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University of Mumbai: Bachelor of Management Studies (Finance) Semester VI
University of Mumbai: Bachelor of Management Studies (Finance) Semester VI
University of Mumbai: Bachelor of Management Studies (Finance) Semester VI
UNIVERSITY OF MUMBAI
MONEY MARKETS
Submitted by
Joshua Freitas
UNIVERSITY OF MUMBAI
MONEY MARKETS
Submitted
In Partial Fulfillment of the requirements
For the Award of Degree of Bachelor of
Management studies – Financial Markets
By
Joshua Freitas
CERTIFICATE
(2018 – 2019)
Place:- Mumbai
DECLARATION
Date:-
Thank you,
Yours faithfully,
JOSHUA FREITAS
MONEY MARKET
ACKNOWLEDGEMENT
At the beginning, I would like to thank Almighty God for his shower of blessing.
The desire of completing this dissertation was given a way by my guide Prof.
PARVEEN SHAIKH. I am very much thankful to her for the guidance, support
and for sparing his precious time from a busy and hectic schedule.
I would fail in my duty if I don’t thank my parents who are pillars of my life.
Finally, I would express my gratitude to all those persons who directly and
indirectly helped me in completing dissertation.
JOSHUA FREITAS
MONEY MARKET
DECLARATION
Date:-
JOSHUA FREITAS for their project, they have completed the project
I hereby, declared that information provided in this project is true as per the best of
my knowledge.
Thank you,
Yours faithfully,
Prof. PARVEEN SHAIKH
MONEY MARKET
TABLE OF CONTENTS
1 Introduction 3
11 Conclusion 60-61
12 Suggestion 62
13 Bibliography 63
MONEY MARKET
EXECUTIVE SUMMARY
The money market is where financial instruments with high liquidity and very short
maturities are traded. It is used by participants as a means for borrowing and lending in the short
term, with maturities that usually range from overnight to just under a year. Among the most
common money market instruments are Eurodollar deposits, Negotiable Certificates of
Deposits(CD’s), Bankers acceptances, U.S. Treasury Bills, Commercial Paper, Municipal Notes
and Federal Notes.
Money market transactions are wholesale, meaning that they are for large denominations and
take place between financial institutions and companies rather than individuals. Money market
funds offer individuals the opportunity to invest smaller amounts in these assets.
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MONEY MARKET
To understand about the main differences between Money Market and Capital Markets.
To understand the growth and problems that the Money Market faces in India.
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MONEY MARKET
CHAP 1 : INTRODUCTION
The financial system of any country is the backbone of the economy of that
country. The financial systems of all economies are broadly sub-divided into
money market, capital market, gilt-edged securities market and foreign exchange
market. The money market, capital market and the gilt securities market provides
avenues to the surplus sector such as household institutions in the economy to
deploy their funds to the deficit sector such as corporate and government sectors
to mobilize funds for their requirements. The operations in the money market are
generally short-term (upto 1 year) in nature, in capital market short-term to long
term and in gilt securities market generally long-term. However, in an integrated
financial system, the occurrence of an event in one market of the financial
system will have an impact on the other market system.
The Indian money market is a market for short-term money and financial asset
that are close substitutes for money, which are close substitute for money, with
the short-term in the Indian context being for 1 year. The money market consists
of many sub-market such as the inter-bank call money, bill discounting, treasury
bills, Certificate of deposits (CDs), Commercial paper (CPs), Repurchase
Options/Ready Forward (REPO or RF), Inter-Bank participation
certificates(IBPCs), Securitized Debts, Options, Financial Futures, Forward Rate
Agreement (FRAs), etc
Lenders:
These are the entities with surplus lendable funds like-Banks (Commercial, Co-
operative & Private) Mutual Funds Corporate Entities with bulk lendable
resources of minimum of Rs. 3 crores per transaction Financial Institutions
Borrowers:
These are entities with deficit funds and include the ones as above.
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MONEY MARKET
“Money market is the term designed to include the financial institutions which
handle the purchase, sale, and transfers of short term credit instruments. The
money market includes the entire machinery for the channelizing of short-term
funds. Concerned primarily with small business needs for working capital,
individual’s borrowings, and government short term obligations, it differs from
the long term or capital market which devotes its attention to dealings in bon ds,
corporate stock and mortgage
credit.”
and institutions that deal in the various grades of the near money.”
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MONEY MARKET
To avoid the difficulties of multiple but linked central banks, we return to the
example in sterling (a synonym for British pounds), but now assume that the
payment was for £100 million. NatWest has reduced its client’s account by £100
million, and instructed the BoE to pay the same sum from its account to that of
HSBC, and when the confirmation arrives, HSBC increases its client’s account
by the same amount.
That done, NatWest has £100 million less than it did in its account at the BoE,
and HSBC has the same amount more. NatWest now needs to find £100 million,
and HSBC has £100 million that is surplus to its immediate requirements. A
natural course of action would be for HSBC to lend NatWest the money at an
interest rate agreed between the two.
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MONEY MARKET
When one bank lends money, it will be at an agreed interest rate and for
repayment on an agreed maturity. Typical maturities for interbank money range
from 1 day for overnight money to 6 months, and even out to 1 year, though with
much less active trading in the longer maturities. The money market is so
important that many banks maintain screens showing the latest prices at which
they are willing to borrow and lend. The figure shows a copy of prices for Swiss-
franc deposits, as published by Credit Suisse First Boston (CSFB), a large Swiss
investment bank, late in the morning of 30 November 2000. At this time CSFB
was willing to accept 3-month Swiss-franc deposits at a rate of 3.30%, and to
lend Swiss francs to other high-quality banks for the same period at a rate of
3.45%. CSFB was making a market in these deposits, bidding for 3-month funds
at 3.30%, and offering 3-month funds at 3.45%. The intention of such market-
making is to borrow some at 3.30%, lend some at 3.45%, and keep the 0.15%
difference, the bid-offer spread, as profit.
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MONEY MARKET
2. The sub markets have close inter- relationship & free movement of funds from
one sub-market to another.
3. A network of large number of participants exists which will add greater depth to
the market.
4. Activities in the money market tend to concentrate in some centre, which serves
a region or an area. The width of such area may vary depending upon the size
and needs of the market itself.
6. Price differentials for assets of similar type will tend to be eliminated by the
interplay of demand & supply.
7. A certain degree of flexibility in the regulatory framework exists and there are
constant endeavours for introducing a new instruments / innovative dealing
techniques.
8. It is a wholesale market & the volume of funds or financial assets traded are very
large i.e. in crores of rupees.
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MONEY MARKET
The following are Money Market advantages that are available to their
purchasers:
• Money Markets are highly liquid instruments, in that you can withdraw from
them at any time, usually without any sort of interest penalty. There are no finite
terms associated with a Money Market instrument. In contrast, a CD (Certificate
of Deposit) requires a minimum amount of duration before you can touch the
principal, and imposes interest penalties for early withdrawal.
