MONEY MARKET & ITS INSTRUMENTS
What is Money Market?
As per RBI definitions “ 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).
 A segment of the financial market in which financial
instruments with high liquidity and very short maturities are
traded.
Continued…….
 It doesn’t actually deal in cash or money but deals with
substitute of cash like trade bills, promissory notes & govt
papers which can converted into cash without any loss at low
transaction cost.
 It includes all individual, institution and intermediaries.
Features of Money Market?
 It is a market purely for short-terms funds or financial assets
called near money.
 It deals with financial assets having a maturity period less
than one year only.
 In Money Market transaction can not take place formal like
stock exchange, only through oral communication, relevant
document and written communication transaction can be
done.
Continued……..
 Transaction have to be conducted without the help of
brokers.
 It is not a single homogeneous market, it comprises of
several submarket like call money market, acceptance & bill
market.
 The component of Money Market are the commercial
banks, acceptance houses & NBFC (Non-banking financial
companies).
Objective of Money Market?
 To provide a parking place to employ short
funds.
term surplus
 To provide room for overcoming short term deficits.
 To enable the central bank to influence and regulate liquidity
in the economy through its intervention in this market.
 To provide a reasonable access to users of short-term funds to
meet their requirement quickly, adequately at reasonable
cost.
Importance of Money Market?
o Development of trade & industry.
o Development of capital market.
o Smooth functioning of commercial banks.
o Effective central bank control.
o Formulation of suitable monetary policy.
o Non inflationary source of finance to government.
Composition of Money Market?
Money Market consists of a number of sub-markets which
collectively constitute the money market.They are:
 Call Money Market
 Commercial bills market or discount market
 Acceptance market
 Treasury bill market
Instrument of Money Market?
A variety of instrument are available in a developed money
market.
In India till 1986, only a few instrument were available.
They were:
• Treasury bills
• Money at call and short notice in the call loan market.
• Commercial bills, promissory notes in the bill market.
New Instruments
Now, in addition to the above the following new instrument
are available:
Commercial papers.
Certificate of deposit.
Banker's Acceptance
Repurchase agreement
Money Market mutual fund
CALL MONEY MARKET
 Call money market is that part of the national money market
where the day to day surplus funds, mostly of banks are
traded in.
 They are highly liquid, their liquidity being exceed only by
cash.
 The loans made in this market are of the short term nature.
Continued……..
 Banks borrow from other banks in order to meet a sudden
demand for funds, large payments, large remittances, and to
maintain cash or liquidity with the RBI. Thus, to the extent that
call money is used in India for the purpose of adjustment of
reserves.
Participants in the call money market
 Scheduled commercial banks
 Non-scheduled commercial banks
 Foreign banks
 State, district and urban, cooperative banks
 Discount and Finance House of India (DFHI)
 Securities Trading Corporation of India (STCI).
The DFHI and STCI borrow as well as lend, like
banks and primary dealers, in the call market.
CALL RATES
 The rate of interest paid on call loans is known as call rate.
 Call rate is highly variable from day to day, often from hour
to hour.
 It is very sensitive to changes in demand for and supply of call
loans.
 Eligible participants are free to decide on interest rates in
call/notice money market.
 Calculation of interest payable would be based on FIMMDA’s
(Fixed Income Money Market and Derivatives Association of
India).
CALL RATE IN INDIA
 CALL RATE IN INDIA has reached as high a level as 30%
in December 1973.
 It is an alarming level for any short-term rate of interest to
reach, and as bank defaulted in a major way in respect of cash
and liquidity requirements at that time due to the
prohibitively high cost of call money, it became necessary to
regulate call rates within reasonable limits.
 Indian Banks’ Association (IBA) in 1973 fixed a ceiling of
15% on the level of call rate.
Continued……
 The IBA lowered this ceiling of 15% to 12.5% in March 1976,
10 % in June 1977, and 8.6% in March 1978, and 10.0% in April
1980.
 And current call rate in India is 8%.
 There are now two call rates in India: one, the interbank call
rate, and the other, the lending rate of DFHI.
 DEALING SESSION
Deals in the call/notice money market can be done up to 5.00
pm on weekdays and 2.30 pm on Saturdays or as specified by RBI
from time to time.
 LOCATION OF CALL MONEY MARKET IN INDIA
Mumbai, Calcutta, Chennai, Delhi, and Ahmadabad.
