Definition - As per RBI definitions “ A market for short term financial assets that are close substitute for money, facilitates the exchange of money in primary and secondary market“.
Market for short-term financial instruments Maturities of one year or less, and often 30 days or less
Trading takes place in large financial centres Companies and investors often use money market securities
Money market instruments have low risk Core of the money market consists of interbank lending
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 intervention in this market
Development of trade & 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.
ORGANISED STRUCTURE 1. Reserve bank of India. 2. DFHI (discount and finance house of India). 3. Commercial banks i. Public sector banks SBI with 7 subsidiaries Cooperative banks 20 nationalised banks ii. Private banks Indian Banks Foreign banks 4. Development bank IDBI, IFCI, ICICI, NABARD, LIC, GIC, UTI etc
II. UNORGANISED SECTOR 1. Indigenous banks 2 Money lenders 3. Chits 4. Nidhis III. CO-OPERATIVE SECTOR 1. State cooperative i. Central cooperative banks Primary Agri credit societies Primary urban banks 2. State Land development banks Central land development banks Primary land development banks
Treasur y Bills – Issued by the Indian government in 1917 They are short-term instruments One of the safest money market instruments They have 3-month, 6-month and 1-year maturity periods
Repurchase Agreements – Also known as repos Repo transactions are allowed only between RBI-approved securities Repurchase agreements are sold by sellers with a promise
Commercial Papers – First issued in the Indian money market in 1990. Promissory notes issued by companies and financial institutions Issued at a discounted rate of their face value Commercial papers yield higher returns than T- bills
Cer tificate of Deposit – First introduced to the money market of India in 1989. A certificate or deposit is a short-term borrowing note in the form of a certificate It usually has a term between 3 months and 5 years The funds cannot be withdrawn on demand
Bankers Acceptance – The terms for these instruments are usually 90 days, but this period can vary Companies use the acceptance as a time draft for financing
Call money market – Maturity period varying from one day to 15 days Interest rate paid on call money loans is called Call Rate
Money Market Mutual Funds – In 1997, only one MMMF was in operation, and that too with very small amount of capital The RBI has approved the establishment of very few such funds in India
Purchasing power of your money goes down, in case of up in inflation Absence of integration Absence of Bill market No contact with foreign Money markets. Limited instruments Limited secondary market Limited participants