• Money Market Instruments are almost always FDIC-insured. That means that
they are backed by the U.S. government against default, and are one of the safest
investments available.
• Money Market instruments are extremely easy to set up. Via the internet, they
can usually be set-up in a matter of hours or maybe 1 business day at the
maximum, if you have a checking account that you can link it to, to initially fund
it.
• Today's internet-based Money Markets very often do not require any sort of
minimum deposits. That means, you can open an account with as little as $1.
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MONEY MARKET
1. Financing Trade:
2. Financing Industry:
a. Money market helps the industries in securing short-term loans to meet their
working capital requirements through the system of finance bills, commercial
papers, etc.
b. Industries generally need long-term loans, which are provided in the capital
market. However, capital market depends upon the nature of and the conditions
in the money market. The short-term interest rates of the money market
influence the long-term interest rates of the capital market. Thus, money market
indirectly helps the industries through its link with and influence on long-term
capital market.
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MONEY MARKET
3. Profitable Investment:
Money market enables the commercial banks to use their excess reserves in
profitable investment. The main objective of the commercial banks is to earn
income from its reserves as well as maintain liquidity to meet the uncertain cash
demand of the depositors. In the money market, the excess reserves of the
commercial banks are invested in near-money assets (e.g. short-term bills of
exchange) which are highly liquid and can be easily converted into cash.
Thus, the commercial banks earn profits without losing liquidity.
Though the central bank can function and influence the banking system in the
absence of a money market, the existence of a developed money market
smoothens the functioning and increases the efficiency of the central bank.
a. The short-run interest rates of the money market serves as an indicator of the
monetary and banking conditions in the country and, in this way, guide the
central bank to adopt an appropriate banking policy,
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MONEY MARKET
b. The sensitive and integrated money market helps the central bank to secure quick
and widespread influence on the sub-markets, and thus achieve effective
implementation of its policy.
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MONEY MARKET
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MONEY MARKET
1. Call Money
Features
• The call market enables the banks and institutions to even out their day-today
deficits and surpluses of money.
• Interest rates in the call and notice money market are market determined.
• In view of the short tenure of such transactions, both the borrowers and the
lenders are required to have current accounts with the Reserve Bank of India.
• It serves as an outlet for deploying funds on short term basis to the lenders
having steady inflow of funds.
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MONEY MARKET
In the short term, the lowest risk category instruments are the treasury bills. RBI
issues these at a prefixed day and a fixed amount. These are four types of
treasury bills.
The usual investors in these instruments are banks who invest not only to part
their short-term surpluses but also since it forms part of their SLR investments,
insurance companies and FIs. FIIs so far have not been allowed to invest in this
instrument.
These T-bills, which are issued at a discount, can be traded in the market. Most
of the time, unless the investor requests specifically, they are issued not as
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MONEY MARKET
The returns on T-bills are dependent on the rates prevalent on other investment
avenues open for investors. Low yield on T-bills, generally a result of high
liquidity in banking system as indicated by low call rates, would divert the funds
from this market to other markets. This would be particularly so, if banks already
hold the minimum stipulated amount (SLR) in government paper.
Interbank market for deposits of maturity beyond 14 days and upto three months
is referred to as the term money market. The specified entities are not allowed to
lend beyond 14 days. The development of the term money market is inevitable
due to the following reasons:
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MONEY MARKET
After treasury bills, the next lowest risk category investment option is the
certificate of deposit (CD) issued by banks and FIs. Allowed in 1989, CDs were
one of RBI's measures to deregulate the cost of funds for banks and FIs. A CD is
a negotiable promissory note, secure and short term (upto a year) in nature. A
CD is issued at a discount to the face value, the discount rate being negotiated
between the issuer and the investor. Though RBI allows CDs upto one-year
maturity, the maturity most quoted in the market is for 90 days. CDs are issued
by banks and FIs mainly to augment funds by attracting deposits from corporate,
high net worth individuals, trusts, etc. the issue of CDs reached a high in the last
two years as banks faced with reducing deposit base secured funds by these
means. The foreign and private banks, especially, which do not have large
branch networks and hence lower deposit base use this instrument to raise funds.
The rates on these deposits are determined by various factors. Low call rates
would mean higher liquidity in the market. Also the interest rate on one-year
bank deposits acts as a lower barrier for the rates in the market.
Apart from CPs, corporate also have access to another market called the inter-
corporate deposits (ICD) market. An ICD is an unsecured loan extended by one
corporate to another. Existing mainly as a refuge for low rated corporate, this
market allows funds surplus corporate to lend to other corporate. Also the better-
rated corporate can borrow from the banking system and lend in this market. As
the cost of funds for a corporate in much higher than a bank, the rates in this
market are higher than those in the other markets. ICDs are unsecured, and hence
the risk inherent in high. The ICD market is not well organized with very little
information available publicly about transaction details.
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MONEY MARKET
Ideally, the discount rates on CPs ought to be determined by the demand and
supply factors in the money market and the interest rates on the other hand
competing money market instruments such as certificate of deposits (CDs),
commercial bills and treasury bills. It has been noticed that in a comparatively
stable and low rate conditions in the money market, the discount rates in the CP
markets do somewhat soften whereas in the tight money market situation it may
not be possible even for a best rated company to issue CPs at lower rates than the
lending rates on its banks lines of credit. This is partly for the reason that banks
could also firm up the lending rates during such periods. The maturity
management of CPs should also affect the CP rates. It has been observed that in
a period of prolong low and steady money market rates there is no significant
different between the discount rates if CPs for 90 and 180 days.
ADVANTAGES OF CP’s
The advantage of CP lies in its simplicity involving less paper work as large
amounts can be raised without having any underlying transaction. It gives
flexibility to the company by providing an additional option of raising funds
particularly when the conditions prevailing in the money market are favourable.
In a regime where there is a prescription of a minimum lending rate for banks
advances, the raising of funds by a company upto 75% of its working capital
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MONEY MARKET
limit through issue of CPs at somewhat lower interest rates, enables it to reduce
the overall cost of short-term funds. It is, however, to be recognized that under
the cash credit system of lending, the borrowers effective interest cost is lower
than the prescribed lending rate as this system affords flexibility to borrowers to
reduce the outstanding as and when surplus funds accrue to them. Hence, a
company proposing to issue CPs should have a clear perception as to its cash
flow during the period for which CPs are proposed to be issued and accordingly
fix the discount rates at which the instrument is to be issued.
From the investor's point of view, the investment in CPs gives comparatively
higher yields than those obtained on bank deposits of similar maturities.
