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8/4/2019 What is Money Market - Assignment
1/21
FM Assignment Money MarketHarsh Dedhia
Roll No.: 113
MMS Finance
What is Money Market? A market for financial assets that are close substitutes for money.
A market for short-term funds and instruments having a maturity of one/less than
one year.
It is an activity, not a place, conducted by telephone.
It constitutes a very important segment of the Indian Financial System.
Characteristics of the Money Market:
It is not a single market but a collection of markets for several instruments.
It is a wholesale market for short-term debt instruments.
Its principal feature is honor where the creditworthiness of the participants is
important.
The main players are:
Reserve Bank of India (RBI),
Discount and Finance House of India (DFHI),
Mutual Funds,
Banks,
Corporate Investors,
Non-Banking Finance Companies (NBFCs),
State Governments,
Provident Funds,
Primary Dealers,
Securities Trading Corporation of India (STCI), or
Public Sector Undertakings (PSUs),
Non-resident Indians and overseas corporate bodies.
It is a need-based market wherein the demand and supply of money shape the
market.
Role of RBI:
o Liquidity & Short term interest rates are maintained at a level consistent
with the monetary policy objectives of maintaining price stability
o To ensure productive flow of credit to the productive sectors of the
economy
o To bring about order in the foreign exchange market
o The RBI influences liquidity & interest rates through:
CRR of banks
Conduct OMOs
Repos
Change in bank rates
Foreign exchange swaps operations
Steps to Develop the Money Market in India:
The money market in India is divided into the Formal (organized) and Informal
(unorganized) segments.
In the 1980s:
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MMS Finance
A committee to review the working of the monetary system under the Chairmanship of
Sukhamoy Chakravorty was set up in 1985. As a follow up, the Reserve Bank set up a
working group on the money Market under the chairmanship of Mr.N Vagul which
submitted its report in 1987.
Based on its recommendations the RBI initiated a number of measures like:
1. The Discount and Finance House of India (DFHI) was set up as a money market
institution jointly by the RBI, public sector banks and financial institutions in 1988
to impart liquidity to money market instruments and help the development of a
secondary market in such instruments.
2. Money Market instruments such as the 182-day Treasury bill, certificate of deposit,
and interbank participation certificate were introduced in 1988-89. Commercial
paper was introduced in January 1990.
3. To enable price discovery, the interest rate ceiling on call money was freed in
stages from October 1988. As a first step, operations of the DFHI in the call/notice
money market were freed from the interest rate ceiling in 1988.
4. Interest rate ceilings on interbank term money (10.5-11.5%), rediscounting of
commercial bills (12.5%), and interbank participation without risk (12.5%) were
withdrawn effective May 1989.
In the 1990s:
The government set up a high-level committee in August 1991 under the chairmanship of
Mr. M Narasimham (Narasimham Committee) to examine all aspects relating to structure,
organization, functions, and procedures of the financial system.
The RBI accepted many of its recommendations.
1. The Securities Trading Corporation of India was set up in June 1994 to provide anactive secondary market in government dated securities and public sector bonds.
2. Barriers to entry were gradually eased by
a. Setting up the primary dealer system in 1995 and satellite dealer system in
1999 to inject liquidity in the market.
b. Relaxing issuance restrictions and subscription norms in respect of money
market instruments
c. Allowing the determination of yields based on the demand and supply of such
paper.
d. Enabling market evaluation of associated risks by withdrawing regulatory
restriction such as bank guarantees in respect of commercial papers.e. Increasing the no. Of participants by allowing the entry of foreign institutional
investors (FIIs), non-bank financial institutions, mutual funds and so on.
3. Several financial innovations in instruments and methods were introduced.
Treasury bills of varying maturities and RBI repos were introduced.
4. The development of a market for short-term funds at market-determined rates has
been fostered.
5. Indirect monetary control instruments such as the bank rate-reactivated in April
1997, strategy of combining auctions, private placements and open market
operations-in 1988-89, and the liquidity adjustment facility (LAF)-in June 2000
were introduced.6. The minimum lock-in-period for money market was brought down to 15 days.
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FM Assignment Money MarketHarsh Dedhia
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MMS Finance
7. The Reserve Bank started repos both on auction and fixed interest rate basis for
liquidity management.
8. The interbank liabilities were exempted from cash reserve ratio (CRR) and
statutory liquidity ratio (SLR) stipulations for facilitating the development of a
term money market.
Money Market InstrumentsThe money market instruments in India mainly comprise:
Call money,
Certificates of deposit,
Treasury bills,
Repo
Bankers acceptance/commercial bills, Commercial paper
CBLO
Call / Notice Money Market OperationsIntroduction:
The money market is a market for short-term financial assets that are close substitutes of
money. The most important feature of a money market instrument is that it is liquid and
can be turned into money quickly at low cost and provides an avenue for equilibrating the
short-term surplus funds of lenders and the requirements of borrowers. The call/notice
money market forms an important segment of the Indian Money Market. Under call money
market, funds are transacted on an overnight basis and under notice money market, funds
are transacted for a period between 2 days and 14 days."Call Money" means deals in overnight funds.
