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INTRODUCTION
Money market is the centre for dealing mainly in short term money assets
It is a market for the lending and borrowing of short
term funds
As the name implies, it does not actually deals withnear substitutes for money or near money like trade
bills, promissory notes and government papers drawnfor a short period not exceeding one year.
It meets the short-term requirements of borrowers andprovides liquidity or cash to lenders.
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Objectives of Money Market
To provide a parking place to employ short-termsurplus funds.
To provide room for overcoming short-term
deficits. To enable the Central Bank to influence and
regulate liquidity in the economy through itsintervention in this market.
To provide a reasonable access to users of Short-term funds to meet their requirements quickly,adequately and at reasonable costs
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ADVANTAGES
Safety
Liquidity
Ideal Short-Term Investment
Ideal Fund Management
Statutory Liquidity Requirement
Source of Short-Term Funds
Non-Inflationary Monetary Tool
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DRAWBACKS
Poor Yield
Absence Of Competitive Bids
Absence of Active Trading
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Components of a Money Market
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Central Bank
It is naturally to be the leader of all banks. It is
the bank, which is entrusted with the task of
controlling the issue of money and funds to
the market and regulates credit facilities
provided by various other institutions.
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Commercial Banks
They play a vital role in the money market.
They make advances, discount bills and lend
against the promissory notes and the like.
They also take help of the market in solving
their liquidity problems.
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Non Banking Financial Companies
A Non Banking Financial Company(NBFC) is a company
registered under the Companies Act, 1956 of India, engaged
in the business of loans and advances, acquisition of shares,
stock, insurance business, or chit business: but does not
include any institution whose principal business is that
includes agriculture or industrial activity; purchase or
construction of immovable property.
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Discount Houses
Discount houses are special institutions for
rediscounting the bills of exchange. They
usually deal in three kinds of bills.
(a) The domestic bills
(b) The foreign bills and
(c) The government treasury bills
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Continued.
The discount houses borrow huge funds for
short periods from the commercial banks and
RBI and Sinvest them in discounting bills. But
before discounting a trade bill of exchange,
the Discount House insists that it should be
accepted by an Acceptance House.
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Acceptance Houses
Acceptance Houses are institutions which
specialize in accepting bills of exchange.
Generally they are merchant bankers. They act
as second signatories on the bills of exchange.
That is they guarantee the bills of a trader
whose financial standing is not known, for
making the bill negotiable.
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Continued
They maintain correspondents in important
towns of various places within and outside the
country to collect information about the
creditworthiness and financial position of thecustomers, who seek the assistance of the
Acceptance Houses. For their service, they
charge a small amount of commission but en-sure great security for the bills discounted by
the Discount Houses.
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INSTRUMENTS
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Certificate of Deposits
A Certificate of Deposit is a promissory note
issued by a bank. It is a time deposit that
restricts holders from withdrawing funds on
demand. Although it is still possible towithdraw the money, this action will often
incur a penalty.
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Commercial Papers
An unsecured, short-term debt instrument
issued by a corporation, typically
for the financing of accounts
receivable, inventories and meeting short-term liabilities. Maturities on commercial
paper rarely range any longer than 270
days. The debt is usually issued at a discount,reflecting prevailing market interest rates.
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Repurchase Agreements
A form of short-term borrowing for dealers in
government securities. The dealer sells the
government securities to investors, usually on an
overnight basis, and buys them back the following day.
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Bankers Acceptance
An instrument issued by a firm that is guaranteed by a
commercial bank. Banker's acceptances are issued by
firms as part of a commercial transaction. These
instruments are similar to T-Bills and are frequentlyused in money market funds. Banker's acceptances are
traded at a discount from face value on the secondary
market, which can be an advantage because the
banker's acceptance does not need to be held untilmaturity.
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Treasury Bills
A particular kind of finance note put out by the
government of the country. Treasury bills are highly
liquid because there cannot be a better guarantee of
repayment than the one given by the government.They are claims against the government.
That means when you buy a Treasury, we are actually
loaning money to the government and the government
in turn is paying you interest on the borrowed money.
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Qualities of T-Bills
High liquidity.
Absence of risk of default.
Readily available Assured yield
Low transaction cost
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Types of T-Bills
Ordinary T-bills:-
Ordinary T-bills are issued to the public and the
RBI for enabling the government to meet the needs of
supplementary short term finance. Adhoc T-bills:-
The practice of issuing adhoc TBs has been
discounted through the singing of two agreement
between the government and the RBI.
