FINANCIAL MARKET

“ Financial market refers to institutional arrangements for dealing in

financial assets and credit instruments of different types such as currency, cheques
, bank deposits, bills etc. “

Functions of financial market:

To serve as intermediaries in the process of mobilisation of savings in the economy

To provide financial convenience to the people.
To facilitate creation and allocation of credit and liquidity
To help the process of economic development through a more balanced regional
and sectoral distribution of investible funds.
 MONEY MARKET

The money market consists of financial institutions and

dealers in money or credit who wish to either borrow or lend.
Participants borrow and lend for short periods of time, typically up
to thirteen months. Money market trades in short-term
financial instruments commonly called "paper." This contrasts with
the capital market for longer-term funding, which is supplied by
bonds and equity.
Common money market instruments

Certificate of deposit - Time deposits, commonly offered to consumers by

banks, thrift institutions, and credit unions.

Repurchase agreements - Short-term loans—normally for less than two

weeks and frequently for one day—arranged by selling securities to an
investor with an agreement to repurchase them at a fixed price on a fixed
date.

Commercial paper - Unsecured promissory notes with a fixed maturity of one

to 270 days; usually sold at a discount from face value.
Eurodollar deposit - Deposits made in U.S. dollars at a bank or bank branch
located outside the United States.
Federal agency short-term securities - (in the U.S.). Short-term securities
issued by government sponsored enterprises such as the
Farm Credit System, the Federal Home Loan Banks and the
Federal National Mortgage Association.
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.

Municipal notes - (in the U.S.). Short-term notes issued by municipalities in

anticipation of tax receipts or other revenues.

Treasury bills - Short-term debt obligations of a national government that are

issued to mature in three to twelve months. For the U.S., see Treasury bills.

Money funds - Pooled short maturity, high quality investments which buy
money market securities on behalf of retail or institutional investors.

Foreign Exchange Swaps - Exchanging a set of currencies in spot date and

the reversal of the exchange of currencies at a predetermined time in the
future.
Short-lived mortgage-backed and asset-backed securities
CHARACTERSTICS OF A DEVELOPED MONEY MARKET:

1. A DEVELOPED COMMERCIAL BANKING SYSTEM.

2. PRESENSE OF A CENTRAL BANK
3. SUB-MARKETS
4. NEAR MONEY ASSETS
5. AVAILABILITY OF AMPLE RESOURCES
6. INTEGRATED INTEREST RATE STRUCTURE
7. OTHER FACTORS
SIGNIFICANCE OF MONEY MARKET:

1.ECONOMIC DEVELOPMENT: Money Market assures supply of fund. The

money market helps in the economic development by providing financial help
to trade, commerce and industry.
2. PROFITABLE INVESTMENT: The banks are required to put their assets
into cash form to meet the directions of the commercial bank while on the
other, they have to put their excess reserve into productive channels to earn
income on them.
3. BORROWINGS BY THE GOVT.: The Money Market helps the govt. in
borrowing short term funds at very low interest rate. The borrowing is done on
the basis of treasury bills.
4. MOBILISATION OF FUNDS: The Money Market helps in transferring funds
from one sector to another. The development of any economy depends upon
the ability of finance.
5. SAVINGS AND INVESTMENT: It helps in promoting liquidity and safety of
financial assets. by doing so it helps in encouraging savings and investments.
THE LONDON MONEY MARKET:
Most well advanced, integrated, developed, organised money market in the
world.The important feature of London money market as discussed by J.L.
Hansen in his book “ MONETARY THEORY AND PRACTICE”
It is the market for short term loans. Market is composed of bank of England,
commercial banks, the acceptance houses and the discount houses.
London Money market was a centre of international finance but it gained further
importance in the 19th century with a corresponding decline of AMSTERDAM.
Uptil 1914 the position of London money market was unique. It was slowly that
the NEW YORK MONEY MARKET AND THE PARIS MONEY MARKET came 2
share the popularity of the London Money Market.

1. THE DISCOUNT HOUSES:

the London discount market has 12 discount houses. Each of them is the public co.
working independent of all financial institutions.
These houses borrow from the banks at the lower rate than the return they get from the
investment, the difference btw these 2 is called profits .
2. THE ACCEPTING HOUSES:
These are the specialised firms which deal in bankers acceptances
In England there are 17 accepting houses.
They form their own group and are active both as bankers and
acceptors.These acceptance are used for financing both domestic and foreign
trade.

3. THE BANK OF ENGLAND:

The bank of England which is known as the CENTRAL BANK OF ENGLAND
evinces a keen interest in the activities of the London Money Market. It is the
lender of last resort.

