MONEY MARKET

By
Jasdeep singh
Enu sambyal
Yogita
Sarita
Money Market
Money market refers to that segment of the
financial system that enables the raising of
short term funds for meeting the temporary
shortages of cash and obligations,& the
temporary deployment of excess funds for
earning returns.
In other words money market is a market for

short-term financial assets which are near-

substitutes for money. Short-term genearlly
means a period of one year or less than one
year.
 CHARACTERISTICS OF MONEY MARKET

 It is not a single market but a collection of markets for several

instruments.
 It is a need-based market wherein the demand & supply of
money shape the market.
 Money market is basically over-the-phone market.
 Dealing in money market may be conductive with or without
the help of brokers.
 It is a market for short-term financial assets that are close
substitutes for money.
 Financial assets which can be converted into money with
ease, speed, without loss & with minimum transaction cost
are regarded as close substitutes for money.


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PREREQUISITES FOR AN EFFICIENT
MONEY MARKET
 Money market should be wide & deep. There should be large
number of participants.
 There should be well diversified mix of money market
instruments, suited to different requirement of borrowers
and lenders.
 A strong central bank for regulation, direction and facilitation
is essential for a well organised and developed money
market.
 A well organised commercial banking system.
 There should be a number of inter-related and integrated sub-
markets.
 Money market should have adequate amount of liquidity.
 Money market should have large demand and supply of
funds.
Functions
Economic development
Profitable investment
Borrowings to government
Importance for central bank
Mobilisation of funds
Savings and investment

reforms
 In the 1980s :
sukhamoy chakravorty committee, underlines the need to develop
the money market instruments.
Later on, a working group was formed and the RESEREVE BANK OF

INDIA initiated a number of measures like:-

1. The discount and finance house of India was set up as a money
market institution jointly by the reserve bank, PSUs, and
financial institutions in April 1988
2. Money market instruments such as the 182-day treasury bill,
certificate of deposit were introduced in 1988-89.
commercial paper was introduced in January 1990.
3. A ceiling of 10 percent on call money rates imposed by the Indian
banks association was withdrawn in 1989.
4.
In the 1990s
The securities trading corporation of India was
setup in June 1994 to provide an active
secondary market in government dated
securities and public sector bonds.
Barriers to entry were gradually eased by
1.Relaxing issuance restrictions and
subscriptions norms
2.Enabling market evaluation of associated risks
by withdrawing regulatory restrictions
3.Increasing the number of participants.
 Several financial innovations in instruments and methods were
introduced. T-bills of various maturities and RBI repos were
introduced.
 Ad hoc and on-tap 91 –day t-bills were discontinued.
 Indirect monetary control instruments such as the bank rate-
reactivated in April 1997, strategy of private placement and
open market operations in 1998-99 and the LAF in June 2000
 The minimum lock in period for instruments was brought down to
15 days
 With a view to adopting sound risk management procedures and
eliminating counter-party risks, the clearing corporation of
India was set up on February 15,2002.
Structure of Money market
Components
 Call Money Market ;
 Collateral Loan Market;
 Acceptance market;
 Bill Market;
Institutions
Commercial banks
Central bank
Acceptance house
Non banking financial intermediaries
Bill brokers

MONEY MARKET INSTRUMENTS
Treasury bills
Call money market
Commercial papers
Certificates of deposits
Commercial bills
TREASURY BILLS

 It is an important instrument of short-term

borrowing by government. Treasury bills are the
promissory notes or a kind of finance bill issued
by the govt. under discount for a fixed period,
not exceeding beyond one year, with a promise
to pay the amount stated there in to the bearer
of the instrument. It is used for bridging
temporary gap between the receipts and
expenditure.
TYPES OF TREASURY BILLS
TYPES
 ONTAP: Through the help of this funds can available
at any time.It can be bought fro RBI at anytime.
 AD HOC: These tbs issued in favor of RBI only and it
serves two purposes which are :-
1]They replenish cash balances of the central govt.

2]They provide an investment outlet to state govt.,

semi-govt. departments and foreign central bank

for parking their temporary surplus and income.
 AUCTIONED: RBI receives bids in an auction and
issued with certain cut off limits.It includes 91
days tbs, 182 days tbs and 364 days tbs.
QUALITIES OF TREASURY BILLS
High liquidity
Zero default risk
Ready availability
Low transaction cost
Assured yield

CALL/NOTICE MONEY MARKET
 Call money market is an important segment of the
money market. Borrowing & lendings in call
money market are for short duration ranging from
overnight to a fortnight. Call money is the money
borrowed or lent on demand for a very short
period. When money is borrowed or lent for a day
is known as Call money market.
 When money is borrowed or lent for more than a
day and up to 14 days, it is known as Notice
Money Market.
 Call money is required mostly by banks.

