MONEY

MARKET
INTRODUCTION
Financial market is place/ mechanism where
funds are transferred from one place to
another section of the economy. It provides a
mechanism for exchange of funds.
According to G. Growther, “Money market is
a collective name given to the various firms
and institutions that deal in the various
grades of near money”.
Or
in other words money market is a market of
short term securities.
FUNCTIONS OF MONEY MARKET
Helps the Government to raise necessary
short term funds. Treasury bills
Helps industries to meet their working
capital needs. Cp’s , Cd’s
Helps in development of capital market. –
Basis of securities
Offers a channel to non-banking financial
institutions, such as insurance companies,
financial houses etc.
Acts as a medium through which the central
bank (RBI) can exercise control of credit in
market._- monetary policy.
FEATURES OF MONEY MARKET
1. Dichotomic Structure : It is a significant aspect of the
Indian money market. It has a simultaneous existence of
both the organized money market as well as unorganised
money markets. The organized money market consists of
RBI, all scheduled commercial banks and other recognized
financial institutions. However, the unorganized part
of the money market comprises domestic money
lenders, indigenous bankers, trader, etc. The
organized money market is in full control of the RBI.
However, unorganized money market remains
outside the RBI control. Thus both the organized and
unorganized money market exists simultaneously.
2. Seasonality : The demand for money in Indian money
market is of a seasonal nature. India being an agriculture
predominant economy, the demand for money is generated
from the agricultural operations. During the busy season
i.e. between October and April more agricultural activities
takes place leading to a higher demand for money.
CONTINUED
1. Multiplicity of Interest Rates : In Indian money market,
we have many levels of interest rates. They differ from bank
to bank from period to period and even from borrower to
borrower. Again in both organized and unorganized segment
the interest rates differs. Thus there is an existence of many
rates of interest in the Indian money market.
2. Lack of Organized Bill Market : In the Indian money
market, the organized bill market is not prevalent. Though
the RBI tried to introduce the Bill Market Scheme (1952) and
then New Bill Market Scheme in 1970, still there is no
properly organized bill market in India.
3. Absence of Integration : This is a very important feature
of the Indian money market. At the same time it is divided
among several segments or sections which are loosely
connected with each other. There is a lack of coordination
among these different components of the money market. RBI
has full control over the components in the organized
segment but it cannot control the components in the
unorganized segment.
CONTINUED
1. High Volatility in Call Money Market : The
call money market is a market for very short term
money. Here money is demanded at the call rate.
Basically the demand for call money comes from
the commercial banks. Institutions such as the
GIC, LIC, etc suffer huge fluctuations and thus it
has remained highly volatile.
2. Limited Instruments : It is in fact a defect of
the Indian money market. In our money market
the supply of various instruments such as the
Treasury Bills, Commercial Bills, Certificate of
Deposits, Commercial Papers, etc. is very limited.
In order to meet the varied requirements of
borrowers and lenders, It is necessary to develop
numerous instruments.
DEFECTS OF MONEY MARKET
1. Absence of Integration : The Indian money market
is broadly divided into the Organized and Unorganized
Sectors. The former comprises the legal financial
institutions backed by the RBI. The unorganized
statement of it includes various institutions such as
indigenous bankers, village money lenders, traders,
etc. There is lack of proper integration between these
two segments.
2. Multiple rate of interest : In the Indian money
market, especially the banks, there exists too many
rates of interests. These rates vary for lending,
borrowing, government activities, etc. Many rates of
interests create confusion among the investors.
1. Shortage of Investment Instruments : In the Indian
money market, various investment instruments such as
Treasury Bills, Commercial Bills, Certificate of
Deposits, Commercial Papers, etc. are used. But
taking into account the size of the population and
market these instruments are inadequate.
2. Shortage of Commercial Bill : In India, as many banks
keep large funds for liquidity purpose, the use of the
commercial bills is very limited. Similarly since a large
number of transactions are preferred in the cash form the
scope for commercial bills are limited.