4. THE JOINT STOCK BANKS:

There are three types of banks which are found in the London money market.
These are the London clearing houses, the Scottish banks and the overseas
banks.
The major funds come from the London clearing banks. The money lent for
the short notice by the clearing bank to the discount houses reinforces their
liquidity
5. BILL BROKERS:
Bill brokers are individuals as well as firms. These brokers discount the bills
of merchants and rediscount them with the banks at the margin of profit.
They do not keep bills with them till maturity. The brokers impart an additional
mobility of funds and help the small merchants

CONCLUSION:
From the above it is clear that the London Money Market has been playing a
very vital role ever since the 19th century. But its character has been changing
from time to time as per the needs of trade, industry and commerce
 THE NEW YORK MONEY MARKET :
This market is clustered in the WALL STREET AREA. It is one of the most
developed money markets of the world and handles huge amounts of money
everyday. The main institution are

1. COMMERCIAL BANKS:
The financial instruments which are tackled by the NY money market are
those of commercial bills, which arises from trade activities in agricultural and
industrial goods.

2. TREASURY:
The treasury bills are obligations of US govt. or that of State govt. and are
repayable at par. These are discounted in the money market and have come
to dominate it through the mere size of the amounts involved in them.

3. THE FEDERAL RESERVE SYSTEM

The FRB of NY deals with the foreign central banks and the governments.It
is correspondent of all the central banks of the world. The powers of the FRB
of NY are described by law which are not wide but they definitely enjoy a
good position in the NY money market
4. THE FOREIGN BANKING AGENCIES:
The another important component of NY money market is the foreing banking
agencies. They enjoy a good reputation in the money market. They help in
providing financial assistance for trade and international transactions. They also
facilitate the transfer of funds from one of economy to another
DEFECTS OF THE INDIAN MONEY MARKET:
1. UNORGANISED MONEY MARKET:
the most important defect is the existence of unorganised segment. In this
segment of the market the purpose as well as period are not clearly demarcated.
Efforts of RBI to bring indigenous bankers within staTutory framework have not
yielded much result.

2. LACK OF INTEGRATION:
Another important deficiency is lack of integration of different segments or
functionaries. However, with the enactment of banking companies regulation
act , 1949 the position has changed considerably .

3. DISPARITY IN INTEREST RATE:

there have been too many interest rates prevailing in the market at the same
time like borrowing rates of govt., the lending rates of commercial banks and the
rates of financial institutions. This was due to lack of mobility of funds from one
sub segment to another.
4. SEASONAL DIVERSITY OF MONEY MARKET:
There are fluctuations in the rate of interest in the money market from one
period to another in the year. November to June is the busy period. During
this period crops from rural areas are moved to cities and parts.
5. LACK OF PROPER BILL MARKET:
Indian bill market is under-developed one . RBI started making efforts in
1952. However, a new and proper bill market was introduced in 1970. there
has been substantial improvements since then.
6. LACK OF VERY WELL ORGANISED BANKING SYSTEM:
Till 1969. the branch expansion was very low. There was tremendous effort
in this direction after nationalisation. Even at present the lack of branches in
the rural areas hinders the movement of funds.
CONCLUSION:
In totality it can be said that INDIAN MONEY MARKET is
relatively under developed. In no case it can be compared with london
money market or NY money market.
THE REFORMS IN THE INDIAN MONEY MARKET:
1. DEVELOPMENT OF MONEY MARKET INSTRUMENTS:
The RBI has played an important role in the introduction of new money
market instruments. The new instruments are 182 days treasury bills,
longer maturity bills, dated govt. securities and commercial papers, 3-4
days repos and 1 day repos from 1998 to 99. the demand for treasury bills
is no longer exclusively linked with statutory liquidity rates consideration.
2. DEREGULATION OF INTEREST RATES:
Deregulation of interest rates helps banks to accustom to better pricing
of assets and liabilities and to the need of manage interest rates across
their balance sheets. In accordance with the recommendation of
NARSIMHAM COMMITTEE in Nov, 1991 the interest rates were further
deregulated.
3. INSTITUTIONAL DEVELOPMENT:
The post reforms period says significance institutional development and
procedural reforms aimed at developing a strong secondary market in the
govt. securities. DISCOUNT AND FINANCE HOUSE OF INDIA LTD. Has
been set up as a part of package of reform of the money market. It
provides short term investment opportunities to bank
4. MONEY MARKET MUTUAL FUNDS:
in 1992. setting up of money market mutual funds was announced to bring it
within the reach of individuals. These funds have been introduced by financial
institutions and banks. With these reforms money market is becoming vibrant.
There is further scope by introducing new market players and extending the
refinance from RBI
5. PERMISSION TO FOREIGN INSTITUTIONAL INVESTORS:
FII’s are allowed to operate in all dated govt. securities. The policy for 1998-99
has allowed them to buy treasury bills within approved debt ceiling.