TREASURY BILLS MARKET
 Treasury
bills (TBs), offer short-term investment
opportunities, generally up to one year.
 They are thus useful in managing short-term liquidity.
 Types of treasury bills through auctions
 91- Day, 182- day, 364- day, and 14- day TBs
91- DAY TREASURY BILL
 Treasury bills are not self-liquidating in the way genuine
trade bills are, although the degree of their liquidity is
greater than that of trade bills.
 If we were to arrange short-term financial instruments
according to their liquidity, the descending order would be
cash, call loans, treasury bills and commercial bills.
Continued….
 Treasury bills are highly liquid because there cannot be a better
guarantee of repayment then the one given by the government
and because the central bank of country is always willing to
purchase or discount them.
 As unlike ordinary trade bills, treasury bills are claims against the
government, they do not require any gardening or further
endorsement or “acceptance”
Important qualities of treasury bills
 The high liquidity
 Absence of risk of default
 Ready availability
 Assured yield
 Low transaction cost
 Eligibility for inclusion in statutory liquidity ratio (SLR)
 Negligible capital depreciation
TYPES OF TREASURY BILLS
 Ordinary TBs
 Ad hoc TBs
 The ordinary TBs are issued to the public and the RBI for
enabling the government to meet the needs of supplementary
short-term finance.
 TBs, also known as ad hocs in short, has been discontinued
through the signing of two agreements between the
government and the RBI.
Continued……
 The instrument of ad hoc Treasury bill and the system of issuing
it were introduced in India in 1937.
 Government shall maintain with the RBI a cash balance of not
less than Rs.50crore on Fridays and Rs.4 crore on other days free
of obligation to pay interest.
Continued……
 whenever the balance falls below these minimums, the
government account would be replenished by the creation of ad
hocs in favour of the RBI.
 The government issued these bills to replenish their cash balance.
They also provide a medium to the state governments, semigovernments, and foreign central banks to invest their temporary
surpluses.
182- DAYS TREASURY BILLS MARKET
 With a view to widening the short-term money market, and
to providing more outlets for temporary surplus fund, the
authorities in India had introduced, in November 1986, a
major innovation in the form of new money market
instrument- the 182-day Treasury bill.
 It used to be sold in the market by the RBI in auctions which
were monthly in the beginning; they were made fortnightly
from July 1988.
Continued……..
 It is important to note that no specific amount of funds was
sought to be raised through the auctions of these bills.
 The amount raised in each auction suspended upon the funds
available with the market participants, and the funds they desired
to invest in these bills. Thus, the new bill had become a handy
instrument for banks, financial institution.
 The 182-day bills could be purchased by any person resident in
India, including individuals, firms, companies, banks, and
financial institutions.
 The 182-day bill was quit liquid because of the availability of
refinance facility against it and the existence of the secondary
market in it.
364-DAY TREASURY BILL MARKET
 Upon discounting the 182-day Treasury bill the authorities
introduced a new money market instrument, namely 364-day
TBs with effect from April 1992.
 It is being auction regularly every fortnight.
 Its features are very similar to those which the 182-day bill
had.
 The RBI dose not purchase and rediscount this bill.
14-DAYS TREASURY BILLS MARKET
With a view to further diversify the TBs market; the authorities
have introduced recently two types of 14-day TBs:
 On April 1, 1997 which is known as intermediate treasury
bill (ITB)
 Second on may 20, 1997.
ITB has replaced the 91-day tap Treasury bill.
Continued……..
 It is sold only to state governments, foreign central banks, and
other specified bodies in order to provide them with alternate
arrangements in place of 19-day tap TBs for investment of their
temporary cash surplus.
 It is issued in a book entry from i.e. by credit to subsidiary
general ledger account.
 It can be repaid/renewed at par on the expiration of 14 days
from the date of issue.
 The disadvantage of 14-day ITB is that it is not tradable or
transferable.
Summary of TBs
 Treasury bills are available for a minimum amount of
Rs.25,000 and in multiples of Rs. 25,000. Treasury bills are
issued at a discount and are redeemed at par. Treasury bills
are also issued under the Market Stabilization Scheme (MSS).
 91-day T-bills are auctioned every week onWednesdays.
 182-day and 364-day T-bills are auctioned every alternate
week onWednesdays.
