Semester II 3 Credits

SC-205 FIN
Financial Markets and Banking
Operations

By: Prof. Mahendra Yadav

 Subject:
205 FIN-Financial Markets and Banking Operations

 Unit-1 Basic Concept of Indian Financial System

 Unit-2 Money Market

 Unit-3 Capital Market

 Unit-4 Banks And NBFCs

 Unit-5 Concepts in Banking and Accounting of transactions

Unit-2 Money Market
 Unit-2 Money Market

 Participants in Indian Money Market,

 Money Market Instruments,

 Structure of Money Market,

 Role of central bank in money market;

 Players in the Indian Money Market,

 The reforms in Indian Money Market.

Recap…….
 What is Market ?

 What is Money Market ?

 What is a Market?

 A market is a location where buyers and sellers

come into contact to exchange goods or services.

 Markets can exist in various forms depending on

various factors.
 What is Money Market ?
 The money market refers to a segment of the financial market

where short-term borrowing and lending take place.

 It deals with highly liquid and low-risk instruments that

typically have maturities of one year or less.

 The main participants in the money market are financial

institutions, governments, corporations, and other large

entities.
Features of money market
 Participants in Indian Money Market
 Commercial Banks: Banks participate in the money market for
short-term funding and investment needs.

 Central Banks: Central banks use the money market to implement

monetary policy and manage interest rates.

 Corporations: Large corporations may use the money market for

short-term financing or to invest their excess cash.

 Government Entities: Governments issue short-term securities in

the money market to manage their short-term financing needs.
 Money Market Instruments
 Treasury Bills (T-Bills): Short-term debt securities issued by
governments.
 Commercial Papers (CPs): Unsecured, short-term debt issued
by corporations.
 Certificates of Deposit (CDs): Time deposits with a fixed
maturity and interest rate, issued by banks.
 Repurchase Agreements (Repos): Short-term agreements
where one party sells securities to another with an agreement to
repurchase them at a later date.
 Since the government started developing the organized money
market in India (mid-1980s), we have seen the arrival of a total
of eight instruments designed to be used by different
categories of business and industrial firms; the description of
which are as follows:
 Treasury Bills (T-Bill)

 Certificate of Deposit(CDs)

 Commercial Papers(CPs)

 Commercial Bill(CB)

 Call Money Market(CMM)

 Money Market Mutual Funds

 Repos and Reverse Repos

 Cash Management Bill (CMB)

 Treasury Bills
 These are money market instruments issued by the Reserve bank of
India (RBI) acting on the behalf of the central government. These bills
are issued when there is a shortage of funds, or when the RBI wants to
control the cash liquidity in the market.
 The maturity of such bills, also known as Zero Coupon Bonds or is
always one year or less than one year. They are highly liquid
instruments and are a very low-risk instrument. Treasury bills are
issued at a discount than the face value and are redeemed at par. The
difference is the interest received by the holder. which in this case will
be known as ‘discount’.
 Three types of Treasury bills (T-bills) are issued with the following
short maturities: 13 weeks (91 days), 26 weeks (182 days), and 52
weeks (365 days). The 13- and 26-week T-bills are auctioned by the
Treasury every week on Mondays (with adjustments made for public
holidays) and issued on the following Thursday. The 52-week T-bills are
auctioned every fourth Thursday and issued the followingThursday.
 Treasury Bills
 Example: A treasury bill of 108 days face value 50,000/- will be
issued at 45.,000/-. If the holder holds it for the whole 108 days,
he will be repaid Rs 50,000/- and so the difference, Rs. 5,000/-
will be the discount.
 Commercial papers (CPs)
 Commercial papers (CPs) are short-term, unsecured promissory
notes that are issued by corporations, financial institutions, and
other entities to raise short-term funds for their working capital
requirements. CPs are typically issued at a discount to face value,
and the issuer pays interest on the CPs
 Commercial Bill
 A commercial bill is essentially a bill of exchange. In a credit
sale, the seller will draw a bill of exchange. The buyer of the
goods will accept such bill, and the bill becomes a trade bill
which is a marketable financial instrument.
 The seller can then go to his bank and get the bill
discounted. Here the bank will promise to pay the amount if
the buyer is unable to do so. And this way a trade bill
becomes a commercial bill. The general term for such bills is
30, 60, or 90 days. It is a negotiable instrument and is also
self-liquidating.
 certificate of deposit (CD)
 A certificate of deposit (CD) is a savings account that holds a
fixed amount of money for a specified period of time, usually 6
months, 1 year, or 5 years. In return, the issuing bank pays
interest. When you redeem your CD, you receive the original
investment plus any interest earned during that period. CDs are
considered one of the safest options for savings

 CDs are issued by banks and credit unions, and are governed by
the Reserve Bank of India (RBI). You can purchase CDs directly
from banks, or from brokerage firms and independent
salespeople, known as "deposit brokers". Deposit brokers can
sometimes negotiate a higher rate of interest for a CD
certificate of deposit (CD)
 Repurchase Agreements (Repos):
 A repurchase agreement (repo) is a contract between two
parties where one sells securities to the other at a
predetermined price, with the agreement to buy them back
at a later date for a higher price. Repos are a type of short-
term borrowing, often involving government securities
 Repos are also known as RP, or sale and repurchase
agreements. Repos with a specified maturity date are called
"term repos", while those that mature the next day are
called "overnight repos". Repos without a specified maturity
date are called "open", and either party can terminate them
at any time.
Repurchase Agreements (Repos):
 Call Money
 At times even banks may need help with maintaining their funds.
At such times they lean on other commercial banks for a short-
term loan. Such an instrument of the money market is known as
call money. One important factor is that this interbank
transaction has no maturity date, it is payable on demand.

