Money Market

The money market is a key component of the financial system as it is the fulcrum
of monetary operations conducted by the central bank in its pursuit of monetary policy
objectives. Money markets in India have evolved over time spawning new instruments
and participants with varying risk profiles in line with the changes in the operating
procedures of monetary policy. Along with the shifts in the operating procedures of
monetary policy, the liquidity management operations of the Reserve Bank have also
been fine-tuned to enhance the effectiveness of monetary policy signalling. The
increasing financial innovations in the wake of greater openness of the economy
necessitated the transition from monetary targeting to a multiple indicator approach with
greater emphasis on rate channels for monetary policy formulation. Accordingly, short-
term interest rates have emerged as a key instrument of monetary policy since the
introduction of LAF, which has become the principal mechanism of modulating liquidity
conditions on a daily basis.

As a result of various policy initiatives, there has been a significant

transformation of the money market, in terms of instruments, participants and
technological infrastructure. Various reform measures have resulted in a relatively deep,
liquid and vibrant money market. The changes in the money market structure and
monetary policy operating procedures in India have been broadly in step with
international experience and best practices.

Notwithstanding the considerable progress made so far, further development of

the money market calls for more measures. Direct regulation in the form of prudential
limits on borrowing and lending in the call money market would need to graduate to a
system, where such limits are taken care of by banks’ own internal system of ALM
framework. Greater efforts would be required to expedite development of the term
money market. Furthermore, there is a need to consider broad-basing the pool of
underlying collateral securities for repo transactions. This would not only facilitate
liquidity management but also promote the development of underlying debt instruments.
The requirement of rating for issuing CP could potentially be made more flexible.
Finally, liquidity forecasting techniques need to be further refined for proper assessment
of liquidity conditions by the Reserve Bank.
Role of Money Markets
By Tara Hornor, eHow Contributor
updated: August 19, 2009
Money markets keep the world economy moving by providing a source of cash flow to pay the bills when
major institutions find themselves short before payday. Investors in the money market basically lend large
sums of money to governments, banks and trustworthy companies for short periods of time lasting from one
day to about a year. The return on money market investments is typically low, but investors are usually
satisfied with a lower return because of the perceived safety of money markets compared with the stock
market.

U.S. Treasury Bills

1. U.S. Treasury bills are one form of money market investment. The United
States raises money by selling Treasury bills at a specified rate of interest,
and the government doesn't pay back the money for three to 12 months. That
doesn't stop investors from selling Treasury bills to one another in the
meantime.

Certificates of Deposit

2. Certificates of deposit (CDs) are another form of money market

investment. In this case, the investor is lending money to the bank for a
specified time and a set rate of interest. The center of the money market is
banks lending money to banks using commercial paper or repurchase
agreements; in this case, the bank borrows money without putting up
collateral. The paper just says the bank will pay back the money plus a low
rate of interest.

Commercial Paper

3. Large, established companies also raise money by selling commercial

paper. These institutions do this based on a reputation for keeping their
promises. Like CDs, commercial paper has a fixed maturity time, usually one
to 270 days.

Federal Funds

4. Banks borrow money from the Federal Reserve to maintain their bank
reserves. This is usually only an overnight loan with the purpose of avoiding
an overdraft. The interest rate is set at the federal funds rate.

Municipal Bonds
 5. Cities, counties, school districts and any other governmental agencies
below the federal government issue bonds to investors. These municipal
bonds are exempt from federal and state income taxes, making them a very
desirable money market investment.

Upside of Money Markets

6. The money market is a good investment when the stock market is

extremely volatile or low. At those times, the money market serves as a way to
earn a low but steady return on one's investment. Another positive factor is
liquidity, meaning that when an investor wants to take money out of the money
market, it is usually easy to sell.

Downside of Money Markets

7. The biggest downside to investing in the money market is that sometimes,

the rate of return on money market investments is lower than inflation. Another
negative factor is that over time, an investor can earn a lot more money
investing in the stock market, so a long-term investment in the money market
is probably a poor investment.

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Types of Money Market Instruments in India

By Norah Faith, eHow Contributor
updated: October 3, 2009
Types of Money Market Instruments in India

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.

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.

Types of Money Market Instruments in India

1. Money market instruments provide for borrowers' short-term needs and

gives needed liquidity to lenders. The types of money market instruments are
treasury bills, repurchase agreements, commercial papers, certificate of
deposit, and banker's acceptance.