Although CP is an unsecured promissory note, the availability of stand-by
facility by banks to the issuing companies makes it's holders confident of getting
the payment on due dates. This agreement also facilitated quicker payment as a
company's banker and make the payment to the holders on their behalf and as the
companies permissible working capital limit gets reinstated to the extent of
maturing CPs provided, however, at the time of maturity of CPs, the companies
maximum permissible bank finance has not been revised downwards.
commercial bills when they are accepted by commercial banks. If the bill is
payable at a future date and the seller needs money during the currency of the
bill then he may approach his bank for discounting the bill. The maturity
proceeds or the bank will receive face value of discounted bill, from the drawee.
If the bank needs fund during the currency of the bill then it can rediscount the
bill already discounted by it in the commercial bill rediscount market at the
market related to discount rate. The RBI introduced the Bills Market scheme
(BMS) in 1952 and the scheme was later modified into New Bills Market
scheme (NBMS) in 1970. Under the scheme, commercial banks can rediscount
the bills, which were originally discounted by them, with approved institutions
(viz., Commercial Banks, Development Financial Institutions, Mutual Funds,
Primary Dealer, etc.).With the intention of reducing paper movements and
facilitate multiple rediscounting, the RBI introduced an instrument called
Derivative Usance Promissory Notes (DUPN). So the need for physical transfer
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MONEY MARKET
of bills has been waived and the bank that originally discounts the bills only
draws DUPN. These DUPNs are sold to investors in convenient lots of maturities
(from 15 days upto 90 days) on the basis of genuine trade bills, discounted by the
discounting bank
The major function of the money market is to provide liquidity. To achieve this
function and to even out liquidity changes, the Reserve Bank uses repos. Repo is
a useful money market instrument enabling the smooth adjustment of short-
term liquidity among varied market participants such as banks, financial
institutions and so on.
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MONEY MARKET
To the lender of cash, the securities lent by the borrower serves as the collateral;
to the lender of securities, the cash borrowed by the lender serves as the
collateral. Repo thus represents a collateralized short term lending. The lender of
securities (who is also the borrower of cash) is said to be doing the repo; the
same transaction is a reverse repo in the books of lender of cash (who is also the
borrower of securities).
Reserve Repos:
A reverse repo is the mirror image of a repo. For, in a reverse repo, securities are
acquired with a simultaneous commitment to resell. Hence whether a transaction
is a repo or a reverse repo is determined only in terms of who initiated the first
leg of the transaction. When the reverse repurchase transaction matures, the
counter- party returns the security to the entity concerned and receives its cash
along with a profit spread. One factor which encourages an organization to enter
into reverse repo is that it earns some extra income on its otherwise idle cash.
The difference between the price at which the securities are bought and sold is
the lender’s profit or interest earned for lending the money. The transaction
combines elements of both a securities purchased/sale operation and also a
money market borrowing/lending operation.
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MONEY MARKET
There are various investment avenues available to an investor such as real estate,
bank deposits, post office deposits, shares, debentures, bonds etc. A mutual fund
is one more type of Investment Avenue available to investors. There are many
reasons why investors prefer mutual funds.
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MONEY MARKET
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MONEY MARKET
They are issued in order to finance the fiscal deficit and managing the temporary
cash mismatches of the Government. All entities registered in India like banks,
financial institutions, Primary Dealers, firms, companies, corporate bodies,
partnership firms, institutions, mutual funds, Foreign Institutional Investors,
State Governments, Provident Funds, trusts, research organisations, Nepal
Rashtra bank and even individuals are eligible to purchase Government
Securities. They are generally by banks and institutions with the Reserve Bank of
India in Subsidiary General Ledger accounts. They can be held in special
accounts known as Constituent Subsidiary General Ledger (CSGL) accounts
which can be opened with banks and Primary Dealers or in dematerialized form
in demat accounts maintained with the Depository Participants of NSDL.
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MONEY MARKET
Issued at face
Issued at
value, but A bond issued
Issued at face discount to Issued at Issued at
paid in at call and put
value the face face value face value
installments option
value
over a period
Interest rate
is fixed as a
Interest or Interest or
percentage Interest rate
coupon rate is coupon rate is This bond is
over a is fixed as a
fixed at the fixed at the due for
predefined percentage
time of Do not carry time of redemption in
benchmark over the
issuance, and any interest issuance, and 2012 and
rate which wholesale
remains rate remains carries a
may be price index
constant till constant till coupon of
Treasury bill, at the time
redemption of redemption of 6.72%
bank rate etc of issuance.
the security the security
at the time
of issuance
24
MONEY MARKET
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MONEY MARKET
(1)The schemes was announced under section 17(4)(c) of RBI Act enables it to make
advances to scheduled banks against the security of issuance of promissory notes
or bills
drawn on and payable in India and arising out of bonafide commercial or trade
transaction bearing two or more good signatures one of which should be that of
scheduled bank and maturing within 90 days from the date of advances.
(2) The scheduled banks were required to convert a portion of the demand
promissory notes obtained by them, from their constituents in respect of
loans/overdrafts and cash credits granted to them into usance promissory notes
maturing within 90 days, to be able to avail of refinance under the scheme;
(3) The existing loan, cash credit or overdraft accounts were, therefore, required to
be split up into two parts viz.,(A) one part was to remain covered by the demand
promissory notes, in this account further.
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MONEY MARKET
The major participants who supply the funds and demand the same in the money
market are as follows:
Reserve Bank of India is the regulator over the money market in India. As the
Central Bank, it injects liquidity in the banking system, when it is deficient and
contracts the same in opposite situation.
ii) Banks:
Commercial Banks and the Co-operative Banks are the major participants in the
Indian money market. They mobilise the savings of the people through acceptance
of deposits and lend it to business houses for their short- term working capital
requirements. While a portion of these deposits is invested in medium and long-
term Government securities and corporate shares and bonds, they provide short-term
funds to the Government by investing in the Treasury Bills. They employ the short-
term surpluses in various money market instruments.
DFHI deals both ways in the money market instruments. Hence, it has helped in
the growth of secondary market, as well as those of the money market instruments.
These institutions (eg. LIC, UTI, GIC, Development Banks, etc.) have been
allowed to participate in the call money market as lenders only.
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MONEY MARKET
v) Corporates:
Companies create demand for funds from the banking system. They raise short-
term funds directly from the money market by issuing commercial paper.
Moreover, they accept public deposits and also indulge in inter- corporate
deposits and investments.
Mutual funds also invest their surplus funds in various money market
instruments for short periods. They are also permitted to participate in the Call
Money Market. Money Market Mutual Funds have been set up specifically for
the purpose of mobilization of short-term funds for investment in money market
instruments.
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MONEY MARKET
Till 1935, when the RBI was set up the Indian money market remained highly
disintegrated, unorganized narrow, shallow and therefore, very backward. The
planned economic development that commenced in the year 1951 market, an
important beginning in the annals of the Indian money market. The
nationalization of banks in 1969, setting up of various committees such as the
Sukhmoy Chakraborty Committee (1982), the Va
gul working group (1986), the setting up of discount and finance house of India
ltd. (1988), the securities trading corporation of India (1994) and the
commencement of liberalization and globalization process in 1991 gave a
further fillip for the integrated and efficient development of India money
market.