BENEFITS OF CALL MONEY MARKET
 Commercial banks, primary dealers and other
financial institutions are allowed to borrow and
lend in call market for adjusting their CR
requirement.
 Bank & other institutions can even out their day to
day deficits & surpluses.
 Specified FFIs, mutual funds &other specified
entities are allowed to operate.
 It is a inter-bank market.
 Participants are required to have current account
with RBI.
 COMMERCIAL
A Commercial paperPAPERS
is an unsecured short term
promissory note, negotiable and transferable with a
fixed maturity period.
 It is issued at a discount by creditworthy
corporates, primary dealers and all India financial
institutions.

Conti…..
 Commercial papers are debt instruments issued by
corporatesfor raising short term resources from
money market. These are unsecured debt of
corporates. They are issue in the form of promissory
notes, redeemable at par to the holder at the maturity
period. Only corporates who get an investment grade
rating can issue CPs, as per RBI rules. A commercial
paper is an unsecured short term promissory note
issued at a discount by creditworthy corporates,
primary dealers and all India financial institutions

CERTIFICATE OF DEPOSIT
 Certificates of deposit are unsecured, negotiable,
short term instruments in bearer form, issued by
commercial banks & development financial
institutions. CDs were introduced in June 1989.
Only scheduled banks excluding RRBs &local area
banks were allowed to issue them initially.

COMMERCIAL BILLS
A commercial bill is a short term & self
liquidity instrument with low risk .These are
also called as trade bills.
 According to Indian Negotiable Instruments
Act,1881,bill of exchange is a written
instrument containing an unconditional order,
signed by the maker, directing to pay a
certain amount of money only to a particular
person or to the bearer of the instrument.
Conti……
In other words these are negotiable


instruments drawn by seller on the buyer

demand which are in turn, accepted &
discounted by commercial banks. These are
varies fro 30 days, 60days, 90days
depending on the credit extended in the
industry.

 MONEY MARKET
INTERMEDIARIES
1. Reserve Bank of India
2. DFHI
3.MMMFs
Commercial banks
Reserve Bank of India
RBI is the most important constituent of the
money market.The aims of the Reserve
Bank is to ensure liquidity,to ensure an
adequate flow of credit to the productive
sectors of the economy.
Discount and Finance House of
India
The Discount and Finance House of India
 The DFHI was set in April 1988 by the
Reserve Bank with the objective of
deepening & activating the money market.
It commenced its operations from July
28,1988.
It is a Joint Stock Company in form & is
jointly owned by the Reserve bank, public
sector banks and all India financial
institutions which have contributed to its
paid up capital of Rs.200crore in the
proportion of 5:3:2.
The role of DFHI is to function as a
specialised money market intermediary for
stimulating activity in money market
instruments.
DFHI mobilises fund/resources from
commercial/co-operative banks, financial
institutions & corporate entities having
resources which are pooled & lent in the
money market.
DFHI is also authorized institution to
undertake repo transactions in a treasury
bills & all dated government securities to
impart greater liquidity to these
instruments.
The major part of the turnover was in the call
money followed by the government dated
securities & treasury bills. Its business in
CDs & CPs was negligible & business in
commercial bills declined sharply in the
1990s.
The DFHI has been concentrating on the call
money market rather than activating other
money market instruments like CPs,
CDs,CBs.These instruments need to be
developed further for activating &
deepening the money market.
MONEY MARKET MUTAL FUNDS

 Money Market Mutual Funds were

introduced in April,1991 to provide an
additional short term avenue for investment
& bring money market investment within
the reach of individuals. These mutual funds
would invest exclusively in money market
instruments.
MMMFs bridge the gap between small
individual investors the money market.
MMMFs mobilizes the savings from small
investors & invests them in short term
debt instruments or money market
instruments.
Tools for managing liquidity in money
market
Reserve requirements
Interest rates
 - Prime lending rate
 - Bank rate
§ Refinance from the reserve bank
§ Liquidity adjustment facility
§ Repos
Can individual investors invest in Money
markets?
 One of the main differences between the money
market and the stock market is that most money
market securities trade in very high
denominations and so individual investors have
limited access to them. The easiest way for
individual investors to gain access to the money
market is with a money market mutual fund, or
sometimes a money market bank account. These
accounts and funds pool together the assets of
thousands of investors and buy the money
market securities on their behalf. Although, some
money market instruments like treasury bills may
be purchased directly or through other large
financial institutions with direct access to these
markets.
Current scenario