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Money Market Operations

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MONETARY POLICY AND CENTRAL BANKING

MONEY MARKET OPERATIONS

Romero, Raizel Anne M. (Leader)


Rosas, Keesha Pauline C.
Salvacion, Kimberly Mae C.

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Monetary Policy & Central Banking FIN151 Prof. A. V. Clarin
RAM Romero 1st Sem 2016-2017
KPC Rosas National University
KMC Salvacion
Money Market Operations
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I. INTRODUCTION

We studied about money market operation. What it money market? What is the function
of the money market? Does money market is important? Where do we use the money market?
And when do we use it? The money market is where financial instruments with high liquidity
and very short maturities are traded. It is used by participants as a means for borrowing and
lending in the short term, with maturities that usually range from overnight to just under a year.

The money market is where financial instruments with high liquidity and very short
maturities are traded. It is used by participants as a means for borrowing and lending in the short
term, with maturities that usually range from overnight to just under a year. Among the most
common money market instruments are Eurodollar deposits, negotiable certificates of deposit
(cds), bankers acceptances, U.S. treasury bills, commercial paper, municipal notes, federal funds
and repurchase agreements (repos).

II. ABSTRACT

The money market thus may be defined as a Centre in which financial institutions congregate for
the purpose of dealing impersonally in monetary assets. In a wider spectrum, a money market can
be defined as a market for short-term money and financial assets that are near substitutes for
money. The term short-term means generally a period up to one year and near substitutes to money
issued to denote any financial asset which can be quickly converted into money with minimum
transaction cost. This is a market for borrowing and lending short-term funds. Banks, financial
institutions, investment institutions, and corporates attempt to manage the mismatch between
inflow and outflow of funds by lending in or borrowing from the money market

We study the money market for the purpose of our daily lives and for our economy.
Creating, investing in, buying and selling short term obligations in the market for short term debt
instruments. Actions undertaken by larger institutions in order to gain short-term funds from
investors. Those same investors gain interest payments, yet still keep their invested funds liquid;
having "the best of both worlds." However, this does not come without significant financial

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Monetary Policy & Central Banking FIN151 Prof. A. V. Clarin
RAM Romero 1st Sem 2016-2017
KPC Rosas National University
KMC Salvacion
Money Market Operations
_____________________________________________________________________________________

risk.Money market transactions are wholesale, meaning that they are for large denominations and
take place between financial institutions and companies rather than individuals. Money market
funds offer individuals the opportunity to invest smaller amounts in these assets.

III. DISCUSSION

Money market refers to the market where money and highly liquid marketable securities
are bought and sold having a maturity period of one or less than one year. It is not a place like
the stock market but an activity conducted by telephone. The money market constitutes a very
important segment of the Indian financial system.

The highly liquid marketable securities are also called as ‘ money market instruments’ like treasury
bills, government securities, commercial paper, certificates of deposit, call money, repurchase
agreements etc.

According to the Geoffrey, “money market is the collective name given to the various
firms and institutions that deal in the various grades of the near money.”

As per RBI definitions “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
(less than one year).

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 & govt papers which can converted into cash without any loss at low
transaction cost.

It includes all individual, institution and intermediaries.

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Monetary Policy & Central Banking FIN151 Prof. A. V. Clarin
RAM Romero 1st Sem 2016-2017
KPC Rosas National University
KMC Salvacion
Money Market Operations
_____________________________________________________________________________________

Actions undertaken by larger institutions in order to gain short-term funds from investors.
Those same investors gain interest payments, yet still keep their invested funds liquid; having "the
best of both worlds." However, this does not come without significant financial risks.

The borrowing and re-lending of highly liquid, short-term assets and securities. Examples
include the borrowing and re-lending of U.S. Treasury bills and commercial paper. Money market
operations are conducted between banks. See also: Banker‘s acceptance.

FEATURES

It is a market purely for short-terms funds or financial assets called near money.

It deals with financial assets having a maturity period less than one year only.

Transaction have to be conducted without the help of brokers.

It is not a single homogeneous market, it comprises of several submarket like call money
market, acceptance & bill market.

The component of Money Market are the commercial banks, acceptance houses & NBFC
(Non-banking financial companies).

In Money Market transaction cannot take place formal like stock exchange, only through
oral communication, relevant document and written communication transaction can be done.

OBJECTIVES

To provide a parking place to employ short term surplus funds.

To provide room for overcoming short term deficits.

