The Fundamentals of Money

Market in India
Overview of Financial Markets
Need for short term funds by Banks.
Outlet for deploying funds on short term
basis
Need to keep the SLR as prescribed
Need to keep the CRR as prescribed
Optimize the yield on temporary surplus
funds
Regulate the liquidity and interest rates
in the conduct of monetary policy to
achieve the broad objective of price
stability, efficient allocation of credit and
a stable foreign exchange market

The Need
The Definition
Money Market is "the centre for dealings,
mainly short-term character, in money
assets.
It meets the short-term requirements of
borrower and provides liquidity or cash to
the lenders.
It is the place where short-term surplus
investible funds at the disposal of financial
and other institutions and individuals are bid
by borrowers, again comprising Institutions,
individuals and also the Government itself"
The Definition (Contd)
Money market refers to the market for short
term assets that are close substitutes of
money, usually with maturities of less than a
year.
A well functioning money market provides a
relatively safe and steady income-yielding
avenue.
Allows the investor institutions to optimize
the yield on temporary surplus funds.
Instrument of Liquidity adjustment by
Central Bank.

Reserve Bank of India
SBI DFHI Ltd (Amalgamation of Discount & Finance
House in India and SBI Gilts in 2004)
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.

The Players
The Products & Process
Certificate of Deposit (CD)
Commercial Paper (C.P)
Inter Bank Participation Certificates
Inter Bank term Money
Treasury Bills
Call Money
CDs are short-term borrowings in the form
of Usance Promissory Notes having a
maturity of not less than 15 days up to a
maximum of one year.
CD is subject to payment of Stamp Duty
under Indian Stamp Act, 1899 (Central Act)
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
Certificate of Deposit
Features of CD
CDs can be issued by all scheduled
commercial banks except RRBs
Minimum period 15 days
Maximum period 1 year
Minimum Amount Rs 1 lac and in
multiples of Rs. 1 lac
CDs are transferable by endorsement

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 satellite
dealers (SDs) and all-India financial
institutions (FIs)
Eligibility for issue of CP

a) the tangible net worth of the company, as per the latest
audited balance sheet, is not less than Rs. 4 crore;
b) (b) the working capital (fund-based) limit of the
company from the banking system is not less than Rs.4
crore
c) and the borrowal 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
Credit Rating Information Services of India
Ltd. (CRISIL)
Investment Information and Credit Rating
Agency of India Ltd. (ICRA)
Credit Analysis and Research Ltd. (CARE)
Duff & Phelps Credit Rating India Pvt. Ltd.
(DCR India)
The minimum credit rating shall be P-2 of
CRISIL or such equivalent rating by other
agencies
Rating Requirement
CP can be issued for maturities
between a minimum of 15 days and a
maximum upto one year from the date
of issue.
If the maturity date is a holiday, the
company would be liable to make
payment on the immediate preceding
working day.


Maturity
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).
Inter-Bank Participations (IBPs)
With a view for providing an additional instrument
for evening out short-term liquidity within the
banking system, two types of Inter-Bank
Participations (IBPs) were introduced, one on risk
sharing basis and the other without risk sharing.
These are strictly inter-bank instruments confined to
scheduled commercial banks excluding regional
rural banks. The IBP with risk sharing can be issued
for 91-180 days
Inter-Bank Participations (IBPs)
The IBP risk sharing provides flexibility in the credit
portfolio of banks. The rate of interest is left free to
be determined between the issuing bank and the
participating bank subject to a minimum 14.0 per
cent per annum. The aggregate amount of such
IBPs under any loan account at the time of issue is
not to exceed 40 per cent of the outstanding in the
account.


Interbank Call Money
Money market that is short term and
allowing a large financial
institution to borrow or
loan money at interbank rates. These
institutions can include banks, corporations,
and mutual fund companies. These loans are
typically short and last only approximately
one week. They are made primarily to assist
banks in meeting their reserve
requirements.
Call 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".
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.
Call Money Market

The term government securities encompass
all Bonds & T-bills issued by the Central
Government, and state governments. These
securities are normally referred to, as "gilt-
edged" as repayments of principal as well as
interest are totally secured by sovereign
guarantee.


Gilt edged securities
Treasury bills, commonly referred to as T-
Bills are issued by Government of India
against their short term borrowing
requirements with maturities ranging
between 14 to 364 days.
All these are issued at a discount-to-face
value. For 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

Banks, Primary Dealers, State
Governments, Provident Funds,
Financial Institutions, Insurance
Companies, NBFCs, FIIs (as per
prescribed norms), NRIs & OCBs can
invest in T-Bills.
Who can invest in T-Bill
INTER CORPORATE DEPOSITS
INTER CORPORATE DEPOSITS An ICD is an unsecured loan
extended by one corporate to another. This market allows
corporate with surplus funds 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 is much higher than that for a bank, the rates in this
market are higher than those in the other markets. Also, as
ICDs are unsecured, the risk inherent is high and the risk
premium is also built into the rates.