Money market means market where money or its

equivalent can be traded.

Money Market is a wholesale market of short term debt

instrument and is synonym of liquidity..

Money

Market is part of financial market where

instruments with high liquidity and very short term maturities i.e. one or less than one year are traded.
Due to highly liquid nature of securities and their short term

maturities, money market is treated as a safe place.

Definition
As per RBI definitions A market for short terms

financial assets that are close substitute for money, facilitates the exchange of money in primary and secondary market. The money market is a mechanism that deals with the lending and borrowing of short term funds (less than one year). Hence, money market is a market where short term obligations such as treasury bills, call/notice money, certificate of deposits, commercial papers and repos are bought and sold.

 So Money market is a market for overnight to short-term

funds (i.e., upto 1 year) and for short-term money and financial assets that are close substitutes for money, that is, financial assets that can be quickly converted into cash (money) with minimum transaction cost and without loss in value. It is a market purely for short-terms funds or financial assets called near money. It deals with financial assets having a maturity period less than one year only.

Features of Money Market

Transaction have to be conducted without the help

of brokers. It is not a single market, it comprises of several submarket like call money market, acceptance & bill market. The component of Money Market are the commercial banks, acceptance houses & NBFC (Non-banking financial companies). In Money Market transaction can not take place formal like stock exchange, only through oral communication, relevant document and written communication transaction can be done.

It is a wholesale market of short term debt instruments It principal feature is honor where the creditworthiness

of the participants is important. It is a need based market wherein the demand and supply of money shape the market.

Objective of Money Market

To provide a reasonable access to users of short-term

funds to meet their requirement quickly, adequately at reasonable cost. To provide a parking place to employ short term surplus funds. To provide room for overcoming short term deficits. To enable the central bank to influence and regulate liquidity in the economy through its intervention in this market.

Role of the Reserve Bank in the Money Market

To ensure that liquidity and short term interest rates are maintained at levels consistent with the monetary policy objectives of maintaining price stability
To ensure an adequate flow of credit to the productive sectors of the economy

To bring about order in the foreign exchange market

The Players
Reserve Bank of India

SBI DFHI Ltd (Amalgamation of Discount & Finance House in

India and SBI in 2004) Acceptance Houses Commercial Banks, Co-operative Banks and 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 and institutions can purchase the treasury bills, CPs and CDs.

A variety of instrument are available in a developed money market In India till 1986, only a few instrument were available

Treasury bills

Commercial Bills

Money at call

Promissory notes

SOME NEW INSTRUMENTS ARE:

Commercial Papers

Mutual Fund

Certificate of deposit

Money Market
Banker's Acceptance Repo instrument

Repurchase Agreement

Call/Notice Money Market

The call money market is an integral part of the Indian

Money Market, 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 one day in this market is known as "Call Money", and if it exceeds one day (but less than 15 days) it is referred to as "Notice Money". Call Money Borrowing and Lending rate 5% to 5.9%

 The call/notice money market forms an important

segment of the Indian money market. Market in which brokers and dealers borrow money to satisfy their credit needs, either to finance their own inventory of securities or to cover their customers' margin accounts. This is the market for very short term funds, known as money on call. The rate at which funds are borrowed in this market is called `Call Money rate'. Call money is required mostly by banks.

Call/Notice Money Market

Commercial banks borrow money from other banks to

maintain a minimum cash balance known as cash reserve requirement. This inter-bank borrowing has led to the development of the call money market. The size of the market for these funds in India is between Rs 60,000 million to Rs 70,000 million, of which public sector banks account for 80% of borrowings and foreign banks/private sector banks account for the balance 20%. Non-bank financial institutions like IDBI, LIC, GIC etc participate only as lenders in this market. 80% of the requirement of call money funds is met by the non-bank participants and 20% from the banking system

Features of Call/Notice Money Market

Call/notice money market in India is purely an inter-

bank market. The borrowings are unsecured. The interest rates depend on the demand and supply of the short term surplus/ deficiency amongst the inter bank players. It serves as an outlet for deploying funds on short term basis to the lenders having steady surplus of funds.

Call/Notice Money Market

Banks borrow in this market for the following purpose To fill the gaps or temporary mismatches in funds To meet the CRR & SLR mandatory requirements as stipulated by the Central bank To meet sudden demand for funds arising out of large outflows. No collateral security required

Participants in Call Money Market

The call money market was predominantly an

inter-bank market till 1971 when UTI and LIC were allowed to operate as lenders. Until March 1978, brokers were also allowed to participate in the call money market, who would effect transactions between lenders and borrowers for a brokerage. In the 1990s, the participation was gradually widened to include DFHI, STCI, GIC, NABARD, IDBI, Money Market Mutual Funds, Corporates, and Private Sector Mutual Funds as lenders in this market. No new non-bank institutions are permitted to operate (i.e., lend) in the call/notice money market with effect from May 5, 2001.

