2. What is Financial Markets?
What is Money Market?
History of Indian Money Market?
Condition of Money Market in the pre-reform
period (before 1991)
Stages in Money Market.
Players of Indian Money Market?
Instrument of Money Market till 1986?
Recent instruments ?
Structure of Indian Money Market?
Some problems which leads to market reform in India
3. Some of the important defects or Drawbacks of Indian money
market
Measure for Improvement of the Money Market
Recent Innovations
Reforms
Characteristic features of a developed money Market?
Summary
4. ◦ Financial markets perform the essential function
of channeling funds from economic players that
have saved surplus funds to those that have a
shortage of funds.
◦ At any point in time in an economy, there are
individuals or organizations with excess amounts
of funds, and others with a lack of funds they
need for example to consume or to invest.
5. 1) Meaning of Money Market:
Money market refers to the market where money and highly liquid
marketable securities are bought and sold having a maturity period of one or
less than one year. It is not a place like the stock market but an activity
conducted by telephone. The money market constitutes a very important
segment of the Indian financial system.
The highly liquid marketable securities are also called as ‘ money market
instruments’ like treasury bills, government securities, commercial paper,
certificates of deposit, call money, repurchase agreements etc.
6. According to the Geoffrey, “Money market is the collective name given to
the various firms and institutions that deal in the various grades of the near
money.”
According to the Reserve Bank of India, “money market is the centre
for dealing, mainly of short term character, in money assets; it meets
the short term requirements of borrowings and provides liquidity or
cash to the lenders. It is the place where short term surplus
investible funds at the disposal of financial and other institutions and
individuals are bid by borrowers’ agents comprising institutions and
individuals and also the government itself.”
7. It is a market purely for short-terms funds or financial assets called
near money.
It deals with financial assets having a maturity period less than one
year only.
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.
Transaction have to be conducted without the help of brokers.
8. Need for short term funds by banks.
Outlet for deploying funds on short term basis.
Need to keep the SLR as prescribed.
Regulate the liquidity and interest rates.
Objective of Money Market?
• To provide a parking place to employ short term surplus funds.
• To provide room for overcoming short term deficits.
• To enable the central bank to influence and regulate liquidity in the
economy through its intervention in this market.
• To provide a reasonable access to users of short-term funds to
meet their requirement quickly, adequately at reasonable cost.
9. Till 1935, when the RBI was set up the Indian money market
remained highly disintegrated, unorganized, narrow, shallow and
therefore, very backward. The planned economic development that
commenced in the year 1951 market an important beginning in the
annals of the Indian money market. The nationalization of banks in
1969, setting up of various committees such as the Sukhmoy
Chakraborty Committee (1982), the Vaghul working group (1986),
the setting up of discount and finance house of India ltd. (1988), the
securities trading corporation of India (1994) and the
commencement of liberalization and globalization process in 1991
gave a further fillip for the integrated and efficient development of
India money market.
10. Financial system functioned in an environment of constriction,
driven primarily by fiscal compulsions. It was geared to provide
significant support for Government expenditure.
The monetary and debt management policy was underlined by
excessive monetisation of Central Government's fiscal deficit.
Money and Govt. Securities market did not display any vibrancy and
had limited significance in the indirect conduct of monetary
policy.Money Market instruments were few.
11. Market had a narrow base and limited to a few participants -
commercial banks and six all India Financial Institutions.
Money market instruments consisted of Treasury Bills (91-days T-Bills)
and term securities of different maturities issued by the Central and
State Governments.
The average maturity of securities remained fairly long, that is above
20-years, reflecting the preference of more the Issuers than those of the
Investors.
Government borrowings were done at rates, which were far below the
market rates. For example, for 30-year securities the interest rate was
low at 6.5 per cent in 1977-78. The Policy led to distortions in the
Banking System with high lending rates on certain segments combined
with relatively low interest rates on deposits.
12. Reserve Bank of India
Government
Discount and Finance House of India
Commercial Banks
Mutual Funds
Primary Dealer
Financial Institutions
Corporate Firms
13. The reserve Bank Of India is the most important player in the Indian
Money Market.
The Organised money market comes under the direct regulation of
the RBI.
The RBI operates in the money market is to ensure that the levels of
liquidity and short-term interest rates are maintained at an optimum
level so as to facilitate economic growth and price stability.
RBI also plays the role of a merchant banker to the government. It
issues Treasury Bills and other Government Securities to raise
funds for the government.
