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INDIAN MONEY MARKETS

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Mbfm ppt

  1. 1. TOPIC- INDIAN MONEY MARKETS
  2. 2. Money Market – The market for borrowing and lending short term funds is called the money market. The Government, banks and other financial institutions are the main players in the money market.
  3. 3. •Money Market Participants:- (i) Government - Government is an active money market player and in most economies, it constitutes the biggest borrower. It needs to borrow funds mainly when the budgeted expenditure goes beyond the budgeted revenues. (ii) Central bank – The central bank of a country generally operates in the money market on behalf of the government. It issues government securities based on the present and future requirements of the government and the market conditions. (iii) Banks - Banks play a significant role in the money market operations. Banks mobilize deposits and utilize the same for credit accommodations.
  4. 4. (iv) Financial Institutions – Like banks, financial institutions also undertake lending and borrowing of short-term funds. Due to the large volumes these FIs transact in, they have a significant impact on the money market. (v) Corporate Units – Corporates also transact in the money market mostly to raise short-term funds for meeting their working capital requirements. This segment partly utilizes both the organized and unorganized sector of the money market. (vi) Other institutional bodies- (MFs, FIIs) – The level of participation of these players varies largely depending on the regulations. For instance, the level of participation of the FIIs in the Indian money market is restricted to investment in government securities only.
  5. 5. (vii) Discount and Acceptance Houses – These players acts as intermediaries in the money market. Discount houses perform the function of the discounting/re-discounting the commercial bills and T-Bills. Acceptance houses are specialized agencies which accept the bills of exchange on behalf of their clients for a commission. (viii) Market makers(Primary Dealers) – Primary dealers are some of the intermediaries that act as underwriters to the government securities and also have the option to be their market makers.
  6. 6. * Money Market Instruments – 1. Treasury bills Purpose – Treasury bills are raised to meet the short-term funds required by the Government of India. T-bills also enable the RBI to perform Open Market Operations (OMO) which indirectly regulate money supply in the economy. Form – T-bills are issued either in the form of promissory note or credited to investors SGL account. For every class, a standardized format is used. Size – Treasury bills are issued for a minimum amount of Rs 25000 and in multiples of 25000 thereof. T-bills are issued at a discount and are redeemed at par.
  7. 7. 2. Commercial Paper(CP) Meaning - Commercial Paper are short-term, unsecured promissory notes issued at a discount to face value by well- known companies that are financially strong and carry a high credit rating. They are sold directly by the issuers to the investor, or else placed by borrowers through agents like merchant banks and security houses. Features of CP :- * They are negotiable by endorsement and delivery like pro- notes and hence are highly flexible instruments. *The maturity varies between 15 days to a year. * They normally have buy-back facility; the issuers or dealers can buy-back the CP if needed.
  8. 8. 3. Certificate of Deposits(CDs) Definition – Certificate of Deposits are issued by banks in the form of usance promissory notes. These bank deposits are negotiable, and are in marketable form bearing specific face value and maturity. They are transferable from one party to the other unlike term deposits. Due to their negotiable nature, these are also known as Negotiable Certificate Of Deposits(NCDs). Subscribers - CDs are available for subscription for Individuals, Corporations, Companies, Trusts, Funds, Associations, etc. Non- resident Indians can also subscribe to these instruments, but only on repatriable basis, which cannot be endorsed to another NRI in the secondary market.
  9. 9. Features of CDs :- 1. CD is a document of title to a time deposit and is distinct from conventional time deposit with respect to negotiability and marketability. 2. The liquidity and marketability features are considered the hallmarks of CDs. 3. CDs are issued at a discount to face value. 4. CDs are freely transferable by endorsement and delivery. 5. CDs attract stamp duty and there is no grace period, as in the case of bill financing.
  10. 10. 4. Money Market Mutual Funds(MMMFs) - MMMFs are mutual funds that invest primarily in money market instruments of very high quality and of very short maturities. MMMFs were set up to make available the benefits of investing in money markets to small investors. MMMFs can be set up by commercial banks, the RBIs and public financial institutions either directly or through their existing mutual funds subsidiaries. Earlier these funds were regulated by the RBI . However, the RBI withdrew its guidelines w.e.f March 7, 2000 and now they are governed by the SEBI.
  11. 11. * Indian Money Market – The Indian Money market can be classified into organized and unorganized sectors. The unorganized sector consists of money lenders, chit funds, and indigenous bankers. The organized sector comprises commercial bank in India- both public sector and private sector banks and foreign banks. The Reserve Bank of India, the apex bank, is the regulator of the money market in India. The open market operation of the RBI provides signals for other segments of the financial system regarding the future monetary and credit policy of the apex bank.
