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JAPANESE MANAGEMENT
SUBMITTED BY:
SNEHA DUBEY
T.Y.BMS
2010- 2011
PROJECT GUIDE
UNIVERSITY OF MUMBAI
It’s with deep sense of gratitude I would like to thank Under whose guidance
I was successfully able to complete my project. I wish to thank him for all
useful discussions and timely suggestions on the related topics of my work
and the invaluable help during the selection and preceding the project.
At last, I would like to thank all the people who helped me to complete this
project by one way or the other.
INDEX
Page
No. Contents
number
01 Introduction to Money Market 1
02 History of Indian Money Market 2
03 Importance & Functions of Money Market 3-7
04 Types of Money Market Instruments 8-34
05 Credit Ratings of Money Market Instruments 35-40
06 Defects & Measures for Development of Money
41-48
Market
07 Capital Market V/s. Money Market
49-51
Capital Market & Money Market Similarities
08 Executive Summary 52-54
09 Bibliography 56
INTRODUCTION TO MONEY MARKET
• DEFINITION
Till 1935, when the RBI was set up, the Indian money market
remained highly disintegrated, unorganized, narrow, shallow and
therefore, very backward. The planned economic development that
commenced in the year 1951 marked an important beginning in the
annals of the Indian money market. The nationalization of banks in
Group (1986), the setting up of Discount and Finance House of
India Ltd (1988), the Vaghul working of India (1994) and the
commencement of liberalization and globalization process in 1991
gave a further fillip for the integrated and efficient development of
Indian money market.
Ref…glossary.reuters.com/index.php?title=Money_Market...history
IMPORTANCE & FUNCTION OF MONEY MARKET
GENERAL CHARACTERISTIC
conducted even over the phone and therefore there is an essential need
for the presence of well developed communications system.
3. Dealings may be conducted with or without the help of brokers.
4. The short-term financial assets that are dealt in are close substitutes
for money, financial assets being converted into money with ease,
speed, without loss and with minimum transactions cost.
5. Funds are traded for a maximum period of one year.
• OBJECTIVES
• IDEAL INVESTMENT
Money market offers an ideal source of investment for the commercial
banks. The market helps them invest their short-term surplus funds so as to
meet statutory reserve requirements. For instance, the requirements of Cash
Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) vary every
fortnight depending on banks’ Net Demand and Time Liability (NDTL).
www.dwsinvest.co.in/showpage.aspx?pageID=33
• ECONOMIC DEVELOPMENT
Money market being an integral part of a country’s economy, contributes
substantially to the economic development of a country. A developed money
market is indispensable for the rapid development of the economy. In fact,
the stage of development of the economy will be reflected in the stage of
development of a money market. This is borne out by the fact that ill-
developed nature of a money market is responsible for the primitive nature of
economic development of a country. The absence of a well-developed
money market would constrain the economies from making available, on a
continuous basis the supply of adequate funds.
• FACILITATING TRADE
Money market is of immense help to the business community in the
following ways:
1. Providing an ideal payment mechanism making it possible for
expeditious transfer of large sums of money.
2. Meeting the working capital requirements for carrying out the
production and marketing activities.
3. Making efficient investment of surplus funds into near-money assets
which can be quickly converted into money as and when needed.
• HELPFUL TO GOVERNMENT
The government uses the money market as an arena in which short-term
funds are raised by floating treasury bills. It helps the government manage its
monetary position smoothly through the central bank of the county.
• GENERAL FUNCTIONS
Money market performs diverse functions within the banking system of an
economy, as discussed below:
• INVESTMENT FUNCTION
The money market provides an ideal source for investment of the funds for a
short period of time for commercial banks, non banking financial concerns,
business corporations and other investors. It enables businessmen, with
temporary surplus funds, to invest them for a short period.
• FINANCING FUNCTION
Money market provides an ideal source for short-term financing for
businessmen, industrialists, traders, etc to meet their day-to-day requirements
of working capital. Funds are available for borrowing by the government and
its agencies also.
• FACILITATING FUNCTION
Money market provides an ideal play ground for the central monetary
authority of the country to carry out various regulatory operations relating to
the banking and financial system of the country. The sensitive nature of the
money market helps the central bank to make it an ideal arena for the
execution of various credit control measures.
