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 .
• A segment of the financial market in which financial
instruments with high liquidity and very short
maturities are traded.
• It doesn’t actually deal in cash or money but deals
with substitute of cash like trade bills, promissory
notes & government papers which can converted
into cash without any loss at low transaction cost.
• The most active part of the money market is the
market for overnight call and term money between
banks and institutions and repo transactions
• It includes all
intermediaries.
individual,
institution
and
Money Market Players
Players
Role
Central Bank
Intermediary/Regulator
Government
Borrower/Issuer
Banks
Borrowers/Issuers
FI’s
Borrowers/Issuers
FII’s
Investors
Dealers
Intermediaries
Corporate
Issuers
Classification of Money market Instruments
(on the basis of type of Issuer and the
requirements they meet)
• Government and Quasi-government Securities
• Banking sector Securities
• Private sector securities
I.
Government and Quasi-government
Securities:TREASURY BILLS
GOVERNMENT DATED
SECURITIES/GILT-EDGE SECURITIES
FEATURES OF TREASURY BILLS
 Treasury Bills are short-term, rupee
denominations issued by Reserve bank of
India(RBI)on behalf of the government of India. Tbills are issued in the form of promissory notes or
finance bills by government to tide over shortterm liquidity shortfalls
 Distinct Features
 Zero default risk
 Assured yield
 Negligible capital depreciation
 Inclusion in (SLR)
INVESTORS
Primary dealers
Financial institutions
Insurance companies
Provident funds
Non-Banking Finance Companies
Foreign Institutional Investors
State governments
TYPES OF TREASURY BILLS
• At present Government of India issues 3 types of
treasury bills viz, 91-days, 182-days and 364-days.
 Ad Hoc Treasury Bills
– Purposes
– Replenish cash balance of central government
– To provide a medium of investment for state gov, semi-gov
department and foreign central banks.
 Ways and Means Advances
 On Tap Treasury Bills
 Auctioned Treasury Bills
TREASURY BILLS IN INTERNATIONAL
MARKETS
 T-bills are important market instrument in US,
where the minimum denomination is$10000 and
in multiple of$5000 thereof. The American T-bills
are mainly classified as regular series T-bills and
irregular-series T-bills
 Regular-series of 13-weeks, 26-week and 52weeks maturities are issued weekly or monthly
while irregular-series are issued for special cash
need of the Treasury.
 The US T-bills are sold in auctions and issued at a
discount to face value.
GILT-EDGED SECURITIES MARKET
 Government of India securities include debt obligations
of central, state governments & other financial
institutions owned by central & state governments. As
the repayment of principal as well as interest is secured
by government these instrument are usually referred to
as ‘Gilt-edged Securities’.
 The minimum amount of investment for a investor is
Rs 10,000 and in multiples thereof.
 The maturity period is up to 20 yrs and based on the
maturity these securities are classified as Short-dated
(<5), Medium-dated (5-10) and Long-dated (>10)
INVESTORS
 Individuals, firms, companies, corporate bodies,
institutions, state government, provident funds &
trusts.
 Commercial banks, insurance companies and
NBFC’s are major buyers of gilt in the market.
PURPOSE
• Open Market Operation
• Help Government in its Fiscal policy
• Used by Commercial banks, NBFC’s,
Insurance company etc to meet their statutory
requirements
Banking Sector Securities
CALL/NOTICE MONEY MARKET
TERM MONEY MARKET
CERTIFICFATES OF DEPOSITS
PARTICIPATION CERTIFICATES
Call/Notice Money Market
• The call money market is a part of money market and
refers to the overweight funds lent and borrowed
mostly by Banks for daily liquidity management.
• It is borrowed or lent for very short period.
• Notice Money(2-14 days)
• Call Money( for overnight)
• Term Money(14 to 365 days)
• The Indian call Money Market deals only with Call
Money.
• The Call loans are highly liquid as they are repayable
on due date.
• Also referred as INTERBANK MARKET.
Participants
• All scheduled commercial banks (Private sector ,
Public sector , Cooperative sector),primary
Dealers(PDs),Development finance institutions,
selected insurance companies and select mutual
funds operate in call/notice marks.
• Intermediaries like Discount and Finance House of
India Limited(DFHI), Securities Trading Corporation of
India Ltd(STCI) and Primary Dealers(PDs) are the
participants in the local call money markets.
