Money Market Instruments

 

The Fundamentals Of Money Market Instruments In India

VIDYUT JAIN

 

RESEARCH METHODOLOGY Problem statements Literature reviews  Research methodology  Data collection Primary Data

Survey

Secondary Data

In-depth interviews Data analysis

Recommendations and Conclusion

 

Overview Of Financial Markets FINANCIAL MARKET

Money Mkt.

Capital Mkt. Debt Mkt.

FOREX Mkt. Mkt.

 

MONEY MARKET It includes

Call/ Notice

Repo

Treasury Bills

Commercial Bill Icd

Term Money Certificate Of Deposit

Commercial Papers

 

Debt Market It includes Government Securities and Bonds. Government Security includes •

Central Govt. Securities • State Govt. Securities Securities  

Bonds includes •

Foreign Investment Bonds • PSU Bonds Bonds   • Corporate Securities Securities  

 

The Six Horses:Why,What,Wh Horses:Why,What,Who,Which, o,Which, How and Where

Why : The Need What : The Definition Who : The Players Which & How : The Products and Process Where : The Resources

 

The Need Need for short term funds by banks Outlet for deploying funds on short term basis Need to keep the SLR & CRR as prescribed Optimize the yield on temporary surplus funds Regulate the liquidity & interest rates

 

The Definition Money Market is “the centre for dealings, mainly short term character, in money assets. It meets the short term requirements r equirements of the borrowers & provides liquidity or cash to the lenders. Money Market refers to the market for short term assets that are close substitutes of money, usually with maturities of less than a year.

 

The Players RBI SBI DFHI Ltd. (Amalgamation of Discount & Finance House in India & SBI Gilts in 2004) Commercial Banks, Cooperative Banks Dealers are allowed to borrow and lend.& Primary Specified All-India Financial Institutions, Mutual Funds and certain specified entities are allowed to access to Call/Notice money market only as lenders. Individuals, Individual s, Firms, Companies, corporate bodies, trusts & institutions can purchase the treasury bills, commercial papers and certificate of deposits.

 

The Products & Process Certificate of Deposit (CD) Commercial Paper (C.P) Inter Bank Participation Certificates Inter Bank Term Money Treasury Bills Call Money Banker’s Acceptance  Acceptance  REPO

 

Certificate Of Deposit (June,1989) Short term borrowings in the form of Usance Promissory Notes having a maturity of not less than 15 days upto a maximum of 1 year. Subject to payment of Stamp Duty under Indian Stamp Act, 1899 (Central Act) They are like bank term deposit accounts, freely negotiable instruments often referred to as Negotiable CD.

 

Features Of CD Can be issued by all scheduled commercial banks except RRB’s  RRB’s  Minimum period 15 days, Maximum period 1 year NRIs can subscribe to CDs on non-repatriable basis. Minimum amount Rs.1 lac & in multiples of Rs.1 lac Transferable by endorsement & delivery. CRR & SLR are to be maintained.

CDs are to be stamped.  

 Advantages ges  Advanta

Enable high return on short term surpluses. Enhances liquidity & allows resale. For raising resources in times of need. To improve lending capacity of the bank.

 

Commercial Paper CP is an unsecured money market instrument (short-term) issued in the form of a promissory note. Who Can Issue CP? • Highly rated corporate borrowers, primary dealers (PDs) & satellite dealers (SDs) & all-India financial institutions (FIs)

 

Features Cheaper source of funds than limits set by banks. Optimal combination of liquidity return. Highly liquid instrument. Transferable by endorsement & delivery. Backed by liquidity & earnings of issuer. Issued for a minimum period of 30 days and a maximum up to one year Issued at a discount to face value Issued in demat form. (Compulsory demat from

July 01).   

Types of CP Direct Papers :Issued directly by company to investors without any intermediary. Dealer Papers :Issued by a dealer or merchant banker on behalf of a client.

 

Eligibility for issue of CP The tangible net worth-not less than Rs.4 crore; the working capital (fund-based) limit-not less than Rs.4 crore & borrowal account- classified as a Standard Asset by the financing banks.

 

Rating Requirement  All eligible participants participants should obtain the credit rating for issuance of CP through the following-Credit Rating Information Services Of India Ltd. (CRISIL) Investment Information & Credit Rating Agency of India Ltd. (ICRA) Credit Analysis & Research Ltd. (CARE) DCR India The minimum credit rating shall be P-2 of CRISIL or such equivalent rating by other agencies.

 

Maturity Issued for maturities between a minimum of 30 days and a maximum upto one year from the date of issue. If the maturity date is a holiday, the company would be liable to make payment on the immediate preceding working day .

