MONEY MARKET

The money market is a market for short-term funds, which deals in financial assets whose period of maturity is up to one year.

Money market does not deal in cash or money as such but simply provides a market for credit instruments such as Bills of Exchange, Promissory notes, Commercial Paper, Treasury Bills, etc. These financial instruments are close substitute of money.

These instruments help the business units, other organizations and the Government to borrow the funds to meet their shortterm requirement.

MONEY MARKET

Money market does not imply to any specific market place. Rather it refers to the whole networks of financial institutions dealing in shortterm funds, which provides an outlet to lenders and a source of supply for such funds to borrowers. Most of the money market transactions are taken place on telephone, fax or Internet. The Indian money market consists of Reserve Bank of India, Commercial banks, Co-operative banks, and other specialized financial institutions. The Reserve Bank of India is the leader of the money market in India. Some Non-Banking Financial Companies (NBFCs) and financial institutions like LIC, GIC, UTI, etc. also operate in the Indian money market.

MONEY MARKET IN INDIA

The Indian money market is divided in two sectors i.e. Organised sector and Unorganised sector. Organised sector: Consists of Reserve Bank of India, private banks, public sector banks, development banks and other financial institutions, NBFCs etc Unorganised sector: Consists of Private moneylenders, indigenous bankers, chit funds, and the co-operative sector.

MONEY MARKET

Characteristics of Money Market 1. Maturity Period - The money market deals in the lending and borrowing of short-term finance (i.e., for one year or less) 2. Credit Instruments - The main credit instruments of the money market are call money, collateral loans, acceptances, bills of exchange etc. 3. Institutions - Important institutions operating in the money market are central banks, commercial banks, acceptance houses, nonbank financial institutions, bill brokers, etc.

MONEY MARKET

4. Purpose of Loan - The money market meets the short-term credit needs of business; it provides working capital to the industrialists. 5. Risk - The degree of risk is small in the money market. The maturity of one year or less gives little time for a default to occur, so the risk is minimised. 6. Basic Role - The basic role of money market is that of liquidity adjustment. 7. Relation with Central Bank - The money market is closely and directly linked with central bank of the country.

MONEY MARKET IN INDIA

Money Market

Organized

Unorganized

RBI

Private Banks

Public Banks

NBFCs and other FIs

Money Lenders

Indigenous Bankers

Chit Funds

MONEY MARKET INSTRUMENTS

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2. 3. 4.

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6. 7. 8. 9. 10. 11. 12. 13.

Commercial Paper (CPs) Certificate of Deposits (CDs) Treasury Bills (T Bills) Government Securities (G Secs) Money Market at Call and Short Notice Call Money / Short term deposit Money Market Mutual Funds (MMFs) Commercial Bills Inter Bank Participation Certificates (IBPCs) Gilt Edged Govt. Securities Bankers Acceptance REPOS Inter Corporate Deposits (ICDs)

CERTIFICATE OF DEPOSITS (CDS)

Certificate of Deposit (CD) is a negotiable money market instrument and issued in dematerialised form or as a Usance Promissory Note against funds deposited at a bank or other eligible financial institution for a specified time period. A promissory note is a negotiable instrument, wherein one party (the maker or issuer) makes an unconditional promise in writing to pay a determinate sum of money to the other (the payee), either at a fixed or determinable future time or on demand of the payee, under specific terms.

CERTIFICATE OF DEPOSITS (CDS)

CDs can be issued by (i) scheduled commercial banks {excluding Regional Rural Banks and Local Area Banks}; and (ii) select All-India Financial Institutions (FIs) that have been permitted by RBI to raise short-term resources within the umbrella limit fixed by RBI. Banks have the freedom to issue CDs depending on their funding requirements. No prescribed cap. Minimum amount of a CD should be Rs.1 lakh, i.e., the minimum deposit that could be accepted from a single subscriber should not be less than Rs.1 lakh, and in multiples of Rs. 1 lakh thereafter

CERTIFICATE OF DEPOSITS (CDS)

CDs can be issued to individuals, corporations, companies, trusts, funds, associations, etc.

Non-Resident Indians (NRIs) may also subscribe to CDs, but only on non-repatriable basis, which should be clearly stated on the Certificate. Such CDs cannot be endorsed to another NRI in the secondary market.
The maturity period of CDs issued by banks should not be less than 7 days and not more than one year, from the date of issue. The FIs can issue CDs for a period not less than 1 year and not exceeding 3 years from the date of issue.

CERTIFICATE OF DEPOSITS (CDS)

CDs may be issued at a discount on face value. Banks / FIs are also allowed to issue CDs on floating rate basis provided the methodology of compiling the floating rate is objective, transparent and market-based. The issuing bank / FI is free to determine the discount / coupon rate. The interest rate on floating rate CDs would have to be reset periodically in accordance with a pre-determined formula that indicates the spread over a transparent benchmark. The investor should be clearly informed of the same.

CERTIFICATE OF DEPOSITS (CDS)

Banks have to maintain appropriate reserve requirements, i.e., cash reserve ratio (CRR) and statutory liquidity ratio (SLR), on the issue price of the CDs. CDs in physical form are freely transferable by endorsement and delivery. CDs in demat form can be transferred as per the procedure applicable to other demat securities. There is no lock-in period for the CDs.

All OTC trades in CDs shall be reported within 15 minutes of the trade on the FIMMDA reporting platform.

