Money Market

Money Market

Money market is a market for shortterm loans or financial assets. It is a market for lending and borrowing of short term funds. It meets the short-term requirements of borrowers and provides liquidity or cash to lenders.

Money market-definition

According to Geottery Crowther, The money market is the collective name given to the various firms and institutions that deal in the various grades of near money

Features of Money Market

It is a market purely for short term funds or financial assets called near money. It deals with financial assets having a maturity period up to one year only. It deals with only those assets which can be converted into cash readily.

Generally transactions takes place through phone and relevant documents and written communication can be exchanged subsequently. Transactions have to be conducted without the help of brokers. The components of a money market are the central bank, commercial bank, NBFC, discount houses. Commercial banks generally play a dominant role in this market.

OBJECTIVES

To provide a place to employ short-term surplus funds . To enable the Central Bank to influence and regulate liquidity in the economy through its intervention in this market . To provide a reasonable access to users of short-term funds to meet their requirements quickly adequately and at reasonable costs .

Characteristics for Development of Money Market

Highly organized banking system Presence of central bank Availability of proper credit instruments Existence of sub market Ample recourses Existence of secondary market Demand and supply of funds

Important of money market

Development of trade and industries Development of Capital Market Smooth functioning of Commercial banks Effective central bank control Formation of suitable monetary policy

Money Market in India

The money market in India developed from 1935 onwards after formation and development of RBI in 1935, Planned economy in 1951, The nationalization of banks in 1969, The financing house of India in 1988, the liberalization and globalization in 1991, the security trading corporation of India in 1994,

Composition of Money Market

Call money market. Commercial bills market or Discount market. Treasury bill market. Short-Term Loan Market:

Call Money Market

The call money market refers to the market for extremely short period loans; say one day to fourteen days. These loans are repayable on demand at the option of either the lender or the borrower.
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The day to day surplus funds of commercial banks are traded in the market. The loans made in call market are of short-term nature . The demand for call money is the highest in the month of March of every year. Because it is the time to meet year end and tax payments and withdrawals of funds by financial institutions to meet their statutory obligations.

Participants of Call Money Market

Reserve Bank of India commercial banks, co-operative banks. Discount and Finance House of India (DFHI) Securities Trading corporation of India (STCI LIC, UTI, GIC, IDBI

Advantages of CMM

High Liquidity High Profitability : Maintenance of SLR Safe and Cheap Assistance to Central Bank

Drawbacks of Call Money Market

Uneven Development Lack of Integration Volatility in Call Market Rates

Commercial Bill Market or Discount Market A commercial bill is one which arises out

of a genuine trade transaction, i.e., credit transaction. As soon as goods are sold on credit, the seller draws a bill on the buyer for amount due. The buyer accepts it immediately agreeing to pay the amount mentioned therein after a certain specified date. It is drawn always for a short period ranging between 3 months and 6 months.

Types of Bills

Demand and Usance bills Clean Bills and Documentary Bills Inland and Foreign Bills Export Bills and Important Bills Indigenous Bills Accommodation Bills and Supply Bills

Advantages of Commercial Bill Market

Liquidity Self-liquidating and Negotiable Asset Certainty of Payment Ideal Investment Simple Legal Remedy High and Quick Yield

Operation in Bill Market

Discount Market Acceptance Market

Treasury Bill Market

Treasury bill market refers to the market where A TBs is nothing but a promissory note issued by the govt. under discount for a specified period stated therein. The period does not exceed a period of one year. It is purely a finance bill since it doesnt arise out of any trade transaction TBs are issued only by the RBI on behalf of govt

Types of TBs

Ordinary/Regular Ad hocs

Ordinary/Regular

TBs are issued to the public and other financial institutions for meeting the short-term financial requirements of the Central Government. These bills are freely marketable and they can be bought and sold at any time and they have secondary market also.

Ad hocs

Ad hocs are always issued in favour of the RBI only. They are not sold through tender or auction. They are not marketable in India. However, the holders of these bills can always sell them back to the RBI.

TBs may be classified into three. They are:

91 days TB 182 days TB 364 days TB

Participants in the TBM

RBI & SBI Commercial banks State Governments DFHI Financial Institutions like LIC, GIC, UTI, IDBI, ICICI, etc.

Important or Merits of TBM

Safety Liquidity Ideal Short-Term Investment Statutory Liquidity Requirement Sources of Short-term Funds

Money Market Instruments

Commercial Papers Certificate of Deposit (CD) Inter-Bank Participation Certificate Repo Instrument

Commercial Papers

Commercial paper is a new instrument introduced in India on 27th March, 1989 and used for financing working capital requirements of corporate enterprises. A commercial paper is an unsecured promissory note issued with a fixed maturity by a company approved by RBI & negotiable.

Advantages of Commercial Paper

Simplicity Flexibility Diversification High Returns Movement of Funds

Features of Commercial Paper

Commercial paper is a short-term money market instrument comprising usance promissory notes with a fixed maturity. It is a certificate evidencing an unsecured corporate debt of short-term maturity. Commercial paper is issued at a discount to face value basis but it can also be issued in interest bearing form.

Features of Commercial Paper

The issue promises to pay the buyer some fixed amount on some future period but pledges no assets, only his liquidity and established earning power, to guarantee that promise. Commercial paper can be issued directly by a company to investors or through banks/merchant bankers.

Advantages of Commercial Paper

Simplicity Flexibility Diversification High Returns Movement of Funds

Certificate of Deposit (CD)

The banks in the USA in 1960s introduced CDs in June 1989 RBI permitting commercial banks (excluding RRBs) to issue CDs. Meaning: Certificate of Deposits are short term deposit instruments issued by banks and financial institutions to raise large sums of money.

Features of CD

Document of title to time deposit. Freely transferable by endorsement and delivery. Issued at discount to face value. Repayable on a fixed date without grace days. Subject to stamp duty like the usance promissory notes.

Repo Instrument

A repo/reverse repo/repurchase is a transaction in which two parties agree to sell and repurchase the same security. The seller sells specified securities, with an agreement to repurchase the same at a mutually decided future date and price. Like wise, the buyer purchases the securities, with an agreement to resell the same to the seller on an agreed date and at a predetermined price.

Repo Instrument-contd.

The difference between the price at which the securities are bought and sold is the lenders profit/interest earned for lending money. Repos are usually entered into with a maturity of 1-14 days. Generally, repo transactions take place in market lots of Rs. 5 crores. There are two types of repos namely, i) inter-bank repos, ii) RBI repos.