Investment Analysis &

Portfolio Management

Unit 4: Introduction to Money Market:

Introduction
 Money Market is a market for overnight to short-term funds, for short-
term money & financial assets that are close substitutes for money
 Short-term generally means a period upto one year
 Participants in the market are commercial banks, financial
intermediaries, large corporates & RBI
 RBI influences the availability & cost of credit by varying liquidity in
the market through various instruments
 The broad functions of the money market are to provide
i) An equilibrium mechanism for evening out short-term surpluses &
deficiencies
ii) A focal point of RBI intervention for influencing liquidity in the economy
iii) A reasonable access to the users of short-term funds to meet their
requirements at realistic/reasonable cost
Call / Notice / Term Money Market
 Deals with the borrowed & lent overnight/one-day call
money & notice money for period upto 14 days
 Balancing the short term liquidity position of banks
 Repayable on demand & with maturity period varying
b/w 1 day & upto 14 days
 When money is borrowed/lent for a day, it is
call(overnight) money otherwise it is notice money
 Used by banks to meet their CRR requirements (Cash
Reserve Ratio)
Call / Notice / Term Money Market….

 It is a inter bank market

 The interest rate paid on call loans is known as the call
rate
 It varies from day to day & hour to hour
 Determined by demand & supply factors
 When there is liquidity in the market call rates move
around repo rate & during tight liquidity call rates move
towards bank rate
 RBI moderates liquidity & volatility in the call market
through repos & CRR
G-Sec Securities
 When Government Expenditure exceeds revenues, the deficit
is financed by issue of variety of securities
 Govt. can tap different sources of funds that are available in the
money market
 Non-demand internal debt securities :
i) permanent debt
- Dated loans with maturity of 12 months/ more
- Floated through agency of the RBI
- RBI also underwrites these issues
- Amounts, issue prices, coupon rates & the timing of the
floatation are taken as per the needs of the important
institutional investors
ii) Floating debt
 Maturity of less than 12 months
 Non marketable securities but may be redeemed as & when deeded
 T-Bills are also floating debt
 Other securities
- Reserve Funds
- Annuity deposits
- Provident funds
- Depreciation deposits
- Market loans
- Special securities issued to RBI
 Foreign securities can be issued by Central Govt. & not by the State
Govt.
Treasury-Bills (T-Bills)

 Short term borrowing instrument by the GOI

 To bridge seasonal/temporary gaps receipts
& expenditure of GOI
 They are negotiable securities
 They are issued at discount & are repaid at
par on maturity
 Tenure of 91 days to 364 days
Repos/Reverse Repos
 A transaction in which two parties agree to sell and repurchase the
same security
 The seller sells specified securities with an agreement to
repurchase the same at a mutually decided future date & price
 Transaction is repo from the viewpoint of the seller of securities &
reverse repo from the view point of buyer of the securities
 It is a temporary sale of debt
 Transaction combines elements of both a securities purchase/sale &
money market borrowing /lending operation
 Terms of the contract is in terms of repo rate generally lower than
the Bank rate (Standard rate @ which RBI lends)
 Usually entered with a maturity of 1-14 days
 Generally take place in market lots of Rs. 5 crore
Repos/Reverse Repos……
 Very safe because settled through SGL system of RBI
 SGL stands for 'Subsidiary General Ledger' account
 It is a facility provided by RBI to large banks and
financial institutions to hold their investments in
Government securities and Treasury bills in the
electronic book-entry form
Commercial Paper
 short term unsecured negotiable instrument with a fixed
maturity (7days to 1 yr.)
 Issued by corporates, primary dealers (dealer in Govt.
Securities) & all India financial institutions under the
umbrella limit fixed by RBI
 Issued on a discount to face value basis or interest
bearing form
 When companies deal directly with investors without any
intermediary it is a direct paper
 When issued by a security dealer they are dealer papers
 Dealers buy at a low price & sell at a higher price
Commercial Paper….
 There is a underwritten facility from banks
 Issued in denominations of Rs. 5 lakh/ multiples
 Total amount of CP proposed to be issued should be raised within a
period of two weeks from the date in which the issuer opens the issue
for subscription
 CP may be used on a single date / in parts on different dates but it
should have same maturity date
 Every issue of CP shall be treated as a fresh issue
 The issuing & paying agent can only be a scheduled bank
 CP can be issued in the form of promissory note/dematerialised form
through any depository approved by & registered with SEBI
 Banks, FIs & PDs are required to issue CPs only in dematerialised form
 CP cannot be underwritten
Advantages of Commercial Paper

 No documentation formalities
 Can be flexible to match the cash flow of the
issuer
 Cheaper cost to the issuer
Eligibility for corporate to issue CP

 The tangible net worth of the co. as per the

latest audited b/s sheet is => Rs. 4 crore
 Co. has been sanctioned WC limit by
banks/all-India FIs
 The borrowal A/c of the Co. is classified as
Standard Asset by the financing banks/
institutions
 Obtain rating credit for issuance of CP (P-2)
by CRISIL/ equivalent rating by other agencies
Certificate of Deposit
 A document of title to a time deposit
 Bearer documents and are readily negotiable
 Marketable receipt of funds deposited in a bank for a fixed period at a specified
rate of interest
 Instead of prematurely encashing the deposits, investors can sell Cds in the
secondary mkt. before its maturity
 Negotiable money market instruments may be issued in demat form
 Can be issued by commercial banks (excluding Regional rural banks/Local area
banks) & Select all India FIs permitted by RBI to raise short term resources
within the limit fixed
 NRIs may subscribe to CDs but cannot be endorsed to another NRI
 The minimum size of CD must be Rs. 1 lakh & multiples
 Maturity between 7 days to one year
 Maturity for FIs can be 1-3 years
 CDs may be issued at discount on face value
Certificate of deposit…

 Can Be issued on floating rate but the

method of calculating interest rate must be
transparent & market based
 CD must be in demat form
 Issuance attract stamp duty