Money Market

money market - Twin objectives of "maintaining price stability and

"ensuring availability of adequate credit to productive
sectors of the economy to support growth continue to govern
the stance of monetary policy,
pIayers - Banks, non banks. , MMFs, Government, government sponsored institutions, central
Banks
activities borrowing and lending for a period of 1 day to 1 week
instruments - Move from direct instruments (such as, administered interest rates, reserve
requirements, selective credit control) to indirect instruments (such as, open market operations,
purchase and repurchase of government securities) for the conduct of monetary policy.
The instruments are CaII money
The call/notice money market forms an important segment of the Indian money market.
Under call money market, funds are transacted on overnight basis and under notice
money market, funds are transacted for the period between 2 days and 14 days.

8ooks bottow lo tbls mooey motket fot tbe followloq ptopose
- 1o flll tbe qops ot tempototy mlsmotcbes lo fooJs
- 1o meet tbe ckk 5lk MooJototy tepoltemeots os stlpoloteJ by tbe ceottol book
- 1o meet soJJeo JemooJ fot fooJs otlsloq oot of lotqe ootflows
1bos coll mooey osoolly setves tbe tole of epolllbtotloq tbe sbotttetm llpolJlty posltloo of books
Porticiponts
lottlclpoots lo coll/ootlce mooey motket cotteotly locloJe books ltlmoty ueolets (lus) Jevelopmeot
floooce lostltotloos losotooce compooles ooJ select motool fooJs Of tbese books ooJ lus coo opetote
botb os bottowets ooJ leoJets lo tbe motket 8ot ooobook lostltotloos (socb os ollloJlo lls select
losotooce compooles ot Motool looJs) wblcb bove beeo qlveo speclflc petmlssloo to opetote lo
coll/ootlce mooey motket coo bowevet opetote os leoJets ooly
lnterest kote
llqlble pottlclpoots ote ftee to JeclJe oo lotetest totes lo coll/ootlce mooey motket



CbIo
uevelopeJ by tbe cleotloq cotpototloo of loJlo llmlteJ (ccll) ooJ lottoJoceJ oo Iooooty 20 200J lt ls o
JlscoooteJ losttomeot ovolloble lo electtoolc book eotty fotm fot tbe mototlty petloJ tooqloq ftom ooe
Joy to oloety Joys (coo be moJe ovolloble op to ooe yeot os pet k8l qolJelloes)
A money market instrument that represents an obligation between a borrower and a lender as to
the terms and conditions oI the loan. Collateralized borrowing and lending obligations
(CBLOs) are used by those who have been phased out oI or heavily restricted in the interbank
call money market.

Investopedia Says:
CBLOs were developed by the Clearing Corporation oI India (CCIL) and Reserve Bank oI India
(RBI). The details oI the CBLO include an obligation Ior the borrower to repay the debt at a
speciIied Iuture date and an expectation oI the lender to receive the money on that Iuture date,
and they have a charge on the security that is held by the CCIL.
market repo
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boosloq floooce compooles ooJ losotooce compooles oot bolJloq 5Cl occooots to ooJettoke tepo
ttoosoctloos wltb effect ftom Motcb J 200J 1bese eotltles wete petmltteJ to occess tbe tepo motket
tbtooqb tbelt qllt occooots molotoloeJ wltb tbe costoJloos 5obsepoeotly oooscbeJoleJ otboo co
opetotlve books ooJ llsteJ compooles wltb qllt occooots wltb scbeJoleJ commetclol books wete olloweJ
to pottlclpote
c8lO ooJ motket tepo belpeJ lo ollqoloq sbotttetm mooey motket totes to tbe lAl cottlJot Motool
fooJs ooJ losotooce compooles ote qeoetolly tbe molo soppllet of fooJs wblle books ptlmoty Jeolets
ooJ cotpototes ote tbe mojot bottowets lo tbe tepo motket ootslJe tbe lAl
Laf
lAl ls boseJ oo tepo / tevetse tepo opetotloos by tbe ceottol book
(i) Repo auctions (for absorption of liquidity) and (ii) Reverse Repo auctions (for injection of
liquidity) will be conducted on a daily basis (Monday to Friday, excepting holidays).
A tool used in monetary policy that allows banks to borrow money through repurchase
agreements. This arrangement allows banks to respond to liquidity pressures and is used by
governments to assure basic stability in the financial markets.

nvestopedia expIains Liquidity Adjustment Facility
Liquidity adjustment facilities are used to aid banks in resolving any short-term cash shortages
during periods of economic instability or from any other form of stress caused by forces beyond
their control. Various banks will use eligible securities as collateral through a repo agreement
and will use the funds to alleviate their short-term requirements, thus remaining stable.
CP
Commercial Paper (CP) is an unsecured money market instrument issued in the form of a
promissory note. It was introduced in India in 1990 with a view to enabling highly rated
corporate borrowers/ to diversify their sources of short-term borrowings and to provide an
additional instrument to investors.
CP can be issued for maturities between a minimum of 15 days and a maximum up to
one year from the date of issue. CP can be issued in denominations of Rs.5 lakh or
multiples thereof. CP can be issued in denominations of Rs.5 lakh or multiples thereof.

