Ch.1 Money Market
Transcript of 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