Money Markets PPT

8/13/2019 Money Markets PPT

1/30

Abhinav BhansaApurv MehAshwin JacoNilesh DayalapwaRitu SingSriharsha


2/30

As per RBI definition : A market for short terms finan

assets that are close substitute for money ,facilitatesexchange of money in primary and secondary marke

The money market is a mechanism that deals with thand borrowing of short term funds.

It doesnt actually deal in cash or money but deals w

substitute of cash like trade bills,promissory notes. It includes all individual, institution and intermediari


3/30

Development of trade and industry.

Development of capital market.Smooth functioning of commercial banks.

Effective central bank control.

Formulation of suitable monetary policy.

Non inflationary source of finance to government.


4/30

The money market consists of number of submarket

Call Money Market.Commercial bills market or discount market.

Acceptance market.

Treasury bill market.

Instruments are :

Certificate of Deposit (CD), Commercial Paper (CP), rates, Treasury bills etc.


5/30


6/30

It is that part of the national money market where the day-

to-day surplus funds, mostly of banks are traded in.

The loans made in this market are of

Short-term nature

Maturity varies between one day to a fortnight.

As these loans are repayable on demand and at the option of

either the lender or borrower-

They are highly liquid.


7/30

Call loans in India are given: To the bill market

For the purpose of dealing in the bullion markets and stock exchanges

Between banks

Frequently to individuals of high financial status for ordinary trade purpose.

Call money market is used in India for the purpose of adjustme

reserves

There are no discount houses in India, hence there is no parallthe loans between commercial banks and discount houses in t

Call loans in India are unsecured


8/30

Transactions or trading on the call money market is characteri

seasonal variations

The seasonal nature of the call money market would be reflec

indicators A decline in money at call and short notice should be greater in the sl

than the busy season of a given year.

An increase in money at call and short notice should be greater in the

than in the slack season.

The need for call money borrowings is the highest around Ma

year

Call money borrowings tend to increase when there is an incre

CRR.


9/30


10/30

Following the acceptance of Vaghul committee recommendations, RBI allows the i

1990.

CP is a short-term negotiable instrument, consisting of usance primary notes with

maturity, indicating the short-term obligation of an issuer. Companies as a means

short-term debt issue it.

It is issued on a discount to face value basis but can also be issued in interest bear

issuer promises the buyer a fixed amount at a future date but pledges no assets.

Participants: Are the corporate bodies, banks, mutual funds, UTI, LIC,GIC and other

surplus funds and are on a lookout for opportunities for short-term investments. T

operates both in the primary and secondary markets for CPs by quoting its bid and

prices RBI guidelines: A company can issue CPs if it conforms to the following conditions:

The tangible net worth of the company, as per the latest audited balance sheet is not le

crores.

Company has been sanctioned working capital limit by banks or financial institutions

The borrowal account of the company is classified as a standard Asset by the financing


11/30

Few others1. It must have fund based working capital of Rs. 25 crores.2. The issuing company would need high credit rating.3. CPs have to be issued in the denominators of Rs.5 lakhs and the minim

amount should be Rs. 1 crore.4. The minimum maturity period is 7 days and a maximum upto one year

the date of issue.5. It is issued in the form of usance promissory notes, negotiable by endo

and delivery. The issuing company can freely determine the rate of dis6. The issues of CPs cannot be underwritten or co-accepted.

7. The total amount of CP proposed to be issued should be raised within of two weeks from the date on which the issuer opens the issue forsubscription. CP may be issued on a single date or in parts on differentprovided that in the latter case each CP shall have the same maturity d

8. Amount invested by a single investor should not be less than Rs. 5 lakh


12/30

A COD is a document title to a time deposit and can be distinguisheconventional time deposit in respect of it free negotiability and henmarketable.

CODs are a marketable receipt of funds deposited in a bank for a fixa specified rate of interest. They are bearer instruments and are reanegotiable.

As per the RBI scheme, the CODs can be issued only by scheduled co

banks at a discount rate from the face value, and the discount rate cdetermined. It means that there is no restriction on the rate of interbe paid to a depositor.

The CODs can be issued to individuals, corporates, companies, trustassociations and so on.


13/30

RBI Guidelines :

1. The denominators of CODs is to be in the multiples of Rs. 5 lasubject to a minimum size of an issue to a single investor bein

lakhs.2. The maturity period to range from 3 months to one year.

3. They are freely transferable by the endorsement and deliveryinitial lock in 45 days.

4. Premature buy back is not permitted.

5. The development financial institutions can issue CODs with thmaturity period of more than one year.


14/30

Emerged as a Money Market instrument in the 70s bu80s it became negligible.

