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Money markets
Money markets
Money markets
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Money markets
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Money markets
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Money markets
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Money markets

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money market

money market

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  • 1. MONEY MARKETS<br />PROF. PARVEEN SULTANA<br />
  • 2. MONEY MARKET<br /><ul><li>As per RBI definitions “ A market for short terms financial assets that are close substitute for money, facilitates the exchange of money in primary and secondary market”.
  • 3. The money market is a mechanism that deals with the lending and borrowing of short term funds (less than one year).
  • 4. A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded.
  • 5. It doesn’t actually deal in cash or money but deals with substitute of cash like trade bills, promissory notes &amp; government papers which can converted into cash without any loss at low transaction cost.
  • 6. It includes all individual, institution and intermediaries.</li></li></ul><li>The Definition<br />Money Market is &quot;the centre for dealings, mainly short-term character, in money assets. <br />It meets the short-term requirements of borrower and provides liquidity or cash to the lenders. <br />It is the place where short-term surplus investible funds at the disposal of financial and other institutions and individuals are bid by borrowers, again comprising Institutions, individuals and also the Government itself&quot; <br />Money market refers to the market for short term assets that are close substitutes of money, usually with maturities of less than a year. <br />A well functioning money market provides a relatively safe and steady income-yielding avenue.<br />Allows the investor institutions to optimize the yield on temporary surplus funds.<br />Instrument of Liquidity adjustment by Central Bank. <br />
  • 7. FORM <br />OF <br />FINANCIAL<br />MARKETS<br />TIME PERIOD <br />
  • 8. OVERVIEW OF FINANCIAL MARKETS<br />
  • 9. Features of Money Market<br /><ul><li>Transaction have to be conducted without the help of brokers.
  • 10. It is not a single homogeneous market, it comprises of several submarket like call money market, acceptance &amp; bill market.
  • 11. The component of Money Market are the commercial banks, acceptance houses &amp; NBFC (Non-banking financial companies).
  • 12. In Money Market transaction can not take place formal like stock exchange, only through oral communication, relevant document and written communication transaction can be done. </li></li></ul><li>Objective of Money Market<br /><ul><li>To provide a reasonable access to users of short-term funds to meet their requirement quickly, adequately at reasonable cost.
  • 13. To provide a parking place to employ short term surplus funds.</li></li></ul><li>importance of Money Market<br /><ul><li>Development of trade &amp; industry.
  • 14. Development of capital market.
  • 15. Smooth functioning of commercial banks.
  • 16. Effective central bank control.
  • 17. Formulation of suitable monetary policy.
  • 18. Non inflationary source of finance to government.</li></li></ul><li>the Players<br /><ul><li>Reserve Bank of India
  • 19. SBI DFHI Ltd (Amalgamation of Discount &amp; Finance House in India and SBI Gilts in 2004)
  • 20. Commercial Banks, Co-operative Banks and Primary Dealers are allowed to borrow and lend.
  • 21. Specified All-India Financial Institutions, Mutual Funds, and certain specified entities are allowed to access to Call/Notice money market only as lenders
  • 22. Individuals, firms, companies, corporate bodies, trusts and institutions can purchase the treasury bills, CPs and CDs. </li></li></ul><li>Composition of Money Market<br />Money Market consists of a number of sub-markets which collectively constitute the money market. They are,<br /><ul><li> Call Money Market
  • 23. Commercial bills market or discount market
  • 24. Acceptance market
  • 25. Treasury bill market</li></li></ul><li>The Products &amp; Process<br />Certificate of Deposit (CD) <br />Commercial Paper (CP)<br />Inter Bank Participation Certificates <br />Inter Bank term Money (Repo rates) <br />Treasury Bills <br />Call Money <br />
  • 26. Instrument of Money Market<br />A variety of instrument are available in a developed money market. In India till 1986, only a few instrument were available.<br />They were<br /><ul><li> Treasury bills
  • 27. Money at call and short notice in the call loan market.
  • 28. Commercial bills, promissory notes in the bill market.</li></li></ul><li>NEW INSTRUMENTS<br />Now, in addition to the above the following new instrument are available:<br /><ul><li>Commercial papers.
  • 29. Certificate of deposit.
  • 30. Inter-bank participation certificates.
  • 31. Repo instrument
  • 32. Banker&apos;s Acceptance
  • 33. Repurchase agreement
  • 34. Money Market mutual fund</li></li></ul><li>Certificate of Deposit<br /><ul><li>CDs are short-term borrowings in the form of Usance Promissory Notes having a maturity of not less than 15 days up to a maximum of one year.