 

To whom Issued CP is issued to and held by individuals, banking companies, other corporate bodies registered or incorporated in India, and unincorporated bodies, Non-Resident Indians (NRIs) and Foreign Institutional Investors (FIIs).

 

Banker's Acceptance  It is a short-term credit investment. It is guaranteed by a bank to make payments. The Banker's Acceptance is traded in the Secondary market.

 

Repo Meaning of Repo Transaction in which 2 parties agree to sell & repurchase the same security. Under such an agreement, the seller sells specified with an agreement to repurchase thesecurities same at a mutually decided future date and a price. The Repo/Reverse repo transaction can only be done at Mumbai between parties approved by RBI & in securities as approved by RBI (Treasury Bills, Central/State Govt. Securities).

 

Repo Uses of Repo • Helps banks to invest surplus cash cash   • Helps investors achieve money market returns with sovereign risks. • Raising funds by borrowers  borrowers  • Adjusting SLR/CRR positions simultaneously. • For liquidity adjustment in the system.

 

Recent changes  All Govt. Securities are eligible for repos. Primary dealers & non-bank participants allowed to undertake such transactions. Minimum 3 days period, for inter-bank transactions has been removed.

 

Call Money Market Integral part of Indian Money Mkt., where the day-to-day surplus funds (mostly of banks) are traded. The loans are of short term duration varying from 1 to 14 days. The money that is lent for 1 day in this mkt. is known as “Call “Call Money ”, & ”, & if it exceeds 1 day (but less than 15

days), it is referred to as Notice Money ”.  ”.   

Call Money Market Features Deals in loans at call and short notices. Deals with extreme form of short term loans; 24 hours, 7-15 days maturity. Recalled on demand or shortest possible notice. Normally, collaterals are not insisted upon. In India, CMM provides facilities for interbank tending. Surplus suppliers of funds: UTI, SBI, LIC

 

Call Money Market Banks borrow in this market for the following purpose: • To fill the gaps in funds. funds.   • To meet CRR & SLR mandatory requirements. • To meet sudden demand for funds

 

Gilt Edged Securities The term Government securities encompass all bonds & treasury bills issued by the Central and the State govt. These securities are normally referred to, as “gilt“gilt-edged” as repayments of principal as well as interest are totally secured by sovereign guarantee.

 

Features These securities have a fixed coupon that is paid on specific dates on half-yearly basis. Maturity dates, from short dated (less than one year) to long dated (upto twenty years).  Available in primary and secondary secondary market. High liquidity-securities can be sold in the t he

secondary market at prevailing rates.  

 Available in physical form form or in demat maintained in Constituents Subsidiary General Ledger (CSGL) a/c with any bank. Securities held in CSGL a/c will have the convenience of automatic credit of half yearly interest and theon due date. redemption proceeds Reasonably good returns

 

Recent Changes During last few years, Government of India has issued new instruments such as Zero Coupon Bonds, Floating Rates Bonds, Partly-paid Stocks, Capital Index Bonds, Tap Stock, etc.

 

Treasury Bills T-Bills are issued by Govt. of India against their short term borrowing requirements with maturities ranging between 14 to 364 days.

 All these atof a Rs.100 discount-to-face value. Forare eg:issued a T-Bill face value issued for Rs.91.50 gets redeemed at the end of its tenure at Rs.100.

 

Features Issued at a discount to face value. Sovereign zero risk instruments.  Available  Availabl e in primary and secondary secondary market. No Tax Deduction at Source (TDS) Highly liquid & attractive returns Eligible securities for SLR purposes. The 14/91/182/364-days bills and are issued for a minimum value of Rs.25,000 multiples thereof. Generally issued in the form of SGL (Subsidiary General Ledger) – Ledger) – entries  entries in the books of RBI &

not as securities securities..  

Who can invest in T-Bill? Banks, Primary dealers, State Governments, Provident Funds, Financial Institutions, Insurance Companies, NBFIs, FIIs (as per prescribed norms), NRIs can invest in TBills.

 

Credit Card Instrument that enables the cardholder to obtain goods & services without actual payment at the time of purchase – purchase –  a “Pay Later” card provided to a customer.  customer. 

 

Features Can be availed for a period of 30-45 days. Card carries a pre-determined limit upto which the holder can spend.on outstanding 2-3% interest p.m. charged balance. Discounts on purchases on gaining additional points on regular use of card.

