Money market definition,Call money,Call money market operator should comply with the following rules,Commercial bills

1. Money Market
Prepared By:
Mohd Danish Bhat
Presidency University Bengaluru
danishbhatt83@gmail.com

2. Definition
• Money market is the market for overnight short-term funds.
Generally, funds with a maturity of one year or less are condisdered
as short term funds.
• The major participants in the money market are
• Commercial banks
• Other financial institutions
• Reserve Bank of India
• RBI uses the money market extensively for managing the money
supply of the country by varying the statutory reserve requirement as
well as the bank rate and repo rate.

3. 3
Money Market
• Short-term funds
• Liquid and low cost
• Source of working capital finance
• Large number of participants
• Wholesale market
• Needs skilled personnel for dealing
• Deals are put through telephones followed by written confirmations
• Generally same day settlement
• Call money, Treasury Bills, Commercial Paper and Certificate of Deposit are sub-
markets.

4. 4
Money Market Instruments
• Call Money
• Commercial Bills
• Commercial Paper
• Certificate of Deposit
• Money Market Mutual Funds

5. Call money
• Call money is the shortest form of funds, generally overnight
borrowing and lending. However the period can go up to 14 days
notice money and short term deposits, the minimum period being
two days.
• Bank and financial institutions use the class money for funding their
liquidity crunch mainly on Fridays when they are supposed to
maintain the stipulated statutory reserve requirements. A fall in
stipulated reserve level will invite penalty imposed by the central
bank (RBI) for each day of failure.

6. Who can participates in the market
• Scheduled commercial banks
• Cooperative banks
• Primary dealers – Mutual funds and corporates etc.
• Non-banking financial institutions are not permitted to participate in
call/short notice money market.

7. Call money market operator should comply
with the following rules
• The outstanding borrowing of a scheduled commercial bank should
not exceed 100 percent of the capital fund of the latest audited
balance sheet.
• The banks are permitted to borrow 125 percent of capital fund on
daily basis.
• As regard to lending bank are not allowed to lend 25 percent of their
capital on fortnight basis.
• The banks are permitted to lend 50 percent to their capital on daily
basis.

8. Continued
• The outstanding borrowings in call/notice money market on a daily
basis by state cooperative banks / District central cooperative banks /
urban cooperative banks should not exceed 2 percent of their
aggregate deposits as at the end of March of the previous financial
year. However there is no limit for lending.
• Primary dealers are permitted to borrow on an average, in a fortnight,
upto 200 percent of their net owned funds as at the end of March of
the previous financial year. They are allowed to lend in call/notice
money market, on an average, in a reporting fortnight, upto 25
percent of the net owned fund.

9. Interest rate and other procedures
• Interest rate can be 85% - 0% and depends on the demand and supply
of money.
• The calculation of interest rate will be done by the FIMMDA’s (Fixed
Income Money Market and Derivative Association of India) hand
book.
• Documentation will also be done according to the FIMMDA.

10. Commercial bills
• Commercial bills are short-term, negotiable, self liquidating financial
instruments with comparatively low risk. The seller of goods draws
these bills on the buyer for the value of the goods delivered. These
bills of exchange and the seller’s bank usually send the bill to the
buyer’s bank for delivery of the documents of title of goods like Lorry
Receipts or Railway Receipt against acceptance of the bill by the
buyer. The buyers bank accepts the signature of the buyer on this bill
and sign on the document. The coaccepted bill is call the commercial
bill and send to the buyer. If buyer needs immediately money send to
the buyer’s bank and discount the bills. Buyers bank rediscount the
bill again with RBI according to the Bill discount market 1952.

11. Continued
• Now a days many financial institutions are permitted into this market
• Scheduled commercial banks
• LIC
• GIC
• UTI

12. Treasury bill
• TB are short term are promissionary note issued by the RBI to finance
the Government’s short term finance.
• Features of the TB
• Negotiable instrument
• Issued at discount and paid at face value
• Difference between discounted price and face value is the return
• These are of 91 days to 365 days and enjoys high liquidity
• They are supported by government guarantee and therefore don’t have
default risk.
• T-bills offer an assured return

13. Continued
• The transaction cost is very low.
• Banks can include in their SLR requirement.

14. 91 day treasury bills
• The bills are sold through auction systems with a pre-
determined/notified amount.
• The cut-off rate is lower than the fixed discount rate.
• Major holder are RBI, State government and banks.
• These bills are sold through competitive/non-competitive bids.
• No rediscounting facility is available to the participants of non-
competitive bids.
• Banks, Mutual Fuds and other financial institutions can participates in
bids

