MONEY MARKET AND MONEY MARKET
INSTRUMENTS
MEMBERS
WHAT IS MONEY MARKET?
Money market means a market where money or its
equivalent can be traded. It is a wholesale market of
short term debt instrument and is synonym of liquidity
RBI defines it as “ A market for short terms financial
assets that are close substitute for money, facilitates the
exchange of money in primary and secondary market”.
The money market is a mechanism that deals with the
lending and borrowing of short term funds (less than
one year).
MONEY MARKET
FIN ANCIALM ARKETS
MONEY MARKET CAPITAL MARKET
FEATURES OF MONEY MARKET
It is market purely for short-term funds or financial
assets called near money.
It deals with financial assets having a maturity period up
to one year only.
It deals with only those assets which can be converted
into cash readily without loss and with minimum
transaction cost.
FEATURES OF MONEY MARKET
(contd)
Generally transactions take place through phone i.e.,
oral communication.
Transactions have to be conducted without the help of
brokers.
The components of a money market are the Central
Bank, Commercial Banks, Non-banking financial
companies, discount houses and acceptance house.
OBJECTIVE OF MONEY MARKET
To provide a reasonable access to users of short-term
funds to meet their requirement quickly, adequately at
reasonable cost.
To enable the Central Bank to influence and regulate
liquidity in the economy through its intervention in this
market.
To provide a parking place to employ short term
surplus funds.
IMPORTANCE OF MONEY MARKET
Development of trade & industry.
Development of capital market.
Smooth functioning of commercial banks.
Effective central bank control.
Formulation of suitable monetary policy.
COMPOSITION OF MONEY MARKET
The money market is not a single homogeneous market. It consists
of a number of sub-markets which collectively constitute the
money market. The main sub-divisions of the Money Market are:
Call Money Market
Commercial bills market or discount market
Acceptance market
Treasury bill market
MONEY MARKET INSTRUMENTS
Treasury Bills
Certificate of Deposit
Commercial Paper
Bankers Acceptance
Inter bank participation certificates.
Repurchase Agreements
Collateralized Borrowing and Lending Obligation
Money Market Mutual Funds
TREASURY BILLS (T-BILLS)
One of the safest money market instruments.
Short term borrowing instruments of the Central
Government of the Country issued through the Central
Bank i.e RBI in this case.
They are zero risk instruments, and hence the returns are
not so attractive.
CERTIFICATE OF DEPOSIT (CD)
A CD is a time deposit with a bank.
CDs have specific maturity date and an interest rate
and they can be issued in any denomination.
Like most time deposit, funds can not withdrawn
before maturity without paying a penalty
The main advantage of CD is their safety
COMMERCIAL PAPER (CP)
CP is a short term unsecured loan issued by a
corporation typically financing day to day operation.
CP is very safe investment because the financial
situation of a company can easily be predicted over a
few months.
Only company with high credit rating issues CP’s.
BANKER'S ACCEPTANCE
It is a short term credit investment created by a non
financial firm and guaranteed by a bank to make
payment.
Acceptances are traded at discounts from face value
in the secondary market.
INTER BANK PARTICIPATION CERTIFICATES
REPURCHASE AGREEMENTS (Repos)
Repo is a form of overnight borrowing and is used
by those who deal in government securities.
The short term maturity and government backing
usually mean that Repos provide lenders with
extremely low risk.
Repos are safe collateral for loans.
COLLATERALIZED BORROWING AND LENDING
OBLIGATION (CBLO)
Is an RBI approved Money Market instrument.
Backed by Gilts as Collaterals
Creates an obligation on the borrower to repay the money
borrowed along with interest on a predetermined future date
and a Right and Authority to the lender to receive money lent
along with interest on a predetermined future date.
It is a mechanism to borrow and lend funds against securities
for maturities of 1 day to 1 year.
MONEY MARKET MUTUAL FUNDS
An individual player cannot invest in majority of the
Money Market Instruments.
Hence for retail market, money market instruments are
repackaged into Money Market Funds.
Investment in Money Markets
Direct Investment in Money Market
Instruments
Investment in Money Market Funds
STRUCTURE OF INDIAN MONEY
MARKET
I :- ORGANISED STRUCTURE
1. Reserve bank of India.
2. DFHI (discount and finance house of India).
3. Commercial banks
i. Public sector banks
SBI with 7 subsidiaries
Cooperative banks
20 nationalized banks
ii. Private banks
Indian Banks
Foreign banks
4. Development bank
IDBI, IFCI, ICICI, NABARD, LIC, GIC, UTI etc.
STRUCTURE OF INDIAN MONEY
MARKET (contd)
II. UNORGANISED SECTOR
1. Indigenous banks
2 Money lenders
3. Chits
4. Nidhis
III. CO-OPERATIVE SECTOR
1. State cooperative
Central cooperative banks
Primary Agri credit societies
Primary urban banks
2. State Land development banks
Central land development banks
Primary land development banks
RECENT DEVELOPMENT IN MONEY
MARKET
Integration of unorganized sector with the organized
sector
Widening of call Money market
Introduction of innovative instrument
Offering of Market rates of interest
Promotion of bill culture
RECENT DEVELOPMENT IN MONEY
MARKET (contd)
Entry of Money market mutual funds
Setting up of credit rating agencies
Adoption of suitable monetary policy
Establishment of DFHI
Setting up of Security Trading Corporation of India ltd.
(STCI)