3. Lack of Organized Banking System : In India even
through we have a big network of commercial banks, still the
banking system suffers from major weaknesses such as the
NPA, huge losses, poor efficiency. The absence of the
organized banking system is major problem for Indian
money market.
Less number of Dealers : There are poor
number of dealers in the short-term assets
who can act as mediators between the
government and the banking system. The
less number of dealers leads tc the slow
contact between the end lender and end
borrowers.
MONEY MARKET INSTRUMENTS
Treasury bills/ risk free securities
Commercial bills/ high net worth firms
Commercial papers
Certificate of deposits
Repo rate/ reverse repo rate.
TREASURY BILLS(GILT- EDGED
SECURITIES/ RISK-FREE SECURITIES)
Features of T-Bills are:
Issued at a discount to the face value
Highly liquid security
Issued by RBI on behalf of the Government
Act as eligible securities for SLR (Statutory Liquidity Ratio)
Low transaction cost as it doesn’t involve stamp duty.
Individuals, firms, corporates, companies, trusts
and institutions in India can purchase them
Issued at a minimum value of Rs. 25,000 and in multiple thereof.
Mainly in India the following Treasury Bills are offered:
14 day T bill, 91 day T bill, 182 days T bill and 364 days T bill.
Govt. treasury bills can be procured by individuals at a discount to
the face value.
Can be issued only by central Govt. in India.
RBI also issues treasury bills under its open market operations
strategy to regulate money supply in the economy.
COMMERCIAL BILLS
Bills of exchange represents the negotiable
instruments drawn by the seller/drawer on
the buyer/drawee for the value of the goods
and services delivered to him. Such bills are
called trade bills. Trade bills accepted by
commercial banks are called commercial
bills.
It acts as an important financial tool
Liquidity level is very high
Easy and convenient source of financing
working capital needs
Provides convenient source of short term
investment option for additional funds.
COMMERCIAL PAPERS
CP’s represents short term unsecured
promissory notes issued by firms with a high
credit rating.
Issued by large corporates, financial
institutions etc.
Sold at discount and redeemable at par
Investors include insurance companies,
banks, mutual funds etc.
CP’s are directly sold to investors or through
brokers.
No secondary market for CP’s.
CERTIFICATE OF DEPOSITS
Cd’s are marketable receipt of funds deposited in bank for a
fixed period at a specified rate of interest. They are bearer
documents and are readily negotiable.
It is a loan from an investor to a bank or similar institution,
where bank issues CD and pays interest thereof. (interest
may vary according to the time period of maturity).
It is a kind of promissory note issued by bank.
Marketable and negotiable instrument.
Issued by banks against the deposits kept by individuals,
companies and institutions.
Issued at discount rate.
Minimum size of CD is 5 lakhs.
Maturity period: 7 days to 1 year. FI’s can issue for 1-3 years.
Offers high rate of interest than treasury bills.
Banks have to maintain SLR and CRR on the issue price of
CD’s.
REPO RATE/ REVERSE REPO RATE
A Repo involves a sale and repurchase agreement
simultaneously by two parties. Repo rate is the
rate at which the central bank lends short term
funds to the market.
Example: Firm X needs to have short term funds
and firm Y wants to make short investments. Now
both the parties enter into an agreement where X
sells the securities to Y at a certain price and
simultaneously agrees to repurchase the same
after a specified time at a slightly high price.
Interest cost to X= difference between sale price
and repurchase price
Interest income to Y= difference between sale
price and repurchase price
EXAMPLE
Repo rate: 4.40%
Reverse repo rate: 3.35%
Marginal Standing Facility Rate:4.25%
Bank rate: 4.25%
CRR: 3%
SLR: 18%
Money market rates
Call rates: 2.50%-3.40%
Govt. Securities market:
5.85%
91 days T-bills: 3.27%
182 days T-bills: 3.45%
364 days T-bills: 3.57%
Capital market rates
S&P BSE Sensex :49034.67
Nifty 50: 14433.70
As on 19/01/21
Source: ww.rbi.org.in
 Activity

Search the current rates from the site of RBI