Money market project (2)


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Money market project (2)

  1. 1. MONEY MARKET<br />INTRODUCTION<br />Money market means market where money or its equivalent can be traded. Money is synonym of liquidity. Money market consists of financial institutions and dealers in money or credit who wish to generate liquidity. It is better known as a place where large institutions and government manage their short term cash needs. For generation of liquidity, short term borrowing and lending is done by these financial institutions and dealers. Money Market is part of financial market where instruments with high liquidity and very short term maturities are traded. Due to highly liquid nature of securities and their short term maturities, money market is treated as a safe place. Hence, money market is a market where short term obligations such as treasury bills, commercial papers and bankers acceptances are bought and sold.<br />PURPOSE<br />Money Market transactions are used for the short- to medium-term investment or borrowing of liquid funds.<br />FEATURES<br />The product types in the Money Market area are:<br />_ Fixed-Term Deposit<br />_ Deposit at Notice<br />_ Commercial Paper<br />The functions offered support the trading activities involved in preparing and entering transactions in addition to the back office activities such as monitoring, accounting, payment control and transaction analysis. Many steps in this process chain are automated by the SAP R/3.<br />System and the status of a transaction can be evaluated and monitored at any time. To access the Money Market module, proceed as follows:<br />Choose Accounting _ Treasury _ Treasury Management _ Money Market.<br />The following sections give you an overview of the Money market functions.<br />The collective processing function simplifies the transaction management process by displaying a list of all the transactions with common selection criteria. From here, you simply click a button to branch to the various processing options. To speed up processing, there is a Fast entry function in the Money Market and Foreign Exchange areas for the most common transactions. The Money Market area also has a Fast processing function.<br />The trading area also includes some Utilities:<br />- Date check (to determine whether the requested due date falls on a workday).<br />- Option price calculator, which you use to compare the option prices requested with your own calculations based on market data (only in the Foreign Exchange and Derivatives areas).<br />- Securities account cash flow in the Securities area, which displays all the flows for a security in a particular securities account.<br />The specific characteristics of certain products call for other activities, which you can carry out in the trading area. These are order execution and order expiration as well as knock-in/knock-out activities for OTC transactions. In the Securities area, you can exercise different rights (conversion rights, subscription rights, exercise warrants, and detach warrants).<br />IMPORTANCE <br /><ul><li>SOURCE OF CAPITAL</li></ul>Money market is an important source of financing for trade and industry. The<br />short-term finances are made available through bills, commercial papers, etc.<br />The happenings in the money market influence the availability of finances<br />both for the national and international trade. Besides trade and industry,<br />money market offers to the government an important non-inflationary avenue<br />of raising short-term funds through bills that are subscribed by commercial<br />banks and the public.<br /><ul><li>IDEAL INVESTMENT</li></ul>Money market offers an ideal source of investment for the commercial<br />banks. The market helps them invest their short-term surplus funds so as to<br />meet statutory reserve requirements. For instance, the requirements of Cash<br />Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) vary every<br />fortnight depending on banks’ Net Demand and Time Liability (NDTL).<br /><ul><li>EFFECTIVE MONETARY MANAGEMENT</li></ul>An efficient money market being sensitive in nature allows for the effective<br />implementation of monetary policy of the central bank and thus paves way<br />for the efficient monetary management of the country. In fact, the money<br />market events serve as an important guide to the government in formulation,<br />revising and implementing its monetary policy. This is rightly so, given the<br />fact that the conditions prevailing in money market serve as an indicator of<br />monetary state of an economy.<br />The monetary authority uses the money market for diffusing the<br />effects of its actions throughout the banking system and the economy, so as<br />to promote economic growth with stability.<br /><ul><li>ECONOMIC DEVELOPMENT</li></ul>Money market being an integral part of a country’s economy, contributes<br />substantially to the economic development of a country. A developed money<br />market is indispensable for the rapid development of the economy. In fact,<br />the stage of development of the economy will be reflected in the stage of<br />development of a money market. This is borne out by the fact that ill developed<br />nature of a money market is responsible for the primitive nature of<br />economic development of a country. The absence of a well-developed<br />money market would constrain the economies from making available, on a<br />continuous basis the supply of adequate funds.<br /><ul><li>EFFICIENT BANKING SYSTEM</li></ul>The existence of a developed money market greatly facilitates the smooth<br />and efficient functioning of the banking and financial system. Such an<br />advantage contributes to the promotion of trade and industry in the economy.<br />Further the mediating role played by the commercial bankers ensures<br />delivery of credit at the most opportune time. Similarly, money market<br />enables the commercial banks to meet much of their unexpected needs for<br />funds quickly and cheaply. It is possible for the commercial banks to utilize<br />their funds profitably and with liquidity.<br /><ul><li>FACILITATING TRADE</li></ul>Money market is of immense help to the business community in the<br />following ways:<br />1. Providing an ideal payment mechanism making it possible for<br />expeditious transfer of large sums of money.<br />2. Meeting the working capital requirements for carrying out the<br />production and marketing activities.