MONEY MARKET

CONTENTS
 What is the Money Market?  Features of the Money Market.  Objective of the Money Market.  Importance of the Money Market.  Role of RBI in the money market.  Structure of the Indian Money Market.  Instruments of the Money Market.  Limitations of the Indian Money Market.  Recent developments in the Indian Money Market.  Summary

What is the Money Market?

FINANCIAL MARKETS

MONEY MARKET

CAPITAL MARKET

What is the Money Market?(cont..)

 As per RBI the Money Market is defined as A market for short terms financial assets that are close substitute for money, facilitates the exchange of money in primary and secondary market .  The Money Market:
Is a mechanism that deals with the lending and borrowing of short term funds (less than one year). Is a segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. Doesn t actually deal in cash or money but deals with substitute of cash like trade bills, promissory notes & government papers which can be converted into cash without any loss at low transaction cost. Includes all individual, institution and intermediaries

Features of the Money Market

 It is a market purely for short-terms funds or financial assets called near money.  It deals with financial assets having a maturity period less than one year only.  Transaction have to be conducted without the help of brokers.  It is not a single homogeneous market, it comprises of several submarket like call the Money Market, acceptance & bill market.  The participants of the Money Market are the commercial banks, central bank, acceptance houses, merchant bankers, insurance companies & NBFC (Non-banking financial companies)

Objectives of the Money Market

To provide a parking place to employ short term surplus funds. To provide room for overcoming short term deficits. To enable the central bank to influence and regulate liquidity in the economy through its intervention in this market. To provide a reasonable access to borrowers & lenders of short-term funds to meet their requirement quickly, adequately at reasonable cost.

Importance of the Money Market

Development of trade & industry. Development of capital market. Smooth functioning of commercial banks. Effective central bank control. Formulation of suitable monetary policy. Non inflationary source of finance to Government.

Role of the RBI in the Indian Money Market

The Reserve Bank of India is the most important constituent of the money market. The money market comes within the direct preview of the Reserve Bank of India regulations. The aims of the Reserve Bank s operations in the money market are:
To ensure that liquidity and short term interest rates are maintained at levels consistent with the monetary policy objectives of maintaining price stability. To ensure an adequate flow of credit to the productive sector of the economy To bring about order in the foreign exchange market.

The Reserve Bank of India influences the liquidity and interest rates through a number of operating instruments - cash reserve ratio of banks, conducting open market operations (OMOs), repos, change in bank rates and at times, foreign exchange swap operations.

Structure of the Indian Money Market

Indian Money Market

Unorganized Money Market

Indigenous Bankers

Organized Money Market

Call Money Market C-Bills

Money Lenders T-Bills NBFIs C-Papers

NOTE: The unorganized sector is not regulated by the RBI.

CD

Repos

MMMFs

Instruments of the Money Market

A variety of instrument are available in a developed the Money Market. In India till 1986, only a few instrument were available. They were:
Treasury bills Money at call and short notice in the call loan market. Commercial bills, promissory notes in the bill market.

Now, in addition to the above the following new instruments are also available:
Commercial papers. Certificate of deposit. Inter-bank participation certificates. Repo instrument. Banker's Acceptance. The Money Market mutual funds.

1. Call Money Market

Call Money Market deals with the short-term inter-bank financial inflows. It is a market where the surplus funds, mostly of banks are traded. The interest rate paid on call loans are known as call money rate. Call Money: Money lent for one day only. Notice Money: Money lent for a period exceeding one day. Its participants includes: commercial banks, co-op banks, NBFCs & primary dealers.

Call Money rate in 2009

2. Commercial Bill Market

It is a market for Discounting Bills of Exchange arising out of genuine trade transactions. In the case of credit sale, the seller draws a Bill of Exchange on the buyer and once the buyer accepts this bill, the seller can discount it with a Bank and receive cash. Discount and Finance House of India was set up in 1988 to promote secondary market in bills. Commercial Banks, UTI, IDBI, GIC, ICICI, IFCI, NABARD, EXIM Bank & other co-op banks participate in commercial bill market.