Treasury Bills (T-Bills)

2. Treasury bills began being issued by the Indian government in 1917. They
are short-term instruments issued by the Reserve Bank of India. They are one
of the safest money market instruments because they are risk free, but the
returns from this instrument are not very large. The primary as well as the
secondary markets circulate this instrument. They have 3-month, 6-month and
1-year maturity periods. T-bills are issued with a separate price from their face
value. The face value is achieved upon maturity, as is the interest earned on
the buy value. The buy value is set by a bidding process in auctions.

Repurchase Agreements

3. Repurchase agreements are also known as repos. They are short-term

loans that buyers and sellers agree to sell and repurchase. As of 1992, repo
transactions are allowed only between RBI-approved securities such as state
and central government securities, T-bills, PSU bonds, FI bonds and
 corporate bonds. Repurchase agreements are sold by sellers with a promise
of purchasing them back at a given price and on a given date in the future.
The buyer will also purchase the securities and other instruments in the
repurchase agreement with a promise of selling them back to the seller.

Commercial Papers

4. Commercial papers are promissory notes that are unsecured and issued
by companies and financial institutions. They are issued at a discounted rate
of their face value. They have a fixed maturity of 1 to 270 days. They are
issued for financing of inventories, accounts receivables, and settling short-
term liabilities or loans. Commercial papers yield higher returns than T-bills.
They are usually issued by companies with strong credit ratings, as these
instruments are not backed by collateral. They are usually issued by
corporations to raise working capital and are actively traded in the secondary
market. Commercial papers were first issued in the Indian money market in
1990.

Certificate of Deposit

5. A certificate or deposit is a short-term borrowing note, like a promissory

note, in the form of a certificate. It enables the bearer to receive interest. It has
a maturity date, a fixed rate of interest and a fixed value. It usually has a term
between 3 months and 5 years. The funds cannot be withdrawn on demand,
but it can be liquidated on payment of a penalty. The returns are higher than
T-bills as the risk is higher. Returns are based on an annual percentage yield
(APY) or annual percentage rate (APR). In APY, interest is gained by
compounded interest calculation, whereas in APR simple interest calculation
is done to calculate the return.The certificate of deposit was first introduced to
the money market of India in 1989.

Banker's Acceptance

6. A banker's acceptance is a short-term investment plan created by a

company or firm with a guarantee from a bank. It is a guarantee from the bank
that a buyer will pay the seller at a future date. A good credit rating is required
by the company or firm drawing the bill. The terms for these instruments are
usually 90 days, but this period can vary between 30 and 180 days.
Companies use the acceptance as a time draft for financing imports, exports
and other trade

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What is the Indian Money Market?
By Casey Helmick, eHow Contributor
updated: June 3, 2010

What is the Indian Money Market?

The Indian Money Market is a banking system in India that involves the lending and borrowing of short-term
funds. The Indian Money Market is often referred to as the business starting instrument, lending money to
various promising businesses to finance areas of agricultural, financing and manufacturing interests. The
Indian Money Market has seen tremendous growth over the past few years.

Central Bank of India

1. The Reserve Bank of India is the largest regulator of the Indian Money
Market. The Reserve Bank of India regulates the money market by controlling
how much money is put into the economy and to what industries they loan
funds to. This type of direct control allows the banks to invest in companies
that they believe will produce the most jobs and better circulate cash.

Repurchase Agreements

2. Repurchase agreements are tools used by the Central Bank of India along
with other government-established banks and organizations. In a repurchase
agreement, the seller agrees to buy back the materials being loaned at a set
price on a specific date if the business receiving the loan cannot cover the
cost of the materials by that time. Repurchase agreements, also known as
repossessions, allow businesses to get the materials or start-up funds that
they need, while giving them a time frame in which to pay for the materials.

Treasury Bills

3. Treasury bills are one of the key items used to help cover the cost of the
business receiving a loan. Treasury bills are auctioned off to bidders/buyers
 and have a three-month, six-month or one-year maturity span. The bills are
paid for and then offer the buyer their money back, along with a set interest
once the bills have matured. These bills are circulated by both the Central
Bank of India and other markets.

Commerical Papers

4. Commercial papers are much like treasury bills but often have a higher
payout once they have matured. Commercial papers are usually offered by
businesses themselves to cover various start-up costs. Because these are
offered directly from the business they are not as reliable as the treasury
notes but because of this risk are sold for much more than they are receiving
on the loan.

Foreign Investors

5. India attracts foreign investors with a rather transparent economy that

appears much like the economy in the United States, promoting a competitive
private sector that has few ties to government regulation. This stable and
simple environment allows foreign investors to conduct business just as easily
as they would in their home region.

