Money Market

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The fundamentals of Money Market in India

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Money Market

  1. 1. The Fundamentals of Money Market in India Ranjan Varma http://www.ranjanblog.com http://personalfinance201.com India’s first online weekly on personal fin
  2. 2. Overview of Financial Markets
  3. 3. The Six Horses: Why, What, Who, Which, How and Where ? <ul><li>Why: The Need. </li></ul><ul><li>What: The Definition. </li></ul><ul><li>Who: The Players. </li></ul><ul><li>Which & How: The Products & Process. </li></ul><ul><li>Where: The Resources </li></ul>
  4. 4. The Need <ul><li>Need for short term funds by Banks. </li></ul><ul><li>Outlet for deploying funds on short term basis </li></ul><ul><li>Need to keep the SLR as prescribed </li></ul><ul><li>Need to keep the CRR as prescribed </li></ul><ul><li>Optimize the yield on temporary surplus funds </li></ul><ul><li>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 </li></ul>
  5. 5. The Definition <ul><li>Money Market is &quot;the centre for dealings, mainly short-term character, in money assets. </li></ul><ul><li>It meets the short-term requirements of borrower and provides liquidity or cash to the lenders. </li></ul><ul><li>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; </li></ul>
  6. 6. The Definition (Cont’d) <ul><li>Money market refers to the market for short term assets that are close substitutes of money, usually with maturities of less than a year. </li></ul><ul><li>A well functioning money market provides a relatively safe and steady income-yielding avenue. </li></ul><ul><li>Allows the investor institutions to optimize the yield on temporary surplus funds. </li></ul><ul><li>Instrument of Liquidity adjustment by Central Bank. </li></ul>
  7. 7. The Players <ul><li>Reserve Bank of India </li></ul><ul><li>SBI DFHI Ltd (Amalgamation of Discount & Finance House in India and SBI Gilts in 2004) </li></ul><ul><li>Commercial Banks, Co-operative Banks and Primary Dealers are allowed to borrow and lend. </li></ul><ul><li>Specified All-India Financial Institutions, Mutual Funds, and certain specified entities are allowed to access to Call/Notice money market only as lenders </li></ul><ul><li>Individuals, firms, companies, corporate bodies, trusts and institutions can purchase the treasury bills, CPs and CDs. </li></ul>
  8. 8. The Products & Process <ul><li>Certificate of Deposit (CD) </li></ul><ul><li>Commercial Paper (CP) </li></ul><ul><li>Inter Bank Participation Certificates </li></ul><ul><li>Inter Bank term Money (Repo rates) </li></ul><ul><li>Treasury Bills </li></ul><ul><li>Call Money </li></ul>
  9. 9. Certificate of Deposit <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. </li></ul><ul><li>CD is subject to payment of Stamp Duty under Indian Stamp Act, 1899 (Central Act) </li></ul><ul><li>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 </li></ul>
  10. 10. Features of CD <ul><li>CDs can be issued by all scheduled commercial banks except RRBs </li></ul><ul><li>Minimum period 15 days </li></ul><ul><li>Maximum period 1 year </li></ul><ul><li>Minimum Amount Rs 1 lac and in multiples of Rs. 1 lac </li></ul><ul><li>CDs are transferable by endorsement </li></ul><ul><li>CRR & SLR are to be maintained </li></ul><ul><li>CDs are to be stamped </li></ul>
  11. 11. Commercial Paper <ul><li>Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note. </li></ul><ul><li>Who can issue Commercial Paper (CP) Highly rated corporate borrowers, primary dealers (PDs) and satellite dealers (SDs) and all-India financial institutions (FIs) </li></ul>
  12. 12. Eligibility for issue of CP <ul><li>the tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs. 4 crore; </li></ul><ul><li>(b) the working capital (fund-based) limit of the company from the banking system is not less than Rs.4 crore </li></ul><ul><li>and the borrowal account of the company is classified as a Standard Asset by the financing bank/s. </li></ul>
  13. 13. Rating Requirement <ul><li>All eligible participants should obtain the credit rating for issuance of Commercial Paper </li></ul><ul><li>Credit Rating Information Services of India Ltd. (CRISIL) </li></ul><ul><li>Investment Information and Credit Rating Agency of India Ltd. (ICRA) </li></ul><ul><li>Credit Analysis and Research Ltd. (CARE) </li></ul><ul><li>Duff & Phelps Credit Rating India Pvt. Ltd. (DCR India) </li></ul><ul><li>The minimum credit rating shall be P-2 of CRISIL or such equivalent rating by other agencies </li></ul>
  14. 14. Maturity <ul><li>CP can be issued for maturities between a minimum of 15 days and a maximum upto one year from the date of issue. </li></ul><ul><li>If the maturity date is a holiday, the company would be liable to make payment on the immediate preceding working day. </li></ul>
  15. 15. To whom issued <ul><li>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). </li></ul>
  16. 16. Repo Rates and Reverse Repo Rates <ul><li>RBI uses Repo and Reverse repo as instruments for liquidity adjustment in the system </li></ul><ul><li>It helps banks to invest surplus cash </li></ul><ul><li>It helps investor achieve money market returns with sovereign risk. </li></ul><ul><li>It helps borrower to raise funds at better rates </li></ul><ul><li>An SLR surplus and CRR deficit bank can use the Repo deals as a convenient way of adjusting SLR/CRR positions simultaneously. </li></ul>
  17. 17. Meaning of Repo <ul><li>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 </li></ul><ul><li>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). </li></ul>
  18. 18. Call Money Market <ul><li>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. </li></ul><ul><li>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;. </li></ul>
  19. 19. Call Money Market <ul><li>Banks borrow in this market for the following purpose </li></ul><ul><li>To fill the gaps or temporary mismatches in funds </li></ul><ul><li>To meet the CRR & SLR mandatory requirements as stipulated by the Central bank </li></ul><ul><li>To meet sudden demand for funds arising out of large outflows. </li></ul>
  20. 20. Gilt edged securities <ul><li>The term government securities encompass all Bonds & 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. </li></ul>
  21. 21. Treasury Bills <ul><li> 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. </li></ul><ul><li>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's tenure at Rs. 100.00. </li></ul>
  22. 22. Who can invest in T-Bill <ul><li>Banks, Primary Dealers, State Governments, Provident Funds, Financial Institutions, Insurance Companies, NBFCs, FIIs (as per prescribed norms), NRIs & OCBs can invest in T-Bills. </li></ul>
  23. 23. The Resources <ul><li>RBI’s site http://rbi.org.in </li></ul><ul><li>SBI DFHI’s site http://sbidfhi.com/ </li></ul><ul><li>Website of R Kannan http://www.geocities.com/kstability/learning/finance/toc.html </li></ul><ul><li>Indian Institute of banking & Finance </li></ul><ul><li>http://www.iibf.org.in </li></ul>

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