Certificate of Deposit
CDs are negotiable money market instruments and are

issued in dematerialized form or a usance promissory note, for funds deposited at a bank or other eligible financial institution for a specified time period. They are like bank term deposits accounts. Unlike traditional time deposits these are freely negotiable instruments and are often referred to as Negotiable Certificate of Deposits A CD is a time deposit with a bank. Like most time deposit, funds can not withdrawn before maturity without paying a penalty.

 CDs have specific maturity date, interest rate and it

can be issued in any denomination. In other words, a CD is a marketable receipt of funds deposited in a bank/FII, for a fixed period, at a specified rate of interest. It is attractive both to the bank/FII and the investors as the former does not have to encash the deposit prematurely, while the latter can sell it in the secondary market before its maturity.

Features of CD
CDs can be issued by

(i) all scheduled commercial banks except RRBs (ii) selected all India financial institutions, permitted by RBI Issued at a discount to face value Maturity period 7 days to one year for banks 1 to 3 years for FIs No lock-in period Minimum Amount Rs 1 lakh and in multiples of Rs. 1 lakh CDs are transferable by endorsement CRR & SLR are to be maintained

CDs are to be stamped The main advantage of CD is their safety.

Anyone can earn more than a saving account

interest.
Discount / Coupon rate of CD is determined by the

issuing bank/FI.
Loans cannot be granted against CDs and Banks / FIs

cannot buy back their own CDs before maturity.

Commercial Paper
Commercial Paper (CP) is an unsecured money market

instrument issued in the form of a promissory note. Who can issue Commercial Paper (CP) Highly rated corporate borrowers, primary dealers (PDs) and all-India financial institutions (FIs) Largest issuers of CPsLeasing and Finance companies 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). Denomination: min. of 5 lakhs and multiple thereof. Maturity: min. of 7 days and maximum of up to one year from the date of issue

Eligibility for issue of CP

The tangible net worth of the company, as per the

latest audited balance sheet, is not less than Rs. 4 crore; The working capital (fund-based) limit of the company from the banking system is not less than Rs.4 crore and The borrowable account of the company is classified as a Standard Asset by the financing bank/s. All eligible participants should obtain the credit rating for issuance of Commercial Paper The minimum credit rating shall be P-2 of CRISIL or such equivalent rating by other agencies

Process for Issuing CP

A resolution to be passed by the Board of Directors
CP issue to be rated Select an Issuing and Paying Agent for verification of documents Arrange for dealers for placement of CP

Report to the RBI regarding the issue

Treasury Bills
T-bills are short term instruments issued by RBI on

behalf of the Govt. to tide over short term borrowing requirements with maturities ranging between 14 to 364 days. Used to bridge seasonal or temporary gaps between revenue and capital. T-bills are issued at a discount-to-face value and redeemable at par. For example a Treasury bill of Rs. 100.00 face value issued for Rs. 91.50 gets redeemed at the end of it's tenure at Rs. 100.00. Treasury bills are available for a minimum amount of Rs.25,000 and in multiples of Rs. 25,000.

Features/Characteristics of T-bills
At present, the Government of India issues three types of treasury bills through auctions, namely, 91-days,

182-days and 364-days. There are no treasury bills issued by State Governments. 91-days T-bills are auctioned every week on Wednesdays, 182-days and 364-days T-bills are auctioned every alternate week on Wednesdays. Absence of default risk Assured yield, low transaction cost Security for SLR purposes Negotiable and highly liquid securities

Types of T Bills
On tap Bills.
Ad hoc Bills. Auctioned T Bills.

(91-day, 182-day, and 364-day T-Bills)

On - tap Bills
On tap Bills could be purchased

from the RBI at any time at an interest yield of 4.66%. These bill discontinued from April 1, 1997, as they had lost much of their relevance.

Ad hoc Bills
Ad hoc bills were introduced in 1955.
They were discontinued from April 1, 1997

due to irrelevance.

Auctioned T Bills
The most active money market instruments. Introduced in April, 1992. The RBI receives bids in an auction from various participants and issues the bills subject to sum cut off limits. The yield of the instrument is market determined. These bills are neither rated nor can they be rediscounted with the RBI. At present RBI issues T-bills of three maturities -91 days, 182 days and 364 days.

Types of Auctions
Sale of T-bills
Conducted through an auction Non-competitive bids also accepted Types of auctions Multiple Price auction. Uniform Price auction.

