MONEY MARKET:-

What is a money market?

Market :Money:- market for money and financial assets which are close substitutes of money Close substitutes here means the assets that can be converted into money with minimum transactions cost without any loss in value.

The definition

It is a market for short term funds.

How short? With assets maturing lower than a year.

PARTICIPANTS:

RBI plays a very important role. Commercial banks, financial institutions, corporate etc.

Features:

It is a whole sale market; volume of funds traded are very huge. Large number of participants. Finances working capital requirements.

Objective:

Money market is an equilibrating mechanism for evening out surpluses and deficiencies etc. A focal point for central bank intervention for influencing liquidity in the economy.

Money market SHORT term funds

Finances working capital requirements
Wholesale market

Capital market
LONG term funds

Finances fixed investments

Not a wholesale market ,as retail buyers can participate

Sub-markets:- call or notice money

Call Money market:- Overnight money Short notice money:- funds are provided for less than 14 days. No collateral is required to cover these transactions

functions:- 1. to even out day to day surplus and deficit. 2.helps to adjust their cash reserve requirements. Interest rates are market determined. Very volatile market.

Till 1971,LIC,UTI only as lenders. RBI enlarged the list to include in 1991, to include GIC,IDBI,NABARD, DFHI etc. Min. size of operation for the non-bank entities was brought down to 3 crs. From 20 crs.

Based on the recommendation of the Narasimhan committee report (1998), the non-bank partcipants are disallowed in the market. They only exist for treasury bills. Now, it is purely an inter-bank market.

While lending, RBI prudential norms apply. Lending not to exceed 25% of the owned funds (paid up capital plus reserves) as fortnightly average. On any single day, bank can lend upto 50% of owned funds.

Factors that affect call money rates:

Reserve requirements Volatile forex market-banks fund foreign currency position by withdrawing form the call market. Tight/ easy liquidity position of banks.

Interest paid on call loans is call money rate. Market determined. Depends upon demand and supply conditions in the country. Earlier, 1974-1989, the IBA had control over it.

Treasury bills market:

T-bills ( Treasury bills):-A short term instrument of borrowing by GOI to bridge the temporary gaps between receipts and expenditure. They are issued at a discount to the face value. (Rightly called zero coupon bonds.)

OTHER FEATURES:

Negotiability High liquidity Absence of default risk Eligibility of inclusion in SLR Transaction through SGL account

Issued by RBI through AUCTION method. It declares the auction calendar at the start of financial year mentioning the amount of issue, date of auction and day of payment.

Two maturities:91 days and 364 days T-Bills

The former are issued every Wednesday. The later are issued on 2nd and 4th Wednesdays.

Types of Auction:

Multiple price based auction or French auction for 91 day T Bill Uniform price based auction or Dutch auction for 364 day T Bill

Auctions process:-multiple price (FRENCH)

For these the RBI invites bids The bidders have to quote the price(per Rs. 100). RBI then decides the cut-off price at which the issue would be exhausted. All the bids above the cut-off are allotted securities. Each winning bid pays the price it bidsWinners curse Primary dealers/ banks bid for it.

Auctions process: uniform price auction(DUTCH)

RBI invites bids in descending order and accepts those that fully absorb the issue amount. Each winning bid pays the same price as decided by the RBI.

Repo market

Repo market:-repurchase agreement Two types of repo transactions are conducted. 1. Inter-Bank repos 2. RBI repos.

Repo ????/

Is a transaction in which two parties agree to sell and repurchase the same security. The seller sells the specified securities with an agreement to purchase the same at a mutually decided price and date.

Repos will have maturity between to days. Repos take place in the market lot of 5 crs. The difference between the price at which securities are bought and sold is the lenders profit. The annual interest rate for the funds transferred by the lender to the borrower is the repo rate.

Short and call money market is not collateralized but repos are, and hence safer.

Inter bank repos were banned after their misuse in the 1992 scam. Again they are allowed since 1995. Repo transactions are allowed in all treasury bills and GOI securities, State government securities etc. The aim of conducting repo transactions is to allow secondary sale in these securities.

The interest paid for the use of funds is called the repo rate. Non- bank participants deal with only the reverse repo. i.e. They can lend money to the eligible participants.

CP(Commercial Paper)

CP is short term negotiable instrument. Issued by companies. Issued at a discount to face value or a fixed interest bearing terms. When companies directly deal with investors- Direct Paper. When companies indirectly deal with investors through a dealer- Dealer Paper Participants in the market are corporates, LIC,GIC, UTI, Banks and mutual funds, NRIs, FIIs.

Who can issue the CP?

Companies having Networth as high as 5 crores. Minimum credit rating of P-2 . Is issued in multiples of Rs.5 lakhs subject to the minimum issue of Rs. 1 crore. Maturity is between 15 days to 12 months. Rate of interest was between 4.6% to 6.3% in 2003.

After Nov. 2001, CPs are held in the dematerialized form.

CDs:

Issued by :commercial banks.and FIs of All India Nature. Min. 1 lakh and in multiples there off. No lock in period for the CDs and are freely transferable by endorsement and delivery. Loans against CDs is not permitted.

Subscribers:Individuals/corporates/trusts/funds/ associations etc. Maturity:- between 15 days and 1 year. FI can issue them for 1 to 3 years.

Primary dealers:

In 1994, the system of PDs started. Applicant must have net owned funds of a minimum 50 crs. consisting of paid up equity capital, free reserves etc.