Money Markets in India

Arjun Parthasarathy December 2010

Money Market
Overnight Money Term Money Treasury Bill Commercial Papers Certificate of Deposits

Overnight Money
Call Money Uncollateralized, restricted to banks and primary dealers. Telephonic market Repo- Collateralized against government securities/ treasury bills- Telephonic as well as electronic (CROMS) CBLO- Collateralized against government securities/treasury bills- Electronic Participants in Repo/CBLO include banks, primary dealers, mutual funds, NBFCs, corporates and insurance companies

Why Overnight Money

Banks to maintain CRR (Cash Reserve Ratio) can borrow as well as lend Primary dealers to balance their books can borrow as well as lend Mutual funds and insurance companies to park excess liquidity can only lend Corporates, NBFCs can borrow as well as lend

CCIL
Clearing Corporation of India acts as the clearing house for Repo and CBLO trades Trades are matched electronically between lender and borrower with the collatral deposited with CCIL CBLO is a daily money market security created, which is settled overnight CBLO sees the highest volumes in overnight markets

Overnight rates
Overnight rates are dependent on demand and supply RBI set policy rates also determine overnight rates If lenders are more than borrowers, overnight rates will revolve around reverse repo rate If borrowers are more than lenders overnight rates will revolve around repo rates Call money index Mibor is the overnight benchmark rate

Term Money
Market where lending and borrowing term is more than 1 day but less than 364 days Not a well developed market in India Reasons due to visibility of funds, lack of proper quotes, lack of depth etc Call, Repo as well as CBLO can have maturities of over 1 day

Treasury Bills
Treasury Bills or T-Bills are issued by the Central Government for its financing needs Government raises money through weekly auctions of 91 day, 182 day and 364 day T-Bills Auctions are through multiple price method and conducted by the RBI Investors include banks, primary dealers, mutual funds, insurance companies etc

T-Bill Market
T-bills are traded electronically as well as telephonically and have T+1 settlement T-bill yields largely depend on liquidity and expected RBI policy rates Rates tend to move up when overnight rates are high due to tight liquidity conditions Rates tend to move down when overnight rates are low due to easy liquidity conditions

Commercial Papers
Money market securites issued by corporates are called commercial papers or CPs CPs are issued in lieu of working capital loans and are largely backed by bank lines CPs can be rated or unrated though rated CPs are the most common CPs can have any maturity which is less than 365 days but most common is three month, six month and one year maturity

CP Market
CPs are traded telephonically and have T+0 or T+1 settlements. Yields are determined by liquidity, demand and supply Yields can be very volatile especially in times of tight liquidity Spreads with T-bills can go down to zero or can go up to very high levels especially in times of credit stress

Certificate of Deposits
Certificate of Deposits or CDs are money market instruments issued by banks to raise institutional money in lieu of bulk deposits Issuances can be rated or unrated Maturity can be of any maturity less than 365 days but the most common are three, six and one year maturity

CD Market
CD market is a telephonic market with T+ 0 or T+1 settlement CD rates are determined by liquidity and demand and supply The market is much larger than the CP market as CDs are considered much safer compared to CPs Liquidity is much better than CPs due to the perceived credit worthiness