14. The Government is the most active player and the largest borrower
in the money market.
It raises funds to make up the budget deficit.
The funds may be raised through the issue of Treasury Bills (with a
maturity period of 91day/182day/364 days) and government
securities.
COMMERCIAL BANKS
Commercial Banks play an important role in the money market.
They undertake lending and borrowing of short term funds.
The collective operations of the banks on a day to day basis are
very predominant and hence have a major impact and influence on
the interest rate structure and the liquidity position.
15. Corporate firms operate in the money market to raise short-term
funds to meet their working capital requirements.
They issue commercial papers with a maturity period of 7 days to 1
year. These papers are issued at a discount and redeemed at face
value on maturity.
These corporate firms use both organised and unorganised sectors
of money market
FINANCIAL INSTITUTIONS
Financial institutions also deal in the money market.
They undertake lending and borrowing of short-term funds.
They also lend money to banks by rediscounting Bills of Exchange.
Since, they transact in large volumes, they have a significant impact
on the money market.
16. A variety of instrument are available in a developed money market. In
India till 1986, only a few instrument were available.
They were :-
• Treasury bills
• Money at call and short notice in the call loan market.
• Commercial bills, promissory notes in the bill market.
17. (T-bills) are the most marketable money market security.
They are issued with three-month, six-month and one-year
maturities.
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.
Auctions of Treasury Bills:
While 91-day T-bills are auctioned every week on Wednesdays, 182
days and 364-day T-bills are auctioned every alternate week on
Wednesdays. The Reserve Bank of India issues a quarterly
calendar of T-bill auctions. It also announces the exact dates of
auction, the amount to be auctioned and payment dates by issuing
press
releases prior to every auction.
18. Funds for working capital required by commerce and industry are
mainly provided by banks through cash credits, overdrafts, and
purchase/discontinuing of commercial bills.
BILL OF EXCHANGE
The financial instrument which is traded in the bill market of exchange.
It is used for financing a transaction in goods that takes some time to
complete.
It shows the liquidity to make the payment on a fixed date when goods
are bought on credit.
Accordingly to the Indian Negotiable Instruments Act, 1881, it is a
written instrument containing as unconditional order, signed by the
maker, directing a certain person to pay a certain sum of money only
to, or to the order of, a certain person, or to the bearer of the
instrument.
19. Call money market is that part of the national money market where
the day to day surplus funds, mostly of banks are traded in.
They are highly liquid, their liquidity being exceed only by cash.
The loans made in this market are of the short term nature.
Banks borrow from other banks in order to meet a sudden demand
for funds, large payments, large remittances, and to maintain cash
or liquidity with the RBI. Thus, to the extent that call money is used
in India for the purpose of adjustment of reserves.
20. Now, in addition to the above the following new instrument are
available:
Commercial papers.
Certificate of deposit.
Inter-bank participation certificates.
Repo instrument
Banker's Acceptance
Repurchase agreement
Money Market mutual fund
21. A CD is a time deposit with a bank.
Like most time deposit, funds can not withdrawn before maturity
without paying a penalty.
The maturity period of CDs issued by banks should be not less than
7 days and not more than one year.
CD’s have specific maturity date, interest rate and it can be issued
in any denomination.
Commercial paper (CP)
CP is a short term unsecured loan issued by a corporation typically
financing day to day operation.
CP is very safe investment because the financial situation of a
company can easily be predicted over a few months.
Only company with high credit rating issues CP’s.
22. A banker’s acceptance (BA) is a short-term credit investment
created by a non-financial firm.
BA’s are guaranteed by a bank to make payment.
Acceptances are traded at discounts from face value in the
secondary market.
BA acts as a negotiable time draft for financing imports, exports or
other transactions in goods.
This is especially useful when the credit worthiness of a foreign
trade partner is unknown.
23. ORGANISED MONEY STRUCTURE
UNORGANISED MONEY STRUCTURE
ORGANISED MONEY STRUCTURE
PARTICIPANTS:
Reserve bank of India.
DFHI (discount and finance house of India)
Commercial banks:-
(i)Public sector banks
SBI with 7 subsidiaries
Cooperative banks
20 nationalized banks
(ii)Private banks
Indian Banks
Foreign banks
Development bank
-- IDBI, IFCI, ICICI, NABARD, LIC, GIC, UTI etc.