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T-Bills Rate
Treasury bills rate is the rate of interest at
which treasury bills are sold by RBI.
The effective return on treasury bills is the
discount at which they are sold and their
redemption value.
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Present Status
At present the government of India issues
four types of treasury bills trough auctions
namely 14 day ,91 day , 182 day and 364 day .
There are no treasury bills issued by state
Government.
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Auction
T-bills are auctioned every alternative week of
Wednesday.
The RBI issues quarterly calendar of T-bills
auction which is available at the banks
website.
All T-bills are now sold through an auction
process according to a fixed auction calendar,
announced by RBI.
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91 day T-bills Auction
Published on Saturday Nov. 11,2010 at 13:50 1 updated
at Saturday Nov.11 2010 at 14:27
The RBI has announced the auction of 91 days
Government of India Treasury Bills for notified amountof Rs 2000cr.
The auction will be conducted on Nov 15 2010.
The sale will be subject to the terms and conditions
specified in
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CONTINUED
he General Notification No. F.Z.(12)-W and M/97 dated
31st March 1998 issued by Government of India and as
amended from time
Tender should be submitted in the prescribed form onWednesday November 15,2010 by 12:30 P..M.
Results will be announced on the same evening.
Payments by success full bidders will be on Friday,
November 17,2010.
Any person in India including individuals, firms,
companies, corporate bodies.
Trusts and Institutes can purchase T-bills.
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FORM
The T-bills are issued in the form of Promising
note in Physical Form or by credit Subsidary
General Ledger (SGL) account or Gill account
in dematerialised form.
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REPAYMENTS
The T-Bills are repaid as par on the expiry of
their tenor at the office of RBI, Mumbai.
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YIELD CALCULATION
The yield of a T-Bill is calculated as per the
following formulla:-
Y=(100-P)*365*100/P*D
Y:-Discounted Yield
P:-Price
D:-Days of maturity
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Salient Features of the Auction
Technique
The auction of T-Bills is done only at RBI
Mumbai.
Bids are submitted in terms of price per Rs100.
e.g a bid for 91-day . T-Bill auction could be for
Rs97.50. Auction Committee of RBI decides
the cut-off price and results are announced on
the same day.
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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 lenderor the borrower.
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INTRODUCTION
A short-term money market, which allows for
large financial institutions, such as banks,
mutual funds and corporations to borrow and
lend money at interbank rates. The loans inthe call money market are very short, usually
lasting no longer than a week and are often
used to help banks meet reserverequirements.
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ADVANTAGES
High Liquidity
High Profitability
Maintenance Of SLR
Safe And Cheap
Assistance To Central Bank Operations
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High Liquidity
Money lent in a call market can be called back
at any time when needed. So, it is highly
liquid. It enables commercial banks to meet
large sudden payments and remittances bymaking a call on the market
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High Profitability
Banks can earn high profiles by lending their
surplus funds to the call market when call
rates are high volatile. It offers a profitable
parking place for employing the surplus fundsof banks temporarily
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Maintenance Of SLR
Call market enables commercial bank to
minimum their statutory reserve
requirements. Generally banks borrow on a
large scale every reporting Friday to meettheir SLR requirements. In absence of call
market, banks have to maintain idle cash to
meet5 their reserve requirements. It will tellupon their profitability
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Safe And Cheap
Though call loans are not secured, they are
safe since the participants have a strong
financial standing. It is cheap in the sense
brokers have been prohibited form operatingin the call market. Hence, banks need not pay
brokers on call money transitions
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Assistance To Central Bank
Operations
Call money market is the most sensitive part
of any financial system. Changes in demand
and supply of funds are quickly reflected in
call money rates and give an indication to thecentral bank to adopt an appropriate
monetary policy. Moreover, the existence of
an efficient call market helps the central bankto carry out its open market operations
effectively and successfully.
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Drawbacks
Uneven Development
Lack Of Integration
Volatility In Call Money Rates
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Uneven Development
The call market in India is confined to only big
industrial and commercial centers like
Mumbai, Kolkata, Chennai, Delhi, Bangalore
and Ahmadabad. Generally call markets areassociated with stock exchanges. Hence the
market is not evenly development.
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Lack Of Integration
The call markets in different centers are not
fully integrated. Besides, a large number of
local call markets exist without an\y
integration.
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Volatility In Call Money Rates
Another drawback is the volatile nature of the
call money rates. Call rates very to greater
extant indifferent centers indifferent seasons
on different days within a fortnight. The ratesvery between 12% and 85%. One can not
believe 85% being charged on call loans.
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THANK YOU