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MONEY MARKET
(a) the central part- consisting of the Reserve Bank of India, State Bank of India, the
Public Sector Bank, the Private Sector Bank, the Exchange Banks, and the other
development financial institution; and
(b) The bazaar part- consisting of the money lenders, indigenous bankers, loan
office, chit funds, nidhis, etc., and the co-operative banks occupying the
intermediate position. The connection between these parts is incomplete as the
Indian financial system was somewhat loosely organized and without much
cohesion until 1935 and lacked a central coordinating agency. Till then, the
central part was largely dominated by government, which controlled currency
and through it influenced the bank rate decisively.
Owing to the absence of a central bank until 1935, the Imperial Bank of India
performed some of the functions of the banker’s bank. The other Bank are not
bound to keep balances with it, but in practice the exchange Banks and larger
India joint-stock banks kept a substantial part of their cash balances with it. The
Imperial bank’s grant of loans to joint-stock banks against government securities
at the bank rate proved very useful to them, but the high bank rate frequently
reduced to a considerable extent the benefits of such loan. On account of the
special banks concessions that the Imperial bank received from the government
and later from the Reserve Bank also, the joint-stock banks have regarded it
more as an unfair competitor than as a friendly supporter. Their feeling towards
the State Bank was not much better.
The exchange banks were also considered as powerful competitors owing to their
large resources and encroachment upto the field of the finance of internal trade at
ports as well as in the interior. The state co-operative banks used to maintain
current accounts with the state bank and also used to get credit and overdraft
facilities from it. The co-operative banks have no connection with the indigenous
bankers and the moneylenders beyond the fact that a few of them were
depositors or directors of central cooperative banks. There is also not much
contact between the indigenous bankers and the moneylenders and both of them
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MONEY MARKET
usually did not maintain account with the State Bank of India and not at all with
the Reserve bank of India (RBI). Till the mid- 1970s, during the busy season
(October-April), when the supply of hundis was greater than there source of the
indigenous bankers, a temporary connection was established between a number
of them who were selected
And placed on the approval list and the State Bank and the joint stock banks
rediscounted the hundis drawn and endorsed by the by the approved indigenous bankers
up to a certain maximum limits determined according to the financial standing off the
financial standing of the banker or gave them advances against demand promissory
notes signed by two of them.
Call money market is the core of the central part of the money market, in which
banks lend money to each other. To begin with call money operated from
Mumbai and later Calcutta, Delhi and Madras joined. The call money is most
sensitive part of the money market and indicates the current condition of the
market. The major participants are the public sector banks. Over the period of
time, the RBI has permitted other institutions, flush with funds, such as LIC,
GIC, UTI, IDBI, NABARD to participate in money market as lenders. The call
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MONEY MARKET
Upto 1956, the exchange banks were the chief borrower on account of nature of
their business. Their advances were generally very liquid and they held large
proportion of bills. As a consequence, they functioned with a fine cash ratio and
turned to the call market to make up any deficiency of funds for day or two. Prior
to 1956, some of the Indian banks also resorted to the call money market
occasionally as a borrowers in order to maintain their cash ratio at the level
required by law. However since 1956, the India Bank have been resorting to the
call money market mare frequently whenever the demand upon them for credit
owing to increasing investment activity press upon their resources. Hence, the
funds now flow more easily and to a large extent, not among Indian banks centre
like Mumbai or Calcutta, but also among various centres.
The bill market can be divided into two viz., the commercial bills market and the
treasury bills market.
Bill financing is an important mode of meeting the credit needs of trade and
industry in developed economies because it facilitates an efficient payment
system being self-liquidating in nature. In India bill financing has been popular
since long in ancient ³Hundi´ form. The existence of an approved bills market
enables rediscounting of bills which is a traditional instrument of credit control.
As such, the Indian Central Banking Enquiry Committee (1931) had strongly
recommended the establishment of a market in commercial bills. But nothing
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MONEY MARKET
could be done by the Reserve Bank till 1952, on account of the war, the
indifference of British Government and the partition of the country.
Banks of India, especially the Exchange Banks, used to discount bills of
approved parties fulfilling certain conditions, but there was no discount in the
discount market in India, except the limited bills market provided by the Reserve
Bank for further dealings in these bills and banks had either to keep them until
they matured or rediscount them in London discount market, if they were export
bills.
The RBI pioneered effort on developing bill culture in India. It introduced Bill
Promotion of bill culture, however, remained one of the major concerns of the
RBI. Finally in November 1970, based on the recommendations of Narasimham
committee, RBI introduced Bill Rediscounting Scheme (BRS)also known as
New Bill Market Scheme (NBMS) which continues till date in modified form.
Under this scheme, all scheduled commercial banks are eligible to rediscount
genuine trade bills arising out of sale/purchase of goods with the RBI and other
approved institutions.
To promote the bills culture, RBI in March 198 educed the discount rate for bills
for borrowers from 16.5% to 15.5%. Thereafter, the bills finance has always
been subject to one percentage point lower rate of interest than prime lending
rate fixed for corporate borrowers. Further, interest rate on rediscounting of bills
was deregulated in May 1989.
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MONEY MARKET
In addition to internal and foreign trade bills, banks deal in Treasury Bills. As
they are issued at a discount by the Government of India or State Government
and are repayable usually after three months, banks regard them as a very
suitable form of investment for their own surplus fund. Most of them have been
issued by Government of India. During the First World War, they were issued to
meet government’s disbursements on behalf of British War Office. During the
post-war period, they were issued to meet budget deficits and to repay old bills.
Later, they have been issued to provide ways and means of current and capital
expenditure, repayment of old bills and conversion of loans. During the Second
World War, they were issued to provide in large amounts for the same purpose
as the First World War.
Tenders for them are invited by government notification and are received by the
office of Reserve Bank. The tenders quoting the lowest discount are accepted
and the bills are issued and paid by the offices of the Reserve Bank. In addition,
intermediate Treasury Bills are sold sometime at a particular rate. At least 90%
of the tenders and purchases are made by few big banks and nearly half of these
by the State Bank alone. This makes government in India dependent upon a few
banks, whereas in London, large funds which do not belong to banks are invested
in Treasury Bills and enable Government there to secure more favourable rates.
