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The document provides an overview of the money market, which is the market for short-term borrowing and lending of funds. It discusses key components of the money market including call/notice money, treasury bills, certificates of deposit, commercial paper, repos/reverse repos, and collateralized borrowing and lending obligations. The money market serves important functions such as providing liquidity and influencing interest rates. Major participants include banks, corporations, and government entities.
The document provides an overview of the money market, which is the market for short-term borrowing and lending of funds. It discusses key components of the money market including call/notice money, treasury bills, certificates of deposit, commercial paper, repos/reverse repos, and collateralized borrowing and lending obligations. The money market serves important functions such as providing liquidity and influencing interest rates. Major participants include banks, corporations, and government entities.
The document provides an overview of the money market, which is the market for short-term borrowing and lending of funds. It discusses key components of the money market including call/notice money, treasury bills, certificates of deposit, commercial paper, repos/reverse repos, and collateralized borrowing and lending obligations. The money market serves important functions such as providing liquidity and influencing interest rates. Major participants include banks, corporations, and government entities.
market became a component of the financial markets for assets involved in short-term borrowing, lending, buying and selling with original maturities of one year or less. • Trading in the money markets is done over the counter, is wholesale. Money Market • Market for short-term money and financial assets that are near substitutes for money. • Short-Term means generally period upto one year and near substitutes to money is used to denote any financial asset which can be quickly converted into money with minimum transaction cost • Its not a physical location (like the stock market), but an activity that is conducted over the phone. Money Market
• It is a place for Large Institutions and
government to manage their short-term cash needs • It is a subsection of the Fixed Income Market • It specializes in very short-term debt securities • They are also called as Cash Investments Characteristics of the Money Market A Money Market is expected to perform three broad functions : 1. Provide a balancing mechanism to even the demand for and supply for short term funds 2. Provide a focal point for central bank intervention for influencing liquidity and general level of interest rates in the economy. 3. Provide reasonable access to suppliers and users of short term funds to fulfil their borrowings and investment requirements at an efficient market clearing price. Defects of Money Market
Lack of Integration
Lack of Rational Interest Rates structure
Absence of an organized bill market
Shortage of funds in the Money Market
Seasonal Stringency of funds and fluctuations in Interest rates
Inadequate banking facilities
Money Market Instruments • Some of the important money market instruments are briefly discussed below; 1. Call/Notice Money 2. Treasury Bills 3. Term Money 4. Certificate of Deposit 5. Commercial Papers • 6. Repos /Reverse Repos • 7. CBLOs 1. Call / Notice Money Market
• By far the most visible market as day-to-day surplus funds, mostly of
banks are traded. • Maturity Period : 1 day – Fortnight • 1 day – call (overnight) money • More than a day – notice money • No collateral security to cover transactions • Call money is a highly liquid • Call money is required mostly by banks. Commercial banks borrow money with out collateral from other banks to maintain a minimum cash balance known as cash reserve requirement (CRR) • CRR refers to that cash that banks have to maintain with the RBI as a certain percentage of their demand and time liabilities • Bank can recall the loan at its maturity Call money market • Call money market is a market for uncollateralized lending and borrowing of funds. • This market is predominantly overnight and is open for participation only to scheduled commercial banks and the primary dealers. 2. Term Money
• Term Money market for deposits of maturity
beyond 14 days is referred to as the term money market. • The entry restrictions are the same as those for Call/Notice Money except that, as per existing regulations, the specified entities are not allowed to lend beyond 14 days. 3. Treasury Bills (T-Bills)
• Treasury bills (Government Paper Securities) are
short-term instruments issued by RBI on behalf of govt to tide over short-term liquidity shortfalls. • T-Bills are paid on maturity. • Sale of T-Bills are conducted thro action • Duration of 91 days(discontinued), 14-day T-Bills • Promissory note of the government to pay a specified sum after a specified period Features of T Bills • Negotiable securities • Absence of default risk • Assured yield , low transaction cost and eligible for inclusion in SLR purposes • Currently 91-day,182-day a d 364-day T-Bills in Vogue. Refer RBI site for update. • T-Bills are available for min of Rs 25,000 and multiples 4. Certificate of Deposits
• Certificates of Deposit (CDs) is a negotiable
money market instrument and issued in dematerialized form or as a Usance Promissory Note, for funds deposited at a bank or other eligible financial institution for a specified time period. • Guidelines for issue of CDs are presently governed by various directives issued by the Reserve Bank of India, as amended from time to time. • CDs are unsecured, short-term, negotiable instruments in bearer form issued by commercial banks, development financial institutions. 4. Certificate of Deposits contd.
