Money market instruments


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Money market instruments

  1. 1. VIDYA V. VISWANATHMar Athanasios College For Advanced Studies, Tiruvalla.
  2. 2. MONEY MARKET Money market instruments are those instruments, which have a maturity period of less than one year. Geoffrey Crowther in his book” An outline of Money” has stated “Money market is a collective name given to the various firms and institutions that deal with various grades of near money”. Reservoir of short term funds.
  3. 3. Characteristics of adeveloped money market. A developed commercial banking system. Presence of a central bank. Sub-markets Near money assets Availability of ample resources Integrated interest rate structure
  4. 4. Functions of money market Economic development – Money market assures supply of funds; financing is done through discounting of the trade bills, commercial banks, acceptance houses and brokers. Profitable Investment – the excess reserves of commercial banks invested in near money assets. Borrowings by the Government – short term funds at very low interest.
  5. 5.  Importance For Central Bank – If the money market is well developed, the central bank implements the monetary policy successfully. Mobilization of Funds – helps in transferring funds from one sector to another. Savings And Investment – encouraging savings and investment by promoting liquidity and safety of financial assets. Self-sufficiency Of Commercial Banks – commercial banks can meet their financial requirements by recalling some of their loans.
  6. 6. MONEY MARKETINSTRUMENTS 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 The most active part of the money market is the market for overnight call and term money between banks and institutions and repo transactions
  7. 7. 1.GOVERNMENT SECURITIES(G- Secs) Issued by the Government for raising a public loan or as notified in the official Gazette. Maturity ranges from of 2-30 years. G-secs consist of Government Promissory Notes, Bearer Bonds, Stocks or Bonds, Treasury Bills or Dated Government Securities. No default risk as the securities carry sovereign guarantee. Ample liquidity as the investor can sell the security in the secondary market
  8. 8. 2. MONEY MARKET AT CALL ANDSHORT NOTICE Money at call is a loan that is repayable on demand, and money at short notice is repayable within 14 days of serving a notice. Participants are banks & all other Indian Financial Institutions as permitted by RBI. Banks borrow call funds for a variety of reasons to maintain their CRR, to meet their heavy payments, to adjust their maturity mismatch etc.
  9. 9. 3. TREASURY BILLS Short term (up to one year) borrowing instruments of the Government of India. Enable investors to park their short term surplus funds while reducing their market risk. Issued at a discount to face value. The return to the investor is the difference between the maturity value and issue price. RBI issues T-Bills for three different maturities: 91 days, 182 days and 364 days
  10. 10. 4. CERTIFICATES OFDEPOSITS A CD is a time deposit, financial product commonly offered to consumers by banks. CDs are negotiable instrument. Financial Institutions are allowed to issue CDs for a period between 1 year and up to 3 years. normally give a higher return than Bank term deposit, and are rated by approved rating agencies.
  11. 11. 5.COMMERCIAL BILLS Commercial bill is a short term, negotiable, and self-liquidating instrument with low risk. Written instrument containing an unconditional order. Once the buyer signifies his acceptance on the bill itself it becomes a legal document. Commercial bill is a short term, negotiable, and self-liquidating instrument with low risk.
  12. 12. 6. COMMERCIAL PAPER Commercial Paper is a money-market security issued (sold) by large banks and corporations to get money to meet short term debt obligations . Commercial paper is usually sold at a discount from face value. Interest rates fluctuate with market conditions, but are typically lower than banks‘ rates.
  13. 13. 7.Repurchase Agreements Repo or Reverse Repo are transactions or short term loans in which two parties agree to sell and repurchase the same security. They are usually used for overnight borrowing Repo/Reverse Repo transactions can be done only between the parties approved by RBI and in RBI approved securities