  • 35. CD is subject to payment of Stamp Duty under Indian Stamp Act, 1899 (Central Act)
  • 36. They are like bank term deposits accounts. Unlike traditional time deposits these are freely negotiable instruments and are often referred to as Negotiable Certificate of Deposits
  • 37. A CD is a time deposit with a bank.
  • 38. Like most time deposit, funds can not withdrawn before maturity without paying a penalty.
  • 39. CD’s have specific maturity date, interest rate and it can be issued in any denomination.
  • 40. The main advantage of CD is their safety.
  • 41. Anyone can earn more than a saving account interest.</li></li></ul><li>Features of CD<br />CDs can be issued by all scheduled commercial banks except RRBs<br />Minimum period 15 days<br />Maximum period 1 year<br />Minimum Amount Rs 1 lac and in multiples of Rs. 1 lac<br />CDs are transferable by endorsement<br />CRR &amp; SLR are to be maintained<br />CDs are to be stamped<br />
  • 42. Commercial Paper<br /><ul><li>Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note. CP is a short term unsecured loan issued by a corporation typically financing day to day operation.
  • 43. CP is very safe investment because the financial situation of a company can easily be predicted over a few months.
  • 44. Only company with high credit rating issues CP’s.
  • 45. Who can issue Commercial Paper (CP) Highly rated corporate borrowers, primary dealers (PDs) and satellite dealers (SDs) and all-India financial institutions (FIs) </li></li></ul><li>Eligibility for issue of CP <br />The tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs. 4 crore;<br />The working capital (fund-based) limit of the company from the banking system is not less than Rs.4 crore and the borrowable account of the company is classified as a Standard Asset by the financing bank/s.<br />
  • 46. Rating Requirement<br />All eligible participants should obtain the credit rating for issuance of Commercial Paper<br /> Credit Rating Information Services of India Ltd. (CRISIL) <br />Investment Information and Credit Rating Agency of India Ltd. (ICRA) <br />Credit Analysis and Research Ltd. (CARE) <br /> Duff &amp; Phelps Credit Rating India Pvt. Ltd. (DCR India)<br /> The minimum credit rating shall be P-2 of CRISIL or such equivalent rating by other agencies <br />
  • 47. Maturity<br />CP can be issued for maturities between a minimum of 15 days and a maximum upto one year from the date of issue.<br /> If the maturity date is a holiday, the company would be liable to make payment on the immediate preceding working day. <br />CP is issued to and held by individuals, banking companies, other corporate bodies registered or incorporated in India and unincorporated bodies, Non-Resident Indians (NRIs) and Foreign Institutional Investors (FIIs). <br />To whom issued<br />
  • 48. Repo Rates and Reverse Repo Rates<br />RBI uses Repo and Reverse repo as instruments for liquidity adjustment in the system <br />It helps banks to invest surplus cash<br />It helps investor achieve money market returns with sovereign risk. <br />It helps borrower to raise funds at better rates<br />An SLR surplus and CRR deficit bank can use the Repo deals as a convenient way of adjusting SLR/CRR positions simultaneously. <br />
  • 49. Meaning of Repo<br />It is a transaction in which two parties agree to sell and repurchase the same security. Under such an agreement the seller sells specified securities with an agreement to repurchase the same at a mutually decided future date and a price <br />The Repo/Reverse Repo transaction can only be done at Mumbai between parties approved by RBI and in securities as approved by RBI (Treasury Bills, Central/State Govt securities).<br />
  • 50. Repurchase agreement (Repos)<br /><ul><li>Repo is a form of overnight borrowing and is used by those who deal in government securities.
  • 51. They are usually very short term repurchases agreement, from overnight to 30 days of more.
  • 52. The short term maturity and government backing usually mean that Repos provide lenders with extreamly low risk.
  • 53. Repos are safe collateral for loans.</li></li></ul><li>Call Money Market<br />The call money market is an integral part of the Indian Money Market, where the day-to-day surplus funds (mostly of banks) are traded. The loans are of short-term duration varying from 1 to 14 days.<br />The money that is lent for one day in this market is known as &quot;Call Money&quot;, and if it exceeds one day (but less than 15 days) it is referred to as &quot;Notice Money&quot;. <br />
  • 54. Call Money Market<br />Banks borrow in this market for the following purpose<br />To fill the gaps or temporary mismatches in funds <br />To meet the CRR &amp; SLR mandatory requirements as stipulated by the Central bank <br />To meet sudden demand for funds arising out of large outflows.<br />
  • 55. Banker&apos;s Acceptance<br /><ul><li>A banker’s acceptance (BA) is a short-term credit investment created by a non-financial firm.
