Money market
Content
Money Market
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.
MONEY MARKET
FINANCIAL MARKETS
MONEY MARKET
CAPITAL MARKET
Features of Money Market
It deals with only those assets which can be converted into cash readily without loss and with minimum transaction cost. 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, unlike a stock exchange, there is a lack of a central trading floor or exchange. Deals are transacted over the phone or through electronic systems. Relevant documents and written communications can be exchanged subsequently Transaction have to be conducted without the help of brokers. The money market is a dealer market, which means that firms buy and sell securities in their own accounts, at their own risk.
It is not a single homogeneous market, it comprises of several submarket like call money market, acceptance & bill market. Money market securities are very liquid, and are considered very safe. As a result, they offer a lower return than other securities. The easiest way for individuals to gain access to the money market is through a money market mutual fund.
Objective of Money Market
To provide a parking place to employ short surplus funds. term
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.
Structure of Indian Money Market
I :- ORGANISED STRUCTURE 1. Reserve bank of India. 2. SBI DFHI Ltd (Amalgamation of Discount & Finance House in India and SBI in 2004); Acting as a Primary dealer 3. Commercial banks i. Public sector banks SBI with 7 subsidiaries Cooperative banks 20 nationalized 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
Primary Dealers The system of Primary Dealers (PDs) in the Government Securities Market was introduced by Reserve Bank of India in 1995 to strengthen the market infrastructure of Government Securities DFHI was set up by RBI in March 1988 to activate the Money Market. It got the status of Primary Dealer in February 1996. Over a period of time, RBI divested its stake and DFHI became a subsidiary of State Bank of India (SBI).
SBI had also set up a subsidiary in 1996 for doing PD business namely SBI Gilts Limited. Both these companies were merged in 2004 to become the largest Primary Dealer in the country Primary Dealers can also be referred to as Merchant Bankers to Government of India as only they are allowed to underwrite primary issues of government securities other than RBI
PDs are allowed the following activities as core activities: 1. Dealing and underwriting in Government securities. 2. Dealing in Interest Rate Derivatives. 3. Providing broking services in Government securities. 4. Dealing and underwriting in Corporate / PSU / FI bonds/ debentures.
5. Lending in Call/ Notice/ Term/ Repo/ CBLO market. 6. Investment in Commercial Papers. 7. Investment in Certificates of Deposit. 8. Investment in debt mutual funds where entire corpus is invested in debt securities.
Drawbacks of Indian Money Market
Absence of Integration : The Indian money market is broadly divided into the Organized and Unorganized Sectors. Multiple rate of interest.: These rates vary for lending, borrowing, government activities, etc Insufficient Funds or Resources Shortage of Investment Instruments: taking into account the size of the population and market the instruments are inadequate.
Lack of Organized Banking System: the banking system suffers from major weaknesses such as the NPA, huge losses, poor efficiency etc. Less number of Dealers
Recent Reforms In Indian Money Market
As per the recommendations of the study (Sukhumoy Chakravarty Committee , Vaghul Committee , Narasimham Committee)groups and with the financial sector reforms initiated in the early 1990s, the government has adopted following major reforms in the Indian money market.
Deregulation of the Interest Rate Money Market Mutual Fund (MMMFs) : In order to provide additional short-term investment revenue, the RBI encouraged and established the Money Market Mutual Funds (MMMFs) in April 1992. MMMFs are allowed to sell units to corporate and individuals. Establishment of the DFHI in April 1988
Liquidity Adjustment Facility (LAF) : Through the LAF, the RBI remains in the money market on a continue basis through the repo transaction. LAF adjusts liquidity in the market through absorption and or injection of financial resources. Electronic Transactions Establishment of the CCIL : The Clearing Corporation of India limited (CCIL) was set up in April 2001.
Products and Processes in Money Market
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 REPO CBLO Commercial Bill Market
Call Money Market
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 Money , & if it exceeds 1 day (but less than 15 days), it is referred to as Notice Money .
What is call money market?