Revived in a modified form of evening out short termliquidity, esp at times were imbalances affecting matumix of bank assets.

2 types of IBPs mainly Risk Sharing.

Issued for 91-180 days.

The aggregate amount of IBPs at the time of issue should not exceed 40%outstanding in the account.

Rate of Interest decided by the Issuing and the Participating bank; theminimum interest stipulation was later removed on Oct 1993

Without risk sharing. Tenure of 90 days only.

Issuing bank shows participation as Borrowing and participating banks shas Advances to banks.

Advantages & Disadvantages.


15/30

Treasury bills are claims against the Governmentissued since the days of inception of the banks.

They were issued for 91 days.

Negotiable Securities- they can be rediscountedwith the banks, highly liquid.

Advantages Absence of Default risk

Easy availability

Assured yield

Low transaction cost


16/30

91 Days T Bills Ordinary:

The treasury bills sold to the public and banks.

They are freely marketable. commercial bank buyentire quantity of such bills issued on tender.

They are bought and sold on discount basis.

Adhoc:

Bills are issued for investment by the stategovernments, semi government departments and

foreign central banks for temporary investment. They are not sold to banks and general public.

They are sold on tap since 1965 to commercialbanks and public at fixed rates.


17/30

Tbills are repaid on par at maturity.

Discount is the Amount paid by tenderer at purchaseand the amount received on maturity.

364 days Introduced on April 1992. Auction takes place on fortnightly basis Short term investment opportunity for banks and othe

parties. Safe avenue for investors, the auction gave good

response.

These bills are not rediscount able with RBI. They are offered periodic sale on an auction basis by R

in Mumbai. The gross borrowing by the end of March 1997 was Rs

7383crores.


18/30

Scheduled commercial banks are permitted to borrow to the

125% of their capital funds in the call/notice money market,

their fortnightly average borrowing outstanding should not e

more than 100% of their capital funds.

At the same time SCBs can lend to the extent of 50% of their

funds on any day, during a fortnight but average fortnightly o

lending should not exceed 25 per cent of their capital funds.

The average daily turnover in the call money market is aroun

12,000-13,000 cr every day and trading occurs between 9.30

pm on Monday to Friday and 9.30 am to 2.30 pm on Saturday

The repayment of the borrowed money also takes place thro

RTGS system on the due date of repayment.


19/30

A money market instrument that represents an obligation bet

borrower and a lender as to the terms and conditions of the

(CBLOs) are used by those who have been phased out of or h

restricted in the interbank call money market.

CBLOs were developed by the Clearing Corporation of India (C

Reserve Bank of India (RBI).

Borrowers in CBLO have to deposit the required amount of e

securities with the CCIL based on which CCIL fixes the borrow


20/30

The details of the CBLO include an obligation for the borrower

debt at a specified future date and an expectation of the lendethe money on that future date, and they have a charge on the

is held by the CCIL.

Membership to the CBLO segment is extended to entities who

NDS members, viz., Nationalized Banks, Private Banks, Foreign

operative Banks, Financial Institutions, Insurance Companies, MFunds, Primary Dealers, etc.

By participating in the CBLO market, CCIL members can borrow

funds against the collateral of eligible securities.


21/30

ICBC Bill Department/bill outlets buy the commercial draft from thcounterparty.The fully endorsed draft should be legitimate,againsttransaction and not yet due.

Target ClientAll classes of financial institutions qualified to engage in bill busine

Features and Advantages(I) Flexible for financial institutions to buy/sell and adjust the scaleasset for better loan-to-deposit ratio;(II) Effective way for financial institutions to adjust cash positions,

asset liquidity while getting higher asset yield;(III) An option for financial institutions to adjust asset/liability ratioasset allocation efficiency and existing asset structure;(IV) Good for financial institutions to reduce the fund-raising cost risk


22/30

Documents Required::

(I) Applicants Business License and photocopy of the Financial Permit (required for firs

application, once every year after annual audit);

(II) Applicants Certificate of Qualification in engaging the business;

(III) Letter of authorization (affixed with company seal and duly signed or stamped by t

(IV) Original ID card of the person-in-charge, photocopy of the identity cards of the per

and the legal person of the financial institution;

(V) Original and photocopy (front and back) of the commercial draft;

(VI) Photocopy of the discount voucher (the voucher showing the bill discounted direct

previous bearer), for commercial acceptance drafts, all the vouchers showing the bill d

between financial institutions;(VII) Photocopies of the inquiry letter and reply letter (stamped with counterpartys bu

seal));

(VIII) Application form (affixed with company seal and signed by the legal representativwith his/her personal stamp, first-time application only);

(IX) Inter-bank discount voucher (stamped with the same company seal or financial sta

ICBC);(X) Other documentation stipulated by ICBC Bill Department/bill outlets


23/30

The call/notice/term money market is a market for trading very

liquid financial assets that are readily convertible into cash at loAn institution which has surplus funds may lend them on an

uncollateralized basis to an institution which is short of funds.