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"Notice Money" means deals in funds for 2 - 14 days.
Term Money means deals in funds for 15 days-1 year.
Participants in call/notice money market currently include scheduled commercial banks
(excluding RRBs), co-operative banks (other than Land Development Banks) and Primary
Dealers (PDs), both as borrowers and lenders.
The prudential limits in respect of both outstanding borrowing and lending transactions in
call/notice money market for scheduled commercial banks, co-operative banks and PDs
are as follows:-
Table : Prudential Limits for Transactions in Call/Notice Money Market
Sr. No. Participant Borrowing Lending
1 ScheduledCommercial
Banks
On a fortnightly average basis,borrowing outstanding should not
exceed 100 per cent of capitalfunds (i.e., sum of Tier I and Tier IIcapital) of latest audited balancesheet. However, banks are allowedto borrow a maximum of 125 percent of their capital funds on anyday, during a fortnight.
On a fortnightly averagebasis, lending outstanding
should not exceed 25 percent of their capital funds.However, banks are allowedto lend a maximum of 50per cent of their capitalfunds on any day, during afortnight.
2 Co-operativeBanks
Outstanding borrowings of State Co-operative Banks/District Central Co-operative Banks/ Urban Co-op.Banks in call/notice money market,on a daily basis should not exceed
2.0 per cent of their aggregatedeposits as at end March of theprevious financial year.
No Limit.
3 PDs PDs are allowed to borrow, onaverage in a reporting fortnight, upto 225 per cent of their net ownedfunds (NOF) as at end-March of theprevious financial year.
PDs are allowed to lend incall/notice money market,on average in a reportingfortnight, up to 25 per centof their NOF.
Non-bank institutions (other than PDs) are not permitted in the call/notice money market.
Eligible participants are free to decide on interest rates in call/notice money market.
All dealings in call/notice money on the Negotiated Dealing System-Call, i.e. NDS-Call (a
screen-based, negotiated, quote-driven system), do not require separate reporting. It is
mandatory for all members of the NDS to report their call/notice money market deals,
other than those done on NDS-Call, on NDS. Deals should be reported within 15 minutes on
NDS, irrespective of the size of the deal or whether the counterparty is a member of the
NDS or not. In case there is repeated non-reporting of deals by an NDS member, such non-
reported deals may be treated as invalid.
Average Daily Turnover in Call Money Market
(Rs. crore)Fortnight ended Average Daily Call Money Turnover
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Banks Primary Dealers Total
Borrowings Lendings Borrowings Lendings
1 2 3 4 5
April 9, 2010 6,178 6,968 796 6 13,949
April 23, 2010 7,637 8,379 767 25 16,808May 7, 2010 8,014 9,457 1,447 4 18,921
May 21, 2010 7,915 8,981 1,066 17,962
June 4, 2010 6,129 7,002 872 14,003
June 18, 2010 5,556 6,236 682 2 12,475
July 2, 2010 7,622 8,124 521 18 16,285
July 16, 2010 8,744 9,301 557 18,603
July 30, 2010 9,468 10,131 663 20,263
August 13, 2010 6,134 7,298 1,164 14,596
August 27, 2010 7,531 8,675 1,144 17,351
September 10, 2010 6,704 7,818 1,114 15,637
September 24, 2010 7,900 9,107 1,207
18,214October 8, 2010 8,129 9,380 1,258 7 18,774
October 22, 2010 7,021 8,004 983 16,008
November 5, 2010 7,681 8,822 1,144 4 17,651
November 19, 2010 9,113 9,879 766 19,758
December 3, 2010 6,950 7,692 742 15,385
December 17, 2010 7,174 8,344 1,172 2 16,691
December 31, 2010 9,909 10,852 943 21,704
January 14, 2011 7,336 8,270 934 16,540
January 28, 2011 7,156 7,843 690 4 15,692
February 11, 2011 7,865 8,372 506 16,743
February 25, 2011 11,304 11,814 510
23,628March 11, 2011 10,104 10,390 286 20,779
March 25, 2011 11,185 11,421 243 7 22,857
April 8, 2011 11,215 11,565 350 23,129
April 22, 2011 15,349 16,244 896 1 32,489
May 6, 2011 10,349 10,990 641 21,979
May 20, 2011 10,708 11,457 748 22,913
June 3, 2011 9,203 10,027 824 20,055
June 17, 2011 9,791 10,716 925 21,431
July 1, 2011 11,636 12,239 603 24,479
July 15, 2011 11,466 12,588 1,128 5 25,187
Notes: 1. Data are provisional.
