Moneymarket

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  • 1.    FINANCIAL MANAGEMENT   D MONEY MARKET     SUBMITTED BY DEEPAK R GORAD AMOL KAKDE GIRISH SUVARNA PRATIK WASNIK
  • 2. MONEY MARKETINTRODUCTIONMoney market means market where money or its equivalent can be traded.Money is synonym of liquidity. Money market consists of financial institutionsand dealers in money or credit who wish to generate liquidity. It is better knownas a place where large institutions and government manage their short termcash needs. For generation of liquidity, short term borrowing and lending isdone by these financial institutions and dealers. Money Market is part offinancial market where instruments with high liquidity and very short termmaturities are traded. Due to highly liquid nature of securities and their shortterm maturities, money market is treated as a safe place. Hence, money marketis a market where short term obligations such as treasury bills, commercialpapers and bankers acceptances are bought and sold.PURPOSEMoney Market transactions are used for the short- to medium-term investmentor borrowing of liquid funds.
  • 3. FEATURESThe product types in the Money Market area are:_ Fixed-Term Deposit_ Deposit at Notice_ Commercial PaperThe functions offered support the trading activities involved in preparing andentering transactions in addition to the back office activities such as monitoring,accounting, payment control and transaction analysis. Many steps in thisprocess chain are automated by the SAP R/3.System and the status of a transaction can be evaluated and monitored at anytime. To access the Money Market module, proceed as follows:Choose Accounting _ Treasury _ Treasury Management _ Money Market.The following sections give you an overview of the Money market functions.The collective processing function simplifies the transaction managementprocess by displaying a list of all the transactions with common selectioncriteria. From here, you simply click a button to branch to the variousprocessing options. To speed up processing, there is a Fast entry function inthe Money Market and Foreign Exchange areas for the most commontransactions. 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 requestedwith your own calculations based on market data (only in the Foreign Exchangeand Derivatives areas).
  • 4. - Securities account cash flow in the Securities area, which displays all theflows for a security in a particular securities account.The specific characteristics of certain products call for other activities, whichyou can carry out in the trading area. These are order execution and orderexpiration as well as knock-in/knock-out activities for OTC transactions. In theSecurities area, you can exercise different rights (conversion rights,subscription rights, exercise warrants, and detach warrants).IMPORTANCE SOURCE OF CAPITALMoney market is an important source of financing for trade and industry. Theshort-term finances are made available through bills, commercial papers, etc.The happenings in the money market influence the availability of financesboth for the national and international trade. Besides trade and industry,money market offers to the government an important non-inflationary avenueof raising short-term funds through bills that are subscribed by commercialbanks and the public. IDEAL INVESTMENTMoney market offers an ideal source of investment for the commercialbanks. The market helps them invest their short-term surplus funds so as tomeet statutory reserve requirements. For instance, the requirements of CashReserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) vary everyfortnight depending on banks’ Net Demand and Time Liability (NDTL).
  • 5. EFFECTIVE MONETARY MANAGEMENTAn efficient money market being sensitive in nature allows for the effectiveimplementation of monetary policy of the central bank and thus paves wayfor the efficient monetary management of the country. In fact, the moneymarket events serve as an important guide to the government in formulation,revising and implementing its monetary policy. This is rightly so, given thefact that the conditions prevailing in money market serve as an indicator ofmonetary state of an economy.The monetary authority uses the money market for diffusing theeffects of its actions throughout the banking system and the economy, so asto promote economic growth with stability. ECONOMIC DEVELOPMENTMoney market being an integral part of a country’s economy, contributessubstantially to the economic development of a country. A developed moneymarket is indispensable for the rapid development of the economy. In fact,the stage of development of the economy will be reflected in the stage ofdevelopment of a money market. This is borne out by the fact that ill developednature of a money market is responsible for the primitive nature ofeconomic development of a country. The absence of a well-developedmoney market would constrain the economies from making available, on acontinuous basis the supply of adequate funds.
