MONEY MARKET

The money market is a market for financial assets that are close substitutes for money .It is a market for overnight to short term funds and the debt instruments are having maturity period of one day to one year. It is not a physical location (like stock market), but an activity that is conducted over the telephone. it is a wholesale market the volumes are very high the major players are : RBI , Discount and Finance House of India (DFHI), Banks, NBFCs ,Mutual Funds, Corporate Investors, Securities Trading Corporation of India (STCI) State Governments, Provident Funds, Primary Dealers, PSUs, NRIs

MM centres in India are : Mumbai , Delhi , Kolkata

Utility Facilitates the conduct of monetary policy Helps RBI to influence liquidity and level of interest rates Facilitates government market borrowing Provides a stable source of funds to banks Helps the organizations in meeting temporary short term surpluses and deficits Well functioning of the MM facilitates the development of a market for long-term securities. The interest rates of short term use of money serve as a benchmark for longer-term financial instrument.

Reforms in the Indian MM Introduction of new instruments Entry to new participants Change in the operating procedures of monetary policy Fine tuning of liquidity management operations Technological infrastructure

MM Instruments
1. 2. 3. 4. Treasury Bills (T-bills) Commercial Paper (CPs) Certificate of Deposits (CDs) Commercial Bills T-bills, Call Money Market and Certificate of Deposit provide liquidity for government and banks Commercial Paper and Commercial Bills provide liquidity for the commercial sector and the financial intermediaries. Salient features of MM instruments: Liquidity Minimum transaction cost Minimum risk

INSTRUMENTS Treasury Bills [T-bills] Issued by RBI on behalf of Central Government to raise short-term funds Issued for 91 days,182-days ,364 days Issued at discount and repaid at par on maturity They are not issued in scrip form. The purchases and sales are effected through the Subsidiary General Ledger (SGL) account. Negotiable security Can be rediscounted with banks , thus highly liquid

 No default risk Assured yield Minimum amount Rs 25,000 or in multiples thereof Participants : RBI, banks , mutual funds , FIs , primary dealers, PFs , corporates ,foreign banks , FIIs. Types: On-tap bills, Ad Hoc , Auctioned T-bills At present RBI issues Tbills of three maturities : 91 days,182-days ,364 days. Importance of T-bills ** cash mgt of the govt. ** short-term benchmark ** preferred tool of central bank The development of the T-bill market is a pre-condition for effective open market operation.

Auctioned T-bills RBI receives bids in an auction from various participants and issues the t-bills subject to some cut off limits. Thus the yield of this instrument is mkt determined. These bills are neither rated nor can they be re-discounted with the RBI] .At present RBI issues T-bills of three maturities : 91 days,182-days ,364 days. (1) Multiple-price Auction: bidders quote the price (per Rs 100 face value) of the security which they desire to purchase. The bank then decides the cut-off price at which the issue would be exhausted. Bids above the cut off price are allotted securities. Each winning bidder pays the price it bid. Advantage- RBI obtains the maxi price each participant is willing to pay and it encourages competitive bidding. Disadvantage-bidder bids more cautiously (i.e. offer lower prices) in these auctions and bidder who paid higher prices could face large capital losses if the trading of these securities start below the marginal price set at the auction. (2) Uniform-price Auction: In this RBI accepts a price that fully absorbs the issue amount. Each winning bidder pays the same (uniform) price as decided by the RBI. Advantage-they tend to minimize uncertainty and encourage broader participation. Disadvantage- irresponsible bidding Importance of T-bills plays a vital role in the cash mgt of the govt. Being

Certificate of Deposit [CD] CDs are unsecured, short term time-deposits issued by scheduled commercial banks and financial institutions. They are interest bearing ,maturity dated obligations of banks . CDs are issued by banks during the period of tight liquidity, at relatively high interest rates. CDs are transferable and tradable while FDs are not.

Guidelines for Issuance of a CDs Eligibility : scheduled commercial banks excluding RRBs ; Local Area Banks; select all-India financial institutions as permitted by RBI. Aggregate Amount: Banks have freedom to issue CDs depending on their requirements. An FI may issue CDs within the overall umbrella limit fixed by RBI. Issues of CDs along with other issues should not exceed 100% of its net owned funds as per the latest balance sheets. Denomination: mini amount of CD should be Rs 1 lakh and the multiples thereof. Maturity: mini 7 days- maxi. 1 year .In case of FIs mini-1yr and maxi. 3 yrs. Denomination: mini Rs 1 lakhs and multiples thereof

 Reserve Requirement : banks should maintain the necessary CRR and SLR on the issue price of CDs. Discount/Coup Rate: may be issued at discount on face value or on floating rate basis. Transferability: no lock in period and freely transferable by endorsement and delivery and can be traded in secondary market Loan and Buy Back: cannot buy back the CDs before maturity .Cannot issue loans against them. Who can subscribe: individuals, corporations, trusts, associations, NRIs on non-repatriable basis . .

