Money Market

Market for Short-term loans or financial assets.

Lending and borrowing of short term funds.
 It does not deal in cash/money but in liquid marketable securities.
 It does not refer to a particular place.
 Maturity period of short term securities are up to one year or within
one year.
 It meets the short term term requirements of borrowers.
 Activity and all the trading is done through telephones.
Honour of commitment and creditworthiness.

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Dr. Ratnesh Chaturvedi, FMS, Session – 10-13
 Players in Money Market

Governments
Why
Banks All of these have a
recurring problem of Because the timing of
 Financial Institutions liquidity management the expenditures rarely
 Mutual Funds synchronies with that
of the receipts. i.e. a
 Business Firms, etc. gap due to mismatch
between expenditure
and receipt

Expenditures GAP Receipts

How
Money market as a bridge By purchasing / selling
to fill the gap. of Short term securities

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Dr. Ratnesh Chaturvedi, FMS, Session – 10-13
 Distinction Between Money Market & Capital Market
Money Market
Market for Short-term loans or financial
assets for a period not exceeding one year.
Supplies funds for financing current
business operations, working capital
requirements of business and short period
requirements of the government.
 In money market instruments are BOE,
treasury bills, commercial papers,
certificate of deposit, etc.
 Commercial banks are the major
institutions.
 Money market instruments do not have
secondary markets.
 Transaction mostly take place over-the-
telephone and there is no formal place.
Dr. Ratnesh Chaturvedi, FMS, Session – 10-13
Capital Market
Market for long term funds exceeding a
period of one year.
Supplies funds for financing the fixed
capital requirements of business as well as
the long term requirements of the govt..
 In money market instruments are shares,
debentures, govt. bonds, etc.
 Development banks play a dominant
role in this market.
 Capital market instruments generally
have secondary markets.
 Transaction mostly take place at a
formal place viz, stock exchange.
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 Money Market Instruments

Treasury Bills (T Bills) Bankers Acceptance

Commercial Paper Term Money

Certificate Deposit Commercial Bills

Bank Deposits
Bills Rediscounting

Fringe Markets Call Money Market

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Dr. Ratnesh Chaturvedi, FMS, Session – 10-13
 Money Market Instruments

Treasury Bills (T Bills)

One of the most important instruments in virtually all the money markets in the world.
Issued by Govt. (Promissory note) for period ranging from 14 days to 364 days through
regular auctions. (issued by RBI on behalf of govt. of India)
 Highly liquid instruments due to shorter tenure and demand is largely from banks,
financial institutions and corporations.
 It is issued by Govt. to raise finance to meet its short term requirements.
 The investment in the TB is reckoned for the purpose of Statutory Liquidity Reserve
requirements.
 The periodicity of the T Bills is 14 days, 28 days, 91 days, 182 days and 364 days.
 Periodically RBI comes out with the T-Bills auctions.
It has secondary market, any participant of money market can sell it.

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Dr. Ratnesh Chaturvedi, FMS, Session – 10-13
 Money Market Instruments DFHI – Discount & Finance House of India
STCI – Securities Trading corporation of India ltd.
Categories of Treasury Bills (T Bills)
Can be bought from the RBI at any time at an interest yield of 4.663
1. On-Top T-Bills : percent. But, with the deregulation of the interest rates, they have
lost much of their relevance.

2. Ad hoc T-Bills :
Are created to replenish the Govt.’s cash balances with the RBI.
Thus, they essentially are just an accounting measures in RBI’s
books. They have a maturity period of 91 days, but can be
redeemed prior to the final date of maturity, because for them the
dealing is only between the Govt. and RBI.

First introduced in April, 1992 are the most active of the three
2. Auctioned T-Bills : categories. In effect, they are the only one among the three
categories which can actually be called an active money market
instrument.