  • 6. EFFICIENT BANKING SYSTEMThe existence of a developed money market greatly facilitates the smoothand efficient functioning of the banking and financial system. Such anadvantage contributes to the promotion of trade and industry in the economy.Further the mediating role played by the commercial bankers ensuresdelivery of credit at the most opportune time. Similarly, money marketenables the commercial banks to meet much of their unexpected needs forfunds quickly and cheaply. It is possible for the commercial banks to utilizetheir funds profitably and with liquidity. FACILITATING TRADEMoney market is of immense help to the business community in thefollowing ways:1. Providing an ideal payment mechanism making it possible forexpeditious transfer of large sums of money.2. Meeting the working capital requirements for carrying out theproduction and marketing activities.3. Making efficient investment of surplus funds into near-money assetswhich can be quickly converted into money as and when needed. HELPFUL TO GOVERNMENTThe government uses the money market as an arena in which short-termfunds are raised by floating treasury bills. It helps the government manage itsmonetary position smoothly through the central bank of the county.
  • 7. FUNCTIONS INVESTMENT FUNCTIONThe money market provides an ideal source for investment of the funds for ashort period of time for commercial banks, non banking financial concerns,business corporations and other investors. It enables businessmen, withtemporary surplus funds, to invest them for a short period. FINANCING FUNCTIONMoney market provides an ideal source for short-term financing forbusinessmen, industrialists, traders, etc to meet their day-to-day requirementsof working capital. Funds are available for borrowing by the government andits agencies also. FACILITATING FUNCTIONMoney market provides an ideal play ground for the central monetaryauthority of the country to carry out various regulatory operations relating tothe banking and financial system of the country. The sensitive nature of themoney market helps the central bank to make it an ideal arena for theexecution of various credit control measures.TRADING USEThe trading area contains the main functions for entering financial transactions.You can enter transactions, call up information on existing transactions, ormake changes to transactions at a later date.In the Money Market, Foreign Exchange, and Derivatives areas, you can alsogive notice on and roll over transactions.
  • 8. PREREQUISITESYou have to enter the master data before you can create a financial transactionin the trading area. In the Money Market, Foreign Exchange, and Derivativesareas, this means entering master data for the respective business partner inthe role of Treasury partner. Before you create a securities order, you mustenter the issuer, the depository bank, and the securities class data in theSecurities area.INSTRUMENTSInvestment in money market is done through money market instruments. Moneymarket instrument meets short term requirements of the borrowers andprovides liquidity to the lenders. Some common Money Market Instruments areas follows:  TREASURY BILLTreasury Bills, one of the safest money market instruments, are short termborrowing instruments of the Central Government of the Country issued throughthe Central Bank (RBI in India). They are zero risk instruments, and hence thereturns are not so attractive. It is available both in primary market as well assecondary 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 issuedate.  GOVERNMENT SEQURITYGovernment Securities are securities issued by the Government for raising apublic loan or as notified in the official Gazette which are issued by RBI onbehalf of Govt. of India (GOI). GOI uses these borrowed funds to meet its fiscal
  • 9. deficit, while temporary cash mismatches are met through treasury bills of 91days.REPOSThe term Repo is used as an abbreviation for Repurchase Agreement orReady Forward. A Repo involves a simultaneous “sales and repurchase”agreements.BENEFITS & FEATURES1. Interest Rate Being collateralized loans, repos help reduce counterparty risk & therefore, fetch a low interest rate.2. Contract The Repo contract provides the seller – bank to get moneyby partying with its security and the buyer – bank in turn to get thesecurity by parting with its money. It becomes a Reserve Repo deal forthe purchaser of the security. Securities are sold first to a buyer bankand simultaneously another contract is entered in to with buyer torepurchase them at a predetermine date and price in future. The priceof the sale and repurchase of securities is determined before enteringinto deal.3. Safety Repo is an almost risk free instrument used to even outliquidity changes in the system. Repos offer short-term outlet fortemporary excess cash at close to the market interest rate.