The call money is the money lent for one day Deals with overnight borrowing and lending The funds located through the money market can be utilized To provide financing for the purchase of securities that can be added to the portfolio of the investment firm As a resource that will cover the margin accounts of the firm s clients.
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 inter-bank 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. To meet CRR & SLR mandatory requirements. To meet sudden demand for funds
The Need
Helps Bank to manage short-term deficit or surplus of money Provides funds that can be used to conduct transactions between banks, or with other money market dealers The call money loan essentially works in the same manner as a day to day loan
MARKET SIZE
The rate at which funds are borrowed in this market is called `Call Money rate' The size of the market for these funds in India is between Rs 60,000 million to Rs 70,000 million Of which public sector banks account for 80% of borrowings Foreign banks/private sector banks account for the balance 20%.
VOLUMES IN THE CALL MONEY MARKET
Banks borrow in this money market for the following propose:
To fill the gaps or temporary mismatches in funds To meet the CRR & SLR Mandatory requirements as stipulated by the Central bank To meet sudden demand for funds arising out of large outflows Thus call money usually serves the role of equilibrating the short-term liquidity position of banks
Call Money Market Participants
Those who can both borrow and lend in the market RBI, All Scheduled Commercial banks and primary dealers SBI DFHI STCI Co-operative Banks Once upon a time, select financial institutions viz., IDBI, UTI, Mutual funds were allowed in the call money market only on the lender s side
These were phased out and call money market is now a pure inter-bank market (since August 2005) The simple logic behind a pure inter-bank call money market is that it allows the central bank more flexibility in managing liquidity and short-term interest rates in the banking system
RISK FOR PARTICIPANTS
From May 1, 1989, the interest rates in the call and the notice money market have been market determined. Interest rates in this market are highly sensitive to the demand - supply factors. Within one fortnight, rates are known to have moved from a low of 1 - 2 per cent to heights of over 140 per cent per annum. Large intra-day variations are also not uncommon.
PRUDENTIAL NORMS OF RBI BORROWING
Scheduled commercial banks: On a fortnightly average basis, borrowing outstanding should not exceed 100 per cent of capital funds. However, banks are allowed to borrow a maximum of 125 % of their capital funds on any day, during a fortnight.
Co-Operative Banks: Banks on a daily basis should not exceed 2.0 per cent of their aggregate deposits as at end March of the previous financial year Primary Dealers: PDs are allowed to borrow, on average in a reporting fortnight, up to 200 per cent of their net owned funds (NOF) as at end-March of the previous financial year.
LENDING
Scheduled Commercial Banks: On a fortnightly average basis, lending outstanding should not exceed 25% of their capital funds; however, banks are allowed to lend a maximum of 50 % of their capital funds on any day, during a fortnight
Co-Operative Banks: No Limits Primary Dealers: PDs are allowed to lend in call money market, on average in a reporting fortnight, up to 25 per cent of their NOF Non-bank institutions are not permitted in the call money market with effect from August 6, 2005.
OPERATIONS IN CALL MARKET
Borrowers and lenders contact each other over telephone. The borrowers and lenders arrive at a deal specifying the amount of loan and the rate of interest. After the deal is over, the lender issues RBI cheque in favour of the borrower. The borrower in turn issues call money borrowing receipt. When the loan is repaid with interest, the lender returns the duly discharged receipt.
Operation in call market CONTD .
The deal can be directly negotiated by routing it through the Discount and Finance House of India (DFHI).
The borrowers and lenders inform the DFHI about their fund requirement and availability at a specified rate of interest.
Once the deal is confirmed, the Deal Settlement Advice is exchanged. In case the DFHI borrows, it issues a call deposit receipt to the lender and receives RBI cheque for the money borrowed. The reverse takes place in the case of lendings by the DFHI.
The duly discharged call deposit receipt is surrendered at the time of settlement.
Call loans can be renewed upto a maximum period of 14 days only and such renewals are recorded on the back of the deposit receipt by the borrower.
