MONETARY ECONOMICS:

Financial System

Dr.Sunitha.S
Assistant Professor
School of Management Studies,
National Institute of Technology (NIT) Calicut
Monetary Economics studies about……

 Banks
 Money market
 Capital Market
 Non Bank Financial Intermediaries
 Unregulated Credit Markets

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And aspects of stock market like……….

 Stock Exchanges
 BSE
 NSE
 NIFTY
 SENSEX
 Bulls &Bears

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Some basic stuff

 Credit
 Liquidity
 Inflation
 Monetary Policy
 Fiscal Policy

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“Inflation is too much money chasing too
few goods”
 Demand pull or cost push inflation

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Banking

 Central Bank
 Commercial Banks
 Development Banks
 Cooperative banks

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 PRIMARY FUNCTIONS
1. Accepting of deposits
 Current deposit Account - withdraw money at any time – no interest
 Fixed deposit - money deposited in the account is for very short
period. – high rate of interest – term deposit – matures at a definite
period.
 Savings deposit Account – some restrictions. – minimum amount of
money – interest rate is low.

2. Granting of loans and advances

 Loans
- Overdraft – draft in excess of credit balance – for the reliable
customer.

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Reserve Bank of India

 Currency Authority
 Banker to Govt
 Bankers’ Bank
 Controller of money supply & credit
 Exchange Management & control

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Non Bank Financial Intermediaries (NBFIs)
Regulated Unregulated

 Mutual Funds (UTI)  Money Lenders

 Insurance companies  Chit funds
(LIC & GIC)  Hire Purchase/Leasing
 Provident/Pension companies
Funds
 Post Offices Savings
 Other NBFIs

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Financial System
Financial System
 Financial institutions
 Commercial banks, RBI, NBFIs, companies

 Financial Assets
 Currency, deposits, cheques, bills, bonds, shares,
 Equities, debentures, T-bills, certificates of deposits,
commercial papers

 Financial markets
 Money market (short term funds)
 Capital market (medium & long term funds)
 Primary Market (New Issue Market)
 Secondary Market (Stock Market)

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Money Market

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Money Market
Submarkets

 Market in which short  Call Money Market

term funds are  Commercial Bill Market
borrowed and lent are  Treasury Bill Market
called as money
market.  Certificate of Deposit
 Commercial Paper

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Call Money Market

 Deals with one day loans (called as call loans

or call money)
 Who are the Participants?
 usually banks, Mutual funds, large corporations
and insurance companies are able to participate
in this market.
borrowers are banks who are temporarily
short of funds
Suppliers are banks with temporary excess of
cash
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 The rate at which the call loan is lent is called
as call rate.
 The rate of interest is always higher than
savings account rate.
 The loans in the call money market are very
short, usually lasting no longer than a week
and are often used to help banks meet
reserve requirements.

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Money lent for a day is called as call money
and for a period more than a day is called as
notice money and money lent for 15 days or
more days is called term money.
Helps in maintaining liquidity, controlling
inflation, fill the gaps or temporary
mismatches in funds

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Commercial Bill market

 Bill of Exchange (BOE) is like a promissory

note ,which has a maturity period of 3
months.
 “I owe you so and so amount of money after
3 months from the present date.”
 Either the BOE holder could wait till it gets
matured or get it discounted or get encashed
through the process of discounting

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Treasury Bill market

 T Bills are short term debt instruments issued

by the Govt to get funds.
 Who are the participants?
 Borrowers: mostly commercial banks
 Lender: Govt departments
 Sold by RBI through auction
 Maturity: 91days,182 days,365 days
 Zero default risk and hence more safer

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Treasury Bills

 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.
 Who can invest in T-Bill
 Banks, Primary Dealers, State Governments, Provident
Funds, Financial Institutions, Insurance Companies,
NBFCs, FIIs (as per prescribed norms), NRIs can invest
in T-Bills.
• At present, the Government of India issues
three types of treasury bills through auctions,
namely, 91-day, 182-day and 364-day. There
are no treasury bills issued by State
Governments.
• Amount
• Treasury bills are available for a minimum
amount of Rs.25,000 and in multiples of Rs.
25,000. Treasury bills are issued at a
discount and are redeemed at par.
 Gilt Edged security Government security
that is a claim on the government and is a
secure financial instrument which guarantees
certainty of both capital and interest. These
securities are free of default risk or credit risk,
which leads to low market risk and high
liquidity.

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Certificate of Deposit (CD)

 CDs are short-term borrowings issued by

banks and are freely transferable by
endorsement and delivery.
 Borrowed mainly by banks
• Minimum period 15 days
• Maximum period 1 year

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Commercial Paper(CP)

 Direct short term finance issued by large

creditworthy companies
 Borrowed by banks, companies
 Maturity : 3 months to one year

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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

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.

Thank You

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