MONEY

MARKET
• Money market deals with all transactions in
short term instruments,

• With a maturity period ranging from one day

to one year,

• MM is basically used for arrangement of funds

for financing Working Capital needs,
 Money Market Instruments
Call /Notice Money Market
The market where short term money is borrowed or lent ranging from one day
to 14 days,
• When money is borrowed/lent for one day it is called call money,
• When money is borrowed/lent for more tan 1 day up to 14 day it is called
notice money,
• Purpose: The market is purely used by banks
• To fill the temporary gaps between credit and deposits,
• To meet out the CRR requirements,
• To meet sudden demand for funds
• Participants:
• commercial banks (Borrow/lend)
• Financial institutions (only lend)
• Call Rates:
– The rates vary day to day even hour to hour depending upon demand
and supply of funds,
– Higher rates indicate tight liquidity position where as lower rates
indicates easy liquidity position in the market,
– In case of easy liquidity conditions the call rates moves around Repo
rate where as in case of tight liquidity conditions it moves around bank
rates,
– An increase to CRR increases the call rates and vice-versa,

• Prudential Norms:
– A bank ca not lend more than 25% of its owed funds ( owned funds are
calculated on fortnight average basis),
– A bank can not borrow more than 100% of its owned funds or an
agreegate of 2% of its deposits,
 Commercial Bills Market
• CB is a short term negotiable instrument issued by corporate in form of
Trade bills (Bills of Exchange) and accepted by the commercial banks (by
discounting the trade bills),
• In CBM the bills already discounted by banks are Re-Discounted in case of
need of funds,
• Purpose:
– To encourage the banks to provide credit to customers by discounting
of trade bills,
– To provide the liquidity to banks by providing rediscounting facility,
arises due to discounting of bills
• Participants:
– Commercial banks
– Financial institutions,
• Prudential Norms:
– Commercial banks can re-rediscount the bills at multistage,
– Where as financial institutions can not re-rediscount the bills once
rediscounted,

• Discounting/rediscounting rates:
– The discounting/rediscounting rates are governed by the Bank Rates
(regulated by RBI),
– Increase in BR increase in the lending rates of banks and vice-versa,
 Treasury Bills Market

• T-bills used by government of India for short term borrowing,

• It is issued by RBI on behalf of government in form of Promissory notes,
• Purpose:
– To raise the funds to fill the gaps arise due to receipt and expenditure
mismatch of GOI,
– To control over the liquidity position in market (under OMOs),
• Features:
– Negotiable instrument,
– Zero coupon bonds having no rate of interest,
– Issued at discount and redeemed at par,
– High liquidity and safety,
– Eligibility for inclusion in SLR securities,
• Types:
– 14 Days T-bill (discontinued),
– 28 Days T-bill (discontinued),
– 91 Day T-bill,
– 182 Day T-bill (discontinued),
– 364 Days T-bill,
• T-bills Market:
– It has primary as well as secondary market,
– GOI sell T-bills by auctions in Primary market,
– The already issued bills are traded in secondary market by Banks and
Financial institutions,
• Yield on T-bills:
Y= (100-P) * 365 * 100
P*D
– Where: P= Purchase Price, D= remaining days of maturity from date of purchasing
 Commercial Papers Market
• CP are negotiated instruments issued by companies in form of promissory
notes,
• The issuer can not pledge any asset. Thus it is an unsecured instrument ,
• It can be issued with and without any intermediation,
• When Cp is issued directly by company to the investors it is called Direct
paper,
• Where as CP is issued with intermediation (through Issuing and Paying
Agent) it is called Dealer Papers,
• Purpose:
– Raising short term funds to meet out working capital requirements,
– To get good credibility in financial market which helps to raise long
term capital,
• Regulation:
– The CPs are regulated through norms prescribed by RBI,
– Only companies, Primary Dealers and Financial Institutions can issue
CP,
– Companies having net worth not less than 4 crore are eligible to issue
CP,
– They have been rated by any rating agency recognized by RBI,
– CPs can have a maturity of minimum 7 days and maximum one year,
– The CPs denomination should not be less than 5 Lakh and multiple of
5 lakh,
– It can not exceed 100% of company’s net owned funds,
– It can also be issued in dematerialized form through depository
approved by SEBI,
 Certificate of Deposits Market

• CDs are negotiable marketable receipt of funds deposited in a

bank for a fixed period at a specified interest rate,
• Only commercial banks or financial institutions can issue CD in
minimum denomination of Rs 1 lakh with a maturity of
minimum 7 days and maximum one year,
• CDs can be subscribed by companies, trusts, funds, individuals
etc,
• CDs can be issued only in Demat form,
• It can not be more than 100% of net owned funds of issuer
banks.
RBI………