Money Market

Def. JSG Wilson a center in which financial institutions congregate for the purpose of dealing impersonally in monetary assets. Money market is a mechanism in which short term funds are borrowed and lent, and through which a large part of the financial transactions of a particular country or of the world are cleared.

Functions of the money market 1) It caters to the short-term financial needs of the economy. 2) It helps the RBI in effective implementation of monetary policy. 3) It provides mechanism to achieve equilibrium between demand and supply of short-term funds. 4) It helps in allocation of short term funds through inter-bank transactions and money market instruments 5) It also provides funds in non-inflationary way to the government to meet its deficits. 6) It facilitates economic development.

 In accordance with the Chakravarthy Committee report and the Vaghul Committee report interest rates were deregulated in the money market. New instruments were introduced since 1986. They are 182 days treasury bills, Certificates of Deposits (CDs), Commercial Papers (CPs) in 1986 and Inter Bank Participation Certificates in 1989, 364 Treasury Bills, Money Market Mutual Funds in 1992. In 1988 DFHI was launched. It is a market maker for money market instruments

Call money market

Call Money rates have been deregulated and left to the demand and supply of the market Call money deals in very short period funds called call funds/money The period ranges from overnight to a fortnight The participants are mostly banks. Therefore it is also called Inter-Bank Money Market. Call money is repayable on the next working day whereas notice money is repayable within 2 to 14 days. These transactions are not covered by any collateral security. Call money is next only to cash

Participants Lenders and borrowers banks & UTI, cooperative banks, DFHI, STCI etc Lenders financial institutions, GIC, LIC, MFs, IDBI, NABARD,

Treasury Bills
A treasury bill is a promissory note issued by the government under discount for a period stated in the document. TBs are short term (upto one year) borrowing instruments of the Central govt. They are issued at discount to the face value, and on maturity, the face value is paid to the holder. The rate of discount and the issue price are determined at each auction. It is purely a finance bill and does not arise out of any transaction.

 State government does not issue any treasury bills. Presently there are 3 types of treasury bills 91 days, 182 days and 364 days Treasury bills are available for a minimum amount of Rs. 25,000 and in multiples of Rs. 25,000.

Commercial bill Commercial bills are short term, negotiable and self liquidating money market instruments with low risk. A bill of exchange is drawn by a seller on the buyer to make payment within a certain period of time. Generally, the maturity period is of three months. Commercial bill can be resold a number of times during the usance period of bill. The commercial bills are purchased and discounted by commercial banks and are rediscounted by financial institutions like EXIM banks, SIDBI, IDBI etc.

Certificates of Deposits They are issued in dematerialized form or as a usance promissory note, for funds deposited at a bank or other eligible financial institutions for a specified period of time and at a specified rate of interest are negotiable term deposits accepted by commercial banks from bulk depositors at market related rates. It was introduced in 1989. Introduced to enable the banking system to mobilise bulk deposits from the market, which they can have at competitive rates of interest.

 The CDs can be issued by scheduled commercial banks (excluding RRBs) and select All- India Financial Institutions at a discount to face value to for a period from 7 days to 1 year. Can be issued for a minimum of 1 lakh and multiples of 1 lakh thereof Discount on CDs is market determined

Commercial Paper - Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note. CP, as a privately placed instrument, was introduced in India in 1990 with a view to enable highly rated corporate borrowers to diversify their sources of short-term borrowings and to provide an additional instrument to investors.

 Corprates, Primary Dealers and all-India financial institutions (FIs) that have been permitted to raise short-term resources under the umbrella limit fixed by the Reserve Bank of India (RBI) are eligible to issue CP.

A corporate would be eligible to issue CP provided: (a) the tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs.4 crore; (b) the company has been sanctioned working capital limit by bank/s or FIs; and (c) the borrowal account of the company is classified as a Standard Asset by the financing bank/institution.

 All eligible participants shall obtain credit rating for issuance of CP from any one of the following credit rating agencies CRISIL, CARE, ICRA, or Fitch ratings The minimum credit rating shall be A2 [As per rating symbol and definition prescribed by Securities and Exchange Board of India (SEBI)].

 CP can be issued in denominations of Rs.5 lakh or multiples thereof. Amount invested by a single investor should not be less than Rs.5 lakh (face value). Only a scheduled bank can act as an Issuing and Paying Agent (IPA) for issuance of CP. CP may be issued to and held by individuals, banking companies, other corporate bodies (registered or incorporated in India) and unincorporated bodies, Non-Resident Indians and Foreign Institutional Investors (FIIs). However, investment by FIIs would be within the limits set for them by Securities and Exchange Board of India (SEBI).