CP will be issued at a discount to face value as may be determined by the issuer.
CP being a `stand alone' product
Eligibility to Issue CP
Corporates, primary dealers (PDs) and the All-India Financial Institutions (FIs)
Credit rating is imp
CD
Certificates of Deposit (CDs) is a negotiable money market instrument and issued in
dematerialised form or as a Usance Promissory Note, for funds deposited at a bank or other
eligible financial institution for a specified time period.
aturity

The maturity period of CDs issued by banks should be not less than 7 days
and not more than one year.

The FIs can issue CDs for a period not less than 1 year and not exceeding 3
years from the date of issue.
Min amt is 1 lakh
#eserve #equirements
Banks have to maintain the appropriate reserve requirements, i.e., cash
reserve ratio (CRR) and statutory liquidity ratio (SLR), on the issue price of the CDs.
poIicy rate of repo covered above
MSF- The Reserve Bank of ndia in its monetary policy for 2011-12, introduced the
marginal standing facility (MSF), under which banks could borrow funds from RB at
8.25%, which is 1% above the liquidity adjustment facility-repo rate against pledging
government securities.
The MSF rate is pegged 100 basis points or a percentage point above the repo rate.
Banks can borrow funds through MSF when there is a considerable shortfall of liquidity.
This measure has been introduced by RB to regulate short-term asset liability
mismatches more effectively.
&nder the Iacility, the eligible entities can avail overnight, up to one per cent oI their respective
Net Demand and Time Liabilities (NDTL) outstanding at the end oI the second preceding
Iortnight. But Ior the intervening holidays, the MSF Iacility will be Ior one day except on Fridays
when the Iacility will be Ior three days or more, maturing on the Iollowing working day. In the
event, the banks` SLR holdings Iall below the statutory requirement up to one per cent oI their
NDTL, banks will not have the obligation to seek a speciIic waiver Ior deIault in SLR
compliance arising out oI use oI this Iacility in terms oI notiIication issued under sub section
(2A) oI Section 24 oI the Banking Regulation Act, 1949

http://www.rbi.org.in/scripts/NotificationUser.aspx?d=6394&Mode=0

# report on procdrs of monetory poIicy - :
(i) the weighted average overnight call money rate has become the operating target of
monetary policy (ii) the repo rate has become the only independently varying policy rate;
(iii) the reverse repo rate, pegged at 100 bps below the repo rate, provides the lower
bound to the corridor of overnight interest rate and (iv) a new Marginal Standing Facility
(MSF) has been instituted at 100 bps above the repo rate that provides the upper bound
to the corridor. Banks can borrow overnight from the MSF up to one per cent of their
respective net demand and time liabilities (NDTL). The new operating procedure
became operational in May 2011

The liquidity adjustment Iacility (LAF) with some modiIications should be the key element in
the operating Iramework oI the Reserve Bank.
CollaLeral pool for reverse repo operaLlon under Lhe LAl could be exLended Lo lnclude oll bonds
1he 8eserve 8ank should conducL second LAl (SLAl) on a regular basls
ttp://www.rbi.org.in/scripts/S_Press#eIeaseDispIay.aspx?prid=24063
governors speec -

crr, repo reverse repo, infIation, Iaf, msf

_ Maintain an interest rate environment that moderates inflation and anchors inflation
expectations.
_ Manage the risk of growth falling significantly below trend.
_ Manage liquidity to ensure that monetary transmission remains effective, without exerting
undue stress on the financial system.

Policy rate will have following effect

*reinIorce the cumulative impact oI past actions on demand;
_ maintain the credibility oI the commitment oI monetary policy to controlling inIlation, thereby keeping
medium-term inIl ation expectations anchored; and
_ reinIorce the point that in the absence oI complementary policy responses on both demand and supply
sides, stronger monetary policy actions are required.

monetory macro deveIo...24t oct 2011 -
ttp://rbidocs.rbi.org.in/rdocs/PubIications/PDFs/MMDOCT241011_F.pdf

transmission mecanism - monetary policy affects the economy..