Ref..moneymarkettalk.wordpress.com/2008/.../nature-and-functions
By convention, the term "money market" refers to the market for short-term
requirement and deployment of funds. Money market instruments are those
instruments, which have a maturity period of less than one year. The most
active part of the money market is the market for overnight and term money
between banks and institutions (called call money) and the market for repo
transactions. The former is in the form of loans and the latter are sale and buy
back agreements - both are obviously not traded. The main traded
instruments are commercial papers (CPs), certificates of deposit (CDs) and
treasury bills (T-Bills). All of these are discounted instruments ie they are
issued at a discount to their maturity value and the difference between the
issuing price and the maturity/face value is the implicit interest. These are
also completely unsecured instruments. One of the important features of
money market instruments is their high liquidity and tradability. A key
reason for this is that these instruments are transferred by endorsement and
delivery and there is no stamp duty or any other transfer fee levied when the
instrument changes hands. Another important feature is that there is no tax
deducted at source from the interest component. A brief description of these
instruments is as follows:
1. Certificate of Deposits
2. Commercial Papers
3. Treasury Bills
4. Ready Forward Contracts ((Repos)
5. Money Market Mutual Funds (MMMFs)
• CERTIFICATE OF DEPOSIT
Meaning of CDs
A marketable document of title to a time deposits for a specified period may
be referred to as a “Certificate of Deposit” (CD). It takes the form of a receipt
given by a bank or any other institution for funds deposited with it by the
depositor.
Features
Certificates of deposits process the following distinguishing characteristics:
1. Negotiable instruments CDs are negotiable term-deposit certificates
year.
3. Nature CDs are in the form of usance promissory notes and hence
www.economywatch.com/market/money-market/money-market-instruments
PROFILE
A distinguishing profile of Certificate of Deposit as operating in India is
presented below:
• THE TAMBE WORKING GROUP
The Tambe working Group set up in 1982 in India, reported that banks and
financial institutions were not willing to support the launch of money market
instruments such as CDs, and therefore advised against the introduction of
these instruments. The Group cited many reasons for the non-popularity of
these instruments including the absence of secondary market, administered
interest rate structure on bank deposits and the danger of CDs giving rise to a
large number of fictitious transactions.
• THE LAUNCH
The RBI launched the scheme of CDs with effect from March 27, 1989.
Following guidelines were laid down in this regard.
• ELIGIBLE ISSUERS
The institutions that are eligible to issue CDs are scheduled commercial
banks (excluding RRBs) and specified all-India financial institutions,
namely, IDBI, IFCI, ICICI, SIDBI, IRBI, and EXIM bank.
• ELIGIBLE SUBSCRIBERS
The parties who are eligible to buy CDs are individuals, associations,
companies, corporations, trust funds, etc. NRI an also subscribe to the CDs.
How ere, this is possible only on a non-repatriation basis. It is not possible
for an NRI to endorse CDs to another NRI in the secondary market.
• NEGOTIATION
CDs are freely transferable by endorsement and delivery after the initial lock
–in period of 15 days. The instrument can be purchased by any of the above
subscribers and DFHI in the secondary market.
• MATURITY
The maturity period of CDs issued by banks ranges from 3 days to 12 months
and that issued by specified financial institutions can have a maturity period
up to 3 years. With the announcement of credit policy on April27, 2000 the
maturity period was reduced from 3 month to 15 days.
• DISCOUNT
CDs are to be issued at a discount to face value, with the maturity period not
having any grace period.
• LIMITS OF ISSUE
The maximum amount of issue by a bank, which was originally fixed at 1
percent of its fortnightly aggregate average deposits, was raised to 10 percent
in 1992. This was subsequently abolished totally. The minimum size of issue
to a single investor, which was originally fixed at Rs.10 lakhs, was reduced
to Rs. 5lakhs with effect from October 21, 1997. Issue of CDs above Rs.5
lakhs can now be made in multiples of Rs.1 lakhs. CDs can now be CRR on
issue price of CDs for which there is no ceiling.
• STAMP DUTY
Stamp duty is payable on CDs as applicable to any other negotiable
instrument.
• SECURITY PAPER
CDs are transferable by endorsement and delivery, and shall therefore be
issued on a good quality security paper.
• OTHER REQUIREMENTS
1. No loans can be granted by banks against CDs.
2. Banks cannot have any buyback arrangement of their own CDs before
maturity.
3. Banks are to submit fortnightly report on their CDs to the RBI under
section 42 of the RBI Act, 1935.
4. Banks are to show CDs under the head ‘liabilities’ in the balance sheet.
YIELD
CDs are offered at interest rates higher than the time deposits of banks.
However, the rate of interest is dependent upon many factors such as urgency
of requirement for funds, alterative opportunities for investment of funds
mobilized, etc. The rate of discount being deregulated is now determined by
the demand and supply of CDs. CDs are issued at a discount to their face
value and redeemed at par. CDs are issued at a front-end discount and in such
a case; the effective rate of interest is higher than the quoted discount rate.
