2. MONEY MARKET INTRODUCTION
Money market means market where money or its equivalent can be traded.
Money is synonym of liquidity.
Money market consists of financial institutions and dealers in money or credit
who wish to generate liquidity
It is better known as a place where large institutions and government manage
their short term cash needs.
Money Market is part of financial market where instruments with high liquidity
and very short term maturities are traded.
Money market is a market where short term obligations such as treasury bills,
commercial papers and bankers acceptances are bought and sold
3. Money Market transactions are used for the short- to medium-term investment or
borrowing of liquid funds.
FEATURES of Money Market
The product types in the Money Market area are:
Fixed-Term Deposit
Deposit at Notice
Commercial Paper.
The functions offered to support the trading activities involved in preparing and
entering transactions in addition to the back office activities such as monitoring,
accounting, payment control and transaction analysis.
4. PROCESS
Choose Accounting Treasury Management Money
Market
An overview of the Money market functions.
you simply click a button to branch to the various
processing options. To speed up processing, there
is a Fast entry function in the Money Market and
Foreign Exchange areas for the most common
transactions.
5. . The Money Market area also has a Fast processing function The trading area
also includes some Utilities: - Date check (to determine whether the
requested due date falls on a workday)
Option price calculator, which you use to compare the option prices requested
with your own calculations based on market data (only in the Foreign
Exchange and Derivatives areas)
Securities account cash flow in the Securities area, which displays all the
flows for a security in a particular securities account The specific
characteristics of certain products call for other activities, which you can
carry out in the trading area.
These are order execution and order expiration as well as knock-in/knock-out
activities for OTC transactions. In the Securities area, you can exercise
different rights (conversion rights, subscription rights, exercise warrants, and
detach warrants) IMPORTANCE
6. SOURCE OF CAPITAL
Money market is an important source of financing for trade and
industry.
The short-term finances are made available through bills,
commercial papers, etc
The happenings in the money market influence the availability of
finances both for the national and international trade.
Besides trade and industry, money market offers to the
government an important non-inflationary avenue of raising short-
term funds through bills that are subscribed by commercial banks
and the public
7. IDEAL INVESTMENT
Money market offers an ideal source of investment for the commercial banks.
The market helps them invest their short-term surplus funds so as to meet
statutory reserve requirements.
For instance, the requirements of Cash Reserve Ratio (CRR) and Statutory
Liquidity Ratio (SLR) vary every fortnight depending on banks’ Net Demand and
Time Liability (NDTL)
8. o EFFECTIVE MONETARY MANAGEMENT
An efficient money market being sensitive in nature allows for the effective implementation of
monetary policy of the central bank and thus paves way for the efficient monetary management of the
country.
the money market events serve as an important guide to the government in formulation, revising and
implementing its monetary policy.
This is rightly so, given the fact that the conditions prevailing in money market serve as an indicator
of monetary state of an economy.
The monetary authority uses the money market for diffusing the effects of its actions throughout the
banking system and the economy, so as to promote economic growth with stability
9. ECONOMIC DEVELOPMENT
Money market being an integral part of a country’s economy, contributes substantially to the
economic development of a country.
A developed money market is indispensable for the rapid development of the economy.
The stage of development of the economy will be reflected in the stage of development of a
money market.
This is borne out by the fact that ill developed nature of a money market is responsible for the
primitive nature of economic development of a country. The absence of a well-developed
money market would constrain the economies from making available, on a continuous basis the
supply of adequate funds
10. EFFICIENT BANKING SYSTEM
The existence of a developed money market greatly facilitates the smooth and efficient
functioning of the banking and financial system.
Such an advantage contributes to the promotion of trade and industry in the economy Further the
mediating role played by the commercial bankers ensures delivery of credit at the most opportune
time.
Similarly, money market enables the commercial banks to meet much of their unexpected needs
for funds quickly and cheaply. It is possible for the commercial banks to utilize their funds
profitably and with liquidity
FACILITATING TRADE
Money market is of immense help to the business community in the following ways:
1. Providing an ideal payment mechanism making it possible for expeditious transfer of large sums
of money
2. Meeting the working capital requirements for carrying out the production and marketing
activities
3. Making efficient investment of surplus funds into near-money assets which can be quickly
converted into money as and when needed
11. HELPFUL TO GOVERNMENT
The government uses the money market as an arena in which short-term funds
are raised by floating treasury bills.
It helps the government manage its monetary position smoothly through the
central bank of the country functions INVESTMENT FUNCTION
The money market provides an ideal source for investment of the funds for a
short period of time for commercial banks, non banking financial concerns,
business corporations and other investors. It enables businessmen, with
temporary surplus funds, to invest them for a short period
12. FINANCING FUNCTION
Money market provides an ideal source for short-term
financing for businessmen, industrialists, traders, etc to
meet their day-to-day requirements of working capital.
