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The Need
Need for short term funds by Banks. Outlet for deploying funds on short term basis Need to keep the SLR as prescribed Need to keep the CRR as prescribed Optimize the yield on temporary surplus funds Regulate the liquidity and interest rates in the conduct of monetary policy to achieve the broad objective of price stability, efficient allocation of credit and a stable foreign exchange market
The Definition
Money Market is "the centre for dealings, mainly short-term character, in money assets. It meets the short-term requirements of borrower and provides liquidity or cash to the lenders. It is the place where short-term surplus investible funds at the disposal of financial and other institutions and individuals are bid by borrowers, again comprising Institutions, individuals and also the Government itself"
The Players
Reserve Bank of India SBI DFHI Ltd (Amalgamation of Discount & Finance House in India and SBI Gilts in 2004) Commercial Banks, Co-operative Banks and Primary Dealers are allowed to borrow and lend. Specified All-India Financial Institutions, Mutual Funds, and certain specified entities are allowed to access to Call/Notice money market only as lenders Individuals, firms, companies, corporate bodies, trusts and institutions can purchase the treasury bills, CPs and CDs.
Who Participates in the Money Markets?: A Sample from the Wall Street Journal
Certificate of Deposit
CDs are short-term borrowings in the form of Usance Promissory Notes having a maturity of not less than 15 days up to a maximum of one year. CD is subject to payment of Stamp Duty under Indian Stamp Act, 1899 (Central Act) They are like bank term deposits accounts. Unlike traditional time deposits these are freely negotiable instruments and are often referred to as Negotiable Certificate of Deposits
Features of CD
CDs can be issued by all scheduled commercial banks except RRBs Minimum period 15 days Maximum period 1 year Minimum Amount Rs 1 lac and in multiples of Rs. 1 lac CDs are transferable by endorsement
Commercial Paper
Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note. Who can issue Commercial Paper (CP) Highly rated corporate borrowers, primary dealers (PDs) and satellite dealers (SDs) and all-India financial institutions (FIs)
a) the tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs. 4 crore; b) (b) the working capital (fund-based) limit of the company from the banking system is not less than Rs.4 crore c) and the borrowal account of the company is classified as a Standard Asset by the financing bank/s.
Rating Requirement
All eligible participants should obtain the credit rating for issuance of Commercial Paper Credit Rating Information Services of India Ltd. (CRISIL) Investment Information and Credit Rating Agency of India Ltd. (ICRA) Credit Analysis and Research Ltd. (CARE) Duff & Phelps Credit Rating India Pvt. Ltd. (DCR India) The minimum credit rating shall be P-2 of CRISIL or such equivalent rating by other agencies
Maturity
CP can be issued for maturities between a minimum of 15 days and a maximum upto one year from the date of issue. If the maturity date is a holiday, the company would be liable to make payment on the immediate preceding working day.
To whom issued
CP is issued to and held by individuals, banking companies, other corporate bodies registered or incorporated in India and unincorporated bodies, Non-Resident Indians (NRIs) and Foreign Institutional Investors (FIIs).
The term government securities encompass all Bonds & T-bills issued by the Central Government, and state governments. These securities are normally referred to, as "giltedged" as repayments of principal as well as interest are totally secured by sovereign guarantee.
Treasury Bills
Treasury bills, commonly referred to as TBills are issued by Government of India against their short term borrowing requirements with maturities ranging between 14 to 364 days. All these are issued at a discount-to-face value. For example a Treasury bill of Rs. 100.00 face value issued for Rs. 91.50 gets redeemed at the end of it's tenure at Rs. 100.00.
Banks, Primary Dealers, State Governments, Provident Funds, Financial Institutions, Insurance Companies, NBFCs, FIIs (as per prescribed norms), NRIs & OCBs can invest in T-Bills.