DEALING SESSIONS
The call money market is primarily located in Mumbai and other centres like Kolkata, Delhi, Chennai, Ahmedabad and Bangalore Deals in the call/notice money market starts at 11.00 am 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
CALL LOAN MARKET TRANSACTIONS
To commercial banks to meet large payments, large remittances, to maintain liquidity with the RBI and so on. To the stock brokers and speculators to deal in stock exchanges and bullion markets To the bill market for meeting matured bills. To the Discount and Finance House of India and the Securities Trading Corporation of India to activate the call market. To individuals of very high status for trade purposes to save interest on O.D. or cash credit
Inter Bank Call Market in India
During the initial phases ( after World war I), Indian and foreign banks and a very few rich individuals participated in the market. Call loans were given for the purpose of dealings in the bullion market and stock exchanges, banks, bill market and frequently to HNIs in Mumbai for ordinary trade purposes
UTI and LIC have been operating as lenders since 1971. RBI deregulated the interest rate in call money market w.e.f May 2, 1989. In 1988, DFHI was set to act as a borrower and lender In 1989, GIC, IDBI and NABARD ( National Bank for Agriculture and Rural Dev.) were allowed only as lenders
Any entity , Corporate body or MF with bulk resources to lend was allowed to lend only through DFHI The Securities and Trading Corporation of India ( STCI) has been permitted to act as a lender and borrower from 1994.
Call Rates
The interest rates paid on call loans is called Call Rate or Money rate Call rates were determined by the market till 1973 ; deregulated in 1989 Avg call rates ranged b/w 7% and 17.5% ( 1993 1996); 4.6% and 7.75% ( 2000 06 ) During 2007 08 , interest rates in the call market decline to an avg. of 6.07
Reasons for fluctuations
Reserve Bank s market Operations Asset liability mismatch in banks Occurs when credit grows faster than bank deposits. To manage this, they enter into the call money market The Cyclical phase of the economy The expansionary and contractory phases of the economy affect the call rates
Remittances for oil imports Advance tax payments Government debt The call rates increase when the dated securities are sold by the govt. to raise funds. At the same time, if the dated securities mature and the payment is made by the govt., the supply of funds increases and interest rates come down
Seasonal demand by banks Stock market conditions
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.
MONEY MARKET
FINANCIAL MARKETS
MONEY MARKET
CAPITAL MARKET
Features of Money Market
It deals with only those assets which can be converted into cash readily without loss and with minimum transaction cost. 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, unlike a stock exchange, there is a lack of a central trading floor or exchange. Deals are transacted over the phone or through electronic systems. Relevant documents and written communications can be exchanged subsequently Transaction have to be conducted without the help of brokers. The money market is a dealer market, which means that firms buy and sell securities in their own accounts, at their own risk.
It is not a single homogeneous market, it comprises of several submarket like call money market, acceptance & bill market. Money market securities are very liquid, and are considered very safe. As a result, they offer a lower return than other securities. The easiest way for individuals to gain access to the money market is through a money market mutual fund.
Objective of Money Market
To provide a parking place to employ short surplus funds. term
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.
Structure of Indian Money Market
I :- ORGANISED STRUCTURE 1. Reserve bank of India. 2. SBI DFHI Ltd (Amalgamation of Discount & Finance House in India and SBI in 2004); Acting as a Primary dealer 3. Commercial banks i. Public sector banks SBI with 7 subsidiaries Cooperative banks 20 nationalized 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
Primary Dealers The system of Primary Dealers (PDs) in the Government Securities Market was introduced by Reserve Bank of India in 1995 to strengthen the market infrastructure of Government Securities DFHI was set up by RBI in March 1988 to activate the Money Market. It got the status of Primary Dealer in February 1996. Over a period of time, RBI divested its stake and DFHI became a subsidiary of State Bank of India (SBI).
SBI had also set up a subsidiary in 1996 for doing PD business namely SBI Gilts Limited. Both these companies were merged in 2004 to become the largest Primary Dealer in the country Primary Dealers can also be referred to as Merchant Bankers to Government of India as only they are allowed to underwrite primary issues of government securities other than RBI
PDs are allowed the following activities as core activities: 1. Dealing and underwriting in Government securities. 2. Dealing in Interest Rate Derivatives. 3. Providing broking services in Government securities. 4. Dealing and underwriting in Corporate / PSU / FI bonds/ debentures.
