3 Money Markets

7/30/2019 3 Money Markets

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Role of Financial Markets Intermediate between savers and investors

Generate resources for investment and growth

Allocate resources efficiently

Improve the efficacy of the transmission mechanism ofmonetary policy


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Money Market Organization in India

RBI Money Market Organization

RoleFunctions Institutional

DevelopmentSub Markets

Commercial Bill Mrkt T-Bill Mrkt Commercial

Paper Mrkt

Certificate of

Deposit Mrkt

Call Market

Primary DealersMoney Market

Mutual Funds


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Money Market: Moneymarket means market where moneyor its equivalentcan be traded.

Money Market is a wholesale market of short term debt

instrument and is synonym of liquidity.. MoneyMarket is part of financial market where instruments

with high liquidity and very short term maturities ie one or lessthan one year are traded.

Due to highly liquid nature of securities and their short term

maturities, moneymarket is treated as a safe place. Hence, moneymarket is a market where short term obligations

such as treasury bills, call/notice money, certificate of deposits,commercial papers and repos are bought and sold.


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Enables raising of short term funds for makingtemporary shortages of Cash & Obligations and for

deploying excess funds to earn returns. In India its not wide in terms of volume and

liquidity.

RBI plays vital role & occupies strategic position

and inf luences availability & cost of credit.*Short term refers to a period less than 1 year


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Banks borrow in the money market to:

Fill the gaps or temporary mismatch of funds

To meet the CRR and SLR mandatory requirements asstipulated by the central bank To meet sudden demand for funds arising out of large

outflows Call money market serves the role of equilibrating the

short-term liquidity position of the banks


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Features Transaction is for less than one year.

Traded in high denominations.

Firms buy/sell securities in their own a/c and at theirown risk.

Lacks in central trading floor i.e. not well organised.

Securities traded have high Face Value.

Instruments include certificate of deposit, T-Bills,Govt. Securities.


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Objectives / Functions of the money market: Mechanism for movement of funds from short term

surplus units to short term deficient units

Central bank intervention to infuse liquidity Reasonable access to users of short term funds to meet

their demand at a reasonable price


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Need for Money Market:


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Business needs working capital for day to day operations andthe major component is Cash.

Lack of adequate cash can lead to disruption in day to day

activities. There is short term mismatch of funds. This could be termed

as Short term liquidity crisis.

(Short term cash deficit leads to not meeting up of day to day

operations and hence adds cost to the firm. Excess of cash alsodoes not bring any yield.)

Hence borrowing and lending in money markets is in high volumeand is less risky.


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The Players in this market ???


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Participants in Money Markets

Issuers/ Borrowers Intermediary Market Makers

Govt.

Banks

Financial Institutions

Corporate HousesMutual Funds

FIIs

Discount Houses

Acceptance Houses

Central Bank

Dealers


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Government Securities Market Significance of the G-Sec. Market

Enables smooth raising of government borrowings

Risk free rupee yield curve provides a benchmark forpricing other debt instruments

Plays a key role in the monetary policy transmissionmechanism


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Primary Dealers The system of Primary Dealers (PDs) in the Government

Securities Market was introduced by Reserve Bank of Indiain 1995 to strengthen the market infrastructure ofGovernment Securities

DFHI was set up by RBI in March 1988 to activate the

Money Market. It got the status of Primary Dealer in February 1996. Over a

period of time, RBI divested its stake and DFHI became asubsidiary of State Bank of India (SBI).

SBI had also set up a subsidiary in 1996 for doing PDbusiness namely SBI Gilts Limited.

Both these companies were merged in 2004 to become thelargest Primary Dealer in the country


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Primary Dealers can also be referred to as MerchantBankers to Government of India as only they are allowed tounderwrite primary issues of government securities otherthan RBI

PDs are allowed the following activities as core activities:1. Dealing and underwriting in Government securities.

2. Dealing in Interest Rate Derivatives.3. Providing broking services in Government securities.4. Dealing and underwriting in Corporate / PSU / FIbonds/ debentures.

5. Lending in Call/ Notice/ Term/ Repo/ CBLO market.6. Investment in Commercial Papers.7. Investment in Certificates of Deposit.8. Investment in debt mutual funds where entire corpus isinvested in debt securities.


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Money Market Instruments1. Certificates of Deposit2. Commercial Paper

3. Inter-bank participation certificates

4. Inter-bank term money

5. Treasury Bills

6. Bill rediscounting

7. Call/notice/term money8. CBLO

9. Market Repo


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Certificate of Deposit:


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CDs are negotiable money market instruments and areissued in dematerialized form or a usance promissory note,for funds deposited at a bank or other eligible financial

institution for a specified time period.

They are like bank term deposits accounts. Unliketraditional time deposits these are freely negotiable

instruments and are often referred to as NegotiableCertificate of Deposits


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CDs are short-term borrowings in the form of UPN issuedby all scheduled banks and are freely transferable byendorsement and delivery.

Introduced in 1989

Maturity of not less than 7 days and maximum up to a year.FIs are allowed to issue CDs for a period between 1 year andup to 3 years

Subject to payment of stamp duty under the Indian StampAct, 1899

Issued to individuals, corporations, trusts, funds andassociations

They are issued at a discount rate freely determined by themarket/investors


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Commercial Paper:


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Short-term borrowings by corporates, financialinstitutions, primary dealers from the money market

Can be issued in the physical form (Usance Promissory

Note) or demat form Introduced in 1990

When issued in physical form are negotiable byendorsement and delivery and hence, highly flexible

Issued subject to minimum of Rs. 5 lacs and in the multipleof Rs. 5 lacs after that

Issued at discount to the face value


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Commercial Paper (CP) is an unsecured money market instrumentissued in the form of a promissory note.Who can issue Commercial Paper (CP):Highly rated corporate borrowers, primary dealers (PDs) andsatellite dealers (SDs) and all-India financial institutions (FIs)

To whom issued:

CP is issued to and held by individuals, banking companies, othercorporate bodies registered or incorporated in India andunincorporated bodies, Non-Resident Indians (NRIs) and Foreign

Institutional Investors (FIIs). Denomination: min. of 5 lakhs and multiple thereof.