  • 56. BA’s are guaranteed by a bank to make payment.
  • 57. Acceptances are traded at discounts from face value in the secondary market.
  • 58. BA acts as a negotiable time draft for financing imports, exports or other transactions in goods.
  • 59. This is especially useful when the credit worthiness of a foreign trade partner is unknown</li></li></ul><li>Treasury Bills<br />Treasury bills, commonly referred to as T-Bills are issued by Government of India against their short term borrowing requirements with maturities ranging between 14 to 364 days. <br /><ul><li>(T-bills) are the most marketable money market security.
  • 60. They are issued with three-month, six-month and one-year maturities.
  • 61. T-bills are purchased for a price that is less than their par(face) value; when they mature, the government pays the holder the full par value.
  • 62. T-Bills are so popular among money market instruments because of affordability to the individual investors. </li></li></ul><li>Who can invest in T-Bill<br />Banks, Primary Dealers, State Governments, Provident Funds, Financial Institutions, Insurance Companies, NBFCs, FIIs (as per prescribed norms), NRIs &amp; OCBs can invest in T-Bills.<br />All these are issued at a discount-to-face value. For example a Treasury bill of Rs. 100.00 face value issued for Rs. 91.50 gets redeemed at the end of it&apos;s tenure at Rs. 100.00. <br />
  • 63. Gilt edged securities<br />The term government securities encompass all Bonds &amp; T-bills issued by the Central Government, and state governments. These securities are normally referred to, as &quot;gilt-edged&quot; as repayments of principal as well as interest are totally secured by sovereign guarantee.<br />
  • 64. Structure of Indian Money Market<br />ORGANISED STRUCTURE<br /> 1. Reserve bank of India.<br /> 2. DFHI (discount and finance house of India).3. Commercial banksi. Public sector banks SBI with 7 subsidiaries Cooperative banks 20 nationalized banks ii. Private banks Indian Banks Foreign banks4. Development bank IDBI, IFCI, ICICI, NABARD, LIC, GIC, UTI etc.<br />
  • 65. Structure of Indian Money Market<br />UNORGANISED SECTOR 1. Indigenous banks 2 Money lenders 3. Chits 4. Nidhis<br />III. CO-OPERATIVE SECTOR 1. State cooperativei. central cooperative banks Primary Agri credit societies Primary urban banks 2. State Land development banks central land development banks Primary land development banks<br />
  • 66. ! Disadvantage of Money Market<br /><ul><li>Purchasing power of your money goes down, in case of up in inflation.
  • 67. Dichotomized and loosely integrated
  • 68. Irrational structure of interest rates
  • 69. Highly volatile market
  • 70. Seasonal stringency of loan able funds
  • 71. Lack of funds in the money market
  • 72. Inadequate banking facilities</li></li></ul><li>Characteristic features of a developed money Market<br /><ul><li>Highly organized banking system
  • 73. Presence of central bank
  • 74. Availability of proper credit instrument
  • 75. Existence of sub-market
  • 76. Ample resources
  • 77. Existence of secondary market
  • 78. Demand and supply of fund</li></li></ul><li>Recent development in Money Market<br /><ul><li>Integration of unorganized sector with the organized sector
  • 79. Widening of call Money market
  • 80. Introduction of innovative instrument
  • 81. Offering of Market rates of interest
  • 82. Promotion of bill culture
  • 83. Entry of Money market mutual funds
  • 84. Setting up of credit rating agencies
  • 85. Adoption of suitable monetary policy
  • 86. Establishment of DFHI
  • 87. Setting up of security trading corporation of India ltd. (STCI)</li></li></ul><li>The Need<br />Need for short term funds by Banks.<br />Outlet for deploying funds on short term basis <br />Need to keep the SLR as prescribed<br />Need to keep the CRR as prescribed<br />Optimize the yield on temporary surplus funds<br />Regulate the liquidity and interest rates in the conduct of monetary policy to achieve the broad objective of price stability, efficient allocation of credit and a stable foreign exchange market <br />
  • 88.
  • 89. THE<br />END<br />

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