5. Lending in Call/ Notice/ Term/ Repo/ CBLO market. 6. Investment in Commercial Papers. 7. Investment in Certificates of Deposit. 8. Investment in debt mutual funds where entire corpus is invested in debt securities.
Drawbacks of Indian Money Market
Absence of Integration : The Indian money market is broadly divided into the Organized and Unorganized Sectors. Multiple rate of interest.: These rates vary for lending, borrowing, government activities, etc Insufficient Funds or Resources Shortage of Investment Instruments: taking into account the size of the population and market the instruments are inadequate.
Lack of Organized Banking System: the banking system suffers from major weaknesses such as the NPA, huge losses, poor efficiency etc. Less number of Dealers
Recent Reforms In Indian Money Market
As per the recommendations of the study (Sukhumoy Chakravarty Committee , Vaghul Committee , Narasimham Committee)groups and with the financial sector reforms initiated in the early 1990s, the government has adopted following major reforms in the Indian money market.
Deregulation of the Interest Rate Money Market Mutual Fund (MMMFs) : In order to provide additional short-term investment revenue, the RBI encouraged and established the Money Market Mutual Funds (MMMFs) in April 1992. MMMFs are allowed to sell units to corporate and individuals. Establishment of the DFHI in April 1988
Liquidity Adjustment Facility (LAF) : Through the LAF, the RBI remains in the money market on a continue basis through the repo transaction. LAF adjusts liquidity in the market through absorption and or injection of financial resources. Electronic Transactions Establishment of the CCIL : The Clearing Corporation of India limited (CCIL) was set up in April 2001.
Products and Processes in Money Market
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 REPO CBLO Commercial Bill Market
Call Money Market
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 Money , & if it exceeds 1 day (but less than 15 days), it is referred to as Notice Money .
What is call money market?
The call money is the money lent for one day Deals with overnight borrowing and lending The funds located through the money market can be utilized To provide financing for the purchase of securities that can be added to the portfolio of the investment firm As a resource that will cover the margin accounts of the firm s clients.
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 inter-bank 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. To meet CRR & SLR mandatory requirements. To meet sudden demand for funds
The Need
Helps Bank to manage short-term deficit or surplus of money Provides funds that can be used to conduct transactions between banks, or with other money market dealers The call money loan essentially works in the same manner as a day to day loan
MARKET SIZE
The rate at which funds are borrowed in this market is called `Call Money rate' The size of the market for these funds in India is between Rs 60,000 million to Rs 70,000 million Of which public sector banks account for 80% of borrowings Foreign banks/private sector banks account for the balance 20%.
VOLUMES IN THE CALL MONEY MARKET
Banks borrow in this money market for the following propose:
To fill the gaps or temporary mismatches in funds To meet the CRR & SLR Mandatory requirements as stipulated by the Central bank To meet sudden demand for funds arising out of large outflows Thus call money usually serves the role of equilibrating the short-term liquidity position of banks
Call Money Market Participants
Those who can both borrow and lend in the market RBI, All Scheduled Commercial banks and primary dealers SBI DFHI STCI Co-operative Banks Once upon a time, select financial institutions viz., IDBI, UTI, Mutual funds were allowed in the call money market only on the lender s side
These were phased out and call money market is now a pure inter-bank market (since August 2005) The simple logic behind a pure inter-bank call money market is that it allows the central bank more flexibility in managing liquidity and short-term interest rates in the banking system
RISK FOR PARTICIPANTS
From May 1, 1989, the interest rates in the call and the notice money market have been market determined. Interest rates in this market are highly sensitive to the demand - supply factors. Within one fortnight, rates are known to have moved from a low of 1 - 2 per cent to heights of over 140 per cent per annum. Large intra-day variations are also not uncommon.
PRUDENTIAL NORMS OF RBI BORROWING
Scheduled commercial banks: On a fortnightly average basis, borrowing outstanding should not exceed 100 per cent of capital funds. However, banks are allowed to borrow a maximum of 125 % of their capital funds on any day, during a fortnight.