The period of lending may be for a period of 1 day which is kno

money and between 2 days and 14 days which is known as not

The entities permitted to participate both as lender and borrowcall/notice money market are Scheduled Commercial Banks (ex

RRBs), Co-operative Banks other than Land Development Bank

Primary Dealers


24/30

Scheduled commercial banks are permitted to borrow to the 125% of their capital funds in the call/notice money market, their fortnightly average borrowing outstanding should not emore than 100% of their capital funds.

At the same time SCBs can lend to the extent of 50% of their funds on any day, during a fortnight but average fortnightly olending should not exceed 25 per cent of their capital funds.

The average daily turnover in the call money market is aroun

12,000-13,000 cr every day and trading occurs between 9.30 pm on Monday to Friday and 9.30 am to 2.30 pm on Saturday

The repayment of the borrowed money also takes place throRTGS system on the due date of repayment.


25/30

Repo/ready forward/repurchase(buy-back) transaction/deal is an ag

between a seller and a buyer.

Under repo transaction there are two counter parties: Lender

Borrower.

It is a short term loan to the seller with securities issued as collateral

Buyer purchases the securities with an agreement to sell the same b

seller .

For the buyer of securitiesreverse repo deal or buy-back arrangem

Both sale and repurchase prices are determined prior to entering int

Repo enable short term funds at competitive rates.

It is a secured form of lending,the underlying securities being collate

Other factors affecting the repo rate include:


26/30

Other factors affecting the repo rate include: the credit worthiness of the borrower liquidity of the collateral comparable rates of other money market instruments.

Apart from inter-bank repos,the RBI has been using this instrument liquidity management.

Thus,repos and reverse repos are sorted to by the RBI as liquidity coin the system.

PRICING In a repo transaction where there are two legs of transactions viz.

the security and repurchasing of the same In the first leg of the transaction for a nearer date, sale price is uson the prevailing market price for outright deals.

In the second leg, which is for a future date, the price will be strucon the funds flow of interest and tax elements of funds exchanged

Thi i t f t f t


27/30

This is on account of two factors.

First, as the ownership of securities passes on from seller to buyer for the repo p

the coupon interest accrued for the period has to be passed on to the buyer.

Thus, at the sale leg, while the buyer of security is required to pay the accrued c

interest for the broken period, at the repurchase leg, the initial seller is required

accrued interest for the broken period to the initial buyer.

Transaction-wise, both the legs are booked as spot sale/purchase tra

If the repo rate and coupon are equal, then the repurchase price wil

to the sale price of security

If the repo rate is greater than the coupon, then the repurchase pric

adjusted upward

If the repo rate is lower than the coupon then, the repurchase price idownward


28/30

A banker's acceptance(BA) is a short-term credit investment.

The bankers acceptance is traded in the secondary market. Corporations use banker's acceptanceto finance imports, exports and

merchandise transactions. Bankers' acceptances are especially useful w

creditworthiness of a foreign trade partner is unknown.

Banker's acceptanceare traded at a discount from face value and can

secondary market prior to maturity. Of course, in that case, their retur

guaranteed.

MONEY MARKETS @ Volume(One Leg)

Weighted

Average Rate


29/30

(One Leg) Average RateA. Overnight Segment (I+II+III+IV)

10,582.77 7.50I. Call Money

357.17 6.86II. Collateralised Borrowing and

Lending Obligation (CBLO)10,225.60 7.52

III. Market Repo0.00

IV. Repo in Corporate Bond0.00 -

B. Term SegmentI. Notice Money**

8.00 6.00II. Term Money@@

0.00 -III. CBLO

0.00 -IV. Market Repo

0.00 -V. Repo in Corporate Bond

0.00 -@ The information is based on provisional Reserve Bank of India RBI) / Clearing Corporation of India Limited CCIL)/ Fixed Income Money Market and Derivatives Association of India FIMMDA) Data.- Not Applicable / No Transaction** Relates to uncollateralized transactions of 2 to 14 days tenor.

@@ Relates to uncollateralized transactions of 15 days to one year tenor


30/30

THANK YOU