15. 182 and 364 days TB
• 182 days
• Require for banks for SLR requirement.
• Carry higher safety and liquidity
• Tradable at secondary market with two way quote
• 364 days
• Sold for fortnight auction
• Re-discounting facility is not available
• Carry higher safety and liquidity

16. Commercial Paper (CP)
• Used by highly rated corporate entitites uses this for diversify their
short term borrowings.
• Financial insitutions can use this for their short term borrowings.
• A corporate is eligible for issuing CPs only if it has
• Minimum tangible net worth 4 crores
• Enjoys a working capital limit from a bank
• It is a standard asset by a bank
• CP should have minimum credit rating P-2 by CRISIL
• Minimum maturity period is 7 days and maximum is one year.
• CP can be issued in denomination 5 lakhs and multiple there of.

17. • CP is sold at a discount and redeemed at its face value. Hence the
implicit interest rate is a function of the size of the discount and the
period of maturity.
• CP is generally placed with investors who intend holding it till its
maturity. Hence there is no well developed secondary market for it.
• Regulation: Since CP is an unsecured instrument of financing the RBI
has stipulated certain conditions meant primarily to ensure that only
financially strong companies can issue CP.

18. A company can issue CP provided:
• It has a tangible net worth of at least Rs. 40 million.
• It can be issued in denominations of Rs. 5 lakh or multiples thereof.
• The issuer should have working capital limits sanctioned by financing
bank/institution/s.
• The equity is listed in the stock market.
• The CP receives a minimum rating of P2 from CRISIL or equivalent
thereof.
• It is classified as a standard asset by the financing bank/institutions.
• The minimum maturity period is 7 days and the maximum one year.

19. Commercial paper cost calculation
• Net amount realized means net investment
• n is the number of period
•
𝐹𝑎𝑐𝑒 𝑉𝑎𝑙𝑢𝑒−𝑁𝑒𝑡 𝐴𝑚𝑜𝑢𝑛𝑡 𝑅𝑒𝑎𝑙𝑖𝑠𝑒𝑑
𝑁𝑒𝑤 𝐴𝑚𝑜𝑢𝑛𝑡 𝑅𝑒𝑎𝑙𝑖𝑠𝑒𝑑
×
360
𝑛

20. Problem
• Calculate the cost of commercial paper from the following data
• Face value is ₹ 10,00,000
• Maturity Period 90 days
• Net amount realized or net investment ₹ 9,55,000
• Discount and other charges is 2%

21. Problem
• A 180 days commercial paper has face value ₹500000. The discounted
price was ₹4,80,000. Calculate the return from this instrument.
Discount and other charges is 3%.

22. Total cost calculation of a commercial paper
of issuing company
• A company issues $300,000 worth of 18%, 90 day commercial paper.
However, the funds are required only for 70 days. The excess funds can be
invested in securities earning 17%. The brokerage fee associated with
paper transaction is 1.5%.
• A company issues $600,000 worth of 20%, 180 day commercial paper.
However, the funds are required only for 100 days. The excess funds can be
invested in securities earning 10%. The brokerage fee associated with
paper transaction is 3%.
• Calculate the percentage cost of issuing commercial paper, for every two
months period in a year.
• Face Value = ₹6,00,000
• Rate of CP is 12%
• Maturity period 2 months
• Brokerage cost is 0.5%

23. Problem
• Calculate the percentage cost of issuing commercial paper, for once in 6
months period in a year.
• Face Value = ₹10,00,000
• Rate of CP is 15%
• Maturity period 6 months
• Brokerage cost is ₹1000 per issue
• Calculate the percentage cost of issuing commercial paper, for every 6
months period in a year.
• Face Value = ₹6,00,000
• Rate of CP is 12%
• Maturity period 6 months
• Brokerage cost is ₹1000 per issue

24. Certificates of Deposites
• CDs are negotiable instruments issued in a dematerialized form or a
usance promissory notes for funds deposited in a bank or a financial
institutions for a specified period.
• The minimum subscription amount is 1 lakh and multiple there off.
• The minimum maturity period is 7 days and maximum one year.
• CDs are issued on discount of face value.
• If maturity date falls on holidays then payment will be made on
earlier working days.

25. Money Market Mutual Funds (MMMFs)
• MMMFs are mutual funds where money are invested in the money
market instruments.
• Unlike other mutual funds MMMFs enjoys high liquidity for its short-
term nature.
• RBI provides the cheque facility to the investors. Hence more liquidity
is available.
• This cheque facility is available for own use not for third party use.