Ch.1 Money Market

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Management of Financial Services

Money Market and

Capital Market


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Meaning of

Money market

It is a market for financial assets that close

substitutes for money. It is a market for

overnight to short-term funds and

instruments having a maturity period of one

or less than one year


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Characteristics of

money market

It is not single market but a collection of marketsfor several instruments.

It is not wholesale market of short-term debtinstruments.

Its principle feature is honour where thecreditworthiness of participants is important.

The main players are: the RBI, the discount and

finance housing of India (DFHI), MF, banks,corporate investors, NBFCs, PF, and PSUs

It is a need-based market wherein the demandand supply of money shape the market.


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Functions of

Money market

transfer of large sums of money

transfer from parties with surplus funds to parties

with a deficit

allow governments to raise funds

help to implement monetary policy

determine short-term interest rates

Provide a balancing mechanism to even out the

demand for and supply of short term funds.


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Benefits of Efficient Money market

Reliability and security

Easy to adopt

Economical and affordable

Higher rate of return in short run

Lack of risk

Provides a stable source of funds to bank

Encourage development of non-bank entities

Source of finance for the government

Makes an effective monetary policy actions


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To ensure that liquidity and short term

interest rates are maintained at levels

consistent with the monetary policy objectives

of maintaining price stability.

To ensure an adequate flow of credit to the

productive sectors of the economy and

To bring about order in the foreign exchange

market


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Instruments of Indian money market

Call money and notice money

Commercial bills

Treasury bills

Commercial papers

Certificate of deposits

Inter bank participator certificate

Repo instruments

Inter corporate deposits


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Treasury Bills

These are short term instruments used by the government toraise short-term funds

Features of T-Bills

1. Negotiable securities

2. Highly liquid

3. Absence of default risk

4. Assured yield, low transaction cost5. At present 91 days, 182 days, and 364 days T-Bills in vogue

6. These are available for minimum amount of Rs. 25000 andin multiple thereof


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Types of T-Bills

On-tap T-Bills

Ad hoc T-Bills

Auction T-Bills 91 day T-Bills

182 day T-Bills

364 day T-Bills 14 day T-Bills


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Commercial Paper

it is an unsecured short-term promissory note,negotiable and transferable by endorsement anddelivery with a fixed maturity period. It isgenerally issued at a discount by the leading

creditworthy and highly rated corporates tomeet their working capital requirements.Depending upon the issuing company, acommercial paper is also known as finance paper,

industrial paper or corporate paperSome times they can also be issued by primary

dealers and all India financial institutions.


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Commercial Bills

These are negotiable instruments drawn by the

seller on the buyer which are, in turn,

accepted and discounted by commercial

banks


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Types of

Commercial Bills

Demand Bill

Usance Bill

Clean Bill

Documentary Bill

Inland Bill

Foreign Bill

Hundi

Derivative Usnace promissory note


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Certificate of Deposit

Certificate of deposit are short term tradable

time deposits issued by commercial banks and

financial institutions


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Call/Notice Money Market

The call money market is a market for very short-termfunds repayable on demand and with a maturity periodvarying between on day to a fortnight. When money isborrowed or lent for a day, it is known as call money

when money is borrowed or lent for more than a dayand up to 14 days, it is known as notice money.

no collateral security is required to cover thesetransactions.

It is highly liquid market


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Explanations of Terms

Call rate

MIBOR

Call rate volatility

Collateralized Borrowing and Lending Obligation (CBLO)

Interest rate Bank rate

Money Market Derivatives

Interest rate swap

Plain vanilla Interest rate swaps Forward Rate Agreements

Plain vanilla forward rate Agreements


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Repos

Repo is a transaction in which the borrower gets fundsagainst the collateral of securities placed with thelender

The maturity period of repos range from 1-14 days, Atthe maturity, the securities revert to the borrower,after he repays the dues.

Types of Repos

1. Inter bank repos

2. RBI repos


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Money Market

Intermediaries

The Discount and Finance House of India

(DFHI)

Money Market Mutual Funds (MMFs)


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Capital Market


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Capital market

It is the market for long term funds- both equity

and debt- and funds raised within and outside

country

Primary market

Secondary market


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Functions of capital market

Mobilize long term savings

Provide risk capital

Provide liquidity

Lower the cost of transactions

Quick valuation of financial instruments

Derivative trading

Direct the flow of funds into efficient channels

through investment, disinvestment andreinvestment

Integration


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Primary market

The primary market is a market for new issues.

Flow of funds from surplus sector to the govt.

or corporate sector

Capital formation


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Nature of fund raising

Domestic

Equity issues by

corporates (primary)

Financial intermediaries (secondary)

Debt issues by

Government

Corporate Financial intermediaries


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Contd.

External

Equity issue through issue of

Global depository receipts and American depository

receipts

Debt instruments through

External commercial borrowing


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Contd.

Other external borrowing

Foreign direct investment (FDI)

Equity and debt form

Foreign institutional investment (FII)

Portfolio investment

Non-resident Indian deposits

Short term and medium term deposits


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FDI

More than 10% stake in a companys equity

Sectors like pharma, consumer durables,

engineering, financials services, telecom, banking,

insurance

Either wholly owned subsidiary or joint venture

Bridges large savings and investment gap, modern

technologies, create employment

100% caps in airport, power trading, petroleum

marketing, alcohol, captive mining, industrial

explosives, hazardous chemicals


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FII

Portfolio investment

Bridges short to medium savings-investment

gap

FII can invest only up to 24% in a company

Needs approval from companys board

May not be stable as there can be suddenoutflow


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Secondary market

Market for outstanding securities

Facilitates only liquidity and marketability ofoutstanding debt and equity instruments

Contributes to economic growth Channelize funds into most efficient channel

through disinvestment and reinvestment

Provides liquidity, price discovery and risktransfer

Wealth effect


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Indian secondary market

For corporate and financial intermediary

Recognized stock exchange

NSE

Over the counter exchange of India (OTCEI)

Interconnected stock exchange of India (ISE)

For govt. securities and bonds

Subsidiary general ledger (SGL)

Wholesale debt market (WDM)


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Major reforms in capital market

Free Pricing

Introduction of book building

Electronic Trading

Instruments and Market Participants

Improvement in Trading, Clearing and SettlementSystems

Increased Dematerialization

Near Elimination of Counter Party Risk

Circuit Breakers / Price Bands

Structure of Informational Flows

Emphasis on Fair Trading Practices


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Major SCAMS

Harshad Mehta scam

Ketan Parekh Scam


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Thank You

Ch.1 Money Market

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