Money markets of India

MONEY MARKETS OF INDIAOsho Kharbanda,

Delhi School of Management, Delhi Technological University.

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Money Markets of India Page 02

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TYPES OF FINANCIAL MARKETS

➤ Any marketplace where buyers and sellers participate in the trade of assets such as equities, bonds, currencies and derivatives.

➤ Financial markets are typically defined by having transparent pricing, basic regulations on trading, costs and fees, and market forces determining the prices of securities that trade.


TYPES OF FINANCIAL MARKETS


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Capital Market

Money Market

Cash or Spot Market

Derivative Market

Forex & The Interbank Market

CAPITAL MARKETS

➤ A capital market is one in which individuals and institutions trade financial securities.

➤ Organisations and institutions in the public and private sectors also often sell securities on the capital markets in order to raise funds(Long-Term).

➤ Thus, this type of market is composed of both the primary and secondary markets.

➤ Stock markets allow investors to buy and sell shares in publicly traded companies.

➤ A bond is a debt investment in which an investor loans money to an entity (corporate or governmental), which borrows the funds for a defined period of time at a fixed interest rate.


CASH OR SPOT MARKETS

➤ Investing in the cash or "spot" market is highly sophisticated, with opportunities for both big losses and big gains.

➤ In the cash market, goods are sold for cash and are delivered immediately.

➤ Prices are settled in cash "on the spot" at current market prices. This is notably different from other markets, in which trades are determined at forward prices.

➤ Dominated by institutional market players such as hedge funds, limited partnerships and corporate investors.


DERIVATIVE MARKETS

➤ The derivative is named so for a reason: its value is derived from its underlying asset or assets.

➤ A derivative is a contract, but in this case the contract price is determined by the market price of the core asset.

➤ It can be used quite effectively as part of a risk management program.

➤ Examples of common derivatives are forwards, futures, options, swaps and contracts-for-difference (CFDs).


FOREX & THE INTERBANK MARKETS

➤ The interbank market is the financial system and trading of currencies among banks and financial institutions, excluding retail investors and smaller trading parties.

➤ The forex market is where currencies are traded. The forex market is the largest, most liquid market in the world with an average traded value that exceeds $1.9 trillion per day.


WHAT ARE MONEY MARKETS?

➤ “ A market for short terms financial assets that are close substitute for money, facilitates the exchange of money in primary and secondary market”.

➤ Money market transactions are generally used for funding the transactions in other markets including Government securities market and meeting short term liquidity mismatches.

➤ Within the one year, depending upon the tenors, money market is classified into:

Overnight market : The tenor of transactions is one working day.

Notice money market : The tenor of the transactions is from 2 days to 14 days.

Term money market : The tenor of the transactions is from 15 days to one year.


STRUCTURE OF MONEY MARKETS IN INDIA


Indian Money Market

Organised Unorganised

Sub Markets

Reserve bank of India Schedule Commercial Banks Lenders Development Banks Investment Institutions Regional Rural Banks Foreign Banks State Financial Corp. Discounted & Finance House of India

Indigenous Bankers Domestic Money Nidhis & Chit Funds Traders & Friends Brokers & Dealers

Call Money Market Bill Market 364 day Bill Market Certificate of Deposit Commercial Paper’s

Commercial Bills Treasury Bills

OBJECTIVES OF MONEY MARKETS

➤ To provide a parking place to employ short term surplus funds.

➤ To provide room for overcoming short term deficits.

➤ 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 requirement quickly, adequately at reasonable cost.


MONEY MARKET IN INDIA

➤ The definition of money for money market purposes is not confined to bank notes but includes a range of assets that can be turned into cash at short notice.

➤ The average turnover of the money market in India is over Rs. 40,000 crores daily.

➤ This is more than 3 percents of the total money supply in the Indian economy and 6 percent of the total funds that commercial banks have let out to the system. This implies that 2 percent of the annual GDP of India gets traded in the money market in just one day.

➤ The major player in the money market are Reserve Bank of India (RBI), Discount and Finance House of India (DFHI), banks, financial institutions, mutual funds, government,big corporate houses.