Traditionally, four key channels of monetary policy transmission are identified,
viz., interest rate, credit aggregates, asset prices and exchange rate channels


ttp://rbidocs.rbi.org.in/rdocs/PubIications/PDFs/59597.pdf

pIicy rate to manoe mkt same as transmission mechanism. think.
weakeness of money mkt - 1. Dicotomy between Organised and Unorganised Sectors:
The most important defect of the ndian money market is its division into two sectors: (a) the
organised sector and (b) the unorganised sector. There is little contact, coordination and cooperation
between the two sectors. n such conditions it is difficult for the Reserve Bank to ensure uniform and
effective implementations of monetary policy in both the sectors.
2. Predominance of Unorganised Sector:
Another important defect of the ndian money market is its predominance of unorganised sector. The
indigenous bankers occupy a significant position in the money-lending business in the rural areas. n
this unorganised sector, no clear-cut distinction is made between short-term and long-term and
between the purposes of loans. These indigenous bankers, which constitute a large portion of the
money market, remain outside the organised sector. Therefore, they seriously restrict the Reserve
Bank's control over the money market,
3. WastefuI Competition:
Wasteful competition exists not only between the organised and unorganised sectors, but also
among the members of the two sectors. The relation between various segments of the money
market are not cordial; they are loosely connected with each other and generally follow separatist
tendencies. For example, even today, the State Bank of ndian and other commercial banks look
down upon each other as rivals. Similarly, competition exists between the ndian commercial banks
and foreign banks.
4. Absence of AII-ndia Money Market:
ndian money market has not been organised into a single integrated all-ndian market. t is divided
into small segments mostly catering to the local financial needs. For example, there is little contact
between the money markets in the bigger cities, like, Bombay, Madras, and Calcutta and those in
smaller towns.
5. nadequate anking FaciIities:
ndian money market is inadequate to meet the financial need of the economy. Although there has
been rapid expansion of bank branches in recent years particularly after the nationalisation of banks,
yet vast rural areas still exist without banking facilities. As compared to the size and population of the
country, the banking institutions are not enough.
6. Sortage of CapitaI:
ndian money market generally suffers from the shortage of capital funds. The availability of capital
in the money market is insufficient to meet the needs of industry and trade in the country. The main
reasons for the shortage of capital are: (a) low saving capacity of the people; (b) inadequate banking
facilities, particularly in the rural areas; and (c) undeveloped banking habits among the people.
7. SeasonaI Sortage of Funds:
A Major drawback of the ndian money market is the seasonal stringency of credit and higher
interest rates during a part of the year. Such a shortage invariably appears during the busy months
from November to June when there is excess demand for credit for carrying on the harvesting and
marketing operations in agriculture. As a result, the interest rates rise in this period. On the contrary,
during the slack season, from July to October, the demand for credit and the rate of interest decline
sharply.
. Diversity of nterest #ates:
Another defect of ndian money market is the multiplicity and disparity of interest rates. n 1931, the
Central Banking Enquiry Committee wrote: "The fact that a call rate of 3/4 per cent, a hundi rate of 3
per cent, a bank rate of 4 per cent, a bazar rate of small traders of 6.25 per cent and a Calcutta
bazar rate for bills of small trader of 10 per cent can exist simultaneously indicates an extraordinary
sluggishness of the movement of credit between various markets." The interest rates also differ in
various centres like Bombay, Calcutta, etc. Variations in the interest rate structure is largely due to
the credit immobility because of inadequate, costly and time-consuming means of transferring
money. Disparities in the interest rates adversely affect the smooth and effective functioning of the
money market.
9. Absence of iII Market:
The existence of a well-organised bill market is essential for the proper and efficient working of
money market. Unfortunately, in spite of the serious efforts made by the Reserve Bank of ndia, the
bill market in ndia has not yet been fully developed. The short-term bills form a much smaller
proportion of the bank finance in ndia as compared to that in the advanced countries.
PADS2WAD
# website
limitations n way fwd - http://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/77574.pdf
Page 106
MA#T D'LOPMT

Greater Flexibility for Participants in the Call Money
Market
Extension of the Repo Market
Development of a Vibrant Term Money Market
Relook at nter-Bank Participation Certificates
ssues Pertaining to CP
Futures on Policy Linked nterest Rates
Promoting Financial Stability

Liquidity Management
First, during periods of abundant liquidity, the LAF window becomes a first resort for parking surplus
funds by banks.