Multiple Price Auction

RBI invites bids by price. The bidders have to quote the

price of the stock which they desire to purchase. Then bank decides the cut off price at which the issue would be exhausted. Bid above the cut off prices are allotted securities.

Uniform Price Auction

RBI invites bids in descending orders and

accepts those that fully absorb the issue amount. Each winning bidder pays the same price as decided by the Reserve Bank. Winning bidders are awarded the auctioned amount at the same price. This system was introduced on an experimental basis on Nov. 6, 1998, in case of 91 day T-bills. Since 1999-2000, 91 day T-bill auctions are regularly conducted on a uniform price basis.

Participants in the T- Bills Market

The RBI, banks, Mutual Funds,

Financial Institutions, Primary Dealers, provident funds, corporate, foreign banks, foreign institutional investors. The state Govt. can invest, but cant issue.

Commercial Bills
CBs are negotiable instruments drawn by the seller on the buyer which are, in turn, accepted and discounted by commercial banks. A short-term, negotiable and self liquidating instrument with low risk. It enhances the liability to make payment in a fixed date when goods are bought on credit. The working capital requirement of business firms is provided by banks through cash-credits/overdraft and purchase/discounting of CB

Commercial Bills
The bank discount this bill by keeping a certain margin

and credits the proceeds. Banks, when in need of money, can also get such bills rediscounted by financial institutions such as LIC, UTI, GIC, ICICI and IRBI. The maturity period of the bills varies from 30 days, 60 days or 90 days, depending on the credit extended in the industry.

Types Commercial Bills

Demand bill: is payable on demand

Usance bill: is payable after a specified time. This is also

called time bill. Clean bill: These bills are not accompanied by any documents that show that a trade has taken place between the buyer and the seller. Because of this, the interest rate charged on such bills is higher than the rate charged on documentary bills. Documentary bill: documents are delivered against payment accepted by the drawee and documents of the file are held by bankers till the bill is paid.

 Inland bill: must be drawn or made in India and must be

payable in India of drawn upon any person resident in India Foreign bill: are drawn outside India and may be payable in and by a party outside India or may be payable in India or drawn on a party in India or it may be drawn in India and made payable outside India. Hundi: the original variety of bills of exchange for financing the movement of agricultural produce. Derivative Usance Promissory Note: to eliminating movement of papers and facilitating multiple rediscounting the RBI introduced an innovative instrument known as Derivative Usance Promissory Notes.

Collateralized Borrowing & Lending Obligation (CBLO)

It is a money market instrument as approved by RBI, is a

product developed by CCIL(Clearing Corporation of India Ltd). CBLO is a discounted instrument available in electronic book entry form for the maturity period ranging from one day to ninety Days (can be made available up to one year as per RBI guidelines). In order to enable the market participants to borrow and lend funds, CCIL provides the Dealing System through: - Indian Financial Network (INFINET), a closed user group to the Members of the Negotiated Dealing System (NDS) who maintain Current account with RBI. - Internet gateway for other entities who do not maintain Current account with RBI.

 What is CBLO?
CBLO is explained as under: An obligation by the borrower to return the money borrowed, at a specified future date; An authority to the lender to receive money lent, at a specified future date with an option/privilege to transfer the authority to another person for value received; An underlying charge on securities held in custody (with CCIL) for the amount borrowed/lent. Banks, financial institutions, primary dealers, mutual funds and co-operative banks, who are members of NDS, are allowed to participate in CBLO transactions. Non-NDS members like corporate, co-operative banks, NBFCs, Pension/Provident Funds, Trusts etc. are allowed to participate by obtaining Associate Membership to CBLO Segment.

Money Market Intermediaries

The Discount and Finance House of India. [DFHI]
Money Market Mutual Funds.

The Discount and Finance House of India. [DFHI]

DFHI was set up in March 1988 by Reserve Bank of India jointly with public sector banks and all India Financial Institutions.
To develop the money market and to provide liquidity to money market instruments. With effect from 1992-93, DFHI was authorized to deal in dated Government Securities.

The Discount and Finance House of India. [DFHI]

After DFHI was accredited as a Primary Dealer in

February 1996, its operations significantly increased particularly in T-Bills and dated Government Securities. During these years, DFHI opened its branches at Ahmedabad, Bangalore, Calcutta, Chennai, New Delhi and very recently at Hyderabad with a view to catering to the requirements of the small and medium sized institutions operating at these centers and at the same time integrating the markets at these regional centers with main money market at Mumbai.