ROLE OF DFHI
The Discount and Finance House of India Ltd. Functions as a market maker
in CDs market. It offers bid rate, the rate of discount at which it is prepared
to buy CDs, and offer rate at which it would be willing to sell the CDs. The
DFHI acts as an ideal conduit for disinvestments of CD holdings, which is
done through their banker in Mumbai. DFHI also engages in buying CDs
from the bank at its bid discount rate. Settlements are effected through RBI
cheque.
ROLE OF BANKS
Scheduled commercial banks are the active players in the realm of CDs
market segment. CDs are used as an important money market instrument.
CDs provide an ideal avenue of investment money market instrument. CDs
provide ideal avenue of investment for bankers. CDs are considered safe,
liquid, and attractive in returns for both scheduled commercial bank and
investors.
It is not necessary for banks to encash CDs before maturity under the
RBI Act. Banks are under obligation to maintain usual reserve requirements
(SLR and CRR) on issue price of CDs. CDs offer the opportunity for banks
for the bulk mobilization of resources as part of effective fund management.
Besides, offering an attractive yield help bankers utilize them eligible assets
for determination of Net Demand and Time Liabilities (NDTL). According to
the RBI guidelines, it will not be possible for banks to enter into buyback
arrangement with the subscriber of CDs. Similarly, they cannot grant loans
against CDs issued by them.
It is possible for investors to sell CDs in secondary market before their
maturity. This offers investors the advantage of liquidity through ready
marketability. However, the tendency on the part of holders of CDs to hold
the instruments till maturity date has not made possible for the creation of an
effective secondary market for them, although the primary market for CDs
has shown a considerable improvement.
• COMMERCIAL PAPER
Debt instrument that are issued by corporate houses for raising short-term
financial resources from the money market are called Commercial Papers
(CPs).
FEATURES
Following are the features of commercial papers:
• NATURE
These are unsecured debts of corporate. They are issued in the form of
promissory notes. These are redeemable at par to the holder at maturity. The
issuing company should have a minimum tangible net worth to the extent of
Rs.4 crores. Moreover, the working capital (fund-based) limit of the
company should not be less than Rs. 4 crores and this allows corporate to
issue CPs up to 100 per cent of their fund based working capital limits. CPs
are issued at a discount to face value in multiples of Rs.5 Lakhs. CPs attracts
stamp duty. No prior approval of RBI is needed to issue CPs and no
underwriting is mandatory. The issuing company has to bear all expense
(Such as dealers’ fees, rating agency fee and charges for provision of stand-
by facilities) relating to the issue of CP. The issue of CPs serves the purpose
of releasing the pressure on bank funds for small and medium sized
borrowers, besides allowing highly rated companies to borrow directly from
the market.
www.answers.com/topic/money-market-instruments
• MARKET
The market for the Cps comprises of issues made by public sector and private
sector enterprises CPs issued by top rated corporate are considered as sound
investments. Conditions attached to the issue are less stringent than those
applicable for raising CPs. Beginning from September 1996, Primary Dealers
(PDs) were also permitted by RBI to issue CPs for augmenting their
resources. This is one of the steps initiated by the RBI to make the CPs
market popular.
• RATING
As per the guidelines of the RBI, CPs are required to be graded by the
organization issuing them. Accordingly, a rated CP is considered to be a
quality and sound instrument. With the liberalization of interest rate
structure, the rate of interest is market-determined. This causes wide
variation in the prevailing rates of interest.
• INTEREST RATES
The rate of interest applicable to CPs varies greatly. This variation is
influenced by a large number of factors such as credit rating of the
instrument, economic phase, the prevailing rate of interest in CPs market,
call rates, the position in foreign exchange market, etc. It is however to be
noted that there is no benchmark for the interest rate.
• MARKETABILITY
The marketability of the CPs is influenced by the rates prevailing in the call
money market and the foreign exchange market. Accordingly where
attractive interest rates prevail in these markets, the demand for Cps will be
affected. This is because; investors will divert their investment into these
markets.
• CPS IN LIEU OF WC
The nature of credit policy announced by the RBI to allows highly rated
corporate to have the advantage of banks offering an automatic restoration of
working capital limits on the repayment of CP. Accordingly, short-term
working capital loans were substituted with cheaper CPs. This was done by
the RBI to hasten the growth of the CP market.
• RATING
In order that the satellite dealers are permitted to trade in CPs, it is essential
that the issuing corporate obtain the minimum specified credit rating from a
credit rating agency. Such a rating must have been approved by the months.
• MATURITY
The CPs shall be issued for a maturity period ranging from 15 days to one
year from the dated is issue.
• TARGET MARKET
The issue of CPs may be targeted to such persons as individuals, banks,
companies, other corporate bodies registered or incorporated in India and
unincorporated bodies and non-resident Indian (NRI) on non-repatriation
basis subject to the condition that it shall be transferable.