Consequently the Reserve Bank sometimes had to intervene and purchase Bills
on its own account. The Reserve Bank has tried to organize and widen the
Treasury bill market, in order to secure better control of the money market, with
the rediscounting of the bills with itself and to enable the market to carry a large
floating debt and thereby reduce the cost of Government borrowing. The efforts
of the Reserve Bank in widening the Treasury bill market have not succeeded
fully until the late 1980s, owing to the absence of a discount market in these
bills. Banks were reluctant to discount Treasury bill with the Reserve Bank
because the money market regarded such discount as a sign of weakness. This
lead to funds being locked in and market elasticity was not there in case of
Treasury bill. Sales of treasury bills were suspended from 20th April 1954to 2nd
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MONEY MARKET
November 1954 and form 6th April 1956 to 1st August 1958. However, since
1970s, the treasury bills were issued at a fixed rate of 4.6% and were for tenure
of 91 days. However, with the setting up of the Discount and Finance House of
India (DFHI) in 1988, the secondary market for the treasury bills began to
develop.
The other important sub-markets that have come into existence in the money
market are the Certificate of deposits (CDs) market and the Commercial Papers
(CPs) market.
These sub-markets are of recent origin. While the CDs market becomes
operational during 1989-1990, the CPs market emerged in 1990-91.
The CDs are basically deposit receipts issued by a bank to the depositor. In India
the Tambe Working group in 1982 was the first one to evaluate the introduction
of CDs in the money market. The group, however, did not recommend
introduction of CDs on the ground of inherent weakness viz.
(i) absence of secondary market,
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MONEY MARKET
The CPs as an instrument are unsecured usance promissory notes issued by the
corporate borrowers with fixed maturity evidencing their short-term debt
obligation. In India, Vaghul Working Group 1987 was the first to recommend
introduction of CPs in Indian money market. It noted that CP market has a
advantage of giving highly rated corporate borrowers cheaper funds while
providing investors higher interest earnings. Though the banks would lose some
of their first rated borrowing clientele and consequently interest income they can
supplement their earning by acting as issuers and dealers of commercial papers.
Accordingly the working group recommended the launch of CPs and suggested a
scheme for issue of CPs.
Important cogs in the evolution of the Indian money market evolution of the
Indian Money Market are the indigenous institutions. Although, nidhis and chit
funds exist, they are not important or money market as such they absorb funds
that might otherwise feed into banking system. A more obvious money market
institution was the Multani shroff. Formerly, and indeed into1960s and the early
1970s, the Multani shroff lent money to customer by discounting a hundi (which
was originally in promissory note form) and then, after endorsement and by
arrangement through a hundi broker, rediscounted with a schedule bank up to
limits agreed upon. Although Multani shroffs have survived as a part of the
indigenous sector, their clan is readily declining and expected to become extinct.
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MONEY MARKET
A very significant step in evolution of the Indian money market has been setting
up of the DHFI and the STCI. As a sequel to the recommendations of the
Working Group of the money market, the Discount and Finance House of India
was set up by the RBI jointly with the Public Sector Banks and all India financial
institutions to deal in money market instruments. DHFI was incorporated on
March 8, 1988 under the Companies Act, 1956 with an authorised share capital
of Rs.100 crores subscribed by the RBI (Rs. 33crores) and all-India financial
institutions (Rs16 crores).DHFI quotes regular bid and offer rates for treasury
bills and commercial bills rediscounting. However only bid prices for CDs and
CPs are normally quoted. DHFI is also authorised to undertake REPO´
transaction against treasury bills and it provides daily buy back and sell back
rates for treasury bills to suit their requirements of commercial banks. The STCI
is of recent origin. Basically, setup for dealing in government securities market
to broaden and deepen this market, the STCI also has been allowed to deal in call
money market and the treasury bills market.
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MONEY MARKET
The Reserve Bank of India is the most important constituent of the money
market. The market comes within the direct preview of the Reserve Bank of
India regulations. The aims of the Reserve Bank’s operations in the money
market are:
• To ensure an adequate flow of credit to the productive sector of the economy and
• To bring about order in the foreign exchange market. The Reserve Bank of India
influence liquidity and interest rates through a number of operating instruments -
cash reserve requirement (CRR) of banks, conduct of open
Market operations (OMO s), repos, change in bank rates and at times, foreign
exchange swap operations.
The Money Market is the close substitutes for money with the short term time
span from overnight to year. The Indian Money Market consists of both
organised and unorganised segment. The organised segment includes the
Reserve Bank of India, State Bank of India, Public Sector as well as Private
Sector Banks, Regional Rural Bank, Commercial Banks including Foreign
38
MONEY MARKET
(ii)The organized sector consists of the Reserve Bank of India, the State Bank of
India with its seven associates, twenty nationalized commercial banks, other
scheduled and non-scheduled commercial banks, foreign banks, and Regional Rural
Banks. It is called organized because its part is systematically coordinated by the
RBI.
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MONEY MARKET
(iii) Non-bank financial institutions such as the LIC, the GIC and subsidiaries, the
UTI also operate in this market, but only indirectly through banks, and not
directly.
(iv) Quasi-government bodies and large companies also make their short-term
surplus funds available to the organized market through banks.
At the local level, there are primary credit societies and urban cooperative banks.
Considering the size, methods of operations, and dealings with the RBI and
commercial banks, only state and central, cooperative banks should be included
in the organised sector. The cooperative societies at the local level are loosely
linked with it.
(vii)The money lenders operate throughout the country, but without any link among
themselves.
(viii)Indigenous banks are somewhat better organised because they enjoy rediscount
facilities from the commercial banks which, in turn, have link with the RBI. But
this type of organisation represents only a loose link with the RBI.
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MONEY MARKET
While the need for long term financing is met by the capital or financial markets,
money market is a mechanism which deals with lending and borrowing of short
term funds. Post reforms period in India has witnessed tremendous growth of the
Indian money markets. Banks and other financial institutions have been able to
meet the high expectations of short term funding of important sectors like the
industry, services and agriculture. Functioning under the regulation and control
of the Reserve Bank of India (RBI), the Indian money markets have also
exhibited the required maturity and resilience over the past about two decades.
Decision of the government to allow the private sector banks to operate has
provided much needed healthy competition in the money markets, resulting in
fair amount of improvement in their functioning.
Money market denotes inter-bank market where the banks borrow and lend
among themselves to meet the short term credit and deposit needs of the
economy. Short term generally covers the time period upto one year. The money
market operations help the banks tide over the temporary mismatch of funds with
them. In case a particular bank needs funds for a few days, it can borrow from
another bank by paying the determined interest rate. The lending bank also gains,
as it is able to earn interest on the funds lying idle with it. In other words, money
market provides avenues to the players in the market to strike equilibrium
between the surplus funds with the lenders and the requirement of funds for the
borrowers. An important function of the money market is to provide a focal point
for interventions of the RBI to influence the liquidity in the financial system and
implement other monetary policy measures.
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MONEY MARKET
the banks in the economy. Market forces generally indicate the need for
borrowing or liquidity and the money market adjusts itself to such calls. RBI
facilitates such adjustments with monetary policy tools available with it. Heavy
call for funds overnight indicates that the banks are in need of short term funds
and in case of liquidity crunch, the interest rates would go up.