Funds are available for borrowing by the government and its
agencies also
13. FACILITATING FUNCTION
Money market provides an ideal play ground for the central monetary authority of the country to carry
out various regulatory operations relating to the banking and financial system of the country.
The sensitive nature of the money market helps the central bank to make it an ideal arena for the
execution of various credit control measures TRADING USE The trading area contains the main
functions for entering financial transactions.
You can enter transactions, call up information on existing transactions, or make changes to
transactions at a later date In the Money Market,, you must enter the issuer, the depository bank, and
the securities class data in the Securities area INSTRUMENTS
Investment in money market is done through money market instruments. Money market instrument
meets short term requirements of the borrowers and provides liquidity to the lenders. Some common
Money Market Instruments are as follows:
14. TREASURY BILL
Treasury Bills, one of the safest money market instruments, are short term
borrowing instruments of the Central Government of the Country issued through
the Central Bank (RBI in India).
They are zero risk instruments, and hence the returns are not so attractive.
It is available both in primary market as well as secondary market. It is a
promise to pay a said sum after a specified period.
T-bills are short-term securities that mature in one year or less from their issue
date
15. GOVERNMENT SECURITY
Government Securities are securities issued by the Government for raising a public loan or as notified in the
official Gazette which are issued by RBI on behalf of Govt. of India (GOI).
GOI uses these borrowed funds to meet its fiscal deficit, while temporary cash mismatches are met through
treasury bills of 91 days REPOS
The term Repo is used as an abbreviation for Repurchase Agreement or Ready Forward. A Repo involves a
simultaneous “sales and repurchase” agreements BENEFITS & FEATURES
1. Interest Rate Being collateralized loans, repos help reduce counter party risk & therefore, fetch a low
interest rate
2. Contract The Repo contract provides the seller – bank to get money by partying with its security and the
buyer – bank in turn to get the security by parting with its money. It becomes a Reserve Repo deal for the
purchaser of the security. Securities are sold first to a buyer bank and simultaneously another contract is
entered in to with buyer to repurchase them at a predetermine date and price in future. The price of the
sale and repurchase of securities is determined before entering into deal
16. 3. Safety Repo is an almost risk free instrument used to even out liquidity changes in the system. Repos
offer short-term outlet for temporary excess cash at close to the market interest rate
4. Hedge tool As purchaser of the repo requires title to the securities for the term of agreement and as
the repurchase price is locked in at a time of sale itself. It is possible to use repos as an effective hedge-
tool to arrange the others repos or to sell them outright or to deliver them to another party to fulfill the
delivery commitment in respect of a forward or future contract or a short sale or a maturing reverse repo
5. Period The minimum period for Ready Forward Transaction Bill will be 3 day. However, RBI withdraws
this restriction for the minimum period with the effect from October 30, 1998
6. Liquidity Control The RBI uses Repo as a tool of liquidity control for absorbing surplus liquidity from the
banking system in a flexible way and thereby preventing interest rate arbitraging.
17. All Repo transaction are to be effected at Mumbai only and the deals are to be
necessary put through the subsidiary General Ledger (SGL) account with the
Reserve Bank of India
7. Cash Management Tool The Repo arrangement essential serves as a short –
term cash management tool as the bank receive cash from the buyer of the
securities in return for the securities. This helps the banker meet temporary cash
requirement. This also makes the repo a pure money lending operation.
On the maturity of the ‘repos’ the security is purchased back by the seller bank
from the buyer-bank by returning the money to the buyer MONEY MARKET
ACCOUNT It can be opened at any bank in the similar fashion as a savings
account. However, it is less liquid as compared to regular savings account. It is a
low risk account where the money parked by the investor is used by the bank for
investing in money market instruments and interest is earned by the account
holder for allowing bank to make such investment. Interest is usually compounded
daily and paid monthly.
18. Money Market Transactional Account By opening such type of account, the account holder can
enter into transactions also besides investments, although the numbers of transactions are
limited.
2. Money Market Investor Account By opening such type of account, the account holder can
only do the investments with no transactions.
MONEY MARKET INDEX To decide how much and where to invest in money market an investor will
refer to the Money Market Index. It provides information about the prevailing market rates.
There are various methods of identifying Money Market Index like:
Smart Money Market Index It is a composite index based on intraday price pattern of the
money market instruments.
3. Salomon Smith Barney’s World Money Market Index Money market instruments are
evaluated in various world currencies and a weighted average is calculated. This helps in
determining the index.
4. Banker’s Acceptance Rate As discussed above, Banker’s Acceptance is a money market
instrument. The prevailing market rate of this instrument i.e. the rate at which the banker’s
acceptance is traded in secondary market, is also used as a money market index.
5. LIBOR/MIBOR London Inter Bank Offered Rate/ Mumbai Inter Bank Offered Rate also serves
as good money market index. This is the interest rate at which banks borrow funds from
other banks.