Commercial Paper [CP] is an unsecured short-term promissory note issued by creditworthy corporates issued at a discount by the highly rated corporates to meet their working capital requirements. All Indian financial institutions ,primary dealers and satellite dealers were also permitted to issue CP to access greater volumes of funds to help increase their activities in the secondary mkt. The other names are finance paper, industrial paper or corporate paper.

Guidelines for Issuance of a CP Eligibility : tangible net worth of Rs 4 crore Rating: credit rating of P2 of Crisil or its equivalent is to be obtained from a credit rating agency Maturity: earlier mini 3 mths- maxi 6 mths ; now a days mini 7 days- maxi. 1 year Denomination: mini Rs 5 lakhs and multiples thereof Investment in CP: individuals , banks , corporates , unincorporated bodies, NRIs can be issued CP only on a nontransferable and non-repatriable basis. FIIs are eligible to invest in CP within the limits set by Sebi.

 Mode of issuance : promissory note , demat form. Total amount should be raised within 2 weeks from the date on which issue opens. Underwriting not permitted.
Issue process: CP is usually privately placed with investors, either through merchant bankers or banks. Issuing and Paying Agent (scheduled commercial banks) ; merchant banker, brokers, banks.

Transferability: it is negotiable and transferable by endorsement and delivery with a fixed maturity period Coupon Rate: The paper is usually priced between the lending rate of the scheduled bank and a representative MM rate.

Usually call money market rates are lower than CP rates hence banks book profits through arbitrage between the two MM.

Factors Inhibiting Growth of CP Market Mini size of investment leaves little scope for retail investor Issue involves administrative difficulties and complex procedural formalities Minimum maturity limit of 7 days LIC , GIC etc do not make bulk purchases in this mkt

Commercial Bills According to the Indian Negotiable Instrument Act ,1881 the bill of exchange is : an instrument in writing containing an unconditional order , signed by the maker , directing a certain person to pay a certain sum of money only to or to the order of , a certain person Important tool to finance credit sales. These bills can be discounted by commercial banks. Banks when in need of money, can get these bills rediscounted by FIs such as LIC ,GIC and RBI. The maturity period of the bills varies from 30 days, 60 days, 90 days depending on the credit extended in the industry.

 Demand bill: payable on demand at sight or on presentation to the drawee Usance bill : payable after a specified time Clean bill :documents are enclosed and delivered against acceptance by the drawee, after which it becomes clear Documentary bill: documents are held by bank till bill is paid Inland bills : (a) drawn or made in India and payable in India (b) drawn upon any person resident in India. Foreign bill: (a) drawn outside India and payable in India (b) drawn in India and made payable outside India.

Precautions
Banks are required to open LC and purchase/ discount /negotiate genuine trade bills under LC only. Accommodation bill should not be purchased / discounted / negotiated by banks. Bills rediscounting is restricted to usance bills held by the banks. Banks should not enter repo transactions using bills discounted /rediscounted as collaterals. While discounting bills of the service sector, banks should ensure that actual services are rendered and accommodation bills are not discounted. Service sector bills are not eligible for re-discounting.

CALL / NOTICE Money Market Predominantly an inter-bank market. Mostly used by commercial banks in borrowing money from other banks to maintain cash balance known as CRR. Minimum size of transaction Rs 10 cr No collateral security is required to cover these transactions Call / Overnight MM- 1day Short Notice more than 1day upto 14 days Extremely volatile market The interest rate paid is called Call Rate. It varies from minute to minute. It is very sensitive to the changes in the demand for and supply of call loans. TERM Money Market Maturity ranges between 3 months -1 year

Collateralized Borrowing and Lending Obligations

The CBLO is an obligation by the borrower to return the borrowed money, at a specified future date and an authority to the lender to receive money lent. The Clearing Corporation of India Ltd [CCIL] launched CBLO to provide liquidity to non-bank entities hit by restriction on access to the call MM. Borrowing cost are low as compared to the call market Discounted instrument available in electronic book entry Maturity 1-19 days Eligible securities are central government securities including T-bills with a residual maturity period of more than 6 months. No restriction on mi minimum denomination as well as lock-in period for its secondary market transactions. Banks, cooperative banks, FIs, insurance companies, mutual funds and primary dealers , who are members of Negotiated Dealing System [NDS] are allowed to participate in CBLO transactions.

Tools for Managing Liquidity in the Money Market Direct Instruments Reserve Requirement :CRR [5.75%] - cash that banks need to keep with RBI ; SLR[24%] mandatory investment in government security Limits on Refinance Administered Interest Rates : bank rate 6% Qualitative and Quantitative Restrictions on Credit Indirect Instruments Open Market Operations Repos / Reverse Repos

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