• LIMITS OF ISSUE
Each issue of CPs (including renewal) shall be treated as a fresh issue. The
CPs issue may take place in multiples of Rs. 5 Lakhs. The investment by any
single investor shall be for a minimum amount of Rs. 25 Lakhs (face Value)
and the secondary market transactions may be dealt in for amounts of Rs.
5Lakhs or multiples thereof. The RBI shall fix the total amount of issue. The
issue amount shall be raised within a period of 2 week from weeks from the
date of approval by the Reserve Bank or ma be issued on a single day or in
parts on different days as the case may be.
• NATURE
The CPs shall be in the form of usance promissory note. It shall be negotiable
by endorsement and delivery. It is issued at discount to face value, discount
being determined by the SD issuing the CPs. The SDs shall bear the expenses
of the issue, including dealer’s fee, rating agency fee, etc.
• TREASURY BILL
www.economywatch.com/market/money-market/money-market-instruments
GENERAL FEATURES
Treasury bills incorporate the following general features:
1. Issuer TBs are issued by the government for raising short-term funds
• HISTORY
It was in the year 1877 that Treasury Bills (TBs) came to be issued for the
first time in the world. Later, it acquired wide popularity around the world
both in developing and developed countries. TBs were first issued in India in
October1971. The issue aimed at raising resources for financing the First
World War efforts of the government and for mopping liquidity in the
economy due to heavy war expenditure.
TBs that were initially sold by the government had a maturity period
of 3 months, 6 months, 9 months and 12 months. Later on, with the setting up
of the RBI in 1935, the issue profile of TBs underwent a lot of changes.
Accordingly, RBI came to issue two type of TBs such as Tap Bills that were
issued at all times and Intermediate Bill that were sold between auctions, to
nongoverment investors. However, in the year 1965, a sale of TBs to public
through auction was suspended and issue took place on top basis at a
discount. Thus commercial banks began to invest in them.
• ISSUE
TBs, which were first up to 1935 by the Government of India directly, came
to be issued by the RBI since its inception in 1935. Thereafter, TBs are
issued at a discount by the RBI on behalf of the Government of India.
• TYPES
There are two types of treasury bills. They are ordinary treasury bills and ad
hoc treasury bills. The freely marketable treasury bills that are issued by the
Government of India to the public, banks and other institution for raising
resources to meet the short-term finance needs takes the form of ordinary
TBs.
Ad hoc TBs, on the other hand, are issued in favor of the RBI only.
They are used by RBI as reserve against which the issue department issue
currency notes. In addition, they are also issue to serve the purpose of
replenishing cash balance of the central government. Besides, ad hoc TBs
provide an investment avenue to state government, semigoverment
department and foreign central banks for parking their temporary surplus and
for earning income. Since ad hoc TBs are not marketable in India, the holders
of these bills can always sell them back to the RBI.
• MATURITY PERIOD
A lot of changes taken place in the realm of the periodicity of treasury bills,
changes having being brought about by the policy announcements made by
RBI from time to time. A brief account of the changes in the period of
maturity of TBs is outlined below:
1. Maturity period of TBs at the close of the First World War was of 3, 6,
9, and 12 month’s duration.
2. Maturity periods of tap bills and Intermediate Bills introduces by RBI
immediately after its inception was 91 days which was continued up to
November 1986.
3. Maturity period of 182 days recommended by Chakraborty Committee
was issued up to April 1992.
4. Maturity period of 365 days beginning from April 1992.
5. Maturity period of 14 days introduced in May 1997 and of 28 days
introduced on October21, 1997.
6. Maturity period of 182 days reintroduced with effect from May26,
1999.
• PARTICIPANTS
The participants in the TBs market include the Reserve Bank of India, the
State Bank Of India, Commercial Banks, State Governments and other
approved bodies, Discounts and Finance House of India as a market maker in
TBs, the Securities Trading Corporation of India (STCI), other financial
institutions such as, LIC, UTI, GIC, NABRAD, IDBI, IFCI, ICICI, etc
corporate entities and general public and Foreign Institutional Investors.
Of the above-mentioned participants, RBI and commercial banks are
the most popular players. This essentially arises from the nature of
relationship between them. TBs are least popular among the corporate
entities and the general public.
AUCTIONING METHODS.
• UNIFORM PRICE AUCTION
The system of uniform price auction system in respect of 97-days, TBs was
introduced as to broaden market participation. (‘Winners’ curse is a
phenomenon whereby those bidding at lower than the cut-off, end up paying
a premium.) The introduction of uniform price auction is expected to reduce
uncertainty associated with the bidding process. This is peculiar to the
underdeveloped nature of Indian money market, which is afflicted by the
lack of reliable information, causing wide differences in the yield
expectations before the auctions. The amounts of issue are notified in respect
of 97-days TBs auctions and the dated securities auctions.