<br />3. Making efficient investment of surplus funds into near-money assets<br />which can be quickly converted into money as and when needed.<br /><ul><li>HELPFUL TO GOVERNMENT</li></ul>The government uses the money market as an arena in which short-term<br />funds are raised by floating treasury bills. It helps the government manage its<br />monetary position smoothly through the central bank of the county.<br />FUNCTIONS<br /><ul><li>INVESTMENT FUNCTION</li></ul>The money market provides an ideal source for investment of the funds for a<br />short period of time for commercial banks, non banking financial concerns,<br />business corporations and other investors. It enables businessmen, with<br />temporary surplus funds, to invest them for a short period.<br /><ul><li>FINANCING FUNCTION</li></ul>Money market provides an ideal source for short-term financing for<br />businessmen, industrialists, traders, etc to meet their day-to-day requirements<br />of working capital. Funds are available for borrowing by the government and<br />its agencies also.<br /><ul><li>FACILITATING FUNCTION</li></ul>Money market provides an ideal play ground for the central monetary<br />authority of the country to carry out various regulatory operations relating to<br />the banking and financial system of the country. The sensitive nature of the<br />money market helps the central bank to make it an ideal arena for the<br />execution of various credit control measures.<br />TRADING USE<br />The trading area contains the main functions for entering financial transactions. You can enter transactions, call up information on existing transactions, or make changes to transactions at a later date.<br />In the Money Market, Foreign Exchange, and Derivatives areas, you can also give notice on and roll over transactions.<br />PREREQUISITES<br />You have to enter the master data before you can create a financial transaction in the trading area. In the Money Market, Foreign Exchange, and Derivatives areas, this means entering master data for the respective business partner in the role of Treasury partner. Before you create a securities order, you must enter the issuer, the depository bank, and the securities class data in the Securities area.<br />INSTRUMENTS<br />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. Some common Money Market Instruments are as follows:<br /><ul><li>TREASURY BILL</li></ul>Treasury Bills, one of the safest money market instruments, are short term borrowing instruments of the Central Government of the Country issued through the Central Bank (RBI in India). They are zero risk instruments, and hence the returns are not so attractive. It is available both in primary market as well as secondary market. It is a promise to pay a said sum after a specified period. T-bills are short-term securities that mature in one year or less from their issue date.<br /><ul><li>GOVERNMENT SEQURITY</li></ul>Government Securities are securities issued by the Government for raising a public loan or as notified in the official Gazette which are issued by RBI on behalf of Govt. of India (GOI). GOI uses these borrowed funds to meet its fiscal deficit, while temporary cash mismatches are met through treasury bills of 91 days.<br />REPOS<br />The term Repo is used as an abbreviation for Repurchase Agreement or<br />Ready Forward. A Repo involves a simultaneous “sales and repurchase”<br />agreements.<br />BENEFITS & FEATURES<br />1. Interest Rate Being collateralized loans, repos help reduce counter<br />party risk & therefore, fetch a low interest rate.<br />2. Contract The Repo contract provides the seller – bank to get money<br />by partying with its security and the buyer – bank in turn to get the<br />security by parting with its money. It becomes a Reserve Repo deal for<br />the purchaser of the security. Securities are sold first to a buyer bank<br />and simultaneously another contract is entered in to with buyer to<br />repurchase them at a predetermine date and price in future. The price<br />of the sale and repurchase of securities is determined before entering<br />into deal.<br />3. Safety Repo is an almost risk free instrument used to even out<br />liquidity changes in the system. Repos offer short-term outlet for<br />temporary excess cash at close to the market interest rate.<br />4. Hedge tool As purchaser of the repo requires title to the securities for<br />the term of agreement and as the repurchase price is locked in at a time<br />of sale itself. It is possible to use repos as an effective hedge-tool to<br />arrange the others repos or to sell them outright or to deliver them to<br />another party to fulfill the delivery commitment in respect of a forward<br />or future contract or a short sale or a maturing reverse repo.<br />5. Period The minimum period for Ready Forward Transaction Bill will<br />be 3 day. However, RBI withdraws this restriction for the minimum<br />period with the effect from October 30, 1998.<br />6. Liquidity Control The RBI uses Repo as a tool of liquidity control<br />for absorbing surplus liquidity from the banking system in a flexible<br />way and thereby preventing interest rate arbitraging. All Repo<br />transaction are to be effected at Mumbai only and the deals are to be<br />necessary put through the subsidiary General Ledger (SGL) account<br />with the Reserve Bank of India.<br />7. Cash Management Tool The Repo arrangement essential serves as a<br />short – term cash management tool as the bank receive cash from the<br />buyer of the securities in return for the securities. This helps the banker<br />meet temporary cash requirement. This also makes the repo a pure<br />money lending operation. On the maturity of the ‘repos’ the security is<br />purchased back by the seller bank from the buyer-bank by returning<br />the money to the buyer.<br />MONEY MARKET ACCOUNT<br />It can be opened at any bank in the similar fashion as a savings account. However, it is less liquid as compared to regular savings account. It is a low risk account where the money parked by the investor is used by the bank for investing in money market instruments and interest is earned by the account holder for allowing bank to make such investment. Interest is usually compounded daily and paid monthly. There are two types of money market accounts:<br /><ul><li>Money Market Transactional Account By opening such type of account, the account holder can enter into transactions also besides investments, although the numbers of transactions are limited.