Co-Operative Banks: Banks on a daily basis should not exceed 2.0 per cent of their aggregate deposits as at end March of the previous financial year Primary Dealers: PDs are allowed to borrow, on average in a reporting fortnight, up to 200 per cent of their net owned funds (NOF) as at end-March of the previous financial year.
LENDING
Scheduled Commercial Banks: On a fortnightly average basis, lending outstanding should not exceed 25% of their capital funds; however, banks are allowed to lend a maximum of 50 % of their capital funds on any day, during a fortnight
Co-Operative Banks: No Limits Primary Dealers: PDs are allowed to lend in call money market, on average in a reporting fortnight, up to 25 per cent of their NOF Non-bank institutions are not permitted in the call money market with effect from August 6, 2005.
OPERATIONS IN CALL MARKET
Borrowers and lenders contact each other over telephone. The borrowers and lenders arrive at a deal specifying the amount of loan and the rate of interest. After the deal is over, the lender issues RBI cheque in favour of the borrower. The borrower in turn issues call money borrowing receipt. When the loan is repaid with interest, the lender returns the duly discharged receipt.
Operation in call market CONTD .
The deal can be directly negotiated by routing it through the Discount and Finance House of India (DFHI).
The borrowers and lenders inform the DFHI about their fund requirement and availability at a specified rate of interest.
Once the deal is confirmed, the Deal Settlement Advice is exchanged. In case the DFHI borrows, it issues a call deposit receipt to the lender and receives RBI cheque for the money borrowed. The reverse takes place in the case of lendings by the DFHI.
The duly discharged call deposit receipt is surrendered at the time of settlement.
Call loans can be renewed upto a maximum period of 14 days only and such renewals are recorded on the back of the deposit receipt by the borrower.
DEALING SESSIONS
The call money market is primarily located in Mumbai and other centres like Kolkata, Delhi, Chennai, Ahmedabad and Bangalore Deals in the call/notice money market starts at 11.00 am 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
CALL LOAN MARKET TRANSACTIONS
To commercial banks to meet large payments, large remittances, to maintain liquidity with the RBI and so on. To the stock brokers and speculators to deal in stock exchanges and bullion markets To the bill market for meeting matured bills. To the Discount and Finance House of India and the Securities Trading Corporation of India to activate the call market. To individuals of very high status for trade purposes to save interest on O.D. or cash credit
Inter Bank Call Market in India
During the initial phases ( after World war I), Indian and foreign banks and a very few rich individuals participated in the market. Call loans were given for the purpose of dealings in the bullion market and stock exchanges, banks, bill market and frequently to HNIs in Mumbai for ordinary trade purposes
UTI and LIC have been operating as lenders since 1971. RBI deregulated the interest rate in call money market w.e.f May 2, 1989. In 1988, DFHI was set to act as a borrower and lender In 1989, GIC, IDBI and NABARD ( National Bank for Agriculture and Rural Dev.) were allowed only as lenders
Any entity , Corporate body or MF with bulk resources to lend was allowed to lend only through DFHI The Securities and Trading Corporation of India ( STCI) has been permitted to act as a lender and borrower from 1994.
Call Rates
The interest rates paid on call loans is called Call Rate or Money rate Call rates were determined by the market till 1973 ; deregulated in 1989 Avg call rates ranged b/w 7% and 17.5% ( 1993 1996); 4.6% and 7.75% ( 2000 06 ) During 2007 08 , interest rates in the call market decline to an avg. of 6.07
Reasons for fluctuations
Reserve Bank s market Operations Asset liability mismatch in banks Occurs when credit grows faster than bank deposits. To manage this, they enter into the call money market The Cyclical phase of the economy The expansionary and contractory phases of the economy affect the call rates
Remittances for oil imports Advance tax payments Government debt The call rates increase when the dated securities are sold by the govt. to raise funds. At the same time, if the dated securities mature and the payment is made by the govt., the supply of funds increases and interest rates come down
Seasonal demand by banks Stock market conditions
