MONEY
MARKET
Money Market
 Money
market is a place for trading in money and short
term financial assets that are close substitutes of money.
 Provides
an opportunity for balancing the short term
surplus funds of investors with short term requirements of
borrowers.
 Market
 Do
for short term loans i.e. less than one year.
not deal in money but near money assets.
 Money
market is not a place but an activity.
 The
transactions are carried out by telephone, mail
etc. among people who may have never met one
other.
 Example:
market
Bombay money market, New York money
The centre for dealings, mainly short term
character, in monetary assets; it meets the
short term requirements of borrowers and
provide liquidity and cash to the lenders.
Characteristics of Money Market
 RBI
occupies an important position in the money market.
 Provides
short term funds to various borrowers.
 Efficient
mechanism for cost control, credit control.
 Enables
businessmen to invest their temporary surplus
Characteristics of a
developed money Market
Developed commercial banking system
Presence of a central bank
Availability of ample resources
Near money assets
Sub markets
Players in Indian Money
Market
 RBI
 Commercial
banks
 Financial institutions
 Brokers
 Corporate units
 Discount and finance house of India
Functions Of Money Market
1. Economic development of the country:
 Provide short term funds
 Ensures
regular supply of funds through its sub- markets
and instruments
 Helps
in economic development by providing financial
assistance to trade, commerce and industry.
2. Profitable investment:
o Helps commercial banks to use their excess reserves in
profitable investments. Maximize profits by investing
their excess reserves.
o Excess reserves are invested in near money assets which
are highly liquid and can be easily converted into cash.
3. Help to government: Borrows short term funds at very
low interest rates.
4. Help to commercial Bank: the banks with deficit of
funds can raise funds from money market at a low rate of
interest.
5. Encouragement to Savings and investment: it
encourages saving and investment by transferring funds
from one sector to another sector.
Money
Market
Components
Institutions
Instruments
Collateral
loan
Market
Acceptance
Market
Call money
Market
Bill Market
Components
1. Call Money Market

It is the market for very short term funds, also called money at
call and short notice.

These loans are given for a very short period not exceeding 7
days.

More often from day to day or for overnight only i.e. 24 hours.

Highly liquid market

Loans are unsecured
2. Collateral loan market

Backed by the securities, stocks and bonds.

Collateral securities may be in the form of some valuable say
govt. bonds which are easily marketable and do not fluctuate
much in prices.

The collateral is returned to the borrower when the loan is
repaid

Once the borrower is unable to repay the loan, the collateral
becomes the property of the lender.

These loans are given for few months.
3. Acceptance Market
 Bankers’ acceptance
is a draft drawn by an individual or a
firm upon a bank and accepted by the bank whereby it is
ordered to pay to the order of a designated party or to
bearer a certain sum of money at a specified time in future.
market where the bankers’ acceptance are easily sold
and discounted is known as acceptance market.
 The
banker’s acceptance can be easily discounted in the
money market because they carry signature of the bankers.
A
4. Bill Market
 It
is a market in which short term papers or bills
are bought and sold.
Bills of
exchange
Short
term
papers
Treasury
bills
A
bill of exchange is a written unconditional order which
is signed by the drawer requiring the drawee to pay on
demand or at fixed future time, a definite sum of money.
 Treasury
bills are government papers securities for a short
period usually of 91 days duration.
 Treasury
bills are promissory notes of the government to
pay a specified sum after a specified period.
MONEY
MARKET
INSTITUTIONS
1. Commercial Banks
 These
are the backbone of the money market.
 These
banks use their short term deposits for financing
trade and commerce for short period.
 They
invest their surplus funds in discounting bills of
exchange.
 Commercial
banks put their excess reserves in different
forms or channels of investments which satisfy their
liquidity and profitability needs.
2. Central bank
 Plays
a vital role
 Monetary
 Acts
authority
as an apex institution
 Lender
of last resort
 Controller
 Raises
and guardian of money market
or reduces the money supply and credit to ensure
economic stability in the economy.
3. Acceptance Houses
 Functions
as intermediaries between importers and
exporters and between lenders and borrowers in the
short period.
 Specialize
bills.
in acceptance of commercial bills/trade
4. Non-banking financial
intermediaries
 Resort
to lending and borrowing of short term funds
in the money market.
 E.g.
Insurance companies,
provident funds etc.
investment
houses,
Money
market
instruments
Treasury bills
Commercial
Bills
Call and
short notice
money
market
Instruments
Certificate of
deposits
REPO
Commercial
Paper
1. Commercial bills
 Written
instrument containing an unconditional order
 Signed by the drawer
 Directing a certain person to pay a certain sum of
money only to, or order of a certain person, or to
bearer of an instrument at a fixed time in future or on
demand
 Bill drawn when goods are sold on credit
 Buyer accepts the bill and return to seller
 The seller may either retain the bill or get it
discounted
2. Treasury Bills
 It
is a short term government security
 Usually
 Sold
 No
of 91 days, 180 days or 365 days duration
by central bank on behalf of government
fixed rate of interest payable
 Sold
on basis of competitive bidding
3. Call and short notice money
 Call
money refers to money given for very short period
 Taken
for a day or overnight but not exceeding seven
days in any circumstances.
 Notice
 If
 If
money refers to a money given for upto 14 days
the loan is given for 1 day – Money at call
loan cannot be called back on demand and will require
notice of atleast 3 days – Money at short notice
4. Certificate of deposit
 These
are marketable receipts in bearer or registered form
of funds deposited in a bank for a specified period at
specified rate of interest
 Freely
 Liquid
transferable
and riskless in terms of default of payment of
interest and principal.
5. Commercial Papers
 These
are short term usance promissory notes
 Issued
by reputed companies with good credit rating
and having sufficient tangible assets
 Negotiable
 Normally
by endorsement and delivery
issued by banks, public utilities, insurance
and finance companies.
6. REPO
 Under
REPO, holder of securities sells them to an
investor with an agreement to repurchase at
predetermined date and rate.
 Also
called ready forward transaction as it involves
selling a security on spot basis and repurchasing the
same on forward basis.
Defects in Indian money market
• Existence of unorganized money market
• Seasonal diversity of money market
• Lack of integration
• Disparity in interest rates
• Lack of very well organized banking system
Reforms in Indian Money Market
Development
of money
market
instruments
Deregulation
of interest
rates
Institutional
development
Permission
to foreign
institutional
investors