The money market is a market for financial assets that are close substitute for money. It is a market of short term funds and instrument having maturity period less than 1 year or 1 year. MAIN PLAYERS OF MONEY MARKET ARE AS FOLLOWS…… Reserve bank of India ( RBI ). The Discount and Finance House of India ( DHFI ). Mutual Funds , Corporate Investors , Non Banking finance Companies ( NBFC ). The Securities Trading Corporation of India ( STCI ).
Treasury bills ( t- bills ) Call / Notice money Commercial Paper ( CPs ) Certificates of Deposits ( CDs ) Commercial Bills ( CBs ) Collateralized Borrowing and Lending Obligation ( CBLO )
T – bills are short term instrument used by the government to raise short term funds. Issue t discount and redeem at par. They are negotiable instrument. Bank, retail institution, organization institution , can purchase t- bills & individual can not purchase. It can be issue trough auction. It is available for a minimum amount of Rs 25000 and in multiples.
Unsecured short term promissory Note, Issued by Company having tangible net worth of Rs. 4 cr, Primary Dealers & FIs. Rating shall be taken b4 issuing. Minimum rating is P2 by CRISIL, A2 by ICRA & PR2 by CARE. Maturity-Minimum 7 days & Maximum 1 year. Investment in CP can be done by individuals, banks, corporates, NRIs, & FIIs. The RBI publishes the rates of interest on CP on monthly as well as weekly basis.
EQUILIBRIUM IN FINANCIAL MARKETS(a) Supply and demand for loanable funds and determination of interest rate Interest rate Sf (lending) S’f ie i’e Df (borrowing) 0 A B Amount of loanable funds
(b) Supply and demand for securities and determination of prices Price SS (borrowing) P’e Pe D’s Ds (lending) 0 A’ B’ Amount of securities
MONEY MARKET RETURNS• Interest Rate Function of the unit of account, maturity, and default risk• Rate of Return on Risky Assets Cash dividend Ending price – Beginning price r= + Beginning price Beginning price Dividend yield Capital yield• Inflation and Real Interest Rate 1 + Nominal rate 1 + Real rate = 1 + Inflation rate
DETERMINANTS OF RATES OF RETURN• Expected Productivity of Capital• Degree of Uncertainty about the Productivity ofCapital• Time Preferences of People.• Degree of Risk Aversion.
The LAF is the tool of day to day liquidity management through sales and purchase of securities or resale / repurchase under the repo/reverse repo operationLAF is a tool for managing day to day liquidity mismatches in the system, restricting & steering short term money market rates in accordance to monetary policy objectives.