MONEY MARKET IN
SOUTH AFRICA VISÀ-VIS INDIA: A
WHAT ARE MONEY MARKETS?
Money markets are a segment of the financial
market in which financial instruments with high
liquidity and very short maturities are traded.
It is used by participants as a means for borrowing
and lending in the short term, from several days to
just under a year.
It is named after wholesale markets where banks
lend and borrow large sums of money.
In the money markets, participants borrow and lend
for short periods of time, typically up to 13 months.
Money market securities consist of negotiable
certificates of deposit (CDs), bankers acceptances,
Treasury bills, commercial paper, municipal notes,
federal funds and repurchase agreements (repos).
Money market trades in short term financial
instruments. This contrasts with the capital market
for longer-term funding which is supplied by bonds
Unlike money invested with banks there is no
"fixed" yield. Instead the yield moves up and down
in accordance with the interest earned on the
investments in the money market fund.
The quoted yield on money market funds may
fluctuate every working day. Investors in money
market funds have to carry the possibility of a
decrease in yields as well as an increase.
OBJECTIVE OF MONEY MARKETS
The objective of money market funds is to offer
investors a ‘safe haven’ for cash during times of
The yield on these investments may outperform
other types of investments for short periods but is
unlikely to do so over the long term.
Investors tend to take refuge in money markets and
income funds when the markets are very volatile or
use these funds as parking places while they
decide where to invest for the longer term.
WHAT INFLUENCES MONEY
It is the process by which the government, central bank,
or monetary authority manages the money supply to
achieve specific goals—such as constraining inflation or
deflation, maintaining an exchange rate, achieving full
employment or economic growth.
Usually the goal of monetary policy is to accommodate
economic growth in an environment of stable prices.
Monetary policy can involve changing certain interest
rates, either directly or indirectly through open market
operations, setting reserve requirements, acting as a
last-resort lender (i.e. discount window lending) or
trading in foreign exchange markets.
It is an economic term that defines the set of principles
and decisions of a government in setting the level of
public expenditure and how that expenditure is funded.
Fiscal policy and monetary policy are the macroeconomic
tools that governments have at their disposal to manage
Fiscal policy is the deliberate and thought out change in
government spending, government borrowing or taxes to
stimulate or slow down the economy.
It contrasts with monetary policy, which describes policies
concerning the supply of money to the economy.
WHY MONEY MARKET? STRENGTHS
Gains on money market funds are usually tax exempt
because they invest mainly in government securities.
However, any dividends are taxable.
They are a good low-risk investment. Hence, money
market funds are widely used defensive investments
when the stock markets are declining.
Money market fund managers place a client's funds on
the best terms possible with institutions. As a result of
this access to the wholesale market, money market
funds usually offer a yield (a percentage return on your
investment) higher than that offered by the retail banks.
WHY NOT MONEY MARKET? WEAKNESSES
Although returns on a money market fund are
higher than those on a savings account, they are
still much lower than returns on equities or bonds.
Some money market securities are very costly
which makes it difficult for individual investors to
MONEY MARKETS IN SOUTH
South African banks resisted the introduction of money
market funds for many years as they had a monopoly on
the investment of short-term funds.
Money market unit trusts were eventually introduced in
South Africa in 1997.
Participants in the money market are the Reserve Bank,
the commercial banks, big companies and large
institutions like Eskom and Transnet.
Money market funds invest in institutional money market
instruments that are often not available to retail
In financial market terms, the money market exists
for the purpose of issuing and trading of short-term
instruments, that is, instruments where the term
remaining from the date when trading takes place
to the date of redemption of the loan represented
by die instrument (commonly referred to as the
"term to maturity"), is of a short-term nature.
In theory, this term for classification as a money
market instrument is given as one year.
In practice, however (especially in South Africa),
instruments with a term to maturity of three years or
less are normally classified as money market
instruments although this is not a hard and fast rule.