2. Since August 6, 2005 eligible participants are Banks and Primary Dealers.
Market ReposRepo (Repurchase Agreement) instruments enable collateralised short-term borrowingthrough the selling of debt instruments. Under a repo transaction, the security is sold withan agreement to repurchase it at a pre-determined date and rate.Reverse repo is a mirror image of repo and represents the acquisition of a security with asimultaneous commitment to resell.Repo tool is used to absorb liquidity from the system while reverse Repo is used to inject
liquidity into the money market.
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Collateralised Borrowing and Lending Obligations (CBLO):The CBLOs were operationalised as a money market instrument by the CCIL on January 20,2003. The product was introduced with the objective of providing an alternative avenuefor managing shortterm liquidity to the market participants who were restricted and/or
phased out of the call money market.The market was quick to reap the benefits of anonymous trading system. Mutual funds andcooperative banks were the main beneficiaries of thisscheme. The anonymous, order-driven and online matching system was a milestone in the Indian debt market.
Treasury Bills:In India, prior to the institution of reforms, the 91-day Treasury Bills were sold on tap atan administered rate of discount, which was fixed at 4.6 per cent from July 1974. They,however, could not emerge as a useful money market instrument due to the administerednature of interest rates, which reflected the perspective of the issuer rather than thebuyer. A reform process in this segment started with the introduction of 182-day TreasuryBills from November 1986. This was followed by the phasing out of tap Treasury Bills andan introduction ofauctioning system in 91-day Treasury Bills. The institution of DFHI as amoney market institution along with other steps taken to develop the market created theground for the emergence of 91-day Treasury Bills as an important market segment.Treasury Bills with 364-day maturity were introduced in April 1992 and tendered throughauction-determined rates of discount. Subsequently, 91-day Treasury Bills were introducedon an auction basis in January 1993. There was also a system of 91-day ad hoc TreasuryBills, which were issued by the Central Government to the A major reform occurred inApril 1997, when the system of ad hoc Treasury Bills was abolished and 14-dayintermediate Treasury Bills and auction bills were introduced to enable better cashmanagement by the Government and to provide alternative avenues of investments to theState Governments and some foreign central banks. Thus, Treasury Bills of different tenors
were introduced to consolidate the market for imparting liquidity, while yields were mademarket determined through auctions for their use as a benchmark for other short-termmarket instruments.
Commercial Bill Market:It is a market for the short term, self liquidating and negotiable money marketinstrument. Commercial bills are used to finance the movement and storage of agricultureand industrial goods in domestic and foreign markets. The commercial bill market in Indiais still underdeveloped.
Commercial PaperIntroduction:Commercial Paper (CP) is an unsecured money market instrument issued in the form of a
promissory note. CP, as a privately placed instrument, was introduced in India in 1990
with a view to enable highly rated corporate borrowers to diversify their sources of short-
term borrowings and to provide an additional instrument to investors. Subsequently,
primary dealers (PDs) and all-India financial institutions were also permitted to issue CP to
enable them to meet their short-term funding requirements. The guidelines for issue of
CP, incorporating all the amendments issued till date, are given below for ready
reference.
Corporates, PDs and all-India financial institutions (FIs) that have been permitted to raise
short-term resources under the umbrella limit fixed by the Reserve Bank of India (RBI) areeligible to issue CP.
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A corporate would be eligible to issue CP provided:
a) The tangible net worth of the company, as per the latest audited balance sheet, is
not less than Rs.4 crore;
b) The company has been sanctioned working capital limit by bank/s or FIs; and (c)
the borrowable account of the company is classified as a Standard Asset by the
financing bank/institution.
Rating Requirement:
All eligible participants shall obtain credit rating for issuance of CP from any one of the
following credit rating agencies (CRAs), viz. the Credit Rating Information Services of India
Ltd. (CRISIL), the Investment Information and Credit Rating Agency of India Ltd. (ICRA),
the Credit Analysis and Research Ltd. (CARE), the FITCH Ratings India Pvt. Ltd. and such
other CRAs as may be specified by the RBI from time to time, for the purpose. The
minimum credit rating shall be P-2 of CRISIL or such equivalent rating by other CRAs. The
issuers shall ensure at the time of issuance of the CP that the rating so obtained is current
and has not fallen due for review.
Maturity:
CP can be issued for maturities between a minimum of 7 days and a maximum of up to one
year from the date of issue. The maturity date of the CP should not go beyond the date up
to which the credit rating of the issuer is valid. CP can be issued in denominations of Rs.5
lakh or multiples thereof. Amount invested by a single investor should not be less than
Rs.5 lakh (face value). The total amount of CP proposed to be issued should be raised
within a period of two weeks from the date on which the issuer opens the issue for
subscription. CP may be issued on a single date or in parts on different dates provided thatin the latter case, each CP shall have the same maturity date. Every issue of CP, including
renewal, should be treated as a fresh issue.