• POLICY MEASURES
With a view to improving the depth and liquidity in the government
securities market, RBI announced the following policy measures relating to
Treasury Bills with effect from October1999:
1. Price based auction of government – dated securities.
2. Auction of 182-day Treasury Bills.
3. A calendar of Treasury Bills Issuance
• TB RATE
The discount rate at which the RBI sells TBs known as Treasury Bills rate.
The effective yield on TBs depends on such factors as the rate of discount,
difference between the issue price and the redemption value, and time period
of their maturity.
The treasury bills rate is computed as follows:
Y= {[(FV-IP)/IP]*[364/MP]}*100.
Where,
FV = Face Value TBs
IP = Issue Price of TBs
MP = Maturity Period of TBs in days
D = Discount.
www.rbi.org.in/scripts/SDDS_ViewDetails.aspx?ID=13
BENEFITS
TBs being an important money market instruments provide the following
benefits:
• LIQUIDITY
Treasury bills command high liquidity. A number of institutions such as
RBI, the DFHI, STCI, commercial banks, etc take part in the TB market. In
addition, the Central bank is always prepared to purchased or discount TBs.
• NO DEFAULT RISK
Since there is a guarantee by the central government, TBs are absolutely free
from the risk of default of payment by the issuer. Moreover, the government
itself issues the TBs.
• AVAILABILITY
RBI has the policy of making available on a steady basis, the TBs especially
through the ‘Tap’ route since July 12, 1965. This greatly helps banks and
other institutions to park their funds temporarily in TBs.
• LOW COST
Trading in TBs involves less transaction costs. This is because two-way
quotes with a fine margin are offered by the DFHI on a daily basis.
• SAFE RETURN
The biggest advantage of TBs is that they offer a steady and sage return to
investors. There are not many fluctuations in the discount rate. It is also
possible for the investors to earn attractive return by keeping investment in
nonearning cash to the minimum and supplementing it with TBs.
• NO CAPITAL DEPRECIATION
Since TBs command high order of liquidity, safely and yield, there is very
little scope for capital depreciation in them.
• SLR ELIGBILITY
TBs are of great attraction to commercial banks as it helps them park their
funds (Net Demand and Time Liabilities) as per the norms or SLR
announced b the RBI from time to time. This reason makes commercial
banks dominate dealers in TBs.
• FUNDS MOBILIZATION
TBs are used as an ideal tool by the government for raising short-term funds
required for meeting temporary budget deficit.
• MONETARY MANAGEMENT
It is also possible for the government to mop up excess liquidity in the
economy through the issue of TBs. Since TBs are subscribed by the investors
other than the RBI, the issue would neither lead to inflationary pressure nor
result in monetization.
• BETTER SPREAD
TBs facilitate proper spread of asset mix different maturity as they are
available on tap basis as well as in fortnightly auctions.
• PERFECT HEDGE
TBs can be used as a hedge against volatility of call loan market and interest
rate fluctuations.
• FUND MANAGEMENT
TBs serve as effective tools of fund management because of the following
reasons:
1. Ready market availability, both for sale and purchase at market driven
prices, thus imparting flexibility.
2. Facility of rediscounting TBs on ‘tap basis’.
3. Facility of refinancing from the RBI.
4. Plethora of options available to fund managers to invest in TBs and for
raising funds against TBs especially through and with the help of
DFHI
5. Ideally suited for investment of temporary surplus
6. Possibility of building up portfolio of TBs with dates of maturities
matching the dates of payment of liabilities, such as certificates of
deposits and deposits of short-term maturities.
7. Possibility of meeting the temporary difficulties of funds by entering
into buyback transactions for surplus TBs and reversing the
transactions when the financial need is over
8. Possibility of making enhanced profit by indulging in quick raising of
money against TBs for investing in call money market when call rates
are high and doing the reverse when call rates dip.
www.business-standard.com/india/news/fii...t-bills.../195294/
REPOS
The term Repo is used as an abbreviation for Repurchase Agreement or
Ready Forward. A Repo involves a simultaneous “sales and repurchase”
agreements.
www.investopedia.com/university/.../moneymarket7.asp
by partying with its security and the buyer – bank in turn to get the
security by parting with its money. It becomes a Reserve Repo deal for
the purchaser of the security. Securities are sold first to a buyer bank
and simultaneously another contract is entered in to with buyer to
repurchase them at a predetermine date and price in future. The price
of the sale and repurchase of securities is determined before entering
into deal.