Depending on the economic situation and available market trends, the RBI
intervenes in the money market through a host of interventions. In case of
liquidity crunch, the RBI has the option of either reducing the Cash Reserve
Ratio (CRR) or pumping in more money supply into the system. Recently, to
overcome the liquidity crunch in the Indian money market, the RBI has released
more than Rs 75,000 crore with two back-to-back reductions in the CRR.
In addition to the lending by the banks and the financial institutions, various
companies in the corporate sector also issue fixed deposits to the public for
shorter duration and to that extent become part of the money market mechanism
selectively. The maturities of the instruments issued by the money market as a
whole, range from one day to one year. The money market is also closely linked
with the Foreign Exchange Market, through the process of covered interest
arbitrage in which the forward premium acts as a bridge between the domestic
and foreign interest rates.
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MONEY MARKET
Diverse Functions
Money markets are one of the most important mechanisms of any deve-loping
economy. Instead of just ensuring that the money market in India regulates the
flow of credit and credit rates, this mechanism has emerged as one of the
important policy tools with the government and the RBI to control the monetary
policy, money supply, credit creation and control, inflation rate and overall
economic policy of the State.
Hence, the first and the foremost function of the money market mechanism is
regulatory in nature. While determining the total volume of credit plan for the six
monthly periods, the credit policy also aims at directing the flow of credit as per
the priorities fixed by the government according to the needs of the economy.
Credit policy as an instrument is important to ensure the availability of the credit
in adequate volumes; it also caters to the credit needs of various sectors of the
economy. The RBI assists the government to implement its policies related to the
credit plans through its statutory control over the banking system of the country.
Monetary policy, on the other hand, has longer term perspective and aims at
correcting the imbalances in the economy. Credit policy and the monetary
policy, both complement each other to achieve the long term goals determined
by the government. It not only maintains complete control over the credit
creation by the banks, but also keeps a close watch over it. The instruments of
monetary policy, including the repo rate, cash reserve ratio and bank rate are
used by the Central Bank of the country to give the required direction to the
monetary policy.
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MONEY MARKET
Inflation is one of the serious economic problems that all the developing
economies have to face every now and then. Cyclical fluctuations do affect the
price level differently, depending upon the demand and supply scenario at the
given point of time. Money market rates play a major role in controlling the price
line. Higher rates in the money markets reduce the liquidity in the economy and
have the effect of reducing the economic activity in the system. Reduced rates,
on the other hand, increase the liquidity in the market and bring down the cost of
capital substantially, thereby increasing the investment. This function also assists
the RBI to control the overall money supply in the economy. Such operations
supplement the efforts of direct infusion of newly printed notes by the RBI.
Indian experience with open markets has been a mixed one. On the positive side,
the growth rate of the country has soared to new levels and the foreign trade had
been growing at around 20 per cent during the past few years. Foreign exchange
reserves have burgeoned to significantly higher levels and the country has
achieved new heights in the overall socio-economic development. The money
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MONEY MARKET
On the flip side, the post-reforms period has witnessed relatively lesser growth of
the social sector. Money market mechanism has kept the markets upbeat, yet the
social sector needs more focused attention. With the base of the economy now
strengthened, the money market mechanism must also focus on ensuring that
proper direction is provided to the credit flows so that the poorest sections of the
society also gain.
The Indian money market has undergone metamorphosis during the last few
years owing to a series of measure which increased the number of participants,
introduced newer instrument and deregulated interest rate. The Reserve Bank of
India (RBI) set up a committee to review the functioning of monetary system,
viz., SUKHMOY CHAKRA VARTY COMMITTEE in1982, a working group to
review the functioning of money market, viz. VAGHUL WORKING GROUP in
1986 and the NARASIHMHAMCOMMITTEE to review the functioning of the
financial system in India. While the Chakravarthy Committee recommended
measures for improvement in the monetary system, the
Vaghul Working Group recommended measures to activate and vitalize the
money market and the Narasimham Committee recommended measures to
streamline the functioning of the financial system.RBI appointed a working
group on Money market under the Chairmanship of Vaghul, which suggested a
number of measures to deepen the money market. As a follow up the RBI took
the following initiatives
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MONEY MARKET
• Increasing the range of money market instruments; CP, CD and Inter- bank
participation Certificates are some of the instruments introduced in1988-89.
• Freeing of call money rates in stages from interest rate regulation to price
discovery based on market forces.
Today the Bank Rate has emerged as a reference rate and the call money rates
generally operate in a corridor with the Repo rate acting as a floor and the Bank
Rate as a ceiling.
At present the overnight money market rate is the only floating rate benchmark.
The methodology used for calculating the overnight index is transparent.
The other benchmark instruments are 14, 91, 182 & 364 days T-bill. Also we
have the SBI-PLR rate.
• The inter-bank call and money market and inter-bank term money market should
be strictly restricted to banks. The only exception should be primary dealer
(PDs), who in a sense, perform a key function of equilibrating the call money
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MONEY MARKET
market and are formally treated as banks for the purpose of their inter-bank
transactions. All the other present non-bank participants in the inter- bank call
money market should not be provided access to the interbank call money market.
These institutions could provide access to the money market through different
other segments of the money market.
• Structural changes would result in the development of a strong and stable money
market with liquidity and depth.
• The foreign institutional investor should be given access to the Treasury bill
market. Broadening the market by increasing the participant would provide
depth to the market.
• With the progressive expansion of the forward exchange market there should be
endeavour to integrate the forward exchange market with the spot market by
allowing the participant in the spot forex market to participate in the forward
market by their exposure. Furthermore, the forex market, the money market and
the securities market should be allowed to integrate and their forward primia
should reflect the interest rate differential. As instruments move in tandem in
these markets the desi derivative of a seamless and a vibrant financial market
would hopefully emerge.
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MONEY MARKET
Some of the important policies in the deregulation of interest rates have been:
1. The lending and deposit rates that have, over time, been considerably freed.
Lending rates are now linked to the PLR, and the banks depending on their risk
perceptions freely determine the spreads. Deposit rates beyond one year have
been freed, and deposit rates less than one year linked or pegged to the Bank
Rate. All re-finance; the OMO operations and liquidity to the Primary Dealers
(PDs) have been linked to the Bank Rate. To that extent the Bank Rate has been
emerging as a kind of reference rate in the interest rate scenario.
2. The second interesting aspect has been that the borrowings by the government
(since 1992) have been at market rates.3. The PSUs and FIs, who had been
largely depending on budgetary support for their resources, have been forced to
go to the market to raise their resource requirements.
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MONEY MARKET
Integration of Markets
The other important aspect of the fixed income market is the close interlinkage
between the money and debt segments. The Call, Notice & Term money markets
are to be made purely inter-bank markets. The nonbank participants are being
shifted to the Repo market. However the existing players have been allowed to
park their short-term investments till they find other avenues. The corporates
have the facility of routing their call transactions through the PDs.
