Money Markets

Money Market
 Call Money/Notice Money
 Term Money
 Certificate of Deposit (CD)
 Commercial Paper (C.P)
 Inter Bank Participation Certificates
 Treasury Bills
 Collateralized Borrowing and Lending Obligation (CBLO)
 Call Money/Notice Money Market
The call money market is an integral part of the Indian Money
Market, where the day-to-day surplus funds (mostly of banks)
are traded.
The money that is lent for one day in this market is known as
"Call Money",
if it exceeds one day (but less than 15 days) it is referred to as
"Notice Money".
 Call Money Market
Banks borrow in this market for the following purpose
 To fill the gaps or temporary mismatches in funds
 To meet the CRR & SLR mandatory requirements as stipulated by the Central
bank
 To meet sudden demand for funds arising out of large outflows.

Limit:
Average borrowing
Fortnight: can not exceed 100% of Tier-I and II capital of the previous year.
On any given day- 125%

Average Lending:
Fortnight: 25%
On any day: 50%
 Certificate of Deposit
1. CDs are short-term borrowings BY BANKS in the form of Promissory
Notes having a maturity of not less than 7 days up to a maximum of one
year.
 Minimum period 7 days
 Maximum period up to 1 year
 Minimum Amount Rs 1 lac and in multiples of Rs. 1 lac

2. FIs may issue CDs within the overall umbrella limit fixed by RBI – i.e.
issue of CDs together of other MM instruments should not exceed
100 % of its Net Owned Fund.
 FIs issue CDs for a period of 1 year to 3 years.
 CD is subject to payment of Stamp Duty under Indian Stamp Act, 1899
(Central Act)
 Features of CD
 CDs are transferable by endorsement
 Issued on discount
 Amount Payable: Face Value (FV)=P+Px(n/12)xR%
 Commercial Paper
 Commercial Paper (CP) is an unsecured money market instrument
issued in the form of a promissory note by corporates/PDs/FIs
 Introduced in 1990.
 Who can issue Commercial Paper (CP)
Highly rated corporate borrowers, primary dealers (PDs) and all-India
financial institutions (FIs)
Eligibility for issue of CP

a) The tangible net worth of the company, as per the

latest audited balance sheet, is not less than Rs. 4
crore;
b) The borrowal account of the company is classified
as a Standard Asset by the financing bank/s.
c) Company has been sanctioned working capital
limit by Banks.
Rating Requirement

 All eligible participants should obtain the credit rating for issuance
of Commercial Paper
 Credit Rating Information Services of India Ltd. (CRISIL)
 Investment Information and Credit Rating Agency of India Ltd.
(ICRA)
 Credit Analysis and Research Ltd. (CARE)
 Duff & Phelps Credit Rating India Pvt. Ltd. (DCR India)
 The minimum credit rating shall be P-2 of CRISIL or such
equivalent rating by other agencies
To whom issued
CP is issued to individuals, banking companies, other
corporate bodies registered or incorporated in India and
unincorporated bodies, Non-Resident Indians (NRIs) and
Foreign Institutional Investors (FIIs).
 Maturity
 CP can be issued for maturities between a minimum of 7 days
and a maximum up to one year from the date of issue.
 Issued at discount to the face value.
 Every issuer must appoint IPA (Issue and pay agent) for issuance
of CP.
 Scheduled bank can act as IPA.
Treasury Bills
Treasury bills, commonly referred to as T-Bills are issued by
Government of India against their short term borrowing
requirements with maturities ranging between 14 to 364 days.
All these are issued at a discount-to-face value. For example a
Treasury bill of Rs. 100.00 face value issued for Rs. 91.50 gets
redeemed at the end of it's tenure at Rs. 100.00.
Who can invest in T-Bill

Banks, Primary Dealers, State Governments, Provident

Funds, Financial Institutions, Insurance Companies, NBFCs,
FIIs (as per prescribed norms), NRIs can invest in T-Bills.
 What is auction of Securities
Auction is a process of calling of bids with an objective of
arriving at the market price. It is basically a price discovery
mechanism
TBs are auctioned every week.
 Yield of Treasury Bill
Y= (100-P)*365*100/P*D

Y = Yield
P= Price
D =Days to maturity
Example
91 days treasury bills maturing on 6-12-2008
Purchased on 12-10-2008
Rate quoted is Rs.99.1489 per Rs100

(100-99.1489)*365*100= 31065.15
----------------------------
(99.1489*55 days) =5453.18
=5.70%
Interbank Participation certificate
 IBPC: Sell loans and credit to lending bank for temporary
period.
Features:
With risk sharing
Min Period-91 days
Max period-180 days
Non risk sharing
Period limited to 90 days
 Features:

 Max participation in loan- 40% of the amount outstanding

 Interest rates are determined between issuing bank and
participating bank
 Not transferable
 Can not redeemed before due date.
Collateralized Borrowing and lending
obligation (CBLO)
 CBLO is discounted instrument available in electronic book
entry form for the maturity raging 1 day to 90 days (can be
made available up to 1 year as per RBI guideline)
 Meaning of Repo
 Unlike an instrument, it is a process wherein a number of instruments such as G-Sec, PSU
bonds and other securities can be used as underlying securities to borrow and lend in the
money market.

 It is a transaction in which two parties agree to sell and 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 and in securities as approved by RBI .
 Repo
 Uses of Repo
It helps banks to invest surplus cash
It helps investor achieve money market returns with sovereign
risk.

 It helps borrower to raise funds at better rates

 An SLR surplus and CRR deficit bank can use the Repo deals as a
convenient way of adjusting SLR/CRR positions simultaneously.

 RBI uses Repo and Reverse repo as instruments for liquidity

adjustment in the system
Coupon rate and Yield
The difference between coupon rate and yield arises because
the market price of a security might be different from the
face value of the security. Since coupon payments are
calculated on the face value, the coupon rate is different from
the implied yield.
Example
 10% Aug 2015 10 year Govt Bond
 Face Value RS.1000
 Market Value Rs.1200
 In this case Coupon rate is 10%
 Yield is 8.33%
 1000*10
 ----------= 8.33%
 1200
Factors influencing interest rates
The factors which govern the interest rates are mostly
economy related and are commonly referred to as
macroeconomic factors. Some of these factors are:
1) Demand for money
2) Government borrowings
3) Supply of money
4) Inflation rate
5) The Reserve Bank of India and the Government policies
determine some of the variables mentioned above.