Financial Markets

Money Markets
By
M.Sitarama Murty
 The Market
 Overlapping of money and capital mkts.
 Instruments liquid, short term, low risks/ yields and
unsecured
 Ensures smooth flow of funds in all mkts.
 Enables discover competitive prices
 Unlike loans, operate on objective criteria of rates
 Interest rates not regulated but dictated by demand
and supply position
 RBI’s mkt. intervention or changes in policy rates can
impact the rates O/n
 The Players and the process
 SCBs, FIs, Ins.cos, MFs, NBFCs, PDs, PSUs,
Corporates are the major players
 OTC trading and Screen based
 Only SCBs /Co-op banks can operate
 FIs, Ins.cos,MFs, Firms can only lend
 PDs are market makers, underwriters and offer two-
way quotes for liquidity and price discovery
 Union Govt. issues G-secs., T-bills
 State govts. issue Development Loans
 More players and products
 FIs,PDs, Corps. Issue CPs
 PSUs/corps. Issue bonds debentures,CPs,FDs
and invest in CDs, FDs, CPs, T-Bills and G- secs
 PF/Pension funds invest in G-secs., SDLs,
PSU/Bank/FI bonds
 PF/Pension funds invest in bonds guaranteed by
Govt.or rated by two approved agencies.
 Banks can rediscount bills under BRD scheme
 More products
 Inter bank PCs with risk and no risk are issued
for 91-180 days and for 90 days
 Participation not to exceed lower of 40% of o/s or limit
 Repos and reverse repos are collaterlised lendings
dealt in D-mat form by banks and FIs
 RBI uses Repo window for LAF scheme
 Price is based on current yield and coupon.
 CCIL facilitates borrowings under CBLO
from 1-90 days (max-360 days)
 Custodians/clearing agencies such as NSDL/CCIL
facilitate tripartite repos on DVP system
 Some product features
 Call money is lent for O/n to 14 days
 CDs/CPs are unsecured negotiable UPNs
for 7-365 days, as a PN or in D-mat form.
 FIs can issue CDs up to 3 years.
 CDs can be at fixed or floating rates.
 Cps to be issued by corps having WC limits
and standard asset classification.
 Banks can’t guarantee or under write CPs
but can provide stand by credit
 CPs can be guaranteed by other better rated corps.
 Policy prescriptions
 SCBs participate in money mkt. to meet temp
mismatches in CRR and SLR and manage liquidity
deficits and surpluses
 SCBs trade in G-secs and T-bills for profit making.
 Insurance cos/MFs/NBFCs invest in G-secs to meet
statutory prescriptions and invest surpluses in ST
instruments
 In case of repos and reverse repos standard
documents prescribed by the PSA/ISMA are used