3. Safety Repo is an almost risk free instrument used to even out
short – term cash management tool as the bank receive cash from the
buyer of the securities in return for the securities. This helps the banker
meet temporary cash requirement. This also makes the repo a pure
money lending operation. On the maturity of the ‘repos’ the security is
purchased back by the seller bank from the buyer-bank by returning
the money to the buyer.
www.derivativesstrategy.com/magazine/.../0297fea1.asp
• MONEY MARKET MUTUAL FUNDS (MMMFS)
The Reserve Bank of India introduced the Money Market Mutual Funds
(MMMFs) scheme in April 1972. The schemes aim at providing additional
short-term avenues to individual investor in order to bring Money Market
Instrument within their reach. MMMFs are expected to be more attractive to
banks and financial institutions, ho would find them providing greater
liquidity and depth to the money market.
www.investorwords.com/.../money_market_mutual_fund.html
FEATURES
He Silent features of the MMMFs are as follows.
• Eligibility
The MMMFs can be set up by schedule commercial banks and public
financial institution as define under section 4A of the companies Act, 1956,
either directly or through their existing Mutual Funds / Subsidiaries who are
engaged in fund management. In addition, private sector Mutual Funds may
also set up MMMFs with the prior approval of RBI, subject to fulfillment of
certain terms and conditions. SEBI’s clearance is required in the event of
MMMFs being set up in the private sector.
• Structure
MMMFs can be set up either as Money Market Deposit Accounts (MMDAs)
or Money Market Mutual Funds (MMMFs)
• Size
There is no ceiling prescribed for the MMMFs for raising resources.
• Investors
The MMMFs are primary indented to serve as a vehicle for individual
investor to participate in the Money Market, the units / shares of MMMFs
can be issued only to individuals. In addition, individual Non Resident Indian
(NRIs) may also subscribe to the share / units of MMMFs. The dividend /
income on such subscription will be allowed to be repatriated, through the
principle amount of subscription will be allowed to be repatriated, though the
principal amount of subscription will not.
• Investment by MMMFs
The resources mobilized by MMMFs should be invested exclusively in the
various money market instruments as listed below.
1. Treasury Bills and dated Government Securities having an unexpired
maturity up to 1 year with no minimum limit
2. call / notice money with no maximum limit
3. Commercial Paper with no maximum limit, the exposure to the
commercial paper issue by the individual company being limited to
3% of the resources of the MMMFs as the prudential requirement.
4. Commercial bills arising out of genuine trade / commercial
transactions and accepted / co-accepted by banks with no – maximum
limits.
5. Certificate of deposit with no limit.
• Reserve Requirements
In the MMMFs set up by banks, the resources mobilized by them would not
to be consider part of their net demand, and time liabilities, and as such
would be free of any reserve requirement.
• Stamp duty
The share / units issued by MMMFs would be subject to Stamp duty.
• Regulatory Authority
RBI is the regulatory that gives the approval for the setting of MMMFs.
Beside this, banks their subsidiaries and public financial institution would
also be required to comply with the guidelines and directives that may be
issued by RBI from time to time for the setting and operation of MMMFs.
Similarly, the Private Sector MMMFs would need to clearance of SEBI, as
also approval of RBI.
www.fundsavvy.com/mutual_funds.../market-mutual-funds.htm
CREDIT RATING OF INSTRUMENT
Credit rating is the process of assigning standard scores which summarize the
probability of the issuer being able to meet its repayment obligations for a
particular debt instrument in a timely manner. Credit rating is integral to debt
markets as it helps market participants to arrive at quick estimates and
opinions about various instruments. In this manner it facilitates trading in
debt and money market instruments especially in instruments other than
Government of India Securities.
ICRA - Promoted by IFCI. Moody’s, the other global rating major, has
recently taken a small 11% stake in ICRA.
CRISIL is believed to have about 42% market share followed by ICRA with
about 36%, CARE with 18% and Duff and Phelps with 4%.
Grading system
Each of the rating agencies has different codes for expressing rating for
different instruments; however, the number of grades and sub-grades is
similar e.g. for long term debentures/bonds and fixed deposits, CRISIL has 4
main grades and a host of sub grades. In decreasing order of quality, these
are AAA, AA+, AA, AA-, A+, A, A-, BBB-, BBB, BBB+, BB+, BB, BB-,
B+, B, B-, C and D. ICRA, CARE and Duff and Phelps have similar grading
systems. The following table contains a key to the codes used by CRISIL and
ICRA.
Credit rating is a dynamic concept and all the rating companies are
constantly reviewing the companies rated by them with a view to changing
(either upgrading or downgrading) the rating. They also have a system
whereby they keep ratings for particular companies on "rating watch" in case
of major events, which may lead to change in rating in the near future.