Continued……
 T-bills auctions are held on the Negotiated Dealing System




(NDS) and the members electronically submit their bids on
the system.
DEFECTS OF TREASURY BILLS
PoorYield
Absence of Competitive Bids
Absence of Active Trading
Type of
Day of
Day of
T-bills
Auction
Payment*
91-day
Wednesday
Following Friday
182-day
Wednesday of non- Following Friday
reporting week
364-day
Wednesday of
reporting week
Following Friday
COMMERCIAL BILLS MARKET
 Funds for working capital required by commerce and
industry are mainly provided by banks through cash credits,
overdrafts, and purchase/discontinuing of commercial bills.
 BILL OF EXCHANGE
 The financial instrument which is traded in the bill market of
exchange. It is used for financing a transaction in goods that
takes some time to complete.
 It shows the liquidity to make the payment on a fixed date when
goods are bought on credit.
 Accordingly to the Indian Negotiable Instruments Act, 1881, it is
a written instrument containing as unconditional order, signed
by the maker, directing a certain person to pay a certain sum of
money only to, or to the order of, a certain person, or to the
bearer of the instrument.
 INLAND BILLS
 Be drawn or made in India, and must be payable in India
 Be drawn upon any person resident in India
 FOREIGN BILLS
 Drawn outside India and may be payable in and by a party outside
India, or may be payable in India or drawn on a party resident in
India
 Drawn in India and made payable outside India.
 A related classification of bills is export bills and import bills
For what purpose bill of exchange used?
 Commercial bills may be used for financing the movement
and storage of goods between countries, before export (preexport credit), and also within the country.
 In India the use of bill of exchange appears to be in vogue for
financing agricultural operations, cottage and small scale
industries, and other commercial and trade transactions.
BANKERS ACCEPTANCE
 A banker's acceptance is a short-term investment plan
created by a company or firm with a guarantee from a bank.
 It is a guarantee from the bank that a buyer will pay the seller
at a future date. A good credit rating is required by the
company or firm drawing the bill.
 This is especially useful when the credit worthiness of a
foreign trade partner is unknown.
 The terms for these instruments are usually 90 days, but this
period can vary between 30 and 180 days. Companies use the
acceptance as a time draft for financing imports, exports and
trade.
 In India, there are neither specialised acceptance agencies for
providing this service on a commission basis nor is it provided to
any significant extent by commercial banks.
 Under the bill market schemes introduced by RBI in 1952, banks
are required to select the borrowers after careful examination of
their means, respectability, and dealings for conversion of their
advances in to bills.
 Banks maintain opinion registers on different drawers of bills and
they get reports from time to time on these drawers of bills.
 BA acts as a negotiable time draft for financing imports, exports
or other transactions in goods.
 Acceptances are traded at discounts from face value in the
secondary market.
 BA’s are guaranteed by a bank to make payment.
DISCOUNT MARKET
 DISCOUNTING SERVICE
 The central banks help banks in their liquidity management
by providing them discounting and refinancing facilities.
 The RBI are in abundance liquidity (funds) to banks on
occasions when liquidity shortages threaten economic
stability.
 The central bank performs his function through its discount
window or discounting mechanism.
 Bank borrow funds temporarily at the discount window of the
central bank.
 They are permitted to borrow or are given the privilege of doing
so from the central bank against certain types of eligible paper,
such as the commercial bill or treasury bill, which the central
bank stands ready to discount for the purpose of financial
accommodation to banks.
DISCOUNT AND FINANCE HOUSE OF
INDIA
 The question of setting up of discount house in India was
considered by the banking commission in the early 1970s.
 DISCOUNT HOUSE FUNCTION
 It should be the sole depository of the surplus liquid funds of the
banking system as well as the non-banking financial institutions.
Continued……
 It should use surplus funds to even out the imbalance in
liquidity in the banking system subject to the RBI guidelines.
 It should create ready market for commercial bills, treasury
bills, and government guaranteed securities by being ready to
purchase from and sell to the banking system such securities.
COMMERCIAL PAPER
 Commercial Paper (CP) is an unsecured money market
instrument issued in the form of a promissory note.
 It was introduced in India in 1990 with a view to enabling
highly rated corporate borrowers/ to diversify their sources
of short-term borrowings and to provide an additional
instrument to investors.