Investment in CP:
CP may be issued to and held by individuals, banking companies, other corporate bodies
(registered or incorporated in India) and unincorporated bodies, Non-Resident Indians and
Foreign Institutional Investors (FIIs). However, investment by FIIs would be within the
limits set for them by Securities and Exchange Board of India (SEBI).
Trading in CP:All OTC trades in CP shall be reported within 15 minutes of the trade to the Fixed Income
Money Market and Derivatives Association of India (FIMMDA) reporting platform.
Mode of Issuance:
CP can be issued either in the form of a promissory note (Schedule I) or in a
dematerialised form through any of the depositories approved by and registered with SEBI.
CP will be issued at a discount to face value as may be determined by the issuer. While
option is available to both issuers and subscribers to issue/hold CP in dematerialised or
physical form, issuers and subscribers are encouraged to opt for dematerialised form of
issue/holding. However, with effect from June 30, 2001, banks, FIs and PDs are requiredto make fresh investments and hold CP only in dematerialised form.
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MMS Finance
Payment of CP:
The initial investor in CP shall pay the discounted value of the CP by means of a crossed
account payee cheque to the account of the issuer through IPA. On maturity of CP, when
CP is held in physical form, the holder of CP shall present the instrument for payment to
the issuer through the IPA. However, when CP is held in demat form, the holder of CP will
have to get it redeemed through the depository and receive payment from the IPA.
Non-bank entities (including corporates) may also provide unconditional and irrevocable
guarantee for credit enhancement for CP issue provided:
the issuer fulfils the eligibility criteria prescribed for issuance of CP;
the guarantor has a credit rating at least one notch higher than the issuer given by
an approved CRA; and
the offer document for CP properly discloses the net worth of the guarantor
company, the names of the companies to which the guarantor has issued similar
guarantees, the extent of the guarantees offered by the guarantor company, and
the conditions under which the guarantee will be invoked.
Commercial Paper Issued by Companies (At face value)
(Rs. crore)
Fortnight EndedTotal AmountOutstanding
Reported Duringthe Fortnight
Rate of Interest(per cent)@
1 2 3
Jul. 15, 2010 1,07,755 11,680 6.02 8.75
Oct. 15, 2010 1,32,093 35,490 6.50 10.00
Jan. 15, 2011 98,913 22,908 6.60
11.95Apr. 15, 2011 1,05,518 30,840 7.15 12.30
Jun. 15, 2011 1,23,400 20,522 8.25 13.00
Jun. 30, 2011 1,04,689 30,290 8.35 13.50@ Typical effective discount rate range per annum on issues during thefortnight.
Issue of Commercial Paper* By Companies
(Amount in Rs. crore)
Fortnig
htended
Total
AmountOutstanding
Rate
ofInterest(percent)@
Fortnig
htended
Total
AmountOutstanding
Rate
ofInterest(percent)@
Fortnig
htended
Total
AmountOutstanding
Rate
ofInterest(percent)@
1 2 1 2 1 2
2009-10 2010-11 2011-12
Apr-15 46,551 6.0012.50
Apr-15 83165 3.858.40
Apr-15 105518 7.15-12.30
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April30
52,881 3.3010.25
April30
98769 3.979.40
April30
124991 6.39-12.50
May-15 57,845 2.83
9.90
May-15 100364 3.85
8.45
May-15 126835 7.01-
13.50May-31 60,740 3.32
9.00May-31 109039 4.50
9.45May-31 121221 7.60-
12.75
Jun-15 67,239 3.509.15
Jun-15 106580 4.758.65
Jun-15 123400 8.25-13.00
Jun-30 68,721 3.2012.00
Jun-30 99792 6.008.50
Jun-30 104689 8.35-13.50
Jul-15 77,560 3.048.85
Jul-15 107755 6.028.75
July 31 79,582 3.258.90
July 31 112704 6.109.00
Aug-15 77,352 3.439.20
Aug-15 127271 4.659.10
Aug-31 83,026 3.059.35
Aug-31 126549 4.409.60
Sep-15 88,161 3.209.05
Sep-15 123225 5.409.25
Sep-30 79,228 3.908.35
Sep-30 112003 6.659.90
Oct-15 91,930 2.989.00
Oct-15 132093 6.5010.00
Oct-31 98,835 3.077.90
Oct-31 149620 7.0018.00
Nov-15 1,03,315 3.008.85
Nov-15 123108 6.3013.00
Nov-30 1,03,915 2.85
8.40
Nov-30 117793 6.32
18.00Dec-15 1,06,677 3.00
9.25Dec-15 102156 8.00
16.00
Dec-31 90,305 3.7210.00
Dec-31 82542 8.0012.10
Jan-15 92,363 3.157.55
Jan-15 98913 6.6011.95
Jan-31 91,564 3.357.50
Jan-31 101752 6.9412.50
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Feb-15 96,152 3.308.00
Feb-15 103726 6.3012.30
Feb-28 97,000 3.20
8.50
Feb-28 101291 6.32
13.05Mar-15 91,025 4.00
8.90Mar-15 96487 7.20
13.50
Mar-31 76,056 5.309.00
Mar-31 80305 7.9315.00
* Issued at face value by companies.