MSS used as sterilization mechanism, no way to find out wether liquidity situation is temp o permanent.
MSS remains immobilized for entire period. There is, therefore, a need to explore further
instruments/options to undertake liquidity management, particularly in the context of a move to fuller
capital account convertibility

Third, the Reserve Bank may not be in a position to conduct sterilization operations indefinitely as its
inventory of Government paper is limited. There is also a limit on MSS issuances.

Fourth, the absence of a vibrant corporate debt market continues to impede further refinements in liquidity
management in terms of eligible instruments as collaterals


#i financiaI sector by #akes Moen

Abroad term money mkt-LO# - An interest rate at which banks can borrow funds, in
marketable size, from other banks in the London interbank market. The LBOR is fixed on a
daily basis by the British Bankers' Association. The LBOR is derived from a filtered average of
the world's most creditworthy banks' interbank deposit rates for larger loans with
maturities between overnight and one full year.

The LBOR is the world's most widely used benchmark for short-term interest rates. t's
important because it is the rate at which the world's most preferred borrowers are able to borrow
money. t is also the rate upon which rates for less preferred borrowers are based. For
example, a multinational corporation with a very good credit rating may be able to borrow
money for one year at LBOR plus four or five points.

Countries that rely on the LBOR for a reference rate include the United States, Canada,
Switzerland and the U.K.

LO#-based derivatives
urodoIIar contracts
The Chicago Mercantile Exchange's Eurodollar contracts are based on three-month US dollar
LBOR rates. They are the world's most heavily traded short term interest rate futures contracts
and extend up to ten years. Shorter maturities trade on the Singapore Exchange in Asian time.
nterest rate swaps
nterest rate swaps based on short LBOR rates currently trade on the interbank market for
maturities up to 50 years. n the swap market a "five year LBOR" rate refers to the 5 year swap
rate where the floating leg of the swap references 3 or 6 month LBOR (this can be expressed
more precisely as for example "5 year rate vs 6 month LBOR"). "LBOR + x basis points", when
talking about a bond, means that the bond's cash flows have to be discounted on the swaps'
zero-coupon yield curve shifted by x basis points in order to equal the bond's actual market
price. The day count convention for LBOR rates in interest rate swaps is Actual/360, except for
the GBP currency for which it is Actual/365 (fixed).[



GSM
current status
activities
limitation n way fwd
why banks shud have 24%
SLR
Limitaions...
Fiscal deficit
price discovery
FOREX
current stauts
mket activity
merchant mkt
Resource mobiliastion
CO#PO#AT DT
wy nt deveIoped -
There are almost no public issues, that is, they are offered to a wide range of investors and
conform to the regulatory standards required of public issues of bonds. Almost all corporate
bond issues are made as private placements. Private placements are characterised by being
only offered to no more than 50 "Qualified nstitutional Buyers

The total issuance is highly fragmented because of the dominance of private placements.

The number of participants in the market is relatively small, there is little diversity of view, and
hence little incentive to trade.

Most buyers intend to buy and hold.

The development of a corporate bond market in ndia has lagged behind in comparison with other financial
market segments owing to many structural factors. While primary issuances have been significant, most of
these were accounted for by public sector financial institutions and were issued on a private placement basis to
institutional investors. The secondary market, therefore, has not developed commensurately and market
liquidity has been an issue.

The Committee made a number of recommendations relating to rationalising the primary issuance procedure,
facilitating exchange trading, increasing the disclosure and transparency standards and strengthening the
clearing and settlement mechanism in secondary market.

rationalization of stamp-duty, and abolition of tax deduction at source, as in the case of government securities

Three important policy challenges that remain are: to improve market liquidity of the new markets; to encourage
greater private sector issuance; and to spread the risks of bond investment more widely."

Development of the domestic corporate debt market in ndia is constrained by a number of factors - low
issuance leading to illiquidity in the secondary market, narrow investor base, inadequate credit
assessment skills, high costs of issuance, lack of transparency in trades, non-standardised instruments,
comprehensive regulatory framework and underdevelopment of securitisation products. The market
suffers from deficiencies in products, participants and institutional framework.

the private placement market provides a cost effective and time saving mechanism for raising resources,
the unbridled growth of this market has raised some concerns

EQUTY
primary mkt
secondary
trends
volatily
positive growth
which industry
MF
resource mobilisation
sectors
disinvestment impact on capital makt
investment as equity
10 marks application
10 mks SNs
a. Exchange rate
b. nstruments in FM
c. interest rate
d. monetory policy
** nterest rate mein real nominal n trend to b covered
** monetory policy mein Treasury related