T-Bills transactions are routed through the Special General Ledger (SGL) Accounts.
Institutional investors like commercial banks, DFHI, STCI, etc., maintain a SGL accounts
with the RBI. Investor not having SGL A/c may sell or purchase TB’s through DFHI.
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Dr. Ratnesh Chaturvedi, FMS, Session – 10-13
 Money Market Instruments
Advantages of Treasury Bills (T Bills)
Safety
Liquidity
Ideal Short-Term Investment
Ideal Fund Management
Statutory Liquidity Requirement
– SLR, CRR
Source of Short-Term Funds
Dr. Ratnesh Chaturvedi, FMS, Session – 10-13
Money Market Instruments
Commercial paper :
 Introduced in Indian Money market in
1990, is a debt instrument for short term
borrowing.
Popular debt instrument of the corporate
world
CP is a form of usance promissory note,
negotiable by endorsement and delivery.
CP is issued at discount determined by the
issuer company.
The discount varies with the credit rating
of the issuer company and the demand and
supply position in the money market.
CP can be issued by companies either
directly to the investors or through
banks/merchant bankers. 7
 Money Market Instruments
Commercial paper :
 An unsecured promissory note issued
with a fixed maturity by a company
approved by RBI
RBI Guidelines for issue
of Commercial paper :
 Introduction
Who can Issue CP : A corporate would 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 crores; (b)
company has been sanctioned working capital limit
by bank/s or all India Financial institution/s; and
(c) the borrowal account of the company is
classified as a Standard Asset by the financing
bank/s/institution/s.
Dr. Ratnesh Chaturvedi, FMS, Session – 10-13
 Rating Requirement : All eligible
participants have to obtained the credit
rating for issuance of CP by
CRISIL/ICRA/CARE/ or other credit rating
agency as may be specified by the RBI.
Maturity : CP can be issued for
maturities between a minimum of 15 days
and a maximum up to one year from the
date of issue. The maturity date should not
cross the credit rating valid period.
Denomination : CP can be issued in
denominations of Rs. 5 lakhs or multiples
thereof. (minimum 5 lakhs)
Limits and the amount of Issue :
 Who can act as issuing and paying
agent (IPA) : Only a scheduled bank can
act as an IPA for issuance of CP.
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 Process of Issue of Commercial Paper

Obtained Obtained Net worth

Credit W/C Limit not less
Rating than 4
crores

Issuer
Company

Redeem CP on Issue CP at Discount

Maturity

Investor/
Bank/
Company

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Dr. Ratnesh Chaturvedi, FMS, Session – 10-13
 Money Market Instruments
Commercial paper :
Investment in CP : CP may be issued to
and held by individuals, banking
companies, other corporate bodies
registered or incorporated in India and
unincorporated bodies, Non Resident
Indians and Foreign Institutional Investors.
FII’s investment within the limitation as
prescribed by SEBI.
Mode of Issuance : (a) It can be issued
either in the form of a promissory note or in
a dematerialised form through any of the
depositories (authorised by SEBI), (b) CP
will be issued at a discount to face value as
may be determined by the issuer and (c) No
issuer shall have the issue of CP
underwritten.
Dr. Ratnesh Chaturvedi, FMS, Session – 10-13
Preference for Dematerialised Form : Now it
is
Payment of CP : Crossed account payee
cheque for discounted value of CP to issuer
(through IPA) from investor. In case of demat
form, redeemed by depository and payment from
IPA.
Procedure for issuance : Every issuer must
appoint an IPA for issuance of CP. The issuer
should disclose to the potential investors its
financial position as per the standard market
practice. After the exchange of deal confirmation
between the investor and issuer, issuing company
shall issue physical certificates to the investor or
arrange for crediting the CP to the investor’s
account with a depository. Investors shall be
given a copy of IPA certificate to the effect that
the issuer has a valid agreement with the IPA and
documents are in order, in the prescribed form.
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 Money Market Instruments
Certificate of Deposit (CD’s) :
 Introduced by RBI
CD’s can be subscribed by an individual,
as well as, by an institution
It is a usance promissory notes issued at a
discount and are negotiable in character.
There is a lock-in-period of 15 days after
which they can be sold.
The minimum size of the deposit is Rs. 5
lakhs and thereafter in multiples of Rs. 5
lakhs.
The rate of interest is determined by the
parties to the transaction freely.
The instrument is to be stamped according
to the rates prescribed by the Indian Stamp
Act.
Dr. Ratnesh Chaturvedi, FMS, Session – 10-13
 Premature closure of CD’s is not
permitted and buy-back of the CD’s is
prohibited.
The CD’s should fall due for payment on
a working day. If it falls on a holiday then
payment is to be made on the previous
working day.
No advance can be taken against the
security of CD’s.
There is no limit for investment in CD’s
by the Banks.
Any Scheduled Commercial Banks
excluding Regional Rural Banks, can issue
CD’s for a period of not less than three
months and up to a period of not more than
one year. FI’s authorised by RBI may issue
CD’s for a period not below one year and
not above three years duration.
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 Money Market Instruments RBI Guidelines for Certificate of Deposit (CD’s) :
 Eligibility
Minimum size of issues and denominations
: Earlier minimum amount of CDs was to be of
Rs. 5 lakhs, i.e., the minimum deposit that can
be accepted from a single subscriber. CDs above
Rs. 5 lakhs was to be in multiple of Rs. 1 lakh.
But in order to increase the investor base, it has
been decided to reduce the minimum size of
certificates of deposits to a single investor from
the existing level of Rs. 5 lakh to Rs. 1 lakh and
in multiples of Rs. 1 lakh thereafter. The amount
relates to maturity value of CDs.
Subscribers to CDs : By individuals,
corporations, companies, trusts, associations,
etc. There is no prohibition on banks investing
in CDs of other banks/FIs.
Maturity : Minimum maturity period is 15
days.
Dr. Ratnesh Chaturvedi, FMS, Session – 10-13
 Discount : CDs should be issued at a
discount on face value. The issuing bank is free
to determine the discount rate.
Stamp Duty : As per provision of Indian
Stamps Act.
Reserve Requirements : Banks have to
maintain CRR and SLR on the issue price of
the CDs.
Transferability : Minimum lock-in-period
15 days. But now it is decided to remove this
restriction.
Loans/buy-backs : Banks can not grant
loans and buy-back against CDs.
Format : CD will be in the form of a usance
promissory note and will attract stamp duty. No
grace period for payment.
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 Money Market Instruments RBI Guidelines for Certificate of Deposit (CD’s) :

