MONEY MARKET

FINANCIAL MARKETS

• Financial Markets- organisations and institutions which lend

funds to business enterprises and public authorities.
-composed of two constituents :
• the money market-deals with provision of short-term credit.
• the capital market-deals with medium-term and long-term
credit.
 Indian Financial Market

Money market Capital market

1. Unorganised sector Non-securities market Securities market

2. Organised sector

Bank deposits 1. Primary market

Fixed deposits 2. Secondary market
Provident Fund
Insurance
Indian Money Market
Money Market-where borrowers manage to obtain short-term
loanable funds and lenders succeed in getting credit worthy
borrowers.
-commercial banks are the most important lenders and they also
creates credit.
- divided into two parts:
• the unorganised sector and
• the organised sector.
The Unorganised Sector of Indian Money Market
1. Unregulated Non-bank Financial Intermediaries (NBFIs)-
• Loan or finance companies
• Chit funds
2. Indigenous Bankers
3. Money Lenders
The Organised Sector of Indian Money Market
• Well organised and integrated
• It comprises RBI, commercial banks, foreign banks,
cooperative banks, finance corporations, mutual funds.
• The principal constituents are as follows:
1. The call money market
2. The treasury bill market
3. The repo market
4. The commercial bill market
5. The certificate of deposit (CD)market
6. The commercial paper(CP) market
7. Money market mutual funds
1. The call money market- borrowing and lending transactions
are carried out for one day.
• When money is borrowed or lent for 1-14 days, it is called
short notice money.
- also called as call loans that may or may not be renewed next
day.
- Call money rate- the rate at which funds are borrowed in this
market
- Banks are the borrowers as well as the lenders for the call
money.
- Highly liquid, call money rate is highly volatile, high risk.
- appropriate indicator of the liquidity position of the money
market.
 2. The Treasury Bill Market- market where treasury bills are
brought and sold, issued by RBI on behalf of Govt., for a period
of maturity ranging from 91-364 days, freely transferable.
-treasury bills also known as T-bills, represent short-term
borrowings of the Government.
-issued by govt. of India through auctions at a discounted rate.
- no default risk/risk free
Types of treasury bills
• 91-Day treasury bills
• 182-Day treasury bills
• 364-Day treasury bills
 3.The Repo Market(repurchase agreement)- market for
collateralised short-term borrowing and lending through sale
and purchase operations in debt instruments.
- securities are sold by their holder to an investor with an
agreement to repurchase them at a predetermined date and rate.
- Repo rate (%) is the rate at which banks borrow funds from the
RBI, due to shortage of funds.
- If the RBI wants to make it more expensive for the banks to
borrow money, it increases the repo rate; similarly, if it wants to
make it cheaper for banks to borrow money, it reduces the repo
rate(more money into circulation).
- Under reverse repo transaction, securities are purchased with a
simultaneous commitment to resell at a predetermined date and
rate.
Reverse repo rate(%) -the rate at which RBI borrows money
from the banks (or banks lend money to the RBI), if it finds
excess money in the banking system.
- or it is the interest rate that banks receive if they deposit
money with the RBI.
- an increase in reverse repo rate leads to higher returns for
banks.
4. The Commercial Bill Market- sub-market which handles trade
bills or the commercial bills.
commercial bill- bill drawn by one merchant firm on the other
or when trade bills accepted by commercial banks.
It arises out of domestic transactions. Its purpose is to reimburse
the seller while the buyer delays payment.
• A bill of exchange contains a written order from the creditor
(seller) to the debtor (buyer) to pay a certain sum, to a certain
person after a certain period.
- issued for 30 days to 120 days, low risk
 5. The Certificate of Deposit (CD)market- certificate issued by a
bank to depositors of funds that remain on deposit at the bank for
a specified period, introduced in 1989.
• CD is a certificate in the form of promissory note issued by
banks(except regional rural banks and cooperative banks) during
period of tight liquidity, at relatively high interest rate against the
short term deposits of companies and institutions, received by
the bank.
It can be issued to individuals, corporations, companies, trusts etc.
Initially CDs were issued with a maturity period from 3 months to
one year. In 1993, the CDs with maturity of 1-3 years were
permitted.
- they are issued at discount,freely transferable by endorsement.
- banks pay high interest rate on CDs, hence CD holders prefer
to hold it till maturity.
6. The Commercial Paper(CP) Market- short-term instrument of
raising funds by corporates. Introduced in 1990.
- maturity of CP is flexible; borrowers and lenders adopt it to
their needs, most attractive returns.
- it can be issued by a listed company with working capital of
not more than INR 5crores. Or issued by highly rated financial
strong companies.
- they are freely transferable by endorsement.
- according to the RBI guidelines for the issue of CP, company
will have to obtain P2 rating from CRISIL or A2 rating from
ICRA.
6. Money Market Mutual Funds-
• A money market mutual fund is a kind of mutual fund that
invests in highly liquid, near-term instruments.
• These instruments include:
• Cash
• Cash equivalent securities
• High-credit-rating, debt-based securities with a short-term
maturity.
• Money market mutual funds are intended to offer investors high
liquidity with a very low level of risk.
• A money market fund is a kind of mutual fund that invests in highly
liquid, near-term instruments. These instruments include:
• Cash
• Cash equivalent securities
• High-credit-rating, debt-based securities with a short-term maturity
(such as U.S. Treasuries)
• Money market funds are intended to offer investors high liquidity
with a very low level of risk. Money market funds are also called
money market mutual funds