  2. 2. Money Market Investor Account By opening such type of account, the account holder can only do the investments with no transactions.</li></ul> MONEY MARKET INDEX To decide how much and where to invest in money market an investor will refer to the Money Market Index. It provides information about the prevailing market rates. There are various methods of identifying Money Market Index like:<br /><ul><li>Smart Money Market Index It is a composite index based on intraday price pattern of the money market instruments.
  3. 3. Salomon Smith Barney’s World Money Market Index Money market instruments are evaluated in various world currencies and a weighted average is calculated. This helps in determining the index.
  4. 4. Banker’s Acceptance Rate As discussed above, Banker’s Acceptance is a money market instrument. The prevailing market rate of this instrument i.e. the rate at which the banker’s acceptance is traded in secondary market, is also used as a money market index.
  5. 5. LIBOR/MIBOR London Inter Bank Offered Rate/ Mumbai Inter Bank Offered Rate also serves as good money market index. This is the interest rate at which banks borrow funds from other banks.</li></ul>GROWTH OF MONEY MARKET IN INDIA<br />ARTICLE<br />Capital investment is the backbone of every developing economy. It is also considered to be one of the most important determinants of the rate of growth of an economy and the governments in the developing countries strive very hard to ensure that the level of capital investment is kept high. To augment the internal investment potential, the governments in the Developing countries aim at achieving higher inflows of foreign investment, both as FDI as well as FII.<br />Money Market Operations as on April 25, 2011<br />(Amounts in ` crore, Rate in Per cent) <br />MONEY MARKETS @ Volume (One Leg) Weighted Average Rate Range A. Overnight Segment (I+II+III+IV) 91,401.386.75 3.50-7.00I. Call Money 17,176.806.88 3.50-7.00II. Collateralised Borrowing and Lending Obligation (CBLO) 60,521.006.72 6.65-6.95III. Market Repo 13,703.586.71 5.50-6.95IV. Repo in Corporate Bond 0.00- -B. Term Segment I. Notice Money** 132.736.63 5.75-7.00II. Term Money@@ 150.00- 9.15-9.20III. CBLO 200.006.80 6.80-6.80IV. Market Repo 5.009.00 9.00-9.00V. Repo in Corporate Bond 0.00- - <br />RBI OPERATIONS Amount Outstanding Current Rate C. Standing Liquidity Facility availed from RBI 1,658.99 6.75 D. Liquidity Adjustment Facility (i) Repo (1 day) 51,580.00 6.75 (ii) Reverse Repo (1 day) 245.00 5.75 <br />RESERVE POSITION @ <br />E. Cash Reserves Position of Scheduled Commercial Banks (i) Cash balances with RBI as on 22/04/2011 338,962.38(ii) Average daily cash reserve requirement for the fortnight ending 22/04/2011 331,145.00 <br />@ From June 21, 2010 the daily press release on Money Market Operations carries the data on aggregate daily cash balances of scheduled commercial banks as well their average daily cash reserve requirement. <br />The information is based on provisional Reserve Bank of India / Clearing Corporation of India Limited Data. <br />- Not Applicable / No Transaction <br />** Relates to uncollateralized transactions of 2 to 14 days tenor <br />@@ Relates to uncollateralized transactions of 15 days to one year tenor<br />