To enable the central bank to influence and regulate liquidity in the economy through its
intervention in this market.

To provide a reasonable access to users of short-term funds to meet their requirement


quickly, adequately at reasonable cost.

IMPORTANCE OF MONEY MARKET

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Monetary Policy & Central Banking FIN151 Prof. A. V. Clarin
RAM Romero 1st Sem 2016-2017
KPC Rosas National University
KMC Salvacion
Money Market Operations
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 Development of trade & industry.

 Development of capital market.

 Smooth functioning of commercial banks.

 Effective central bank control.

 Formulation of suitable monetary policy.

 Non-inflationary source of finance to government.

COMPOSITION OF MONEY MARKET

Money Market consists of a number of sub-markets which collectively constitute the money
market. They are,

 Call Money Market

 Commercial bills market or discount market

 Acceptance market

 Treasury bill market

INSTRUMENTS OF MONEY MARKET

A variety of instrument are available in a developed money market. In India till 1986, only a
few instrument were available. They were

• Treasury bills

 (T-bills) are the most marketable money market security.

 They are issued with three-month, six-month and one-year maturities.


 T-bills are purchased for a price that is less than their par (face) value; when
they mature, the government pays the holder the full par value.
 T-Bills are so popular among money market instruments because of
affordability to the individual investors.

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Monetary Policy & Central Banking FIN151 Prof. A. V. Clarin
RAM Romero 1st Sem 2016-2017
KPC Rosas National University
KMC Salvacion
Money Market Operations
_____________________________________________________________________________________

• Money at call and short notice in the call loan market.

 A short-term loan that does not have a set repayment schedule, but is payable
immediately and in full upon demand. Money-at-call loans give banks a way to
earn interest while retaining liquidity. Investors might use money at call to cover a
margin account. The interest rate on such loans is called the call-loan rate.

• Commercial bills, promissory notes in the bill market.

 Commercial bill is a short term, negotiable, and self-liquidating instrument with


low risk. It enhances he liability to make payment in a fixed date when goods are
bought on credit. According to the Indian Negotiable Instruments Act, 1881, bill or
exchange is a written instrument containing an unconditional order, signed by the
maker, directing to pay a certain amount of money only to a particular person, or to
the bearer of the instrument. Bills of exchange are negotiable instruments drawn by
the seller (drawer) on the buyer (drawee) or the value of the goods delivered to him.
Such bills are called trade bills. When trade bills are accepted by commercial banks,
they are called commercial bills. The bank discounts this bill by keeping a certain
margin and credits the proceeds. Banks, when in need of money, can also get such
bills rediscounted by financial institutions such as LIC, UTI, GIC, ICICI and IRBI.
The maturity period of the bills varies from 30 days, 60 days or 90 days, depending
on the credit extended in the industry

.NEW INSTRUMENTS

Now, in addition to the above the following new instrument are available:

 Commercial papers.

 CP is a short term unsecured loan issued by a corporation typically financing


day to day operation.
 CP is very safe investment because the financial situation of a company can
easily be predicted over a few months.

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Monetary Policy & Central Banking FIN151 Prof. A. V. Clarin
RAM Romero 1st Sem 2016-2017
KPC Rosas National University
KMC Salvacion
Money Market Operations
_____________________________________________________________________________________

 Only company with high credit rating issues CP’s.

 Certificate of deposit.

 A CD is a time deposit with a bank.


 Like most time deposit, funds can not withdraw before maturity without paying
a penalty.
 CD’s have specific maturity date, interest rate and it can be issued in any
denomination.
 The main advantage of CD is their safety.
 Anyone can earn more than a saving account interest.

 Inter-bank participation certificates.

 With a view to providing an additional instrument for evening out short-term


liquidity within the banking system, two types of Inter-Bank Participations (IBPs)
were introduced, one on risk sharing basis and the other without risk sharing. These
are 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 only in respect of advances classified under Health Code No. 1 Status.
Under the uniform grading system introduced by Reserve Bank for application by
banks to measure the health of bank advances portfolio, a borrower account
considered satisfactory or assigned Health Code No. 1 is the one in which the
conduct of account is satisfactory, the safety of advance is not in doubt, all the terms
and conditions are complied with, and all the accounts of the borrower are in order.
The IBP risk sharing provides flexibility in the credit portfolio of banks. The rate
of interest is left free to be determined between the issuing bank and the
participating bank subject to a minimum 14.0 per cent per annum. The aggregate
amount of such IBPs under any loan account at the time of issue is not to exceed
40 per cent of the outstanding in the account.

