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Growth of Indian Money Market in
              India
                        Rahul Sharma(94)
                           Ratanjeet(96)
                Rishi Kumar Srivastav(97)
                          Ritesh Jain(98)
What        Features



          Reforms
                                           Objective




Characteristic      MONEY MARKETS
                                                   Importance
  Features



   Drawbacks                                Composition


                    Structure    Instruments
As per RBI definitions “ A market for short terms
financial assets that are close substitute for money,
facilitates the exchange of money in primary and
secondary market”
Introduction
   The India money market is a monetary system
    that involves the lending and borrowing of short-
    term funds
   The instruments in the money market are short-
    term in nature and are highly liquid
   Money market provides avenues to the players in
    the market to strike balance between the surplus
    funds with the lenders and the obligation of funds
    for the borrowers
Classification
                          • The unorganized sector consists
                            of money lenders, chit funds, and
                            indigenous bankers
        Money
        Market            • The organized part comprises
                            commercial banks in India both
Organized   Unorganized
                            public sector and private sector
 Sector       Sector        banks and foreign banks

                          • The organized money market is in
                            full control of the RBI. However,
                            unorganized money market
                            remains outside the RBI control.
Structure of Indian Money Market

                      ORGANISED             CO-OPERATIVE          UNORGANISED
                      STRUCTURE                SECTOR               SECTOR




           DFHI(Discount
                                  Commercial          Development
RBI         and Finance
                                    banks                bank
           house of India




                            Public Sector
                                                                                Private banks
                               banks




        SBI with 7          Co-Operative        20 nationalized
                                                                      Indian banks        Foreign banks
       subsidiaries            banks                banks
Continued…..

                                                                              CO-
                      UNORGANISE
                                                                           OPERATIVE
                       D SECTOR
                                                                            SECTOR




                                                                                         State Land
Indigenous                                                      State
             Money lenders     Nidhis   Chits                                           development
  banks                                                      cooperative
                                                                                           banks




                                                               Central         Central land      Primary land
                                                             cooperative       development       development
                                                               banks              banks             banks




                                                 Primary Agri        Primary urban
                                                credit societies         banks
Money Market Instruments
                 Treasury
                   Bills




    Banker’s                  Commercial
   Acceptance                   Papers



                   Money
                  Market
                Instruments


   Corporate                  Certificate
    Bonds                     of Deposits




                Repurchase
                Agreement
Treasury Bills (T-Bills)

   (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.
   T-Bills are so popular among money market
    instruments because of affordability to the
    individual investors.
Certificate of deposit (CD)

   A CD is a time deposit with a bank.
   Like most time deposit, funds can not withdrawn
    before maturity without paying a penalty.
   CD’s have specific maturity date, interest rate and it
    can be issued in any denomination.
   The main advantage of CD is their safety.
   Anyone can earn more than a saving account
    interest.
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.
Repurchase agreement (Repos)


   Repo is a form of overnight borrowing and is
    used by those who deal in government
    securities.
   They are usually very short term repurchases
    agreement, from overnight to 30 days of more.
   The short term maturity and government backing
    usually mean that Repos provide lenders with
    extreamly low risk.
   Repos are safe collateral for loans.
Banker's Acceptance

   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.
Features of Money Market
   Dichotomic         • Simultaneous existence of both the organized money
    Structure           market as well as unorganized money markets



  Multiplicity of     • Differ from bank to bank from period to period and even
  Interest Rates        from borrower to borrower



     Limited          • Supply of various instruments such as the Treasury Bills,
                        Commercial Bills, Certificate of Deposits, Commercial
   Instruments          Papers, etc. is very limited.


 High Volatility in   • Call money market is a market for very short term money,
                        Institutions such as the GIC, LIC, etc suffer huge
Call Money Market       fluctuations and thus it has remained highly volatile.