 Only company with high credit rating issues CP’s
 Subsequently, primary dealers and satellite dealers were also
permitted to issue CP to enable them to meet their short-term
funding requirements for their operations.
 Primary dealers (PDs) and the All-India Financial Institutions
(FIs) are eligible to issue CP.
 CP is very safe investment because the financial situation of a
company can easily be predicted over a few months.
 CP can be issued for maturities between a minimum of 15 days
and a maximum up to one year from the date of issue.
 The aggregate amount of CP from an issuer shall be within the
limit as approved by its Board of Directors or the quantum
indicated by the Credit Rating Agency for the specified rating,
whichever is lower.
 As regards FIs, they can issue CP within the overall umbrella
limit fixed by the RBI i.e., issue of CP together with other
instruments viz., term money borrowings, term deposits,
certificates of deposit and inter-corporate deposits should not
exceed 100 per cent of its net owned funds, as per the latest
audited balance sheet.
 Only a scheduled bank can act as an IPA for issuance of CP.
 Individuals,
banking companies, other corporate bodies
registered or incorporated in India and unincorporated bodies,
Non-Resident Indians (NRIs) and Foreign Institutional Investors
(FIIs) etc. can invest in CPs.
 Amount invested by single investor should not be less than Rs.5
lakh (face value).
 However, investment by FIIs would be within the limits set for
their investments by Securities and Exchange Board of India
Continued…..
 CP will be issued at a discount to face value as may be
determined by the issuer.
 The investor in CP is required to pay only the discounted
value of the CP by means of a crossed account payee cheque
to the account of the issuer through IPA.
CERTIFICATES OF DEPOSIT
 With a view to further widening the range of money market
instruments and give investors greater flexibility in
deployment of their short-term surplus funds, Certificates of
Deposit (CDs) were introduced in India in 1989.
 Certificate of Deposit (CD) is a negotiable money market
instrument and issued in dematerialised form or as a Usance
Promissory Note against funds deposited at a bank or other
eligible financial institution for a specified time period
CDs can be issued by
 Scheduled commercial banks excluding Regional Rural Banks
(RRBs) and Local Area Banks (LABs)
 Select all-India Financial Institutions that have been
permitted by RBI to raise short-term resources within the
umbrella limit fixed by RBI.
AGGREGATE AMOUNT on CD
 Banks have the freedom to issue CDs depending on their
requirements.
 An FI may issue CDs within the overall umbrella limit fixed
by RBI, i.e., issue of CD together with other instruments,
viz., term money, term deposits, commercial papers and
inter-corporate deposits should not exceed 100 per cent of
its net owned funds, as per the latest audited balance sheet.
MINIMUM SIZE OF ISSUE AND
DENOMINATIONS
 Minimum amount of a CD should be Rs.1 lakh, i.e., the
minimum deposit that could be accepted from a single
subscriber should not be less than Rs.1 lakh and in the
multiples of Rs. 1 lakh thereafter.
 INVESTORS
CDs can be issued to individuals, corporations, companies,
trusts, funds, associations, etc. Non- Resident Indians (NRIs)
may also subscribe to CDs, but only on non-repatriable basis,
which should be clearly stated on the Certificate. Such CDs
cannot be endorsed to another NRI in the secondary market.
MATURITY
 The maturity period of CDs issued by banks should be not
less than 7 days and not more than one year.
 The FIs can issue CDs for a period not less than 1 year and
not exceeding 3 years from the date of issue.
Other aspect of CD
 CDs may be issued at a discount on face value.
 Banks / FIs are also allowed to issue CDs on floating rate
basis provided the methodology of compiling the floating rate
is objective, transparent and market-based.
 Banks have to maintain appropriate reserve requirements,
i.e., cash reserve ratio (CRR) and statutory liquidity ratio
(SLR), on the issue price of the CDs.
 CDs in physical form are freely transferable by endorsement
and delivery.
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
Nationalised banks
ii. Private banks
Indian Banks
Foreign banks
4. Development bank
IDBI, IFCI, ICICI, NABARD, LIC, GIC, UTI etc.
II. UNORGANISED SECTOR
1. Indigenous banks
2 Money lenders
3. Chits
4. Nidhis
III. CO-OPERATIVE SECTOR
1. State cooperative
i. central cooperative banks
Primary Agri credit societies
Primary urban banks
2. State Land development banks
central land development banks
Primary land development banks