@ Typical effective discount rate range per annum on issues during the fortnight.
The issuance of CP has generally been observed to be inversely related to call moneyrates. Activity in the CP market reflects the state of market liquidity as its issuancestend to rise amidst ample liquidity conditions when companies can raise funds through CPsat an effective rate of discount lower than the lending rate of banks. Banks also prefer
investing in CPs during credit downswing as the CP rate works out higher than the callrate.
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Certificate of DepositsIntroduction:
Certificate of Deposit (CD) is a negotiable money market instrument and issued in
dematerialised form or as a Usance Promissory Note against funds deposited at a bank orother eligible financial institution for a specified time period. Guidelines for issue of CDs
are presently govened by various directives issued by the Reserve Bank of India (RBI), as
amended from time to time. With a view to further widening the range of money market
instruments and giving investors greater flexibility in deployment of their short-term
surplus funds, Certificates of Deposit (CDs) were introduced in India in 1989.
Eligibility:
CDs can be issued by
(i) scheduled commercial banks {excluding Regional Rural Banks and Local Area Banks};
(ii) select All-India Financial Institutions (FIs) that have been permitted by RBI to raiseshort-term resources within the umbrella limit fixed by RBI.
Banks have the freedom to issue CDs depending on their funding requirements.
An FI can issue CD within the overall umbrella limit prescribed in the Master Circular on
Resource Raising Norms for FIs, issued by DBOD and updated from time-to-time.
Minimum amount of a CD should be Rs.1 lakh, i.e., the minimum deposit that could be
accepted from a single subscriber should not be less than Rs.1 lakh, and in multiples of Rs.
1 lakh thereafter.
Investors:CDs can be issued to individuals, corporations, companies, trusts, funds, associations, etc.
Non-Resident Indians (NRIs) may also subscribe to CDs, but only on non-repatriable basis,
which should be clearly stated on the Certificate. Such CDs cannot be endorsed to another
NRI in the secondary market.
Maturity:
The maturity period of CDs issued by banks should not be less than 7 days and not more
than one year, from the date of issue.
The FIs can issue CDs for a period not less than 1 year and not exceeding 3 years from the
date of issue.
Discount / Coupon Rate:
CDs may be issued at a discount on face value. Banks / FIs are also allowed to issue CDs on
floating rate basis provided the methodology of compiling the floating rate is objective,
transparent and market-based. The issuing bank / FI is free to determine the discount /
coupon rate. The interest rate on floating rate CDs would have to be reset periodically in
accordance with a pre-determined formula that indicates the spread over a transparent
benchmark. The investor should be clearly informed of the same.
CDs in physical form are freely transferable by endorsement and delivery. CDs in demat
form can be transferred as per the procedure applicable to other demat securities. Thereis no lock-in period for the CDs.
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Loans / Buy-backs:
Banks / FIs cannot grant loans against CDs. Furthermore, they cannot buy-back their own
CDs before maturity. However, the RBI may relax these restrictions for temporary periods
through a separate notification.
Format of CDs:
Banks / FIs should issue CDs only in dematerialised form. However, according to the
Depositories Act, 1996, investors have the option to seek certificate in physical form.
Further, issuance of CDs will attract stamp duty. There will be no grace period for
repayment of CDs. If the maturity date happens to be a holiday, the issuing bank/FI should
make payment on the immediate preceding working day. Banks / FIs, therefore, should fix
the period of deposit in such a manner that the maturity date does not coincide with a
holiday to avoid loss of discount / interest rate.
Payment of Certificate:
Since CDs are transferable, the physical certificates may be presented for payment by the
last holder. The question of liability on account of any defect in the chain of
endorsements may arise. It is, therefore, desirable that banks take necessary precautions.
They should be signed by two or more authorised signatories.
Certificates of Deposit Issued by Scheduled Commercial Banks
(Rs. crore)
FortnightEnded
Total AmountOutstanding #
Issued Duringthe Fortnight #
Rate of Interest(per cent)@
1 2 3
Jul. 2, 2010 3,42,362 44,167 5.92 7.05
Oct. 8, 2010 3,44,158 38,285 6.36 8.26
Jan. 14, 2011 3,71,881 44,019 7.18 9.82
Apr. 8, 2011 4,44,525 61,292 8.00 11.70
Jun. 17, 2011 4,23,767 69,976 9.02 10.50
Jul. 1, 2011 4,21,072 74,973 8.19 10.21
@ Effective interest rate range per annum.