INSTITUTIONS IN THE MARKET
Individual: They form an important and integral part of
the market through cash income and spending,
investments and borrowings at banks and funds (e.g.
unit trusts, pension funds, etc.) and other short-term
funds which they invest and borrow.
Government: It is involved in the market through the
Treasury and the Reserve Bank.
These interact with other players in the market such as
the commercial banks, merchant banks, funds and
Other financial institutions such as insurers, money
market trusts, micro-lenders, etc. all play a part to keep
the money market vibrant and liquid.
INSTRUMENTS IN THE MONEY
There are two types of instruments which are
traded in the money markets in South Africa. These
Interest Instruments: These pay interest on the
amount invested where the interest is normally paid
to the holder of the instrument (the lender) together
with the redemption amount at redemption date.
Interim interest payments may be made in certain
Discount Instruments: These are the ones that do
not pay interest on the amount invested but are
issued at a discount on the nominal value (the
Negotiable certificates of deposit (NCDs) - It is a
document evidencing a time deposit placed with a
depository institution. It contains information about the
amount of the deposit, date on which it matures, interest
rate and the method under which the interest is
calculated. Large negotiable NCDs are generally issued
in denominations of $1 million or more.
o Short-term government stock
o Interest rate instruments issued by the private sector
with terms to maturity of less than three years.
Bankers' acceptances (BAs) - Short-term debt instrument issued
by a firm that is guaranteed by a commercial bank. These are
issued by firms as part of a commercial transaction. These are
traded at a discount from face value on the secondary market
which can be an advantage because it does not need to be held
o Treasury bills (TBs) - These are short-term securities. The
Treasury sells bills at regularly scheduled auctions to refinance
major issues. It also helps to finance current federal deficits.
They further sell bills on an irregular basis to smooth out the
uneven flow of revenues from corporate and individual tax
o Commercial paper – It is a short-term unsecured promissory
note issued by corporations and foreign governments. It is a
low-cost alternative to bank loans for many large credit worthy
issuers who are able to efficiently raise large amounts of funds
quickly and without expensive registration.
o Land Bank bills – Bills issued by the Land Bank.
HOW ARE INSTRUMENTS
The system of trading recently changed in South
Africa. It has moved from a completely paper based
system to an electronic process.
The Over-The-Counter system has been phased
out and replaced by the Computerized system.
instruments are traded through the
Johannesburg Stock Exchange (JSE) which is the
sole license holder for trading in money market
instruments in South Africa.
REGULATION OF SOUTH
AFRICAN MONEY MARKET
The Financial Services Board (FSB) is the financial
regulatory agency of the government of South
It is responsible for the non-banking financial
services industry in South Africa.
It is an independent body that supervises and
regulates the financial services industry in the
This includes the regulation of the biggest stock
exchange in Africa the Johannesburg Stock
Exchange and subsequently, the money market.
MONEY MARKET IN INDIA
In India, money market is for short-term and long-term
funds with maturity ranging from overnight to one year
including financial instruments that are deemed to be close
substitutes of money.
Similar to developed economies, it is diversified and has
evolved through many stages. From the conventional
platform of treasury bills and call money to commercial
paper, certificates of deposit, repos, forward rate
agreements and most recently interest rate swaps.
It consists of diverse sub-markets, each dealing in a
particular type of short-term credit.
The money market fulfills the borrowing and investment
requirements of providers and users of short-term funds
and balances the demand for and supply of short-term
funds by providing an equilibrium mechanism. It also
serves as a focal point for the central bank's intervention in
SOUTH AFRICAN MARKET VIS-À-VIS
A close analysis of the two markets reveals a lot of
similarities between the two market systems:
Maturity Period: The maturity period for both the
systems is the same.
Regulations: There is a central statutory authority
regulating both the markets in the two countries.
However, there is minimum involvement of both the
Instruments: The types of instruments permitted for
trading are the same.
Manner of Trading: Both the countries have phased
out paper based trading and now have
Influencing Factors: The fiscal and monetary
policies of both the countries affect the money
market rates in the countries.