Ratings are made public through periodic newsletters issued by rating
companies, which also elucidate briefly the rationale for particular ratings. In
addition, they issue press releases to all major newspapers and wire services
about rating events on a regular basis.
en.wikipedia.org/wiki/Money_market
Factors involved in credit rating Credit rating depends on several factors,
some of which are tangible/numerical and some of which are judgmental and
intangible. Some of these factors are listed below:
www.immfa.org/about/faq/default.asp
Derived ratings and structured obligations
Sometimes, debt instruments are so structured that in case the issuer is unable
to meet repayment obligations, another entity steps in to fulfill these
obligations. Sometimes there is a documented, concrete mechanism for
recourse to the third party, while on other occasions the arrangement is loose.
On such occasions, the debt instrument in question is said to be "credit
enhanced" by a "structured obligation" and the rating assigned to the
instrument factors in the additional safety mechanism. The extent of
enhancement is a function of the rating of the "enhancer", the nature of the
arrangement etc and usually there is a suffix to the rating which expresses
symbolically that the rating is enhanced e.g. A bond backed by the guarantee
of the Government of India may be rated AAA (SO) with the SO standing for
structured obligation.
www.rocw.raifoundation.org/management/mba/.../lecture-41.pdf
Rating agencies all across the world have often been accused of not being
able to predict future problems. In part, the problem lies in the rating process
itself, which relies heavily on past numerical data and standard ratios with
relatively lower usage of judgment and understanding of the underlying
business or the country economics. Data does not always capture all aspects
of the situation especially in the complex financial world of today. An
excellent example of the meaningless over reliance on numbers is the poor
country rating given to India. Major rating agencies site one of the reasons
for this as the low ratio India’s exports to foreign currency indebtedness. This
completely ignores two issues – firstly, India gets a very high quantum of
foreign currency earnings through remittances from Indians working abroad
and also services exports in the form of software exports which are not
counted as "merchandise" exports. These two flows along with other
"invisible" earnings accounted for almost US$11bn in FY 99. Secondly,
since India has tight control on foreign currency transactions, there is very
little error possible in the foreign currency borrowing figure. As against this,
for a country like Korea, the figure for foreign currency borrowing increased
by US$50bn after the exchange crisis began. This was on account of hidden
forward liabilities through swaps and other derivative products.
In general, Indian rating agencies have lost some amount of their credibility
in the last two years due to their inability to predict defaults in many
companies, which they had rated quite highly. Sometimes, some of the
agencies had an investment grade rating in place when the company in
question had already defaulted to some of the fixed deposit holders. Further,
rating agencies resorted to mass downgrading of 50-100 companies as a
reaction to public criticism, which further eroded their credibility. The major
reasons for these downgrades are as follows
By and large, the rating is a very good estimate of the actual creditworthiness
of the company; however, it is not able to predict extreme situations such as
the ones described above, which are unlikely to have been predicted by most
investors in any case. Investors should realize that a credit rating is not
sacrosanct and that one has to do one’s own due diligence and investigation
before investing in any instrument. They should use the rating as a reference
and a base point for their own effort. One good way of doing this is
examining the behavior of the stock price in case the stock is listed. As a
collective, the market is far smarter at predicting problems than any credit
rating agency. Witness the sharp erosion in stock prices of companies much
before their credit ratings were downgraded. Witness also the fact that
foreign currency bonds from Indian issuers trade at yields lower than
countries which have been rated higher by rating agencies.
www.efama.org/index2.php?option=com_docman&task
www.managementparadise.com/forums/...php/t-22086.html
• DEFECTS
1. UNORGANIZED MONEY MARKET The presence of indigenous
Indian money market. Several sectors are very loosely connected with
each other. Often, there used to be hostility among the different
sections of the money market. There is hardly any cohesive working
relationship between the organized banking system and the
unorganized indigenous bankers.
3. INADEQUATE NATIONAL MARKET The has been a late entry of
national level players such as the DFHI, STCI, etc in the Indian
financial system. This to great extent retarded the early growth of the
money market. The so-called advancements in computerization and
telecommunications are also very limited and confined mostly to urban
and semi-urban areas. Coordination between various money markets
and their constituents is lacking. It is imperative that a well-
coordinated and operationally uniform money market has to emerge in
the country.
4. INTEREST RATE DISPARITY A major defect of the Indian money
market has been that the interest rate varies from place to place, from
time to time and from segment to segment. Wide disparity in money
rates exists. This condition makes it difficult for any worthwhile
regulatory mechanisms to be put in place.