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Characteristics of Money Market Instruments

By an eHow Contributor

1.
Some money market instruments are banker's acceptance notes, short-term
loans given to businesses.

You may have heard of money market accounts and wondered if they were
safe or what they contained. Money market instruments are really a form of
debt issued by governments, private organizations and agencies of the
government. Some examples of these types of instruments include
commercial paper, banker's acceptances, short-term municipal securities and
treasury bills.

What Is a Money Market Instrument?

2. The money market instruments normally have a maturation date of a year

or less. For instance, if an importer needs money to get his product to a client
but expects to receive payment within a short period, normally less than three
months, he might use a banker's acceptance. This is a short-term loan or debt
instrument. It is also a money market instrument.

Easily Sold

3. Money market instruments create a market for active trading. Both the
instruments and futures contracts on money market instruments create an
active trading market. If the bank giving the loan wants to recoup their money
for other loans, they can sell the bankers acceptance on the open market.
Sometimes large institutions purchase them for money market accounts.
Other times, investors simply buy the instruments as a secure short-term
investment.

Liquidity

4. Money market instruments are liquid. They have a short investment period
but you can also trade them on the open market. These two factors make
them liquid, a term than means you can convert the instruments to cash
easily.

Low Risk

5. Money market instruments are loans to entities of the highest credit rating.
The short term to maturity is another factor affecting the risk. Unlike long-term
notes where the credit rating could dramatically change after a number of
years, short-term debt doesn't have that problem.

Buy at a Discount

6. When the issuer of a money market instrument creates the instrument, he

includes the interest and principal in the face amount. When the issuer sells
the instrument, he sells it at a discount price of its face amount. Once the
 instrument matures, the purchaser receives the entire face amount, thus
gaining interest on his funds.

Break the Buck Insurance

7. Money market funds consist of money market instruments. If the

instruments drop in value, so does the fund. If the value of a money market
funds drop below a dollar, it "breaks the buck." This happened twice in the
history of money market funds. Once, in 1994, there was a 4 percent drop in
the normal $1.00 per share and a second time it occurred in September 2008
when the NAV of the money market funds of the Federal Reserve dropped
below the dollar. The treasury offered a guarantee program on the funds
issued after September 19, 2008 that lasted until September 19, 2009. The
program is no longer in place, so, while safe, unless the product is a bank
money market instrument backed by the FDIC, the principal has no guarantee.

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3.4 - Money Market Instruments

In the financial marketplace, a distinction is made between the capital markets and the money markets. The capital
market is a source of intermediate-term to long-term financing in the form of equity or debt securities with maturities of
more than one year. The money market provides very short-term funds to corporations, municipalities and the United
States government. Money market securities are debt issues with maturities of one year or less. For more information,
review our Money Market tutorial.

Characteristics
Money market instruments give businesses, financial institutions and governments a means to finance their short-term
cash requirements. Three important characteristics are:

• Liquidity - Since they are fixed-income securities with short-term maturities of a year or less, money market
instruments are extremely liquid.

• Safety - They also provide a relatively high degree of safety because their issuers have the highest credit
ratings.

• Discount Pricing- A third characteristic they have in common is that they are issued at adiscount to their face
value.
What is Call Money Market ?[Top ]

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". Term Money refers to Money lent for 15 days or more in the
InterBank Market.

Banks borrow in this money 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.

Thus call money usually serves the role of equilibrating the short-term liquidity position of banks

Call Money Market Participants :

1.Those who can both borrow as well as lend in the market - RBI (through LAF) Banks, PDs

2.Those who can only lend Financial institutions-LIC, UTI, GIC, IDBI, NABARD, ICICI and mutual funds etc.

Reserve Bank of India has framed a time schedule to phase out the second category out of Call Money Market and make Call Money
market as exclusive market for Bank/s & PD/s.

What are Money Market Instruments?[Top ]

By convention, the term "Money Market" refers to the market for short-term requirement and deployment of funds. Money market
instruments are those instruments, which have a maturity period of less than one year.The most active part of the money market is the
market for overnight call and term money between banks and institutions and repo transactions. Call Money / Repo are very short-term
Money Market products. The below mentioned instruments are normally termed as money market instruments:

1) Certificate of Deposit (CD)

2) Commercial Paper (C.P)

3) Inter Bank Participation Certificates

4) Inter Bank term Money

5) Treasury Bills

6) Bill Rediscounting

7) Call/ Notice/ Term Money

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