 Application Forms : It is desirable that  Reporting : Banks should include the amount
banks prescribe an appropriate application form of CDs in the fortnightly return under section 42
for issue of CD’s. of the RBI Act and also separately indicate the
Security Aspect : Since CDs are freely amount so included by way of a footnote in the
return.
transferable by endorsement and delivery,must
signed by two or more authorised signatories. Issue in demat form : With effect from June
Payment of Certificate : As the CDs are 30, 2002, banks and FIs should issue CDs only
in the dematerialised form.
transferable instruments the certificate may be
presented for payment by the last holder and the
payment should be made to him only by a
crossed cheque.
Accounting : (a) Banks may account the issue
price under the head “CDs issued” and show
them under deposits. Accounting entries towards
discount will be made as in the case of “Cash
Certificates”. (b) Banks should maintain a
register of CDs issued with complete particulars.

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Dr. Ratnesh Chaturvedi, FMS, Session – 10-13
 Money Market Instruments
Commercial Bills :
Sec. 5 of the Negotiable Instruments
 Purchase and Discounting Act defines a “BOE is an instrument in
writing containing an unconditional
Funds for working capital
order, signed by the maker, directing a
It is a written instrument containing certain person to pay a certain sum of
unconditional order signed by the maker, money only to, or to the order of a
directing to pay a certain amount of money certain person or to the bearer of the
only to a particular person, or to the bearer
instrument.”
of the instrument.
It is a negotiable self –liquidating
instrument with low degree of risk.
The spread between the face value of the  It should arise out of a genuine trade
bill and ready money paid is the discount transaction.
rate.
 Maturity period should fall within 90
Till the bill matures, the banks can use the days from the date of discounting.
same process of discounting to get ready
By Commercial Banks
cash.
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Dr. Ratnesh Chaturvedi, FMS, Session – 10-13
 Money Market Instruments
Bills Rediscounting : Bills rediscounting Scheme :
 Eligible Institutions : All licensed scheduled banks will be eligible to offer BOE to the
RBI for rediscount.
 Limit Fixation : Eligible banks should apply to the RBI in a prescribed proforma for
sanction of limits for rediscounting of bills. Limits will be sanctioned/renewed for one
year (1st Nov. to 31st Oct.). For renewal, renewal application to RBI before expiry of the
existing limit.
 Eligibility of Bills :
i) The BOE should be a genuine trade bill and should have arisen out of sale of
goods.
ii) The BOE should normally have a maturity of not more than 90 days from the
date of rediscounting. (e.g. 120 days may eligible if ……)
iii) The BOE should bear at least two good signatures ( sig. of licensed scheduled
bank)
iv) A licensed schedule bank may accept BOE from any other bank but RBI will
provide rediscounting only BOE offered by licensed schedule bank. 15
Dr. Ratnesh Chaturvedi, FMS, Session – 10-13
 Money Market Instruments
Bills Rediscounting : Bills rediscounting Scheme :

c) Eligibility of Bills :
v) The RBI will not rediscount BOE arising out of sale of such commodities as may
be indicated by it from time to time.
 BOE should be given in bunches (to avoid number of small bills).
 The rediscounting facilities will, for the present, be available at banking departments of
the RBI at Calcutta, Chennai, Mumbai and New Delhi.