Reserve Bank of India, as amended from time to time.
CDs can be issued by (i) Scheduled commercial banks excluding Regional Rural Banks (RRBs) and Local Area Banks (LABs); and (ii) Select all-India Financial Institutions 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 requirements. An FI may issue CDs within the overall umbrella limit fixed by RBI, i.e., issue of CD together with other instruments viz., term money, term deposits, commercial papers and interoperate deposits should not exceed 100 per cent of its net owned funds, as per the latest audited balance sheet. Some additional info on CDs • Min Size : Rs 1 lakh and multiples of 1 lakh • Maturity : • Banks :Not less than 7 days but not more than 1 year • Fis : Not less than 1 year but not more than 3 years • CDs may be issued at a discount on face value 5. Commercial Paper (CP) • Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note. • Corporates, primary dealers (PDs) and the 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 are eligible to issue CP. • CP can be issued for maturities between a minimum of 7 days and a maximum up to one year from the date of issue. Commercial Paper
• CP is an unsecured money market instrument
(short-term) issued in the form of a promissory note. • Who Can Issue CP? • Highly rated corporate borrowers, primary dealers (PDs) & satellite dealers (SDs) & all- India financial institutions (FIs) Buyers : A CM can be issued to individuals, banks, companies and other registered Indian Corporate bodies and unincorporated bodies. 5. Commercial Paper Contd. • CP is a note in evidence of the debt obligation of the issuer. • On issuing commercial paper the debt obligation is transformed into an instrument. • CP is thus an unsecured promissory note privately placed with investors at a discount rate to face value determined by market forces. • CP is freely negotiable by endorsement and delivery. 5. Commercial Paper Contd. A company shall 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 working capital (fund-based) limit of the company from the banking system is not less than Rs.4 crore and (c) the borrowal account of the company is classified as a Standard Asset by the financing bank/s. The minimum maturity period of CP is 7 days. 6/ 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). 6/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. 7/ Collateralised Borrowing and Lending Obligation (CBLO) • CBLO is another money market instrument operated by the Clearing Corporation of India Ltd. (CCIL), for the benefit of the entities who have either no access to the inter bank call money market or have restricted access in terms of ceiling on call borrowing and lending transactions. Collateralised Borrowing and Lending Obligation (CBLO) • CBLO a new product launched by CCIL- to provide liquidity to Non-bank entities hit by restrictions on access to the call money market. • CBLO is a discounted instrument available in electronic book entry form for the maturity period ranging from one day to ninety days (up to one year as per RBI guidelines). • In order to enable the market participants to borrow and lend funds, CCIL provides the Dealing System through Indian Financial Network (INFINET), a closed user group to the Members of the Negotiated Dealing System (NDS) who maintain Current account with RBI and through Internet for other entities who do not maintain Current account with RBI. Collateralised Borrowing and Lending Obligation (CBLO) • By participating in the CBLO market, CCIL members can borrow or lend funds against the collateral of eligible securities. • Eligible securities are Central Government securities including Treasury Bills, and such other securities as specified by CCIL from time to time. Collateralised Borrowing and Lending Obligation (CBLO) • Borrowers in CBLO have to deposit the required amount of eligible securities with the CCIL based on which CCIL fixes the borrowing limits. CCIL matches the borrowing and lending orders submitted by the members and notifies them. • While the securities held as collateral are in custody of the CCIL, the beneficial interest of the lender on the securities is recognized through proper documentation.