  12. 12. *The sub-markets in the Indian money Market- The money market in India is composed of several sub- markets like call money market and bill market. 1. Call Money Market – One of the important sub-market of the money market in India is the call money market. This market is for very short- term funds which is also termed money at call or short notice. These market comprises two segments – the call money market and overnight market. 2. Bill Market – Bills are the promise to pay a fixed amount of money by a particular company or the Government and may be transacted in the bills market or discount markets . It deals with short-term bills which are generally of 3 months duration. These are mainly of two types – Bills of exchange and finance bills.
  13. 13. * Indian Money Market Instruments:- 1. Call Money or Notice – These funds represent borrowings made for a period of one day up to a fortnight. 2.Term Money- Short-term funds having a maturity of 15 days and over are categorized as term money. 3. Treasury Bills- T-Bills are issued to enable the Government to tide over short-term liquidity requirements with maturities varying from a fortnight to a year. 4. Certificate of Deposits – Banks issue CDs to raise short-term funds having a maturity of 15 days to a 1 year. They are issued to individuals/corporates/institutions etc.
  14. 14. 5. Participants Certificates (PCs)- To ease the bank’s liquidity, they share their credit assets with other banks by issuing Participation Certificates. These certificates are also known as Inter Bank Participations(IBPs). 6. Commercial Papers (CPs) – Commercial Papers (CPs) are promissory notes with fixed maturity, issued by highly rated corporates.The maturity period varies from 15 days to a year 7.Bills of Exchange – It is a financial instrument that facilitates funding of a trade transactions. It is a negotiable instrument and hence is easily transferable. 8.Money Market Mutual Funds- In april 1992, the Government of India introduced money market mutual funds in the Indian money market. MMMFs provide an avenue to the retail investor to invest in the money market.
  15. 15. 9. Repo Transaction – It is basically a contract that is entered into by two parties which may include the RBI, a Bank or a NBFC. The Government of India introduced these instruments in the year 1992. * Features and weakness of the Indian Money Market:- 1.Existence of unorganized Money Market – In India, the semi- urban and rural areas are still dominated by the indigenous bankers and money lenders. The unorganized and organized money markets exists side by side in India. 2. Absence of integration – There is no proper co-ordination or co-operation among different segments of the money market.
  16. 16. 3. Diversity of Interest Rates – Indian Money Market is prevalence of too many interest rates- the borrowing rate of Government of India, the deposit and lending rate of commercial banks and co-operative banks and the lending rates of discount finance house, etc. 4. Seasonal nature of Indian Money Market – A striking feature of the Indian money market has been the seasonal shortage of funds in some particular months of the year. 5. Volatile Nature of Call money market – This segment of Indian money market is highly volatile. The volatility in the call rates has risen in recent years.
  17. 17. 6.Underdeveloped Bill Market – The Bill market in India is underdeveloped. In spite of certain measures taken by the RBI, it has not been developed. 7. Absence of a well organized Banking System – The absence of banking facilities to the rural masses is due to slow branch expansion in the country, and this is a matter of concern. 8. Lack of Instruments – Even during the 80’s, the Indian money market did not have sufficient number of short-term money market instruments .But now new instruments have been introduced like 182-day T-bills, 364-day T-bills, commercial Papers, Certificates of deposits.
  18. 18. * The Bill Market In India:- A bill market trades in short-term bills, which are generally of 3 months duration. There are mainly two types of bills – bills of exchange and finance bills. There are two segments of the bill market:- a. Commercial Bills Market – Commercial bills and bank credit are important sources of finance to a firm. b. Treasury Bill Market – The treasury bills are raised to meet the short-term funds required by the Government of India.
  19. 19. * Origin of bill Market :- The bill market first originated in London. By 19th Century, London had developed a successful market in commercial bills. Gradually it was developed in England and in other countries as well. * Bill Market Scheme,1952:- The RBI’s efforts to develop a bill market in India provided the impetus to introduce the “Bill Market Scheme” in january 1952. Here, the RBI provided advances to scheduled banks in the form of loans against their promissory notes supported by 90 days t-bills or promissory notes.
  20. 20. * New Bill Market Scheme,1970:- Section 17(2)(a) of the Reserve Bank Of India Act, declared the New Bill Market Scheme following the recommendations of the M Narismham Committee from 1st November, 1970. Under this Scheme, the RBI rediscounted actual trade bills. The new Bill Market Scheme,1970 was a big leap forward to the development of a bill market in India. It was the first genuine effort to develop market for trade bills.
  21. 21. Future Prospects for the Bill Market in India:- The bill market in India is still in the developing stage. It depends on whether trade and industry recover their receivables and whether or not the payers of dues are prepared to accept the discipline of bills. The progress of the Bill Market in India is hindered by the following:- 1. Large parties who expect special incentives may not be prompt in repaying their dues. 2. Weak parties might keep asking for more time to their creditors. 3. Public sector enterprises and Government departments who are found to be delaying payments on account of procedural hurdles.

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