 Repo instrument
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Monetary Policy & Central Banking FIN151 Prof. A. V. Clarin
RAM Romero 1st Sem 2016-2017
KPC Rosas National University
KMC Salvacion
Money Market Operations
_____________________________________________________________________________________

 A repurchase agreement (repo) is a form of short-term borrowing for dealers in


government securities. The dealer sells the government securities to investors,
usually on an overnight basis, and buys them back the following day.

For the party selling the security, and agreeing to repurchase it in the future, it is a
repo; for the party on the other end of the transaction, buying the security and
agreeing to sell in the future, it is a reverse repurchase agreement.

 Banker's Acceptance

 A banker’s acceptance (BA) is a short-term credit investment created by a non-


financial firm.
 BA’s are guaranteed by a bank to make payment.
 Acceptances are traded at discounts from face value in the secondary market.
 BA acts as a negotiable time draft for financing imports, expoArts or other
transactions in goods.
 This is especially useful when the credit worthiness of a foreign trade partner
is unknown.

 Repurchase agreement

 CP is a short term unsecured loan issued by a corporation typically financing


day to day operation.
 CP is very safe investment because the financial situation of a company can
easily be predicted over a few months.
 Only company with high credit rating issues CP’s.

 Money Market mutual fund

 A money market fund (also called a money market mutual fund) is an open-ended
mutual fund that invests in short-term debt securities such as US Treasury bills and

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Monetary Policy & Central Banking FIN151 Prof. A. V. Clarin
RAM Romero 1st Sem 2016-2017
KPC Rosas National University
KMC Salvacion
Money Market Operations
_____________________________________________________________________________________

commercial paper. Money market funds are widely (though not necessarily
accurately) regarded as being as safe as bank deposits yet providing a higher yield.

STRUCTURE OF INDIAN MONEY MARKET?

I: ORGANISED STRUCTURE

1. Reserve bank of India

2. DFHI (discount and finance house of India).

3. Commercial banks
I. Public sector banks
SBI with 7 subsidiaries
Cooperative banks
20 nationalized banks
ii. Private Banks
Indian Banks
Foreign banks
4. Development bank
IDBI, IFCI, ICICI, NABARD, LIC, GIC, UTI etc.

II. UNORGANISED SECTOR


1. Indigenous banks
2 Money lenders
3. Chits
4. Nidhi’s

III. CO-OPERATIVE SECTOR


1. State cooperative
I. central cooperative banks
Primary Agri credit societies
Primary urban banks
2. State Land development banks

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Monetary Policy & Central Banking FIN151 Prof. A. V. Clarin
RAM Romero 1st Sem 2016-2017
KPC Rosas National University
KMC Salvacion
Money Market Operations
_____________________________________________________________________________________

central land development banks


Primary land development banks

DISADVANTAGE OF MONEY MARKET

 Purchasing power of your money goes down, in case of up in inflation.

 Absence of integration.

 Absence of Bill market.

 No contact with foreign Money markets.

 Limited instruments.

 Limited secondary market.

 Limited participants.

CHARACTERISTIC FEATURES OF A DEVELOPED MONEY MARKET?

 Highly organized banking system

 Presence of central bank

 Availability of proper credit instrument

 Existence of sub-market

 Ample resources

 Existence of secondary market

 Demand and supply of fund

RECENT DEVELOPMENT IN MONEY MARKET

 Integration of unorganized sector with the organized sector

 Widening of call Money market

 Introduction of innovative instrument

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Monetary Policy & Central Banking FIN151 Prof. A. V. Clarin
RAM Romero 1st Sem 2016-2017
KPC Rosas National University
KMC Salvacion
Money Market Operations
_____________________________________________________________________________________

 Offering of Market rates of interest

 Promotion of bill culture

 Entry of Money market mutual funds

 Setting up of credit rating agencies

 Adoption of suitable monetary policy

 Establishment of DFHI

 Setting up of security trading corporation of India ltd. (STCI)

IV. REFERENCES

http://www.businessdictionary.com/definition/money-market-operations.html

http://financial-dictionary.thefreedictionary.com/Money+Market+Operations

http://www.teachmefinance.com/Financial_Terms/money_market_operations.html

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11
Monetary Policy & Central Banking FIN151 Prof. A. V. Clarin
RAM Romero 1st Sem 2016-2017
KPC Rosas National University
KMC Salvacion