MONEY MARKET
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It is not a single market but a collection of
markets for several instruments.
Main players are: RBI, DFHI, Mutual Funds,
Banks, Corporate Investors, Non-Banking
finance companies, State government, Primary
Dealers, Public Sector Undertakings, NRI’s and
Overseas corporate bodies.
Functions of Money Market
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A balancing mechanism to even out the demand
for and supply of short-term funds.
A focal point for central bank intervention for
influencing liquidity and general level of interest
rates in the economy.
Reasonable access to suppliers and users of
short-term funds to fulfill their borrowings &
investment requirements.
Money Market Instruments
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Treasury Bills (T-bills)
Call/Notice money market
Certificates of Deposit (CD)
Commercial Paper
Commercial Bills (CB)
KEY TERMINOLOGIES
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MONEY MARKET MUTUAL FUNDS
(MMMFs) : It mobilises savings from small
investors and invest them in a short-term debt
instruments or money market instruments.
Discount & Finance House of India ( DFHI):
KEY TERMINOLOGIES
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Cash Reserve Ratio (CRR): a portion of
deposits (as cash) which banks have to
keep/maintain with the RBI.
Statutory Liquidity Ratio (SLR): banks are
required to invest a portion of their deposits in
government securities as a part of their statutory
liquidity ratio (SLR) requirements.
KEY TERMINOLOGIES
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Repo (Repurchase) Rate: It is the rate at which banks
borrow funds from the RBI to meet the gap between
the demand they are facing for money (loans) and how
much they have on hand to lend.
Reverse Rapo Rate : The rate at which RBI borrows
money from the banks (or banks lend money to the
RBI) is termed the reverse repo rate.
Bank Rate: This is the rate at which RBI lends money
to other banks (or financial institutions).The bank rate
signals the central bank’s long-term outlook on interest
rates. If th
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Prime Lending Rate: It is the minimum lending
rate charged by the bank from its best corporate
customers or prime borrowers.
Liquidity Adjustment Facility (LAF): Providing
various general and sector specific refinance
facilities to the commercial banks i.e. Export
Credit Refinance (ECR) and Collateralized
Lending Facility (CLF).
Treasury Bills
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A short term promissory notes issued by the
Central Government to tide over short-term
liquidity shortfalls.
A negotiable security, highly liquid, absence of
default risk, assured yield and are eligible for
inclusion in the securities for SLR purpose.
Issued for maturities of 91, 182 & 360 days.
Types of Auctions in T-Bills
Multiple –
Price Auction
UniformPrice Auction
Commercial Papers
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Unsecured promissory note issued by highly
rated companies.
Issuing company should get itself rated by
approved rating agencies.
Minimum period 7 days & maximum 1 year.
Issued at a discount & the discount is
determined by market forces.
Certificates of Deposits
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Unsecured, negotiable, short-term instruments
in bearer form.
Issued by Commercial Banks and development
financial institutions.
Time deposit of specific maturity.
Issued by banks during the period of tight
liquidity, at relatively high interest rate
Commercial Bills
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It is a short-term, negotiable and self-liquidating
instrument with low risk.
Transferable by endorsement and delivery.
Call/Notice Money Market
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It is a market for very short-term funds
repayable on demand and with a maturity period
varying between one day to fortnight.
Money is borrowed to maintain minimum level
of CRR.
Call rate is determined by market forces of
demand & supply.