Contemporary issue

on Money Market
Instruments
Submitted By:-
Maninder Kaur
Reg No. 1081702
M.B.A 3rd Sem
 Money market instruments

Money market instrument meets short term

requirements of the borrowers and provides
liquidity to the lenders.
 Characteristic of Money Market
Instrument
• Short Duration
• High Liquidity
( near money and close substitute of money)
• High safety
Government of India - Treasury Bills
Scheduled commercial banks - BRS and CD’s
Public Financial Institutions - CD’s
High rated public and private
Corporate Bodies - CP’s
• Large volume
TB - minimum 1 Lakh
CP - minimum 25 Lakh
call Loan - minimum 10 crore
 Money Market
Hence, Money market is a market
where short term obligations such
As treasury bills, commercial
papers and banker’s acceptances
are bought and sold.
Current scenario in Money Market

The money market is a monetary system of lending and

borrowing of short-term funds. After the globalization
initiative in 1992, India has witnessed a growth in its
money markets. Financial institutions have been
employing money market instruments to finance the
short-term monetary requirements of industries such as
agriculture, finance and manufacturing. The money
markets have performed well in the past 20 years.
 Who control money market
instruments

The Reserve Bank of India (RBI) has been

playing the key role of regulator and controller
of such money markets. The RBI intervenes
regularly to curb crisis situations, such as
liquidity crunching in the markets, by reducing
the cash reserve ratio (CRR) or by pumping in
more money.
 Benefits and functions of Money
Market
• Money markets exist to facilitate efficient
transfer of short-term funds between holders
and borrowers of cash assets.

• For the lender/investor, it provides a good return

on their funds.

• For the borrower, it enables rapid and relatively

inexpensive acquisition of cash to cover short-
term liabilities.
 Sebi recently issued a directive on
valuing commercial paper, certificates
of deposit
Feb 11, 2010
• The Reserve Bank of India (RBI) wants to track the activities in
the commercial papers (CPs) and certificates of deposit (CDs)
markets for transparency and better price discovery.
• The recent Securities Exchange Board of India (Sebi) directive
to mutual funds on valuing these papers by daily trade price,
instead of their historic value.
 All money market and debt securities, including floating rate
securities, with residual maturity of over 91 days shall be
valued at weighted average price at which they are traded on
the particular valuation day,"

RBI has asked the Fixed Income Money Markets and Derivatives
Association to build a trading and reporting platform for these
money market instruments that banks and corporations float,
according to sources familiar with the matter
 New platform

• RBI has asked the Fixed Income Money

Markets and Derivatives Association to build a
trading and reporting platform for these
money market instruments that banks and
corporations float, according to sources
familiar with the matter
Performance of CP’s and CD’s in 2009

The outstanding volume of the CDs in mid-December was Rs2.48

trillion and that of the CPs was Rs90,305 crore, as per RBI data.
The rate of interest at which these CDs were issued ranged from
3.60% to 6.75%, depending on the rating and credit profile of
the issuer. For CPs, the interest rates ranged between 3.72% and
10.00%.
 SEBI changes rules for debt,
Money market instruments

SEBI said that all securities in debt and money

markets including those which offer a floating
rate, with residual maturity of up to 91 days or
over 91 days, would have to be valued at the
weighted average price at which they are
traded on the particular valuation day.
 Money Market Account
It can be opened at any bank in the similar fashion as a
Savings account. However, it is less liquid as compared to
regular savings account. It is a low risk account where the
money parked by the investor is used by the bank for
investing in money market instruments and interest is
earned by the account holder for allowing bank to make
Such investment. Interest is usually compounded daily
and paid monthly. There are two types of money market
accounts:
Money Market Transactional Account
By opening such type of account, the account
holder can enter into transactions also besides
investments, although the numbers of
transactions are limited.
 Money Market Investor Account

By opening such type of account, the account

holder can only do the investments with no
transactions.
 Money Market Index

To decide how much and where to invest in

money market an investor will refer to the
Money Market Index. It provides information
about the prevailing market rates. There are
various methods of identifying Money
Market Index like:
 Smart Money Market Index

It is a composite index based on intra day price

Pattern of the money market instruments.
Salomon Smith Barney’s World Money
Market Index

Money market instruments are evaluated in

various world currencies and a weighted
average
is calculated. This helps in determining the
index.
 Banker’s Acceptance Rate

Banker’s Acceptance is a Money market

instrument The prevailing market rate of this
instrument i.e. the rate at which the banker’s
acceptance is traded in secondary
market, is also used as a money market index.
 LIBOR/MIBOR
London Inter Bank Offered Rate/ Mumbai Inter
Bank Offered Rate also serves as good money
market index. This is the interest rate at which
Banks borrow funds from other banks.
 
 Money Market Instruments
Investment in money market is done through
money market instruments. Money market
instrument meets short term requirements of
the borrowers and provides liquidity to the
lenders. Common Money Market Instruments
are as follows:
 Treasury Bills (T-Bills):
The Treasury bills are short-term money
market instrument that mature in a year or
less than that. The purchase price is less than
the face value. At maturity the government
pays the Treasury Bill holder the full face
value. The Treasury Bills are marketable,
affordable and risk free. The security attached
to the treasury bills comes at the cost of very
low returns.
 Certificate of Deposit
The certificates of deposit are basically time
deposits that are issued by the commercial
banks with maturity periods ranging from 3
months to five years. The return on the
certificate of deposit is higher than the
Treasury Bills because it assumes a higher
level of risk
 Commercial Paper
Commercial Paper is short-term loan that is
issued by a corporation use for financing
accounts receivable and inventories.
Commercial Papers have higher
denominations as compared to the Treasury
Bills and the Certificate of Deposit. The
maturity period of Commercial Papers are a
maximum of 9 months. They are very safe
since the financial situation of the corporation
can be anticipated over a few months.
 Banker's Acceptance
It is a short-term credit investment. It is
guaranteed by a bank to make payments. The
Banker's Acceptance is traded in the
Secondary market. The banker's acceptance is
mostly used to finance exports, imports and
other transactions in goods. The banker's
acceptance need not be held till the maturity
date but the holder has the option to sell it off
in the secondary market whenever he finds it
suitable.
 Repurchase Agreements
The Repo or the repurchase agreement is
used by the government security holder when
he sells the security to a lender and promises
to repurchase from him overnight. Hence the
Repos have terms raging from 1 night to 30
days. They are very safe due government
backing.
 
 Recent Changes in Repos

• All government securities are eligible for

repos.

• Minimum 3 days period for inter-bank

transaction has been removed
 Municipal notes - (in the U.S.)

Short-term notes issued by municipalities in

anticipation of tax receipts or other revenues.
 Conclusion
Money market instruments are good For those
who wants to save their money for short period
to meet their short term requirements.
 Bibliography
• http://www.caalley.com/art/Money_Market_and_Money_Market_
Instruments.pdf
• http://www.economywatch.com/market/money-market/money-
market-instruments.html
• http://www.ehow.com/about_5489094_types-money-market-
instruments-india.html
•  http://www.economywatch.com/market/money-market/money-
market-instruments.html
• http://business.mapsofindia.com/india-market/money.html
• http://www.expss.com/MoneyMarket/MoneyMarket.htm
•
• http://en.wikipedia.org/wiki/Money_market