   Absence of         • Divided among several segments or sections which are
   Integration          loosely connected with each other
REFORMS in Money Market
                • Government has adopted an interest rate policy of liberal nature
                • Lifted the ceiling rates of the call money market, short-term deposits, bills
Deregulation of rediscounting, etc.
 the Interest   • Further deregulation of interest rates during the economic reforms.
     Rate



                  • 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
Money Market      • The upper limit of 50 crore investments has also been lifted. Financial institutions such
Mutual Fund         as the IDBI and the UTI have set up such funds
 (MMMFs)




                  • Set up in April 1988 to impart liquidity in the money market.
                  • Set up jointly by the RBI, Public sector Banks and Financial Institutions
Establishment
  of the DFI
Reforms (contd..)
                 • Through the LAF, the RBI remains in the money market on a continue basis
                   through the repo transaction
  Liquidity      • It adjusts liquidity in the market through absorption and or injection of financial
 Adjustment
Facility (LAF)     resources



                 • In order to impart transparency and efficiency in the money market transaction
                   the electronic dealing system has been started.
 Electronic
Transactions
                 • It is useful for the RBI to watchdog the money market.




                 • Set up in April 2001,it clears all transactions in government securities, and
Establishment
                   repose reported on the Negotiated Dealing System.
 of the CCIL




                 • GoI consistently tried to introduce new short-term investment instruments.
                   Examples: Treasury Bills of various duration, Commercial papers, Certificates of
Development
of New Market      Deposits, MMMFs, etc. have been introduced in the Indian Money Market.
 Instruments
Drawbacks in Indian Money Market


Absence of         Insufficient         Lack of            Less number
Integration        Funds or             Organized          of Dealers
• Lack of proper   Resources            Banking            • Poor number of
  integration      • The Indian         System               dealers in the
  between            economy with its                        short-term
  Organized and                         • Banking system     assets who can
                     seasonal             suffers from
  Unorganized        structure faces                         act as mediators
  segments                                major              between the
                     frequent             weaknesses
                     shortage of                             government and
                                          such as            the banking
                     financial            the NPA, huge
                     recourse.                               system.
                                          losses, poor
                                          efficiency
CONCLUSION


   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.

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Growth of indian money market