Issue of Certificates of Deposit by Scheduled Commercial Banks(Amount in Rs. crore)
Fortnightended
TotalAmountOutstanding
RangeofDiscountRate(percent)@
Fortnightended
TotalAmountOutstanding
RangeofDiscountRate(percent)@
Fortnightended
TotalAmountOutstanding
RangeofDiscountRate(percent)@
1 2 1 2 1 22009-10
2010-11
2011-12
Apr 10 1,98,497 5.90
11.50
Apr 9 3,41,830 4.35
8.95
Apr 8 4,44,525 8.00 -
11.70Apr 24 2,10,954 3.90 Apr 2 3,36,807 4.15 Apr 2 4,47,354 7.30 -
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11.50 3 6.90 2 9.93
May 8 2,11,370 3.756.20
May 7 3,40,757 4.227.01
May 6 4,31,372 7.85 -10.05
May 22 2,18,437 3.65
7.60
May 2
1
3,40,343 4.24
6.30
May 2
0
4,33,287 8.10 -
10.05June 5 2,18,079 3.90
6.60June 4 3,37,006 4.73
7.50June 3 4,32,144 8.65 -
10.25
June 19 2,21,491 3.608.00
June 18
3,21,589 5.757.50
June 17
4,23,767 9.02 -10.50
July 3 2,28,638 3.348.25
July 2 3,42,362 5.927.05
July 17 2,35,715 3.348.00
July 16
3,27,720 6.057.19
July 31 2,40,395 3.558.00
July 30
3,24,810 6.257.50
Aug 14 2,30,198 3.758.00 Aug 13 3,27,582 6.257.90
Aug 28 2,32,522 3.608.00
Aug 27
3,41,616 6.418.00
Sept 11 2,26,756 3.706.21
Sept 10
3,48,203 6.418.06
Sept 25 2,16,691 3.756.51
Sept 24
3,37,322 6.418.25
Oct 9 2,25,781 3.706.05
Oct 8 3,44,158 6.368.26
Oct 23 2,27,227 3.746.41
Oct 22
3,43,353 6.418.30
Nov 6 2,35,859 3.557.00
Nov 5 3,32,126 6.418.80
Nov 20 2,45,101 3.157.00
Nov 19
3,32,982 6.418.75
Dec 4 2,43,584 3.506.50
Dec 3 3,33,109 7.809.08
Dec 18 2,48,440 3.606.75
Dec 17
3,28,566 8.259.75
31
3,61,408 8.579.80
Jan 1 2,64,246 3.75
6.75
Jan
Jan 15 2,64,698 3.386.61
Jan 14
3,71,881 7.189.82
Jan 29 2,82,284 3.096.51
Jan 28
3,77,640 7.359.90
Feb 12 2,78,388 3.356.76
Feb 11
4,07,862 8.1510.15
Feb 26 3,09,390 3.248.25
Feb 25
4,18,524 9.7210.60
Mar 12 3,39,279 4.007.36
Mar 11
4,30,971 7.6510.72
Mar 26 3,41,054 4.527.12
Mar 25
4,24,740 9.0010.60
@ Effective discount rate range per annum.
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FM Assignment Money MarketHarsh Dedhia
Roll No.: 113
MMS Finance
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MMS Finance
How RBI Operations Have Changed
Money MarketThe Reserve Bank traditionally regulates the money markets. The Government Notification
under Section 16 of the Securities Contract (Regulation) Act and the amendment to the
RBI Amendment Act 2006 have further clarified the powers available to the Reserve Bank
to regulate the money markets. The important components of the money market in India
are inter-bank call (overnight) money, market repo, collateralised borrowing and lending
obligation (CBLO), Commercial Paper (CP), Certificate of Deposit (CD) and term money
market. Treasury bills constitute the main instrument of short-term borrowing by the
Government. Historically, the call money market has constituted the core of the money
market in India. However, the collateralised segments, viz., market repo and CBLO have
come into prominence in recent years. The market continues to be liquid with a low and
stable bid-ask spread. A better trading and settlement infrastructure coupled with the
introduction of financial market reforms have led to a decline in money market volatility.
In the derivatives segment, the swap market (especially overnight index swaps) has been
the active segment and is used by banks as well as other entities to manage their interest
rate risk more than any other instrument. The notional principal outstanding in respect of
Interest Rate Swaps has increased.
Market Development:
Recommendations by - Report of the Committee on Financial Sector Assessment:
Interest rate deregulation has made financial market operations more efficient, but it has
also exposed the participants to increased risks. Interest rate derivative products could be
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an effective risk mitigant in this regard. Rupee derivatives in India were introduced in July
1999, when the Reserve Bank permitted banks/FIs/PDs to undertake interest rate swaps/
forward rate agreements. Currently, interest rate swaps are the predominant instruments.
