card.
Types of Cards
Master card Secured Card
VISA Card
Affinity Card Standard Card Classic Card Gold/Executive Card
Smart Card
Charge Card Rebate Card Co-branded Card Cash Card
Platinum Card
Titanium Card
Travel Card
Debit Card
Recent Changes
Personal Accident Insurance Cash withdrawal facility Increase in credit
Add-on facility
Leveraged investment facility
bond market are known as Foreign bonds. Foreign bonds are sold in the foreign countries and are denominated in that countrys currency.
German auto maker sales a foreign bond in US denominated in US dollar. Euro Bond: Bonds denominated in a currency than that of the country in is sold. Euro bond: A bond denominated in US dollar and London.
other which it
sold in
Euro Bond if it is sold outside the countries that adopted Euro as their currencies. Euro Currencies: A variant of euro bond is euro currencies. Foreign currencies deposited in banks outside the home country. US dollar deposited in Banks outside US.
Municipal notes - (in the U.S.) Short-term notes issued by municipalities in anticipation of tax receipts or other revenues.
Federal funds - (in the U.S.) Interest-bearing deposits held by banks and other depository institutions at the Federal Reserve; these are immediately available funds that institutions borrow or lend, usually on an overnight basis. They are lent for the federal funds rate.
Instrument
Federal Funds Discount Window Negotiable Certificates of Deposit (CDs) Eurodollar Time Deposits and CDs
Principal Borrowers
Banks Banks Banks Banks
Repurchase Agreements
Treasury Bills Municipal Notes Commercial Paper Bankers Acceptances Government-Sponsored Enterprise Securities Shares in Money Market Instruments
options are available where use is made of the money market, two of which are ---Selling money market instruments & Increasing interest rates by offering less money
Current Reports
Special repo for 140.3 bn rupees to enable banks to meet
liquidity needs of mutual funds: RBI. The repo rate is now 7.25%.
Summary
1. Efficient financial markets are required to channel funds from surplus-spending units (savers) to deficit-spending units. Typically, such securities entitle the holder to a stream of periodic future cash payments. Financial intermediaries allow economies of scale to be realized when matching surplus-spending units with deficit-spending units. Greater opportunities for portfolio diversification and money management can be gained.
2.
Major findings
Various segments of the financial market in India have achieved market efficiency
The 91-day Treasury bill rate is the appropriate 'reference rate' of the financial sector in
India
The financial markets in India are largely integrated at the short-end of the market, and The long-end of the market is integrated with the short-end of the market.
The above findings suggest that monetary policy should rely more on interest rate and asset price channels to control inflation.
Conclusion
The money market is a vibrant market, affecting our everyday
lives. As the short-term market for money, money changes hands in a short time frame and the players in the market have to be alert to changes, up to date with news and innovative with strategies and products
In brief, various policy initiatives by the Reserve Bank have facilitated development of a wider range of instruments such as market repo, interest rate swaps,