 

Types of Cards Master card

Secured Card

VISA Card

Smart Card

 Affinity Card Standard Card

Charge Card Rebate Card

Classic Card

Co-branded Card

Gold/Executive Card

Cash Card Travel Card

Platinum Card

Debit Card

Titanium Card  

Recent Changes Personal Accident Insurance Cash withdrawal facility Increase in credit “Add--on” facility  “Add facility  Leveraged investment facility

 

Internationalization of Financial Markets With the ongoing financial liberalization, each country now have a wider source of funds. The traditional instruments in the international bond market are known as Foreign bonds. Foreign bonds are sold in the foreign countries and are denominated in that

country s currency.  currency.   

Internationalization of Financial Markets

Foreign bonds: German auto maker sales a foreign bond in US denominated in US dollar. Euro Bond: Bonds denominated in a currency other than that of the country in which it is sold. Euro bond:  A bond denominated denominated in US dollar dollar and sold in London.

 

Internationalization of Financial Markets

However, A bond denominated in euro is called Euro Bond if it is sold outside the countries that adopted Euro as their currencies. Euro Currencies:  A variant of euro bond is euro euro currencies. Foreign currencies deposited in banks outside the home country. US dollar deposited in Banks outside US.

 

 Money market mutual funds Introduced in June,1996

Pooled short maturity, high quality investments which buy money market securities on behalf of retail or institutiona institutionall investors

 

notes - (in the U.S.) Municipal notes Short-term notes issued by municipalities in anticipation of tax receipts or other revenues. Federal funds funds - (in the U.S.) Interest-bearing deposits held by banks and other depository institutions at the Federal Reserve; these are immediately available funds that institutions borrow or lend, usually on an overnight basis. They

are lent for the federal funds rate.  

Instrument   Instrument

Principal Borrowers  Borrowers 

Federal Funds

Banks

Discount Window

Banks

Negotiable Certificates of Deposit (CDs)

Banks

Eurodollar Time Deposits and CDs

Banks

Repurchase Agreements

Securities dealers, banks, non financial corporations, governments (principal participants)

Treasury Bills

government

Municipal Notes

State and local governments

Commercial Paper

Non financial and financial businesses

Bankers Acceptances

Nonfinancial and financial businesses

Government-Sponsored Enterprise Government-Sponsored Securities

Farm Credit System, Federal Home Loan Bank System, Federal National Mortgage Association

Shares in Money Market Instruments

Money market funds, local government investment pools, short-term investment funds

Futures Contracts

Dealers, banks (principal users)

Futures Options

Dealers, banks (principal users)

Swaps

Banks (principal dealers)

 

Money market and the financial world   world

The money available to consumers, investors, etc. to spend or invest in products is known as the money supply of the market. High money supply high → increased demand for products in the products market → inflation (rising prices).  prices).   To enable the monetary authorities to guard against this kind of inflation, a few options are available where use is made of the money market, two of which are ---- Selling money market instruments & Increasing interest rates by offering less money

 

Current Reports Special repo for 140.3 bn rupees to enable banks to meet liquidity needs of mutual funds: RBI. The repo rate is now 7.5%.

 

Summary 1.

Efficient financial markets are required to channel funds from surplus-spending units (savers) to deficit-spen deficit-spending ding units. units. Typicall Typically, y, such securities entitle the holder to a stream of periodic future cash payments.

2.

Financial intermedi intermediaries aries allow economies of scale to be realized when matching surplusspending units with deficit-spending units. Greater opportunities for portfolio diversification diversifica tion and money management can be gained.

 

Major findings various segments of the financial market in India have achieved market efficiency the 91-day Treasury bill rate is the appropriate 'reference rate' of the financial sector in India the financial markets in India are largely integrated at the short-end of the market, andlong-end of the market is integrated the with the short-end of the market. The above findings suggest that

monetary policy should rely more on interest rate and asset price channels to control inflation.  

Conclusion The money market is a vibrant market, affecting our everyday lives. As the short-term market for money, money changes hands in a short time frame and the players in the market have to be alert to changes, up to date with news and innovative innovativ e with strategies and products

 

.

In brief, various policy initiatives by the Reserve Bank have facilitated development of a wider range rate of instruments market repo, interest swaps, CDssuch and as CPs. This approach has avoided market segmentation while meeting demand for various products. These developments in money markets have enabled better liquidity management by the Reserve Bank.  Bank. 

 

The Resources RBIs site http://rbi.org.in http://rbi.org.in   SBI DFHI’s site http://sbidfhi.com/ http://sbidfhi.com/   Website of R Kannon http://www.geocities.com/kstability/lea   http://www.geocities.com/kstability/lea I.M. Pandey (Book) Indian Institute Of Banking & Finance http://www.iibf.org.in   http://www.iibf.org.in