The swap market, especially the Overnight Indexed Swaps (OIS) market, has been very
active in India and is used by banks as well as other entities to manage their interest rate
risk more than any other instrument. However, the absence of a term money market, and
therefore a 3-or 6-month benchmark rate, has led to market concentration on the
overnight benchmark. The development of active interest rate futures market would
contribute to the development of term money market. For the development of the IRF
market, there is a case for permitting banks to take trading positions in the interest rate
futures market as they are already allowed in the OTC interest rate swap market.
There is a need to permit short-selling of different kinds of money market securities in a
phased manner. In the interests of market development, broad-basing market repo by
allowing AAA-rated corporate bonds to be repoable, with appropriate safeguards, should
be considered. This would also require a reasonably well-developed corporate bond
market along with a transparent and efficient clearing and settlement system. The
commercial paper market has witnessed vibrant growth in the past three years. Though it
is not obligatory on the part of financial institutions to provide any stand-by facility to
the issuers of corporate paper, the existence of an appropriate liquidity back-up is
imperative for mitigating risks in the commercial paper market. The Panel on Financial
Stability Assessment and Stress Testing recommends that the rating of commercial paper
should take into account the availability of an appropriate liquidity back-up.
Rakesh Mohan Report:
The money market is an important channel for monetary policy transmission and India has
generally conformed to being a liquid market. In the ongoing global financial crisis, the
Indian money market has continued to function normally. The gradual shift towards a
collateralised inter-bank market, phasing out of non-bank participants from the call and
notice money market, policy direction towards reductions in cash reserve requirements,
the introduction of new instruments, such as, Collateralised Borrowing and Lending
Obligation (CBLO), implementation of Real Time Gross Settlement (RTGS), significanttransformation of monetary operations framework towards market-based arrangements
and facilitating trading through Negotiated Dealing System Call Money (NDS-CALL) are
some of the reform measures that have contributed to the development of a relatively
vibrant and liquid money market. However, the limitations of market participants in
taking a medium- term perspective on interest rates and liquidity, coupled with the
absence of a credible long-term benchmark, constraining further market development that
needs to be addressed.
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Financial Stability Report June 2011
Autonomous factors
cause banking systemliquidity to remain in
deficit:
The banking system
liquidity has remained
in deficit mode for
almost a year as
reflected in the
Liquidity Adjustment
Facility (LAF)
operations of theReserve Bank (Chart
2.11). The factors
affecting it have been
the increase in required
reserve resulting from the growth in bank credit and Net Demand and Time Liabilities
(NDTL) and currency in circulation. Inspite of a sharp turnaround in Government cash
balances with the Reserve Bank during the current financial year, liquidity in the system
remained in a deficit mode reflecting an increase in liquidity requirements of the
economy. Volatility in the liquidity situation needs to be actively managed by the Reserve
Bank.
The tightness in liquidity
conditions on account of
autonomous and frictional
factors got reflected in
money market rates (Chart
2.12). The call money rates
generally hovered around
the upper bound of the LAFcorridor. Similarly, the
interest rates in the CD
market moved in tandem
with the call rates, except
during a brief period
leading to March 31, 2011, when banks raised funds prior to the annual closing of
accounts. Commercial Paper (CP) and Certificate of Deposit (CD) rates touched double
digits and treasury bill rates too rose above 8 per cent on occasions. The rates in the
collateralised segments generally continued to move in tandem with the call rate, and
stayed below it. Transaction volumes in the collateralised borrowing and lendingobligation (CBLO) and market repo segments showed marginal improvement in Q4
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compared to Q3 of 2010-11.
Banks and primary dealers
continued to remain the
major group of borrowers in
the collateralised segments
whereas mutual funds (MFs)
remained the major group of
lenders of funds in these
segments. The collateralised
segment of the money market
continued to remain the
predominant money market
segment, accounting for more
than 80 per cent of the total volume during this period.
Macroeconomic and Monetary Developments
First Quarter Review 2011-12 - Monetary Policy Statement 2011-12
Liquidity conditions eased further during Q1 of 2011-12 while remaining in deficit mode.
This brought about an adjustment in liquidity in line with the policy objective. The easing
reflected mainly structural factors, as the divergent trend between credit growth and
deposit growth narrowed with rising interest rates. The sharp rise in currency growth
observed during 2010- 11 was also reversed as the opportunity cost of holding currency
increased with rise in deposit rates. Following the pick-up in the deposit growth, themoney supply growth remained
above the indicative trajectory.
Though credit growth moderated,
partly reflecting base effect, it is
still above the indicative
trajectory.
As inflation became increasingly
generalised, the Reserve Bank
raised policy repo rate by 50 bps in
May, followed by another 25 bps inJune. The Reserve Bank has thus
raised the reverse repo rate, repo
rate and the CRR by 325 basis
points (bps), 275 bps and 25 bps
respectively since March 2010.
Following a shift from absorption
mode to injection mode in the
liquidity adjustment facility (LAF),
there has been, in effect, a rise in
policy rates by 425 bps since February 2010 till date as the money market rate started
hovering around the upper bound from the lower bound of the LAF corridor (Table IV.1).