Objectives of DHFI

To even out the liquidity imbalances in the banking system To promote secondary market in short term money market instruments To integrate markets at regional centers with the main market at Mumbai, through its network. Provide safe and risk-free short-term investment avenues to institutions; Provide greater liquidity to money market instruments. Facilitate money market transactions for small and medium sized institutions who are not regular participants in the market.

Money Market Instruments in which DFHI Deals

Treasury Bills Dated Government Securities Certificates of Deposit Commercial Papers Call (overnight) Money Notice Money Term Money Derivative Usance Promissory Commercial Banks

Notes

of

Money Market Mutual Funds

MMMFs were introduced in April 1991.
To provide an additional short term avenue for

investment and bring money market investment within the reach of individuals. These funds invests in the money market instruments only.

Features of MMMFs
Bridge the gap between small individual investors and

the money market. It mobilizes savings from small investors and invests them in short term debt instruments or money market instruments. Provides an additional short term avenue for investment.

Link Between the Money Market and the Monetary Policy in India
The Monetary Policy represents policies, objectives and instruments directed towards regulating money supply and the cost and availability of credit in the economy. Money market provides a balancing mechanism to even out the demand for and supply of short term funds. The monetary policy in India is an adjunct of the economic policy. The objectives of the monetary policy are not different from those of the economic policy.

Link Between the Money Market and the Monetary Policy in India
Money market provides a focal point for central bank intervention for influencing liquidity and general level of interest rates in the economy. In the monetary policy framework, broad objectives are prescribed and an operating framework of policy instruments to achieve them is formulated. Money market facilitates the development of a market for longer term securities. RBI uses multiple instruments to ensure that appropriate liquidity is maintained in the system.

Tools for Managing Liquidity in the Money Market

Reserve Requirements.
Interest Rates. Bank Rate. Refinance from the Reserve

Bank. Repos.

Repos
It is a transaction in which two parties agree to sell

and 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 and in securities as approved by RBI (Treasury Bills, Central/State Govt securities).

What is Repo rate?

Whenever the banks have any shortage of funds they can

borrow it from RBI. Repo rate is the rate at which our banks borrow rupees from RBI. A reduction in the repo rate will help banks to get money at a cheaper rate.
So Repo (Repurchase) rate is the rate at which the RBI

lends shot-term money to the banks. When the repo rate increases borrowing from RBI becomes more expensive. Therefore, we can say that in case, RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate; similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate.

Historical Rates of Repo Rates in India

24-Jan-2006 6.50 8-Jun-2006 6.75

25-Jul-2006 7.00
30-Oct-2006 7.25 31-Jan-2007 7.50

30-Mar-2007 7.75
12-Jun-2008 8.00 RBI circular dated 11/6/2008 25-Jun-2008 8.50 RBI circular dated 24/06/2008

30-Jul-2008 9.00 RBI circular dated 29/07/2008

20-Oct-2008 8.00 RBI circular dated 20/10/2008 3-Nov-2008 7.50 RBI circular dated 3/11/2008

8-Dec-2008 6.50 RBI circular dated 6/12/2008

 5-Jan-2009 5.50 RBI circular dated 2/01/2009 5-March-2009 5.00 RBI circular dated 4/03/2009 21-April-2009 4.75 RBI circular dated 21/04/2009 19-March-2010 5.00 RBI circular dated 19/03/2010 20-Apr-2010 5.25 RBI circular dated 20/04/2010 02-July-2010 5.50 RBI circular dated 02/07/2010 27-July-2010 5.75 RBI circular dated 27/07/2010 16-Sept-2010 6.00 RBI circular dated 16/09/2010 02-Nov-2010 6.25 RBI circular dated 02/11/2010 25-January-2011 6.50 RBI circular dated 25/01/2011 7-March-2011 6.75 RBI circular dated 17/03/2011 03-May-2011 7.25 RBI circular dated 03/05/2011

 16-June-2011 7.50 RBI circular dated 16/06/2011

26-July-2011 8.00 RBI circular dated 26/07/2011

16-Sept-2011 8.25 RBI circular dated 16/09/2011 25 October-2011 8.50 RBI circular dated 25/10/2011

17-April-2012 8.00 RBI Circular dated 17/04/2012

Reverse Repo rate

Reverse Repo rate is the rate at which banks park their

short-term excess liquidity with the RBI. The RBI uses this tool when it feels there is too much money floating in the banking system. An increase in the reverse repo rate means that the RBI will borrow money from the banks at a higher rate of interest. As a result, banks would prefer to keep their money with the RBI. *[Till 03/05/2011, reverse repo rate was an independent rate and announced by RBI. However, in the monetary policy announced on 03/05/2011, RBI has decided that now the reverse repo rate will not be announced separately, but will be linked to Repo rate.