  • 1. Growth of Indian Money Market in India Rahul Sharma(94) Ratanjeet(96) Rishi Kumar Srivastav(97) Ritesh Jain(98)
  • 2. What Features Reforms Objective Characteristic MONEY MARKETS Importance Features Drawbacks Composition Structure Instruments
  • 3. As per RBI definitions “ A market for short terms financial assets that are close substitute for money, facilitates the exchange of money in primary and secondary market”
  • 4. Introduction  The India money market is a monetary system that involves the lending and borrowing of short- term funds  The instruments in the money market are short- term in nature and are highly liquid  Money market provides avenues to the players in the market to strike balance between the surplus funds with the lenders and the obligation of funds for the borrowers
  • 5. Classification • The unorganized sector consists of money lenders, chit funds, and indigenous bankers Money Market • The organized part comprises commercial banks in India both Organized Unorganized public sector and private sector Sector Sector banks and foreign banks • The organized money market is in full control of the RBI. However, unorganized money market remains outside the RBI control.
  • 6. Structure of Indian Money Market ORGANISED CO-OPERATIVE UNORGANISED STRUCTURE SECTOR SECTOR DFHI(Discount Commercial Development RBI and Finance banks bank house of India Public Sector Private banks banks SBI with 7 Co-Operative 20 nationalized Indian banks Foreign banks subsidiaries banks banks
  • 7. Continued….. CO- UNORGANISE OPERATIVE D SECTOR SECTOR State Land Indigenous State Money lenders Nidhis Chits development banks cooperative banks Central Central land Primary land cooperative development development banks banks banks Primary Agri Primary urban credit societies banks
  • 8. Money Market Instruments Treasury Bills Banker’s Commercial Acceptance Papers Money Market Instruments Corporate Certificate Bonds of Deposits Repurchase Agreement
  • 9. Treasury Bills (T-Bills)  (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.  T-Bills are so popular among money market instruments because of affordability to the individual investors.
  • 10. Certificate of deposit (CD)  A CD is a time deposit with a bank.  Like most time deposit, funds can not withdrawn before maturity without paying a penalty.  CD’s have specific maturity date, interest rate and it can be issued in any denomination.  The main advantage of CD is their safety.  Anyone can earn more than a saving account interest.
  • 11. 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.
  • 12. Repurchase agreement (Repos)  Repo is a form of overnight borrowing and is used by those who deal in government securities.  They are usually very short term repurchases agreement, from overnight to 30 days of more.  The short term maturity and government backing usually mean that Repos provide lenders with extreamly low risk.  Repos are safe collateral for loans.
  • 13. Banker's Acceptance  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.
  • 14. Features of Money Market Dichotomic • Simultaneous existence of both the organized money Structure market as well as unorganized money markets Multiplicity of • Differ from bank to bank from period to period and even Interest Rates from borrower to borrower Limited • Supply of various instruments such as the Treasury Bills, Commercial Bills, Certificate of Deposits, Commercial Instruments Papers, etc. is very limited. High Volatility in • Call money market is a market for very short term money, Institutions such as the GIC, LIC, etc suffer huge Call Money Market fluctuations and thus it has remained highly volatile. Absence of • Divided among several segments or sections which are Integration loosely connected with each other
  • 15. REFORMS in Money Market • Government has adopted an interest rate policy of liberal nature • Lifted the ceiling rates of the call money market, short-term deposits, bills Deregulation of rediscounting, etc. the Interest • Further deregulation of interest rates during the economic reforms. Rate • 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 Money Market • The upper limit of 50 crore investments has also been lifted. Financial institutions such Mutual Fund as the IDBI and the UTI have set up such funds (MMMFs) • Set up in April 1988 to impart liquidity in the money market. • Set up jointly by the RBI, Public sector Banks and Financial Institutions Establishment of the DFI
  • 16. Reforms (contd..) • Through the LAF, the RBI remains in the money market on a continue basis through the repo transaction Liquidity • It adjusts liquidity in the market through absorption and or injection of financial Adjustment Facility (LAF) resources • In order to impart transparency and efficiency in the money market transaction the electronic dealing system has been started. Electronic Transactions • It is useful for the RBI to watchdog the money market. • Set up in April 2001,it clears all transactions in government securities, and Establishment repose reported on the Negotiated Dealing System. of the CCIL • GoI consistently tried to introduce new short-term investment instruments. Examples: Treasury Bills of various duration, Commercial papers, Certificates of Development of New Market Deposits, MMMFs, etc. have been introduced in the Indian Money Market. Instruments
  • 17. Drawbacks in Indian Money Market Absence of Insufficient Lack of Less number Integration Funds or Organized of Dealers • Lack of proper Resources Banking • Poor number of integration • The Indian System dealers in the between economy with its short-term Organized and • Banking system assets who can seasonal suffers from Unorganized structure faces act as mediators segments major between the frequent weaknesses shortage of government and such as the banking financial the NPA, huge recourse. system. losses, poor efficiency
  • 18. CONCLUSION  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.

Editor's Notes

  1. I :- ORGANISED STRUCTURE 1. Reserve bank of India. 2. DFHI (discount and finance house of India).3. Commercial banksi. Public sector banks SBI with 7 subsidiaries Cooperative banks 20 nationalized banks ii. Private banks Indian Banks Foreign banks4. Development bank IDBI, IFCI, ICICI, NABARD, LIC, GIC, UTI etc.
  2. . UNORGANISED SECTOR 1. Indigenous banks 2 Money lenders 3. Chits 4. NidhisIII. CO-OPERATIVE SECTOR 1. State cooperative i. central cooperative banks Primary Agri credit societies Primary urban banks 2. State Land development banks Central land development banks Primary land development banks