24. UNORGANISED SECTOR
Indigenous
Money lenders
Unregulated Intermediaries
INDEGENEOUS BANKS
Private firms that receive deposits and give loans and thereby
operate as banks
As activities are not regulated properly ,they are unorganized
segment
Broadly classified into 4 groups- GUJRATI SHROFFS,MULTANI
SHROFFS,CHETTIARS AND MARWARI KAYAS
25. A) FINANCE COMPANIES- gives loans to the retailers,artisians and
other self-employed persons
B) CHIT FUNDS- are saving institutions
C) NIDHIS- operate in unregulated credit market and provide kind
of mutual benefit funds
26. Indian Government appointed a committee under the chairmanship of
Sukhamoy Chakravarty in 1984 to review the Indian monetary system.
Later, Narayanan Vaghul working group and Narasimham Committee was
also set up. As per the recommendations of these study groups and with
the financial sector reforms initiated in the early 1990s, the government has
adopted following major reforms in the Indian money market.
Deregulation of the Interest Rate : In recent period the government
has adopted an interest rate policy of liberal nature. It lifted the ceiling rates
of the call money market, short-term deposits, bills rediscounting, etc.
Commercial banks are advised to see the interest rate change that takes
place within the limit. There was a further deregulation of interest rates
during the economic reforms. Currently interest rates are determined by the
working of market forces except for a few regulations.
27. Money Market Mutual Fund (MMMFs) : In order to provide additional
short-term investment revenue, the RBI encouraged and established the
Money Market Mutual Funds (MMMFs) in April 1992. MMMFs are allowed
to sell units to corporate and individuals. The upper limit of 50 crore
investments has also been lifted. Financial institutions such as the IDBI and
the UTI have set up such funds.
Liquidity Adjustment Facility (LAF) : Through the LAF, the RBI
remains in the money market on a continue basis through the repo
transaction. LAF adjusts liquidity in the market through absorption and or
injection of financial resources.
Electronic Transactions : In order to impart transparency and
efficiency in the money market transaction the electronic dealing system
has been started. It covers all deals in the money market. Similarly it is
useful for the RBI to watchdog the money market.
28. Development of New Market Instruments : The government
has consistently tried to introduce new short-term investment
instruments. Examples: Treasury Bills of various duration,
Commercial papers, Certificates of Deposits, MMMFs, etc. have
been introduced in the Indian Money Market.
These are major reforms undertaken in the money market in India.
Apart from these, the stamp duty reforms, floating rate bonds, etc.
are some other prominent reforms in the money market in India.
Thus, at the end we can conclude that the Indian money market is
developing at a good speed.
29. 1980s : A committee formed under the chairmanship of Sukhamoy
Chakravorty to develop the money market Instruments.
1988 : Discount and Finance House of India (DFHI) was set up as
a money market institution jointly by RBI , Public Sector Banks and
Financial institutions to provide liquidity to money market
instruments.
1989: Introduced money market instruments such as 182 day,
treasury bill, certificate of deposit and inter bank paticpation.
1991 : The government set a high level committee in august 1991 to
examine all aspects
30. related to structure, organisation, functions and procedures of
financial system.
1994 : The securities Trading Corporation of India was set up to
provide an active secondary market in government dated securities
and public sector bonds.
1995: Primary dealer system and statelite dealer system set up to
inject liquidity in the market.
TREASURY BILLS of varying maturities and RBI repos were
introduced.
AUCTIONED TREASURY BILLs were introduced leading to market
determined interest rates.
1998: Strategy of combining auctions, private placements, and
money market operations are introduced.
31. 2000: Liquidity Adjustment Facility were introduced in April, 2000
(LAF)
2003 : (CBLO) COLLATERAL BPRROWING AND LENDING
OBLIGATION was operationalised as money market instrument
through the clearing corporations of India Limited. (CCIL)
2004: Real Time Gross Settlement System was implemented after
LAF.
2005 : Prudential Limits on exposure of banks to call market are
introduced.
Maturity of Certificate of deposit shortened by april 2005.
Transformation of call money into pure inter-bank market.
32. 2007: Widening of collateral base by making state government
securities eligible for LAF operations.
2010: Repo in corporate bonds allowed.
2012: Operationalisation of a screen based negotiated system for
all dealings in call/notice. The reportings of such transactions made
compulsory in Nov, 2012.
2014: The SEC ( Securities and Exchange Commision) issued new
rules for the management of money market funds.
NEW RULES : New rules plays tighter restrictions on portfolio
holdings while enhancing liquidity and quality requirements.
33. Retail investors will continue to be able to invest in the full
range of taxable & tax-exempt money market funds.
