Money market


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Money market

  1. 1. Money Market
  2. 2. Introduction  As per RBI Definitions, ◦ “A market for short term financial assets that are close substitutes for money, facilitates the exchange of money in primary and secondary markets”   The money market is a mechanism that deals with the lending and borrowing of short term funds. A segment of the financial market in which financial instruments with high liquidity and very short term maturities are traded.
  3. 3. Functions of Money Market    Provide a balancing mechanism to even out the demand for and supply of short-term funds Provide a focal point for central bank intervention for influeincing liquidity and general level of interest rates in the economy. Provide reasonable access to suppliers and users of short-term funds to fulfill their borrowings and investment requirments at an efficient market claring price.
  4. 4. Money Market Instruments       Treasury Bills Call/ Notice Money Market Commercial Papers Certificates of Deposits Commercial Bills Collateralized Borrowings Obligations and Lending
  5. 5. Treasury Bills
  6. 6. Meaning    They are short term instruments issued by the Reserve Bank on behalf of the government to tide over the short-term liquidity shortfalls. It is used by the governments to raise short term funds to bridge seasonal or temporary gaps between its receipts and expenditures. They are repaid at par on maturity.
  7. 7. Features      Negotiable securities Highly liquid Absence of default risk An assured risk, low transaction cost and are eligible for inclusion in the securities for SLR They are not issued in scrip form. The purchases and sales are effected through the Subsidiary General Ledger (SGL) account.
  8. 8. Who can invest in T-Bills?  Reserve Bank of India, mutual funds, financial institutions, primary dealers, provident funds, corporates, foreign banks and FIIs
  9. 9. Types of T-Bills  On-tap Bills ◦ Discontinued form April 1, 1997.  Ad hoc Bills ◦ Discontinued form April 1, 1997.  Auctioned Bills ◦ First introduced in April 1992. ◦ The RBI receives bids in an auction from various participants and issue the bills subject to some cut off limits. ◦ At present, RBI issues T-Bills of three maturities –  91 days  182 days  364 days
  10. 10. How T-Bills are sold? Sale of T-Bills Competitive Bids Participants submit their bids through auction Multiple-price auction Each winning bidder pays the price it bid Non-competitive Bids Participants are not allowed to bid Uniform-price auction Each winning bidder pays the uniform price decided by the RBI
  11. 11. To Sum up… Treasury Bills are available for a minimum amount of Rs.25,000 and in multiples of Rs.25,000.  Treasury bills do not bear any coupon and hence, issued at discount and redeemed at par.  The T-bills are issued by the RBI through auction method. It declares auction calender at the starting of the financial year, mentioning the amount of issue, the day of the auction and the day of the payment.  91-day T-bills are auctioned every week on Wednesdays and payments are made on following friday.  182-day and 364-day T-bills are auctioned every alternate week on Wednesday and payments are 
  12. 12. Commercial Paper
  13. 13. Meaning A commercial paper is an unsecured short-term promissory note issued at a discount by creditowrthy corporates, primary dealers and all India financial institutions.  It is also known as finance paper, industrial paper, or corporate paper. 
  14. 14. Who can invest in Commercial Papers? Individuals  Banks *  Corporates  NRIs  FIIs 
  15. 15. Company conducts internal check on its eligibility to issue CPs Decides issue size Applies to CRISIL for rating of CP issue Appoints issueing and paying agent Issuer executes agreement with depository for issue of CPs in dematerialised form The process for issuing a CP Prepares documents pertaining to CP issue Gets quotes from investors along with their depository participant ID and Client ID Finalises allotment of CPs; Adjudicates on stamp duty on the jumbo CP certificate documentation Instruct depository to credit CPs to IPA’s CP allotment account; IPA issues CP certificates to investors Company gives investor details such as DP ID, client ID and allotted quantity to registrar and transfer (R&T) / IPA credit to investor’s account the next day Investor’s account is credited with the CPs a day after IPA gets clear funds in its account Receives HV cheque from Investors Funds cleared in HV clearing the next day
  16. 16. Guidelines for issuance of a CP Eligibility  Rating requirement  Maturity  Denomination  Issuing and Paying Agent  Investment in a CP  Mode of issuance 
  17. 17. Commercial Bills
  18. 18. Meaning  Commercial bills are negotiable instruments drawn by the seller on the buyer which are, in turn, accepted and discounted by commercial banks.
  19. 19. Types Demand Bill  Usace Bill  Clean Bill  Documentry Bill  Inland Bill  Foreign Bill  Hundi  Derivative Usance Promissory Note 
  20. 20. Features: It can be traded by offering the bills for rediscounting.  Repayable on maturity of bill.  High degree of liuidity. 
  21. 21. Certificate of Deposites
  22. 22. Meaning  They are short term tradable time deposits issued by commercial banks and financial institutions.
  23. 23. Guidelines for issue of CDs Eligibility  Minimum size of issue and denomination  Who can subscribe  Maturity  Discount rate  Buy-back 
  24. 24. Factors limiting the growth of CDs Limited participants  High interest rate  CDs are not listed.  Minimum level of investment is high  Stamp duty 
  25. 25. Call / Notice Money
  26. 26. Meaning  Call Money Market ◦ Here, funds are transacted on overnight basis.  Notice Money Market ◦ Funds are borrowed / lent for a period between 2 to 14 days.
  27. 27. Importance Without collateral  Flexibility to banks 
  28. 28. Participants  Lenders ◦ DFHI, STCI, GIC, IDBI, NABARD, Mutual Funds  Borrowers ◦ Brokers & dealers in the securities / bill market ◦ Individuals of high financial status  Borrowers and Lenders ◦ Schedule and non-schedule commercial banks ◦ Foreign banks, State, district and urban co