3. Treasury bills (T-bills)

T-bills are the most marketable the Money Market security. They are issued with maturity of 91 days, 182 days and 364 days. T-Bills are so popular among the Money Market instruments because of affordability to the individual investors. Treasury bills are available for a minimum amount of Rs.25,000 and in multiples of Rs.25,000. Treasury bills are issued at a discount and are redeemed at par. Treasury bills are also issued by the RBI on behalf of the government.

Advantages of T-Bills
No Tax Deducted at Source (TDS). Zero default risk as these are the liabilities of Govt. of India. Eligibility for inclusion in SLR. Assured Yields. Liquid Money Market Instrument. Active secondary market thereby enabling holder to meet immediate fund requirements.

4. Commercial Paper(CP)
CP is a short term unsecured loan issued by a corporate typically financing day to day operation. CP was introduced in 1990 & it is in the form of a promissory note. Maturities: min 7 days & max. 1 year. CP can be issued in denominations of Rs. 5 lakhs & in multiples there of. Only company with high credit rating can issue CP s.

5. Certificate of Deposit(CD)
A CD is like a time deposit with a bank. CD can be issued to individuals, corporate, trusts, funds and so on. CD s have specific maturity date, interest rate and it can be issued in denomination of Rs. 1 lakh & in multiples there of. CD s may be issued at discount or face value. CD s can earn more interest than a saving a/c interest. The maturity period of CD s issued by banks should be not less than7 days & not more than 1 year. The Financial Institutions can issue CD s for a period not less than 1 year and not exceeding 3 years from the date of issue.

Advantages of CD as a money market instrument 1. Since one can know the returns from before, the certificates of deposits are considered much safe. 2. One can earn more as compared to depositing money in savings account. 3. The Federal Insurance Corporation guarantees the investments in the certificate of deposit.

Disadvantages of CD as a money market instrument: 1. As compared to other investments the returns is less. 2. The money is tied along with the long maturity period of the Certificate of Deposit. 3. Huge penalties are paid if one gets out of it before maturity.

6. Repurchase agreement (Repos)

A repo/reverse repo is a transaction in which two parties agree to sell & purchase the same security. They are usually very short term repurchases agreement, from overnight to 14 days or more. Repos are safe collateral for loans. All government securities, t-bills are eligible for repo. A repo transaction takes place in market lot of Rs. 5 crores.

Repo & Reverse Repo rates in India

7. Money market mutual funds(MMMFs)

MMMFs have been set up to enable small investors to participate in money market. These funds invest in short-term debt obligations such as T-bills, CP & CD s. They provide a reasonable rate of return similar to money market instruments. They are highly liquid investments & less risky too. Individuals & corporates invest in MMMFs.

Mutual Fund-working

Unorganized Money Market

Unorganized NBFIs
Loan companies Nidhis

Private money lenders

Indigenous Bankers

Limitations of Indian Money Market

Dichotomy structure. Multiplicity of Interest Rates. Underdeveloped Banking System. Lack of developed Bill Market. Shortage of Funds. Absence of Integration. Seasonal Variations. Inadequate Credit Instruments.

Recent Developments in the Indian Money Market

Indian Government appointed a committee under the chairmanship of Sukhamoy Chakravarty in 1984 to review the Indian monetary system. Later Narayanan Vaghul working group and Narasimham Committee was also set up. As per the recommendations of these study groups and with the financial sector reforms initiated in the early 1990s, the government has adopted following major reforms in the Indian money market:

 Deregulation of the Interest Rate. Setting up of Money Market Mutual Fund (MMMFs) in 1991. Establishment of DFHI in 1998. Electronic Transactions. Development of New Market Instruments. Establishment of the CCIL in April 2001. Remitting the stamp duty. Development of call/notice money market.(1990) Introduction of Repos.

Bibliography
www.google.co.in http://www.indianofficer.com/forums/1652structure-indian-money-market.html www.en.wikipedia.org www.rbi.gov.in www.myfinancedirectory.com www.investopedia.com http://www.economywatch.com/market/mon ey-market/money-market-instruments.html

CREDITS OF THIS PRESENTATION:

ATTARWALA MOHAMMED SADIQUE LEADER SAUMIL RAMBHIA VINAY VERMA CLINTON VAZ VIVEK VERMA JITENDRA YALLAMEELI SAURABH RAO HARISH INDORIYA