5. DEFICIENT BILL MARKET Lack of popularity of bill culture among
the traders both at national and international arena, has given rise to a
sick and a deficient bill market. This has greatly affected the
development of the money market. The transactions relating to bill
discounting and purchasing are limited. Besides, they also constitute
only a small part of total money market operations in the country. It is
a sad commentary that the different sub markets in the bill market have
not shown much development too. For instance, the market for
government and semigoverment securities is narrow. This has greatly
affected the efficient use of the monetary control measures of the RBI
so as to curb the inflationary pressure or to keep the slump away from
the economy.
Moreover, the investment in government securities is largely
confined to
Institutional investors comprising mainly the Reserve Bank of India,
Commercial Banks, Life Insurance Corporation of India, and in certain cases,
provident Fund schemes and other trust funds. This prevents the RBI from
using these instruments effectively for influencing the level of liquidity in the
money market, through open market operations. Similarly, transactions in the
interbank call money market, despite constituting the fulcrum of the Indian
money market, are not appreciably large enough to form a sensitive segment.
Despite a series of serious measures initiated by the RBI over a period
of time, the plight of Indian bill market largely remains secluded,
constrained, and under developed much to the chagrin of the monetary
managers.
supply of loan able funds. The far exceeding demand has created a
wide chasm in the Indian money market. This situation can be
attributed to such factors as lower savings rate on account of poverty,
inadequate banking facilities, poor banking habits among the people,
inadequate facilities for investment of small saving and the existence
of a parallel economy with vast amount of black money defying all
regulations.
www.favaro.net/john/home/publications/pursuit.pdf
In many respects, both money market and capital markets exhibit similar
characteristics as specified below.
1. TRANSFER OF RESOURCES TRANSFER of resources takes place from
surplus units to deficit units both in money market and capital market.
2. COMMERCIAL BANKS Commercial banks provide both short-term
and long-term finance and therefore, take an active part in the money
market as well as capital market.
3. LIQUIDITY ADJUSTMENT Nonbanking financial institution and
www.improvingyourworld.com/.../the_difference_between_capital_markets_an
d_money_markets_001673.html
EXECUTIVE SUMMARY
Debt Instruments which have a maturity of less than one year at the time of
issue are called money market instrument. These instruments are highly
liquid and have negligible risk. The major money market instruments are
Treasury Bills, Certificate of Deposit, Commercial Paper, Money market
Mutual Fund, & Repos. The money market is dominated by the Government,
financial institutions, banks, and corporate. Individual investors scarcely
participate in the money market directly. A brief description of money
market instruments is given below.
Treasury bills are the most important money market instrument. They
represent the obligation of the Government of India which has a primary
tenor like 91 days and 364 days. They are sold on an auction basis every
week in certain minimum denominations by the Reserve Bank of India. They
do not carry an explicit interest rate. Instead, they are sold at a discount and
redeemed at par. Hence the implicit yield of a Treasury bill is a function of
the size of the discount and the period of maturity.
Though the yield on Treasury bills is somewhat low, yet they have an
appeal for the following reasons: (a) These can be transacted readily and
there is a very active secondary market for them. (b) Treasury bills have nil
credit risk and negligible price risk.
CDs are a popular form of short-term investment for companies for the
following reasons: (i) Banks are normally willing to tailor the denominations
and maturities to suit the needs of the investors. (ii) CDs are generally risk-
free. (iii) CDs generally offer a higher rate of interest than Treasury bills or
term deposits.
The Reserve Bank of India introduced the Money Market Mutual Funds
(MMMFs) scheme in April 1972. The schemes aim at providing additional
short-term avenues to individual investor in order to bring Money Market
Instrument within their reach. MMMFs are expected to be more attractive to
banks and financial institutions, ho would find them providing greater
liquidity and depth to the money market.
Repos -:
A Repo works as follow as follows. Party A needs short-term funds and Party
B wants to make a short-term investment. Party A sells securities to Party B
at a certain price and simultaneously agrees to repurchase the same after a
specified time at a slightly higher price. The difference between the sale price
and repurchase price represent the interest cost to Party A (the party doing the
repo) and conversely the interest income for Party B (the party doing the
Reverse Repo). Reverse Repos are a safe and convenient form of short-term
investment.
REFERENCES
• …www.investopedia.com/university/moneymarket
• linkinghub.elsevier.com/retrieve/pii/S0161893807000890
• Ref…www.investorglossary.com/money-market.htm
• www.improvingyourworld.com/.../the_difference_between_capital_mark
ets_and_money_markets_001673.html
• www.favaro.net/john/home/publications/pursuit.pdf
• www.derivativesstrategy.com/magazine/.../0297fea1.asp
• www.economywatch.com/market/money-market/money-market-
instruments
• www.investorwords.com/.../money_market_mutual_fund.html
• www.immfa.org/about/faq/default.asp
BIBLIOGRAPHY
• www.google.com
• www.rbi.org.in
• www.calypso.com
• www.yahoo.com