Designation of the Prime Money Market Fund** and six tax-
exempt funds** as retail funds that seek to maintain a stable
NAV.
Reopening of Federal Money Market Fund†—which also
seeks to maintain a stable NAV—to all investors. The fund
won't be subject to the liquidity fee or redemption gate
requirements.
If you have Vanguard Brokerage Account,your money market
settlement fund change as a result of these rules .
34. The amendments allow retail and institutional
funds to put in place of liquidity fees and
redemption gates.
Liquidity Fees : If a funds weekly liquid assets fall below 30%, a
fee of upto 2% may be put in place on all redemptions if the funds’s
board deems that the fee is the best interest of the funds.
Gates : If the funds weekly liquid assets fall below 30% the funds
board has the power to temporarily suspend redemptions if the
board of director finds that the imposing a gate is in the funds best
interest.
35. Beginning later in 2016, Vanguard Federal Money Market Fund will
be the only money market fund you can use to settle brokerage
trades.
Vanguard Brokerage selected this fund for retail accounts because
it's open to all investors and won't have fees and gates.
Also, after considering factors such as yield, fees, investment
objectives, risks, and current market conditions, Vanguard
Brokerage believes it's the most appropriate alternative to current
money market settlement funds.
36. Absence of Integration : The Indian money market is broadly divided
into the Organized and Unorganized Sectors. The former comprises the
legal financial institutions backed by the RBI. The unorganized statement of
it includes various institutions such as indigenous bankers, village money
lenders, traders, etc. There is lack of proper integration between these two
segments.
Multiple rate of interest : In the Indian money market, especially the
banks, there exists too many rates of interests. These rates vary for lending,
borrowing, government activities, etc. Many rates of interests create
confusion among the investors.
Insufficient Funds or Resources : The Indian economy with its
seasonal structure faces frequent shortage of financial recourse. Lower
income, lower savings, and lack of banking habits among people are some
of the reasons for it.
37. Shortage of Investment Instruments : In the Indian money market,
various investment instruments such as Treasury Bills, Commercial Bills,
Certificate of Deposits, Commercial Papers, etc. are used. But taking into
account the size of the population and market these instruments are
inadequate.
Shortage of Commercial Bill : In India, as many banks keep large funds for
liquidity purpose, the use of the commercial bills is very limited. Similarly since a
large number of transactions are preferred in the cash form the scope for
commercial bills are limited.
Lack of Organized Banking System : In India even through we have a big
network of commercial banks, still the banking system suffers from major
weaknesses such as the NPA, huge losses, poor efficiency. The absence of the
organized banking system is major problem for Indian money market.
Less number of Dealers : There are poor number of dealers in the short-
term assets who can act as mediators between the government and the banking
system. The less number of dealers leads to the slow contact between the end
lender and end borrowers.
38. The activities of the money lender and chit fund should brought
under control.
Banking facilities should be extended, especially in the unbanked
and neglected areas.
The number of clearing house should be increased
Adequate and easy remittance facilities should be provided to the
businessman.
Harmony between sub-markets and co-ordination of their activities
must be achieved .
39. 91 days T- bill
182 days T- bill
364 days T- bill
2 years T-bond
5 years T-bond
10 years T-bond
20 years T-bond
40.
41.
42.
43.
44.
45.
46. The money market specializes in debt securities that mature in less
than one year.
Money market securities are very liquid, and are considered very
safe. As a result, they offer a lower return than other securities.
The easiest way for individuals to gain access to the money market is
through a money market mutual fund.
T-bills are short-term government securities that mature in one year
or less from their issue date.
MMMFs bridge a gap between small individual investors the money
market. MMMFs mobilises savings from small investors and invests
them in short-term debt instruments or money market instruments.
A certificate of deposit (CD) is a time deposit with a bank.
Annual percentage yield (APY) takes into account compound
interest, annual percentage rate (APR) does not.
47. Commercial paper is an unsecured, short-term loan issued by a
corporation. Returns are higher than T-bills because of the
higher default risk .
Banker’s acceptance (BA) are negotiable time draft for financing
transactions in goods.
Repurchase agreement (repos) are a form of overnight borrowing
backed by government securities.
CDs are safe, but the returns aren't great, and your money is tied up
for the length of the CD.
The rate of discount fixed by the central bank of the country for the
rediscounting of eligible paper is called the bank rate. It is also the rate
charged by the central bank on advances on specified collateral to
banks.