Maturity: min. of 7 days and a maximum of upto one year from thedate of issue


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Eligibility for issue of CP :

The tangible net worth of the company, as per the latestaudited balance sheet, is not less than Rs. 4 crore;

the working capital (fund-based) limit of the company fromthe banking system is not less than Rs.4 crore

and the borrower account of the company is classified as aStandard Asset by the financing bank/s.

All eligible participants should obtain the credit rating forissuance of Commercial Paper

The minimum credit rating shall be P-2 of CRISIL or suchequivalent rating by other agencies


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T- Bills:


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Treasury bills, commonly referred to as T-Bills are issued byGovernment of India against their short term borrowingrequirements with maturities ranging between 14 to 364days.

All these are issued at a discount-to-face value. For examplea Treasury bill of Rs. 100.00 face value issued for Rs. 91.50gets redeemed at the end of it's tenure at Rs. 100.00.

Who can invest in T-Bill

Banks, Primary Dealers, State Governments, ProvidentFunds, Financial Institutions, Insurance Companies,NBFCs, FIIs (as per prescribed norms), NRIs & OCBs caninvest in T-Bills.


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At present, the Government of India issues three types oftreasury bills through auctions, namely, 91-day, 182-day and

364-day. There are no treasury bills issued by StateGovernments.

Amount

Treasury bills are available for a minimum amount ofRs.25,000 and in multiples of Rs. 25,000. Treasury bills areissued at a discount and are redeemed at par.

The rate of discount and the corresponding issue priceare determined at each auction

RBI auctions 91-day T-Bills on a weekly basis, 182-day T-Bills and 364-day T-Bills on a fortnightly basis on behalfof the central government


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Call Money Market


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The call money market is an integral part of the IndianMoney Market, where the day-to-day surplus funds (mostlyof banks) are traded. The loans are of short-term duration

varying from 1 to 14 days. The money that is lent for one day in this market is known

as "Call Money", and if it exceeds one day (but less than 15days) it is referred to as "Notice Money".


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Banks borrow in this market for the following purpose:

To fill the gaps or temporary mismatches in funds

To meet the CRR & SLR mandatory requirements asstipulated by the Central bank

To meet sudden demand for funds arising out of largeoutflows.


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Call loans are generally made on a clean basis- i.e. nocollateral is required

The main function of the call money market is toredistribute the pool of day-to-day surplus funds of banks

among other banks in temporary deficit of funds

The call market helps banks economize their cash and yetimprove their liquidity

It is a highly competitive and sensitive market

It acts as a good indicator of the liquidity position


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Participants: Those who can both borrow and lend in the market RBI

(through LAF), banks and primary dealers

Once upon a time, select financial institutions viz., IDBI,UTI, Mutual funds were allowed in the call money marketonly on the lenders side

These were phased out and call money market is now apure inter-bank market (since August 2005)


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CBLO (Collateralized borrowing andlending obligation)


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It is a money market instrument as approved by RBI, is aproduct developed by CCIL. CBLO is a discounted instrumentavailable in electronic book entry form for the maturity periodranging from one day to ninety Days (can be made available upto one year as per RBI guidelines). In order to enable the marketparticipants to borrow and lend funds, CCIL provides theDealing System through:

- Indian Financial Network (INFINET), a closed user group tothe Members of the Negotiated Dealing System (NDS) whomaintain Current account with RBI.

- Internet gatewayfor other entities who do not maintainCurrent account with RBI.


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What is CBLO? CBLO is explained as under:

An obligation by the borrower to return the money

borrowed, at a specified future date; An authority to the lender to receive money lent, at a

specified future date with an option/privilege to transferthe authority to another person for value received;

An underlying charge on securities held in custody (withCCIL) for the amount borrowed/lent.


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NDS members like Banks, financial institutions, primarydealers, mutual funds and co-operative banks, are allowedto participate in CBLO transactions.

Non-NDS members like corporates, co-operative banks,NBFCs, Pension/Provident Funds, Trusts etc. are allowed toparticipate by obtaining Associate Membership to CBLO

Segment.


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Operationalized as money market instruments by the CCILin 2003

Follows an anonymous, order-driven and online tradingsystem

On the lenders side main participants are mutual funds,insurance companies.

Major borrowers are nationalized banks, PDs and non-financial companies

The average daily turnover in the CBLO segment increasedfrom Rs. 515 crore (2003-04) to Rs. 32, 390 crore (2006-07)


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Repos It is a transaction in which two parties agree to sell

and repurchase the same security. Under such anagreement the seller sells specified securities with an

agreement to repurchase the same at a mutuallydecided future date and a price

The Repo/Reverse Repo transaction can only bedone between parties approved by RBI and in

securities as approved by RBI (Treasury Bills,Central/State Govt securities).


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Market Repos Repo (repurchase agreement) instruments enablecollateralized short-term borrowing through the selling ofdebt instruments

A security is sold with an agreement to repurchase it at apre-determined date and rate

Reverse repo is a mirror image of repo and reflects theacquisition of a security with a simultaneous commitmentto resell

Average daily turnover of repo transactions (other than theReserve Bank) increased from Rs.11,311 crore during April2001 to Rs. 42,252 crore in June 2006


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Documents

3 Money Markets