MONEY MARKET

• It is a market for dealing in monetary assets of short-term nature.

• It is a wholesale market.

• The volumes are very high.

• Transactions are settled on daily basis.

• Short term constitute : 1 day to 1 year

• MM centres in India are : Mumbai , Delhi , Kolkata

Major Players

• RBI

• Commercial Banks

• Mutual Funds

• Financial Institutions

• Primary Dealers

MM instruments have following characteristics:

• Liquidity

• Minimum transaction cost

• No loss in value

Utility

• Helps in meeting temporary shortages of cash.

• Facilitates the conduct of monetary policy

• Short term surpluses and deficits are evened out

• Helps RBI to influence liquidity and level of

interest rates

• Facilitates government market borrowing

CALL / NOTICE Money Market

• Predominantly an inter-bank market• Minimum size of transaction Rs 10 cr• Call- overnight & Short Notice -1 day - 14 days

TERM Money Market

• Maturity ranges between 3 months -1 year

INSTRUMENTS

Treasury Bills [T-bills]

• Issued by RBI on behalf of Central Government to raise short-term funds

• Issued for 91 days,182-days ,364 days

• Issued at discount and repaid at par on maturity• Negotiable security

• Can be rediscounted with banks , thus highly liquid

• No default risk

• Easy availability

• Assured yield

• Minimum amount Rs 25,000 or in multiples thereof

• Participants are banks , mutual funds , FIs , PFs , corporates ,foreign banks , FIIs.

Certificate of Deposit [CD]• They are short term time-deposits issued by

commercial banks and financial institutions.

• They are interest bearing ,maturity dated obligations of banks .

• They are unsecured in nature.

• Minimum issue of Rs 1 lac and additional amount in multiples thereof

• They are in bearer form and can be traded in secondary market

• Issued for varying period between 2 weeks - 5 years.

• Can be issued on a discount to face value basis as well as on floating rate method.

• Banks and FIs cannot issue loan against CDs

• They cannot buy back their own CDs before maturity

• Usually purchased by individuals, corporates , trusts , funds and NRIs .

Commercial Paper [CP]

• Is an unsecured short-term promissory note issued at a discount by creditworthy corporates , primary dealers and all Indian financial institutions

• Issued for minimum period of 7 days and maximum of 1 year from the date of issue

• Issued in denominations of Rs 5 lac and multiples thereof

• Can be issued at a discount as decided by the company

• It is negotiable and transferable

• Usually purchased by individuals , banks , corporates , unincorporated bodies , NRIs and FIIs.

Commercial Bills

• Are negotiable instruments drawn by the seller on the buyer which are , in turn , accepted and discounted by commercial banks.

• Important tool to finance credit sales

• Demand bill: payable on demand

• Usance bill : payable after a specified time

• Documentary bill: documents are held by bank till bill is paid

• Clean bill

Tools for Managing Liquidity in the Money Market

Direct Instruments

• Reserve Requirement :CRR [8.75%] - cash that banks need to keep with RBI ; SLR[25%] – mandatory investment in government security

• Limits on Refinance

• Administered Interest Rates : bank rate – 6%

• Qualitative and Quantitative Restrictions on Credit

Indirect Instruments

• Open Market• Repos / Reverse Repos

Thank you