FEATURES OF INDIAN MONEY MARKETS

➤ Existence of Unorganised Money Market.

➤ Absence of Integration

➤ Diversity in Money Rates of Interest

➤ Seasonal Stringency of Money

➤ Absence of the Bill Market

➤ Highly volatile call money market

➤ Absence of a well organised Banking System

➤ Availability of credit instruments


ROLE OF RESERVE BANK OF INDIA

➤ The Reserve Bank of India is the most important constituent of the money market.

➤ The aims of the Reserve Bank’s operations in the money market are:

To ensure that liquidity and short term interest rates are maintained at levels consistent with the monetary policy objectives of maintaining price stability.

To ensure an adequate flow of credit to the productive sector of the economy and

To bring about order in the foreign exchange market.

➤ The Reserve Bank of India influence liquidity and interest rates through a number of operating instruments - cash reserve requirement (CRR) of banks, conduct of open market operations (OMOs), repos, change in bank rates and at times, foreign exchange swap operations.


HISTORY OF INDIAN MONEY MARKETS

➤ Till 1935, when the RBI was set up the Indian money market remained highly disintegrated, unorganised, narrow, shallow and therefore, very backward.

➤ The planned economic development that commenced in the year 1951 market an important beginning.

➤ The nationalisation of banks in 1969, setting up of various committees such as the Sukhmoy Chakraborty Committee (1982), the Vaghul working group (1986), the setting up of discount and finance house of India ltd. (1988), the securities trading corporation of India (1994) and the commencement of liberalization and globalization process in 1991 gave a further fillip for the integrated and efficient development of India money market.


DEVELOPMENTS IN INDIAN MONEY MARKETS

➤ Deregulation of the Interest Rate : In recent period the government has adopted an interest rate policy of liberal nature. It lifted the ceiling rates of the call money market, short-term deposits, bills re-discounting, etc. Commercial banks are advised to see the interest rate change that takes place within the limit. There was a further deregulation of interest rates during the economic reforms. Currently interest rates are determined by the working of market forces except for a few regulations.



➤ Money Market Mutual Fund (MMMFs) : In order to provide additional short-term investment revenue, the RBI encouraged and established the Money Market Mutual Funds (MMMFs) in April 1992. MMMFs are allowed to sell units to corporate and individuals. The upper limit of 50 crore investments has also been lifted. Financial institutions such as the IDBI and the UTI have set up such funds.

➤ Establishment of the DFI : The Discount and Finance House of India (DFHI) was set up in April 1988 to impart liquidity in the money market. It was set up jointly by the RBI, Public sector Banks and Financial Institutions. DFHI has played an important role in stabilising the Indian money market.



➤ Liquidity Adjustment Facility (LAF) : Through the LAF, the RBI remains in the money market on a continue basis through the repo transaction. LAF adjusts liquidity in the market through absorption and or injection of financial resources.

➤ Electronic Transactions : In order to impart transparency and efficiency in the money market transaction the electronic dealing system has been started. It covers all deals in the money market. Similarly it is useful for the RBI to watchdog the money market.



➤ Establishment of the CCIL : The Clearing Corporation of India limited (CCIL) was set up in April 2001. The CCIL clears all transactions in government securities, and repose reported on the Negotiated Dealing System.

➤ Development of New Market Instruments : The government has consistently tried to introduce new short-term investment instruments. Examples: Treasury Bills of various duration, Commercial papers, Certificates of Deposits, MMMFs, etc. have been introduced in the Indian Money Market.

These are major reforms undertaken in the money market in India. Apart from these, the stamp duty reforms, floating rate bonds, etc. are some other prominent reforms in the money market in India. Thus, we can conclude that the Indian money market is developing at a good speed.


MONEY MARKETS INSTRUMENTS

A variety of instrument are available in a developed money market. In India till 1986, only a few instrument were available. They were,

Treasury bills Money at call and short notice in the call loan market. Commercial bills, promissory notes in the bill market.

Following new instrument are available:

Commercial papers. Certificate of deposit. Bankers Acceptance. Repurchase agreement (Repo Markets). Money Market mutual fund.



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Money markets of India