CERTIFICATE OF DEPOSITS (CDS)

Banks / FIs cannot grant loans against CDs. Furthermore, they cannot buy-back their own CDs before maturity. However, the RBI may relax these restrictions for temporary periods through a separate notification. There will be no grace period for repayment of CDs. If the maturity date happens to be a holiday, the issuing bank/FI should make payment on the immediate preceding working day. Banks / FIs, therefore, should fix the period of deposit in such a manner that the maturity date does not coincide with a holiday to avoid loss of discount / interest rate.

CERTIFICATE OF DEPOSITS (CDS)

Since CDs are transferable, the physical certificates may be presented for payment by the last holder. Issuer make payment only by a crossed cheque. The holders of demat CDs will approach their respective depository participants (DPs) and give transfer / delivery instructions to transfer the security represented by the specific International Securities Identification Number (ISIN) to the 'CD Redemption Account' maintained by the issuer. The holders should also communicate to the issuer by a letter / fax enclosing the copy of the delivery instruction they had given to their respective DP and intimate the place at which the payment is requested to facilitate prompt payment. Upon receipt of the demat credit of CDs in the "CD Redemption Account", the issuer, on maturity date, would arrange to repay to holders / transferors by way of Banker's cheque / high value cheque, etc.

CERTIFICATE OF DEPOSITS (CDS)

In case of loss of physical certificates, duplicate certificates can be issued after compliance with the following:

a. A notice is required to be given in at least one local newspaper; b. Lapse of a reasonable period (say 15 days) from the date of the notice in the newspaper; and c. Execution of an indemnity bond by the investor to the satisfaction of the issuer of CDs
The duplicate certificate should be issued only in physical form. No fresh stamping is required as a duplicate certificate is issued against the original lost CD. The duplicate CD should clearly state that the CD is a Duplicate one stating the original value date, due date, and the date of issue (as "Duplicate issued on ________").

TREASURY BILLS (T BILLS)

Treasury Bills are money market instruments to finance the short term requirements of the Government of India.

These are discounted securities and thus are issued at a discount to face value. The return to the investor is the difference between the maturity value and issue price. In India, at present, the Treasury Bills are issued for the following tenors 91-days, 182-days and 364-days Treasury bills
T Bills are issued only by Central Government. The treasury bills are issued in the form of promissory note in physical form or by credit to Subsidiary General Ledger (SGL) account or Gilt account in dematerialised form.

TREASURY BILLS (T BILLS)

Bids for treasury bills are to be made for a minimum amount of Rs 25000/- only and in multiples thereof. All entities registered in India like banks, financial institutions, Primary Dealers, firms, companies, corporate bodies, partnership firms, institutions, mutual funds, Foreign Institutional Investors, State Governments, Provident Funds, trusts, research organisations, Nepal Rashtra bank and even individuals are eligible to bid and purchase Treasury bills. The treasury bills are repaid at par on the expiry of their tenor at the office of the Reserve Bank of India, Mumbai. All the treasury Bills are highly liquid instruments available both in the primary and secondary market.

TREASURY BILLS (T BILLS)

Yield Calculation The yield of a Treasury Bill is calculated as per the following formula: (100-P)*365*100 Y= -----------------P*D Wherein Y = discounted yield P= Price D= Days to maturity

TREASURY BILLS (T BILLS)

A commercial bank wishes to buy 91 Days Treasury Bill Maturing on Dec. 6, 2012 on Oct. 12, 2012. The rate quoted by seller is Rs. 99.1489 per Rs. 100 face value. The YTM can be calculated as following: The days to maturity of Treasury bill are 55 (October 20 days, November 30 days and December 5 days) YTM = (100-99.1489) x 365 x 100/(99.1489*55) = 5.70% Similarly if the YTM is quoted by the seller price can be calculated by inputting the price in above formula.

TREASURY BILLS (T BILLS)

T Bills in Primary market Issued through Bid auction by RBI Type of T Bills 91 days Day of Auction Day of Payment

Wednesday

Following Friday

182 days

Wednesday of non-reporting week

Following Friday

364 days

Wednesday of reporting week

Following Friday

TREASURY BILLS (T BILLS)

The Auction Technique The auction of treasury bills is done only at Reserve Bank of India, Mumbai. Bids are submitted in terms of price per Rs 100. For example, a bid for 91-day Treasury bill auction could be for Rs 97.50. Auction committee of Reserve Bank of India decides the cut-off price and results are announced on the same day. Bids above the cut-off price receive full allotment; bids at cut-off price may receive full or partial allotment and bids below the cut-off price are rejected.

TREASURY BILLS (T BILLS)

Types Of Auctions There are two types of auction for treasury bills: Multiple Price Based or French Auction: Under this method, all bids equal to or above the cut-off price are accepted. However, the bidder has to obtain the treasury bills at the price quoted by him. Uniform Price Based or Dutch auction: Under this system, all the bids equal to or above the cut-off price are accepted at the cut- off level. However, unlike the Multiple Price based method, the bidder obtains the treasury bills at the cut-off price and not the price quoted by him.

TREASURY BILLS (T BILLS)

Benefits Of Investment In Treasury Bills No tax deducted at source Zero default risk being sovereign paper Highly liquid money market instrument Better returns especially in the short term Transparency Simplified settlement High degree of tradeability and active secondary market facilitates meeting unplanned fund requirements.

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7.

COMMERCIAL BILLS

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 discount this bill by keeping a certain margin and credits the proceeds. Banks 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. Commercial bill is an important tool finance credit sales. It may be a demand bill or a usance bill; clean bills or documentary bills.; inland bills or foreign bills