VIDYA V. VISWANATHMar Athanasios College For Advanced Studies, Tiruvalla.
MONEY MARKET Money market instruments are those instruments, which have a maturity period of less than one year. Geoffrey Crowther in his book” An outline of Money” has stated “Money market is a collective name given to the various firms and institutions that deal with various grades of near money”. Reservoir of short term funds.
Characteristics of adeveloped money market. A developed commercial banking system. Presence of a central bank. Sub-markets Near money assets Availability of ample resources Integrated interest rate structure
Functions of money market Economic development – Money market assures supply of funds; financing is done through discounting of the trade bills, commercial banks, acceptance houses and brokers. Profitable Investment – the excess reserves of commercial banks invested in near money assets. Borrowings by the Government – short term funds at very low interest.
Importance For Central Bank – If the money market is well developed, the central bank implements the monetary policy successfully. Mobilization of Funds – helps in transferring funds from one sector to another. Savings And Investment – encouraging savings and investment by promoting liquidity and safety of financial assets. Self-sufficiency Of Commercial Banks – commercial banks can meet their financial requirements by recalling some of their loans.
MONEY MARKETINSTRUMENTS Investment in money market is done through money market instruments. Money market instrument meets short term requirements of the borrowers and provides liquidity to the lenders The most active part of the money market is the market for overnight call and term money between banks and institutions and repo transactions
1.GOVERNMENT SECURITIES(G- Secs) Issued by the Government for raising a public loan or as notified in the official Gazette. Maturity ranges from of 2-30 years. G-secs consist of Government Promissory Notes, Bearer Bonds, Stocks or Bonds, Treasury Bills or Dated Government Securities. No default risk as the securities carry sovereign guarantee. Ample liquidity as the investor can sell the security in the secondary market
2. MONEY MARKET AT CALL ANDSHORT NOTICE Money at call is a loan that is repayable on demand, and money at short notice is repayable within 14 days of serving a notice. Participants are banks & all other Indian Financial Institutions as permitted by RBI. Banks borrow call funds for a variety of reasons to maintain their CRR, to meet their heavy payments, to adjust their maturity mismatch etc.
3. TREASURY BILLS Short term (up to one year) borrowing instruments of the Government of India. Enable investors to park their short term surplus funds while reducing their market risk. Issued at a discount to face value. The return to the investor is the difference between the maturity value and issue price. RBI issues T-Bills for three different maturities: 91 days, 182 days and 364 days
4. CERTIFICATES OFDEPOSITS A CD is a time deposit, financial product commonly offered to consumers by banks. CDs are negotiable instrument. Financial Institutions are allowed to issue CDs for a period between 1 year and up to 3 years. normally give a higher return than Bank term deposit, and are rated by approved rating agencies.
5.COMMERCIAL BILLS Commercial bill is a short term, negotiable, and self-liquidating instrument with low risk. Written instrument containing an unconditional order. Once the buyer signifies his acceptance on the bill itself it becomes a legal document. Commercial bill is a short term, negotiable, and self-liquidating instrument with low risk.
6. COMMERCIAL PAPER Commercial Paper is a money-market security issued (sold) by large banks and corporations to get money to meet short term debt obligations . Commercial paper is usually sold at a discount from face value. Interest rates fluctuate with market conditions, but are typically lower than banks‘ rates.
7.Repurchase Agreements Repo or Reverse Repo are transactions or short term loans in which two parties agree to sell and repurchase the same security. They are usually used for overnight borrowing Repo/Reverse Repo transactions can be done only between the parties approved by RBI and in RBI approved securities