Primary Dealers
In order to make the government securities market more vibrant, liquid and to
ensure market making capabilities outside RBI a system of PD’s was established.
The PDs have been allowed to operate a current account and along with a SGL
account. They also have been allowed to open constituent SGL accounts. RBI
has provided them liquidity support facility. In order to facilitate their continued
presence in auctions the RBI invites bids for underwriting in respect of all
auctions. Routing of operations in the call money market is allowed through
PD’s. They are allowed the facility of funds from one centre to another under
RBI’s Remittance facility scheme. The number of PDs has been increased from 7
to 13. Infact the introduction of PDs has added to the liquidity in the market.
Valuation of securities
Banks have been required to mark 70% of their portfolio to market from the year
1998-99 and 75% from 1999-2000.
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MONEY MARKET
FIIs have been allowed to trade in T. Bills within the overall debt ceiling. They
now have access to all types debt instruments.
As per the suggestions of the Narasimham Committee II, the RBI in the Mid-
Term Review of October 1998 that it would move towards a pure inter- bank
call/notice/term money market, including the PDs. Towards this end the nonbank
participants can invest their short-term resources in the Repo market and other
money market instruments. Taking into consideration the transitional problems,
it has also been decided to continue with the present system of permitting FIs
and MFs to lend in the call/notice money market. The corporates can route their
call/notice money transactions through the PDs.
Term Rate
Inter-bank CRR, other than minimum 3% has been done away with. In this
direction the Interest Rate Swaps (IRS) have been introduced for the participants
to hedge their interest risks. For benchmarking we have the 14,
91& 364 T-Bills. Also we have the CPs. Now it is to the participants to use this
opportunity.
Many Mutual Funds have started funds which specifically focus on money
market. They have also been permitted to invest in rated corporate bonds and
debentures with a residual maturity of up to only one year, within the ceiling
existing for CP.
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MONEY MARKET
Non-bank entities, which are currently permitted to take Repos, have been
permitted to borrow money through reverse Repos at par with banks and PDs.
There is no restriction for the duration of a Repo. All government securities have
been made available for Repo. The Repos have also been permitted in PSU
bonds and private corporate debt securities provided they are held in demat form
in a depository and the transactions are done in recognized stock exchanges.
The major drawback of India Money Market is its high volatility. Gradually the
money market transaction is increasing. But, on the recommendation of the
Sukhmoy Chakravarty Committee (on the review of the working of the Monetary
System) and the Narasimham committee (on the Report on the working of the
financial system in India, 1991), RBI initiated a series of reform in Indian Money
Market. The following are some of the measures undertaken,
Many new money market instruments are introduced like Commercial Papers,
Certificates of Deposits, 182-day Treasury, 364-day Treasury etc. The Discount
and Finance House have also developed. These facilitate different short term
borrowings to the different borrowers to collect fund as and when required to
maintain their financial position.
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MONEY MARKET
The all types of interest rates like lending as well as deposit rates of the banks and
financial institution are controlled and regulated by RBI. But, gradually the interest
rates of the bank loans are controlled by the market forces which result decontrolled
of it.
In August 1989, Government remitted the stamp duty. But, it is not effective till
it discourages the cash credit system in favor of using the bill system.
Export credit refinance and general refinance are two refinance schemes that are
in operation in the current financial system. The refinance is used by the central
bank to control credit conditions and the liquidity positions in the system. But if
the excessive funds supplies into the system do not result any the development
then it could be highly distorted one.
5. Introduction of repo:
This is used by the banks for short term liquidity through sale or purchase of debt
instruments. It is an agreement to repurchase them at a predetermined rate and
date between the RBI and commercial banks.
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MONEY MARKET
The Money Market Mutual Funds were introduced in April 1991. The collection
of the small savings invested generates short term avenues to the different
investors.
The DFHI equilibrated the surplus of fund and the deficit amounts of the banks.
The DFHI helps in lending and borrowing of funds to the different banks as well
as financial institutions.
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MONEY MARKET
The first futures experimental contracts included trades against the U.S. dollar
such as the British pound, Swiss franc, German deutschmark, Canadian dollar,
Japanese yen and in September 1974, the French franc. This list would later
expand to include the Australian dollar, the euro, emerging market currencies
such as the Russian ruble, Brazilian real, Turkish lira, Hungarian forint, Polish
zloty, Mexican peso and South African rand. In 1992, the German
deutschmark/Japanese yen pair was introduced as the first futures cross rate
currency. But these early successes didn't come without a price.
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MONEY MARKET
The Chicago Board Options Exchange competed and received the right to trade
U.S. 30-year bond futures while the IMM secured the right to trade Eurodollar
contracts, a 90 days interest rate contract settled in cash rather than physical
delivery. Eurodollars came to be known as the
"eurocurrency market," which is used mainly by the Organization for Petroleum
Exporting Countries (OPEC), which always required payment for oil in U.S.
dollars. This cash settlement aspect would later pave the way for index futures
such as world stock market indexes and the IMM Index. Cash settlement would
also allow the IMM to later become known as a "cash market" because of its
trade in short-term, interest rate sensitive instruments.
The 1990s were a period of explosive growth for the IMM due to three world
events:
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MONEY MARKET
This not only allowed capital to flow freely throughout national borders but also
allowed all banks to incorporate in any EU nation.
3. Basel II
This is geared to control risk by preventing losses, the realization of which is still
a work in progress.
A bank's role is to channel funds from depositors to borrowers. With these news
acts, depositors could be governments, governmental agencies and multinational
corporations. The role for banks in this new international arena exploded in order
to meet the demands of financing capital requirements, new loan structures and
new interest rate structures such as overnight lending rates; increasingly, IMM
was used for all finance needs.
Plus, a whole host of new trading instruments was introduced such as money
market swaps to lock in or reduce borrowing costs, and swaps for arbitrage
against futures or hedge risk. Currency swaps would not be introduced until the
2000s.
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MONEY MARKET
Asian money markets linked up with the IMM because Asian governments,
banks and businesses needed to facilitate business and trade in a faster way
rather than borrowing U.S. dollar deposits from European banks. Asian banks,
like European banks, were saddled with dollar-denominated deposits because all
trades were dollar-denominated as a result of the U.S. dollar's dominance. So,
extra trades were needed to facilitate trade in other currencies, particularly euros.
Asia and the E.U. would go on to share not only an explosion of trade but also
two of the most widely traded world currencies on the IMM. For this reason, the
Japanese yen is quoted in U.S. dollars, while Eurodollar futures are quoted based
on the IMM Index, a function of the three month LIBOR.