 Mostly banks depend on call money to main their cash liquidity

ratio as per RBI guidelines. The rate of interest on call money is
known as call rates.
 Structure of Indian Money Markets

The money market can be broadly categorized into organized and

unorganized segments based on the level of structure, regulation, and
formality within the marketplace.
 Organized v/s Unorganized Money Market
 The organized money market refers to the structured and regulated
marketplace where participants engage in the buying and selling of short-term
financial instruments. This market is characterized by well-defined rules, regulations,
and organized structures to facilitate efficient trading, enhance transparency, and
mitigate risks. (Treasury Bills (T-Bills), Commercial Paper (CP), Certificates
of Deposit (CDs), Repurchase Agreements (Repos))

 The unorganized money market refers to a segment of the financial

market that lacks a formalized structure, standardized rules, and centralized

regulatory oversight. (Private Loans, Informal Credit Arrangements,
Informal Savings Groups, Local Money Lenders:)
 Role of central bank in money market
 The central bank plays a crucial and multifaceted role in the money
market, contributing to the overall stability, liquidity, and effective
functioning of the financial system.
 key roles of a central bank in the money market:
 Monetary Policy Implementation:
 Interest Rate Management:
 Liquidity Management:
 Control of Inflation:
 Market Surveillance and Regulation:
 Foreign Exchange Reserves Management:
 Bank Supervision:
 Repo Rate full form is Repurchase Agreement or
Repurchasing Option. Banks obtain loans from the Reserve
Bank of India (RBI) by selling qualifying securities. The
current Repo Rate in India, fixed by RBI is 6.50%. As per
the latest news, the repo rate remained unchanged, as
announced on 8th February 2024.

 The reverse repo rate is the interest rate that the Reserve
Bank of India (RBI) pays to commercial banks for depositing
surplus funds. As of February 2024, the reverse repo rate is
3.35%, which has remained the same since April 2020
 Cash Reserve Ratio
CRR stands for Cash Reserve Ratio, which is the percentage of a bank's
total deposits that it must keep as cash reserves with the central bank. The
central bank determines the CRR based on its economic objectives. For
example, if the central bank wants to reduce inflation, it raises the
CRR. When the CRR increases, banks have less money to use. When the
CRR decreases, banks can provide loans to more businesses and industries,
which can boost the economy
 Statutory Liquidity Ratio,
SLR stands for Statutory Liquidity Ratio, and refers to the minimum
percentage of deposits that commercial banks are mandated to maintain as
gold assets, cash, or government-approved securities, in their own vaults.
These deposits have to be maintained by the banks themselves and not with
the Reserve Bank of India.
Players in the Indian Money Market
 The Indian money market consists of various participants, including
financial institutions, government entities, corporations, and individuals.
 key players in the Indian money market:
 Reserve Bank of India (RBI):
 Commercial Banks:
 State Bank of India (SBI) and Nationalized Banks:
 Private Sector Banks:
 Foreign Banks:
 Non-Banking Financial Companies (NBFCs):
 Money Market Mutual Funds (MMMFs):
 Insurance Companies:
 Individual Investors:
 The reforms in Indian Money Market.
 India has implemented several reforms in its money market over
the years to enhance efficiency, transparency, and overall market
development.
 Some notable reforms in the Indian money market include:
 Liberalization, Privatization, and Globalization
 Introduction of Treasury Bills Auctions:
 Establishment of Securities Trading Corporation of India (STCI):
 Primary Dealership System:
 Introduction of Commercial Paper (CP) and Certificate of Deposit
(CD):
 Development of Money Market Mutual Funds (MMMFs):
 Securities and Exchange Board of India (SEBI) Regulations:
Liberalization, Privatization, and Globalization (LPG)

 Liberalization, Privatization, and Globalization (LPG) are three

structural reform policies that aim to improve a country's
economy.
 Liberalization, privatization, and globalization are the three
strategies that were adopted by the Government of India under
its New Economic Policy in 1991 when India was heading toward
an economic crisis.
 The basic aim of liberalization was to put an end to those
restrictions which became hindrances in the development and
growth of the nation. The loosening of government control in a
country and when private sector companies’ start working
without or with fewer restrictions and government allow private
players to expand for the growth of the country depicts
liberalization in a country.
 Liberalization, Privatization, and Globalization (LPG)

 Privatization is the increment of the dominating role of private

sector companies and the reduced role of public sector companies.

In other words, it is the reduction of ownership of the management
of a government-owned enterprise.

 Globalization means to integrate the economy of one country

with the global economy. During Globalization the main focus is

on foreign trade & private and institutional foreign investment.
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