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Dr. Ratnesh Chaturvedi, FMS, Session – 10-13
 Money Market Instruments
Call Money Market : Advantage :
 Market for extremely short period loans
 Market for extremely
One day to fourteen days short period loans
Call money transactions – overnight funds – returnable Maintenance of SLR
next day
Notice money – more than two days but generally for a
maximum of fourteen days
In both the cases transaction is unsecured.
Rate is determined on market condition
The document by which the call/notice money are
carried out is the call/notice money receipt which is
exchanged against banker’s cheque.
The following day or on a day fixed according to the
notice, the reversal takes place by repayment from the
borrower to the lender against return of the call/notice 17
money receipt duly discharged by the lender
Dr. Ratnesh Chaturvedi, FMS, Session – 10-13
 Money Market Instruments
Bank Deposits :
 Banks are permitted to keep deposits
with other banks for a period of 15 days
and above
Rate of interest mutual negotiation
Not reckoned for the purpose of CRR
requirements
Transactions are evidenced by Deposit
Receipt.
Deposits are not transferable but they
could be prematurely closed at the
discretion of the lender.
Bankers Acceptance :
 BA is a draft against a bank ordering the bank to pay some specified amount at a
future date.
Dr. Ratnesh Chaturvedi, FMS, Session – 10-13
Term Money :
 RBI has permitted some of the
financial institutions like IDBI, ICICI,
IFCI, IIBI, SIDBI, NABARD, EXIM
Bank, etc. to borrow from the market
for a period of 3 months up to a period
of not more than 6 months within the
stipulated limits.
Rate of interest mutual negotiation.
Unsecured and limit is fixed by RBI
Transactions are evidenced by Term
Deposit Receipt.
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 Money Market Instruments
Repurchase Agreements (Repos) :
 Sell of security by one party to another
with an agreement to buy it back at a
specified time and price.
Repos are active between the commercial
banks
Pledge transactions
Payment at a mutually agreed price after
a specified period.
This period ranges between 1-14 days.
The difference between the sale and buy-
back price is interest cost.
Risk free short-term instrument – against
security
For short term liquidity needs.
Dr. Ratnesh Chaturvedi, FMS, Session – 10-13
Inter-Bank Participation Certificate
(IBPC) :
 Issued by scheduled commercial banks
to raise or deploy money
 On Risk Sharing Basis / Without Risk
Sharing Basis
Minimum Period 91 days with maximum
of 180 days on Risk Sharing Basis and in
case of Non-risk Sharing Basis it is limited
to 90 days.
Interest rates are determined between
issuing bank and the participating bank.
Participation contract – in the prescribed
format
Not transferable and can not be redeemed
before the due date.
Issuing bank will pay with interest to
participating banks. 19
 Money Market Instruments
Fringe Market :
 Disorganised Money Market
Include everything that is outside the
scope of the money market.
Include activities like the Inter-Corporate
Deposit, financing of investments in the
stock market, etc.
High Risk and high interest rates
Dr. Ratnesh Chaturvedi, FMS, Session – 10-13
Primary Dealers :
 Concept introduced by RBI
 To reduce the growing resistance from
banks to subscribe to the issue of govt.
securities
Primary dealers have two major roles to
play that of an underwriter in the primary
market and that of a market maker in the
secondary market for the govt. instruments.
DFHI, STCI, ICICI securities, SBI Gilts,
PNB Gilts and Gilt Securities Trading
Corporation are acting as PDs.
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 Securities Trading Corporation of
India Ltd. (STCI) :
 Incorporated as a public ltd. Company
under the companies act, 1956, on 10th
May’1994
Jointly setup by the RBI, public sector
banks and all India financial institutions
Play a role of market-maker in Govt.
securities
Treasury Bills & Govt. Securities
Dr. Ratnesh Chaturvedi, FMS, Session – 10-13
Discount and Finance House of
India :
 Set up by RBI, 25th April, 1988
Jointly owned by the RBI, public sector
banks and all India financial institutions
which have contributed its paid-up capital
of Rs. 150 crores
The main objective is to strengthen the
short term money market and making short
term resources available to the institutions.
Play role as a smoothing of short term
liquidity imbalances by developing active
primary and secondary money markets.
DFHI operations cover presently the 182
days treasury bills, commercial bills, call
money, commercial papers and certificates
of deposits.
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