Reverse Repo Rates in India

29-Apr-2005 5.00 26-Oct-2005 5.25

24-Jan-2006 5.50
8-Jun-2006 5.75 25-Jul-2006 6.00

8-Dec-2008 5.00 RBI announced on 6/12/2008

5-Jan-2009 4.00 RBI circular dated 2/01/2009 5-March-2009 3.50 RBI circular dated 4/03/2009

21-Apr-2009 3.25 RBI circular dated 21/04/2009

19-March-2010 3.50 RBI circular dated 19/03/2010 20-Apr-2010 3.75 RBI circular dated 20/04/2010

02-July-2010 4.00 RBI circular dated 02/07/2010

Reverse Repo Rates in India

27-July-2010 4.50 RBI circular dated 27/07/2010 16-Sept-2010 5.00RBI circular dated 16/09/2010 02-Nov-2010 5.25 RBI circular dated 02/11/2010 25-January-2011 5.50 RBI circular dated 25/01/2011 17-March-2011 5.75 RBI circular dated 17/03/2011

03-May-2011 6.25* RBI circular dated 03/05/2011*

16-June-2011 6.50*RBI circular dated 16/062011* 26-July-2011 7.00* RBI circular dated 26/072011*

16-September-2011 7.25* RBI circular dated 16/09/2011*

25 October-2011 7.50* RBI circular dated 25/10/2011 17-April-2012 7.00* RBI circular dated 17/04/2012

What is CRR?
Cash reserve Ratio (CRR) is the amount of funds that the

banks have to keep with RBI. If RBI decides to increase the percent of this, the available amount with the banks comes down. RBI is using this method (increase of CRR rate), to drain out the excessive money from the banks. [Before the enactment of this amendment, in terms of Section 42(1) of the RBI Act, the Reserve Bank could prescribe CRR for scheduled banks between 3 per cent and 20 per cent of total of their demand and time liabilities].

 23-Dec-2006 5.25 RBI circular dated 11/12/2006 6-Jan-2007 5.50 RBI circular dated 11/12/2006

CRR

17-Feb-2007 5.75 RBI circular dated 01/03/207

3-Mar-2007 6.00 RBI circular dated 01/03/207 14-Apr-2007 6.25 RBI circular dated 20/4/2007

28-Apr-2007 6.50 RBI circular dated 20/4/2007

4-Aug-2007 7.00 RBI circular dated 31/7/2008 10-Nov-2007 7.50 RBI circular dated 30/10/2007

26-Apr-2008 7.75 RBI circular dated 21/4/2008

10-May-2008 8.00 RBI circular dated 21/4/2008 24-May-2008 8.25 RBI circular dated 29/4/2008

5-Jul-2008 8.50 RBI circular dated 26/7/2008

CRR
19-Jul-2008 8.75 RBI circular dated 26/7/2008 30-Aug-2008 9.00 RBI circular dated 30/07/208

11-Oct-2008 7.50 RBI circular dated 6/10/2008 and

10/10/2008 11-Oct-2008 6.50 RBI Circular dated 15/10/2008 25-Oct-2008 6.00 RBI Circular dated 3/11/2008 8-Nov-2008 5.50 RBI Circular dated 3/11/2008 17-Jan-2009 5.00 RBI circular dated 02/01/2009 13-Feb-2010 5.50 RBI circular dated 29/01/2010 27-Feb-2010 5.75 RBI circular dated 29/01/2010 24-Apr-2010 6.00 RBI circular dated 20/04/2010 28-Jan-2012 5.50 RBI circular dated 24/01/2012

What is SLR?
SLR (Statutory Liquidity Ratio) is the amount a commercial

bank needs to maintain in the form of cash, or gold or govt. approved securities (Bonds) before providing credit to its customers. SLR rate is determined and maintained by the RBI (Reserve Bank of India) in order to control the expansion of bank credit. Every bank is required to maintain at the close of business every day, a minimum proportion of their Net Demand and Time Liabilities as liquid assets in the form of cash, gold and un-encumbered approved securities. The maximum limit of SLR is 40% An increase in SLR also restrict the banks leverage position to pump more money into the economy.

SLR
25-Oct-1997 25.00

8-Nov-2008 24.00
7-Nov-2009 25.00 18-Dec.-2010 24.00 Announced on 16/12/2010 Mid-

Quarter Monetary Policy Review: December 2010 11th August, 2012 23.00 Policy Review : Announced on 31/07/2012 at the time First Quarter Review of Monetary Policy of 2012-13