• The Non-Bank institutions are given specific
permission to operate in call/notice money markets
can, and operate as lenders only.
• The banks and Primary Dealers can borrow and lend
money but mutual funds and select Corporate can
participate in lending only
• The participant under the category of banks can be
divided into two types : Predominant lenders(mostly PSUs)
 Predominant borrowers(foreign and private sector
banks)
• Based on the committee report on banking sector
reforms 1998:RBI carried out basic restructuring of call money
market to make it a pure interbank market and no
new Non-bank institutions are permitted to operate
w.e.f 5th May,2001.
• RBI decided to phase out Non –Banking participants
from Call Money w.e.f. 6thAugust2005.
Eligibility for transactions in Call/Notice Money
Market
Borrowing
 Scheduled commercial banks
(excluding RRBs)
Co-operative Banks
Primary Dealers(PDs)
Lending
Scheduled commercial banks
Cooperative Banks
Primary Dealers(PDs)
Select all-India Financial
Institutions
 Select Insurance Companies
Select Mutual Funds
Purpose
• In India, Call Money market is lent to cater the
following purposes:
 Firstly , The short term mismatches due to variation
in maturities.
 Secondly, To meet CRR requirements.
 Thirdly , To discount Commercial Bills.
Call Rates
• The Interest paid on Call Loans is known as the Call
Rates.
• These rates are calculated on daily Basis and vary
from day to day and Hour to hour within a day.
• High Rates indicates a tight Liquidity and low rates
shows easy liquidity in the market.
• There are influenced by the forces of supply and
demand for funds.
Location
• In India , Call Money Markets are mainly located in
main Commercial and big Industrial centers such as
Mumbai, Kolkata, Chennai, Delhi and Ahmedabad.
Term Money
• Short term funds having a maturity of 15 days
to one year are borrowed and lent without a
collateral
• Requires to bring greater stability in Banks
short term deficits.
• Funds are borrowed on the forecasted
requirements by banks.
• Introduced in 1989
• An Unsecured Promissory notes
• CDs are short term funds having maturity of 7 days
to 1 year
• Issued to individuals/Corporates/institutions etc at
discount to face value
• Subject to payment of stamp duty under the Indian
• Negotiable Instrument
• Issued at a discount to face value
• They form part of deposits and hence attract reserve
requirements.
• Financial Institutions can issue CDs for a period not
less than a year and not exceeding 3 years.
• One of the main activity of Bank is Credit Accommodation.
• So two types of Inter-Bank Participations (IBPs) were introduced,
one on risk sharing basis and the other without risk sharing
• To ease the liquidity position , Banks have option to share their
credit assets with other banks by issuing participation notes.
• Also called Inter Bank Participations(IBPs)
• Rate at which PCs are issued can be Negotiable depending upon
interest rate scenarios subject to a minimum 14.0 per cent per
annum
• strictly inter-bank instruments confined to scheduled
commercial banks excluding regional rural banks.
• The IBP with risk sharing can be issued for 91-180
days and without risk sharing is a money market
instrument with a tenure not exceeding 90 days
Private Sector Securities
COMMERCIAL PAPERS
BILLS OF EXCHANGE
INTER CORPORATE DEPOSITS
MONEY MARKET MUTUAL FUNDS
BONDS/DEBENTURES BY THE CORPORATE.
COMMERCIAL PAPERS
•
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 ( Private and public
sector Companies , Primary dealers , All India Financial
Institutions) for the financing of Working capital
Requirements, pay taxes and other short term
commitments after satisfying the eligibility criterion by
RBI
• Commercial Papers are generally issued in multiples of
INR 5 Lakhs for a period ranging from a minimum of 15
days to a maximum of 1 year
• Commercial paper is not usually backed by any form
of collateral, so only firms with high-quality debt
ratings will easily find buyers without having to
offer a substantial discount (higher cost) for the debt
issue.
• Commercial paper is usually sold at a discount from
face value, and carries shorter repayment dates than
bonds. The longer the maturity on a note, the higher
the interest rate the issuing institution must pay.
Interest rates fluctuate with market conditions, but
are typically lower than banks' rates
BILLS OF EXCHANGE
A bill of exchange is playing an important part in the
commercial life of the country. The need for it arises
where the buyer of goods needs a period of credit
before paying it, it is drawn by the creditor and is
accepted by the debtor.
