Money Market Instruments In India

Jaswinder Singh

Overview Of Financial Markets

FINANCIAL MARKET

Money Mkt.

Debt Mkt.

FOREX Mkt.

Capital Mkt.

Money Market includes

Call/ Notice Treasury Bills Term Money Certificate Of Repo Commercial Bill Inter corporate

deposits

Deposit

Commercial Papers

Debt Market
It includes Government Securities and Bonds.

Government Security includes

Central Govt. Securities

State Govt. Securities

Bonds includes
Foreign Investment Bonds

PSU Bonds Corporate Securities

The Six Horses: Why, What, Who, 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 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 & Primary Dealers are allowed to borrow and lend. Specified All-India Financial Institutions, Mutual Funds and certain specified entities are allowed to access to Call/Notice money market only as lenders. Individuals, 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

Bankers 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

RRBs 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
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) & allIndia 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 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 securities with an agreement to repurchase the 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 Helps investors achieve money market returns with sovereign risks. Raising funds by 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 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 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

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-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 market. High liquidity-securities can be sold in the secondary

market at prevailing rates.

 Available in physical 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 the redemption proceeds on due date.

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, 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 are issued at a discount-to-face value. For

eg: a T-Bill of Rs.100 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 in primary and secondary market. No Tax Deduction at Source (TDS)

Highly liquid & attractive returns

Eligible securities for SLR purposes. The 14/91/182/364-days bills are issued for a minimum value of

Rs.25,000 and multiples thereof. Generally issued in the form of SGL (Subsidiary General Ledger) entries in the books of RBI & not as 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 T-Bills.

Credit Card
Instrument that enables the cardholder to obtain

goods & services without actual payment at the time of purchase a Pay Later card provided to a customer.

Features
Can be availed for a period of 30-45 days. Card carries a pre-determined limit upto which the

holder can spend. 2-3% interest p.m. charged on outstanding balance. Discounts on purchases on gaining additional points on regular use of card.

Types of Cards
Master card Secured Card

VISA Card
Affinity Card Standard Card Classic Card Gold/Executive Card

Smart Card
Charge Card Rebate Card Co-branded Card Cash Card

Platinum Card
Titanium Card

Travel Card
Debit Card

Recent Changes
Personal Accident Insurance Cash withdrawal facility Increase in credit

Add-on 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 countrys 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 than that of the country in is sold. Euro bond: A bond denominated in US dollar and London.

other which it

sold in

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 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 institutional investors

Municipal notes - (in the U.S.) Short-term notes issued by municipalities in anticipation of tax receipts or other revenues.
Federal 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
Federal Funds Discount Window Negotiable Certificates of Deposit (CDs) Eurodollar Time Deposits and CDs

Principal Borrowers
Banks Banks Banks Banks

Repurchase Agreements

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

government State and local governments Non financial and financial businesses Nonfinancial and financial businesses Farm Credit System, Federal Home Loan Bank System, Federal National Mortgage Association Money market funds, local government investment pools, short-term investment funds Dealers, banks (principal users) Dealers, banks (principal users) Banks (principal dealers)

Treasury Bills Municipal Notes Commercial Paper Bankers Acceptances Government-Sponsored Enterprise Securities Shares in Money Market Instruments

Futures Contracts Futures Options Swaps

Money market and the financial 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).

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 7.25%.

Summary
1. Efficient financial markets are required to channel funds from surplus-spending units (savers) to deficit-spending units. Typically, such securities entitle the holder to a stream of periodic future cash payments. Financial intermediaries allow economies of scale to be realized when matching surplus-spending units with deficit-spending units. Greater opportunities for portfolio diversification and money management can be gained.

2.

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, and The long-end of the market is integrated 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 with strategies and products

In brief, various policy initiatives by the Reserve Bank have facilitated development of a wider range of instruments such as market repo, interest rate swaps,

CDs and 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.