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Based on the recommendations of the Working Group on Operating Procedures of
Monetary Policy (Chairman: Shri Deepak Mohanty), the Reserve Bank in its Monetary
Policy Statement for 2011-12 effected the following changes to the operating procedure
of monetary policy:
(i) The weighted average overnight call money rate has become the operating target of
monetary policy;
(ii) The repo rate has become the only independently varying policy rate;
(iii) The reverse repo rate, pegged at 100 bps below the repo rate, provides the lower
bound to the corridor of overnight interest rate and
(iv) A new Marginal Standing Facility (MSF) has been instituted at 100 bps above the repo
rate that provides the upper bound to the corridor. Banks can borrow overnight from the
MSF up to one per cent of their respective net demand and time liabilities (NDTL). The
new operating procedure became operational in May 2011.
Liquidity conditions eased significantly during Q1 of 2011-12. The average availment of
liquidity under LAF was lower at around Rs.49,300 crore in Q1 of 2011-12 as compared
with around Rs.84,400 crore in Q4 of 2010-11. The easing was mainly on account of sharp
drawdown in Governments cash balances with the Reserve Bank. With the Government
transiting to Ways and Means Advances/ Overdraft in early April, reflecting, inter alia, tax
refunds, the liquidity conditions were in absorption mode for a brief period in early April
2011. As part of their usual year-end balance sheet adjustments, banks maintained higher
cash reserves with the Reserve Bank, which following their unloading, also had an easing
effect on liquidity conditions in early April 2011.
Liquidity conditions reverted to the deficit mode in the second week of April 2011.
Seasonally, the month of April has mostly seen surplus liquidity in terms of the net
absorption under LAF, reflecting lower credit demand and Governments cash draw-down.
This year turned out to be contrarian in that April experienced liquidity deficit on an
average daily basis (around Rs.19,000 crore, albeit, lower than that of Rs.81,000 crore in
March 2011) (Chart IV.1). The deficit liquidity conditions were in line with stated policyobjective of the Reserve Bank. With the Government substituting WMA by issuances of
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cash management bills (CMBs) and additional borrowing through Treasury Bills from the
market, the average daily net liquidity injection under the LAF increased to around
Rs.55,000 crore in May 2011.
Even as liquidity was in the surplus mode during early April 2011, the Reserve Bank had
anticipated reversal in liquidity conditions based on its liquidity assessment for the
subsequent period. Accordingly on April 8, 2011, the Reserve Bank had pre-emptively
extended the additional liquidity support to SCBs under the LAF to the extent of up to one
per cent of their NDTL till May 6, 2011. Moreover, the second LAF (SLAF) on a daily basis
was also extended up to May 6, 2011. Following the introduction of MSF on May 9, 2011,
where banks can submit their bids during 15.30 - 16.30 hrs, the second LAF was
discontinued. Further, under the MSF scheme, banks need not seek a specific waiver for
default in SLR compliance arising out of use of this facility. Till date the maximum
availment of liquidity under MSF has been Rs.4,105 crore
Liquidity in the banking system remained in deficit mode in June as Government balances
increased reflecting quarterly advance tax outflows (Table IV.2). The average daily net
outstanding liquidity injection was around Rs.74,000 crore in June 2011. Liquidity
conditions eased in early July reflecting drawdown of Government cash balances
including, inter alia, redemption of a security amounting to around Rs.37,000 crore on July
2, 2011. The average daily net liquidity injection is placed at around Rs.41,000 crore
during July 1 to 22, 2011.
Structural drivers ease pressure on
liquidity:During the third quarter of 2010-11,
the deficit liquidity conditions were
driven by structural as well as
frictional factors. The structural
factors included a sharp rise in
currency demand and divergent
trends in credit and deposit growth,
while the frictional factors included
maintenance of surplus cash
balances by the Government withthe Reserve Bank (Table IV.3).
During Q4 of 2010-11, the liquidity
conditions eased marginally due to
pick-up in government spending,
staggered OMOs carried out by the
Reserve Bank and narrowing
divergence between credit growth
and deposit growth. The currency growth, however, continued to be strong. In contrast,
the deficit liquidity conditions during the first quarter of 2011-12 were largely driven by
frictional factors, i.e., Governments cash balance with the Reserve Bank. The structural
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drivers of liquidity responded to the monetary policy signals, thereby alleviating the
pressure on liquidity.
Narrowing divergence between credit growth and deposit growth:
During the first three quarters of 2010- 11, the divergence between credit growth and
deposit growth was high and growing. As the cost of funds under LAF increased
progressively with the rise in the repo rate, banks raised their deposit and lending rates
making the monetary policy transmission increasingly effective. This resulted in narrowing
of the divergence between deposit and credit growth from 9 percentage points in mid-December to 5.6 percentage points in March and further to 1.5 percentage points in July
2011 (Chart IV.2).