  • 10. 4. Hedge tool As purchaser of the repo requires title to the securities forthe term of agreement and as the repurchase price is locked in at a timeof sale itself. It is possible to use repos as an effective hedge-tool toarrange the others repos or to sell them outright or to deliver them toanother party to fulfill the delivery commitment in respect of a forwardor future contract or a short sale or a maturing reverse repo.5. Period The minimum period for Ready Forward Transaction Bill willbe 3 day. However, RBI withdraws this restriction for the minimumperiod with the effect from October 30, 1998.6. Liquidity Control The RBI uses Repo as a tool of liquidity controlfor absorbing surplus liquidity from the banking system in a flexibleway and thereby preventing interest rate arbitraging. All Repotransaction are to be effected at Mumbai only and the deals are to benecessary put through the subsidiary General Ledger (SGL) accountwith the Reserve Bank of India.7. Cash Management Tool The Repo arrangement essential serves as ashort – term cash management tool as the bank receive cash from thebuyer of the securities in return for the securities. This helps the bankermeet temporary cash requirement. This also makes the repo a puremoney lending operation. On the maturity of the ‘repos’ the security ispurchased back by the seller bank from the buyer-bank by returningthe money to the buyer.
  • 11. MONEY MARKET ACCOUNTIt 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 riskaccount where the money parked by the investor is used by the bank forinvesting in money market instruments and interest is earned by the accountholder for allowing bank to make such investment. Interest is usuallycompounded daily and paid monthly. There are two types of money marketaccounts:  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.  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 inmoney market an investor will refer to the Money Market Index. It providesinformation about the prevailing market rates. There are various methods ofidentifying Money Market Index like:  Smart Money Market Index It is a composite index based on intraday price pattern of the money market instruments.  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.
  • 12.  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.  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.GROWTH OF MONEY MARKET IN INDIAARTICLECapital investment is the backbone of every developing economy. It is alsoconsidered to be one of the most important determinants of the rate of growth ofan economy and the governments in the developing countries strive very hardto ensure that the level of capital investment is kept high. To augment theinternal investment potential, the governments in the Developing countries aimat achieving higher inflows of foreign investment, both as FDI as well as FII.
  • 13. Money Market Operations as on February 25, 2013 (Amount in ` crore, Rate in per cent)MONEY MARKETS @ Volume Wtd.Avg.Rate Range (One Leg)A. Overnight Segment 100,082.47 7.80 6.40-7.95(I+II+III+IV) I. Call Money 19,322.47 7.85 6.40-7.95 II. CBLO 50,189.00 7.73 7.65-7.85 III. Market Repo 30,571.00 7.87 7.70-7.95 IV. Repo in Corporate 0.00 - -BondB. Term Segment I. Notice Money** 343.99 7.43 6.40-7.65 II. Term Money@@ 1,695.00 - 7.75-9.65 III. CBLO 0.00 - - IV. Market Repo 1,800.00 8.25 8.25-8.25 V. Repo in Corporate 0.00 - -BondRBI OPERATIONS Amount Rate OutstandingC. Liquidity Adjustment Facility (i) Repo (1 day) 128,425.00 7.75 (ii) Reverse Repo (1 day) 25.00 6.75D. Marginal StandingFacility (1 day) 0.00 8.75E. Standing Liquidity Facility Availed fromRBI 25,609.62 7.75 of which (i) Special Refinance Facility^ 0.00 (ii) Refinance under the forex swap ~ 5,743.95
  • 14. RESERVE POSITION @F. Cash Reserves Position of Scheduled Commercial Banks(i) Cash balances with RBI as on # 21/02/2013 259,586.00 (ii) Average daily cash reserve requirement 22/02/2013 276,960.00for the fortnight ending @ 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# The figure for the cash balances with RBI on Sunday is same as that of the previous day (Saturday).^ Under Section 17(4-J) of the RBI Act 1934.~ Under Section 17(3-A) of the RBI Act 1934. Ajit Prasad Assistant General ManagerPress Release : 2012-2013/1435