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MONEY MARKET
The IMM Index base of 100 is subtracted from the three-month LIBOR to ensure
that bid prices are below the ask price. These are normal procedures used in
other widely traded instruments on the IMM to insure market stabilization.
EUROBOND MARKET
Eurobonds are unique and complex instruments of relatively recent origin. They
debuted in 1963, but didn't gain international significance until the early 1980s.
Since then, they have become a large and active component of international
finance. Similar to foreign bonds, but with important differences, Eurobonds
became popular with issuers and investors because they could offer certain tax
shelters and anonymity to their buyers. They could also offer borrowers
favourable interest rates and international exchange rates.
DEFINING FEATURES
Conventional foreign bonds are much simpler than Eurobonds; generally, foreign
bonds are simply issued by a company in one country for purchase in another.
Usually a foreign bond is denominated in the currency of the intended market.
For example, if a Dutch company wished to raise funds through debt to investors
in the United States, it would issue foreign bonds (dollar-denominated) in the
United States. By contrast, Eurobonds usually are denominated in a currency
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MONEY MARKET
other than the issuer's, but they are intended for the broader international
markets. An example would be a French company issuing a dollar-denominated
Eurobond that might be purchased in the United Kingdom, Germany, Canada,
and the United States.
However, these generalizations should not obscure the fact that the terms of
many Eurobond issues are uniquely tailored to the issuers' and investors' needs,
and can vary in terms and form substantially. A large number of Eurobond
transactions involve elaborate swap deals in which two or more parties may
exchange payments on parallel or opposing debt issues to take advantage of
arbitrage conditions or complementary financial advantages (e.g., cheaper
access to capital in a particular currency or funds at a lower interest rate) that the
various parties can offer one another.
MARKET COMPOSITION
The Eurobond market consists of several layers of participants. First there is the
issuer, or borrower, that needs to raise funds by selling bonds. The borrower,
which could be a bank, a business, an international organization, or a
government, approaches a bank and asks for help in issuing its bonds. This bank
is known as the lead manager and may ask other banks to join it to form a
managing group that will negotiate the terms of the bonds and manage issuing
the bonds. The managing group will then sell the bonds to an underwriter or
directly to a selling group. The three levels—managers, underwriters, and
sellers—are known collectively as the syndicate. The underwriter will actually
purchase the bonds at a minimum price and assume the risk that it may not be
possible to sell them on the market at a higher price. The underwriter (or the
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MONEY MARKET
managing group if there is no underwriter) sells the bonds to a selling group that
then places bonds with investors. The syndicate companies and their investor
clients are considered the primary market for Eurobonds; once they are resold to
general investors, the bonds enter the secondary market. Participants in the
market are organized under the International Primary Market Association
(IPMA) of London and the Zurich-based International Security Market
Association (ISMA).
After the bonds are issued, a bank acting as a principal paying agent has the
responsibility of collecting interest and principal from the borrower and
disbursing the interest to the investors. Often the paying agent will also act as
fiscal agent, that is, on the behalf of the borrower. If, however, a paying agent
acts as a trustee, on behalf of the investors, then there will also be a separate
bank acting as fiscal agent on behalf of the borrowers appointed.
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MONEY MARKET
Money market is distinguished from capital market on the basis of the maturity
period, credit instruments and the institutions:
1. Maturity Period:
The money market deals in the lending and borrowing of short-term finance (i.e.,
for one year or less), while the capital market deals in the lending and borrowing
of long-term finance (i.e., for more than one year).
2. Credit Instruments:
The main credit instruments of the money market are call money, collateral
loans, acceptances, bills of exchange. On the other hand, the main instruments
used in the capital market are stocks, shares, debentures, bonds, securities of the
government.
The credit instruments dealt with in the capital market are more heterogeneous
than those in money market. Some homogeneity of credit instruments is needed
for the operation of financial markets. Too much diversity creates problems for
the investors.
4. Institutions:
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MONEY MARKET
Purpose of Loan:
The money market meets the short-term credit needs of business; it provides
working capital to the industrialists. The capital market, on the other hand, caters
the long-term credit needs of the industrialists and provides fixed capital to buy
land, machinery, etc.
5. Risk:
The degree of risk is small in the money market. The risk is much greater in
capital market. The maturity of one year or less gives little time for a default to
occur, so the risk is minimised. Risk varies both in degree and nature throughout
the capital market.
6. Basic Role:
The basic role of money market is that of liquidity adjustment. The basic role of
capital market is that of putting capital to work, preferably to long-term, secure
and productive employment.
The money market is closely and directly linked with central bank of the country.
The capital market feels central bank's influence, but mainly indirectly and
through the money market.
8. Market Regulation:
In the money market, commercial banks are closely regulated. In the capital
market, the institutions are not much regulated.
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MONEY MARKET
CONCLUSION
The Indian money market was controlled by tight controls and administered
interest rate structure up to late 1980s. However, following the policy measures
during the early 1990s the money market has become broad based with the
enlargement of participants and instruments, and change in liquidated conditions
is quickly transmitted. The reform measures have greatly contributed to the
development of inter-linkages; increasing liquidity across various segments of
the money market. An enabling environment has thus been created whereby the
monetary authority can gradually switch away from the direct instruments of
control to indirect methods like open market operation, including repos. The
market determined interest rate is gradually emerging as an important
intermediate target with the ultimate objective of achieving price stability and
economic growth.
Radical measures are taken to transform the Indian money market from a closed,
inward and narrow domestic space to open, outward-looking and international,
can have competitive and efficient operation for optimal gain. Interest rates have
been freed at certain level of bank deposits and lending, foreign financial
institutions have been allowed to invest in domestic market. Securities market
has been reorganized with the setting up of new institutions (like DFI and
Primary Dealers), introduction of new instruments (like CP, CD) and new
organization (like NSE).
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MONEY MARKET
dualistic economy where the rural sector dominates, money market reform
should start from reorganizing rural financial structure so that funds can
sufficiently flow to the wider activities. In doing this government has important
role of regulation and redirection of financial institutions under liberalization.
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MONEY MARKET
SUGGESTIONS
(i) There should be a mechanism to make the call range bound which may reduce
uncertainty and provide confidence to the bankers for lending/borrowing. In the
context, it is emphasized that Repos and Reverse Repos conducted by RBI has
the potential to set the floor and ceiling in the call money market.
(iii) Non-bank segment should be brought under the same regulation on par with the
banks early as possible so that level playing field is created.
(v) The lock-in period of CDs and CPs should be completely removed in a phase
manner.
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MONEY MARKET
BIBLOGRAPHY
BOOKS REFERENCE:
WEBSITES:
• http://www.jdawiseman.com/books/pricing-money/pricing-money-chapter-
1.html
• http://beginnersinvest.about.com/cs/moneymarket/f/blmoneymarketac.htm
• http://money.howstuffworks.com/personal-finance/financial-
planning/moneymarket-accounts1.htm
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