According to F.W Muller
A bill of exchange is an unconditional order in writing
addressed by one person to another, signed by the
person giving it, requiring the person to whom it is to
pay on demand or at a fixed or determinable future
time a sum certain in money to or the order of a
certain person or to bearer.
CHARACTERISTICS OF BILLS OF EXCHANGE
• A bill of exchange must be in writing.
• It must contain an order to pay.
• The order to pay must be unconditional.
• If it is subject to the happening of some events, it will
not be a bill of exchange.
Cont…..
• It must be signed by the drawer and properly
stamped.
• The parties to the bill, the drawer and the drawee
and payee must be certain and definite individuals.
• The amount payable must be certain.
• The payment must be made in money and not in
kind.
INTER CORPORATE INVESTMENTS/DEPOSITS
(ICDs)
• An Inter-Corporate Deposit (ICD) is an unsecured loan
extended by one corporate to another.
• This market allows corporates with surplus funds to lend to
other corporates. Also the better-rated corporates can borrow
from the banking system and lend in this market.
• The cost of funds for a corporate is much higher than that for
a bank.
• As ICDs are unsecured, the risk inherent is high and the risk
premium is also built into the rates.
Characteristics of ICD’S
• The transaction is free from bureaucratic and legal
hassles.
• The market of inter-corporate deposits maintains
secrecy.
• The market of inter-corporate deposits depends
crucially on personal contacts
WHAT IS MMMFs?
• A money market fund is a mutual fund that
invests solely in cash/cash equivalent
securities, which are also often referred to
as money market instruments. These
investments are short-term, very liquid
investments with high credit quality
GENERALLY INCLUDES
•
•
•
•
•
Certificates of deposit (CDs)
Commercial paper
U.S. Treasuries
Bankers' acceptances
Repurchase agreements
Securities and Exchange Commission (SEC)
rules dictate that the average maturity of
money market fund securities must be 90
days.
MONEY MARKET FUNDS ARE SPECIAL
FOR 3 REASONS
• SAFETY
By purchasing debt securities issued by banks, large
corporations and the government, money market
funds carry a low default risk while still offering a
reasonable return.
• LOW INITIAL INVESTMENT
money market funds allow you to take advantage of
the safety related to a money market investment at
low investment amounts
• ACCESSIBILITY
Money market fund shares can be bought and sold at
any time and are not subject to market timing
restrictions
•
•
•
•
It is a certificate issued by Government, credit
institutions acknowledging indebtedness.
It is one of the source of raising long term funds by
Public, Private and Financial Institutions.
Bonds can be issued for short and long term.
Issuers of bonds are mainly government owned
Financial Institutions, Public Sector Units and Private
Corporates.
Role of RBI in Indian Money Market
The primary aim of Central bank in the money
market is:
• To maintain the liquidity
• Consistent short term interest rates
Monetary Policy
Monetary Policy may have an indirect impact on Money market
 Changes in the CRR
A Decrease in CRR
Enhances loanable funds of banks .Hence less dependence upon
call and term money market.
An Increase in CRR
Create a need of Borrowing from market or to raise additional
deposits.
• Changes in SLR
A decrease in the SLR
Banks will have excess investment in the SLR securities
and Disinvestment will not be better to do as it will
reduce down prices due to more sellers.
A Increase in SLR
Reduce the liquidity of Banks as transfer of cash into
securities and increases the demand of it which will
be available at higher prices.
Open Market Operations
Monetary Policy may have a Direct impact on Money market
• Bank Rate
Prime lending rate is dependent on bank rate.
If the PLR is reduced the commercial paper and commercial
deposit rates will also get affected.
• Repo Rate
A cut in the repo rate will directly bring down call rates also
other term money rates.
References
• Financial Institutions and Markets By LM
Bhole
• Financial Markets ,ICFAI
• www.investopedia.com
Thank You
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Pranjul Srivastava
FI-0829
Pravin Kumar Choudhary FI-0830
Sakshi Aggarwal
FI-0838
Ridhi Aggarwal
FI-0835
Priyanka Kapila
FI-0833
Sachin Kapoor
FI-0837
Siddharth Neri
FI-0841
Sanjay Prajapati
FI-0840