Management of Financial Services

Money Market and Capital Market

Meaning of Money market

It is a market for financial assets that close substitutes for money. It is a market for overnight to short-term funds and instruments having a maturity period of one or less than one year

Characteristics of money market

It is not single market but a collection of markets for several instruments. It is not wholesale market of short-term debt instruments. Its principle feature is honour where the creditworthiness of participants is important. The main players are: the RBI, the discount and finance housing of India (DFHI), MF, banks, corporate investors, NBFCs, PF, and PSUs It is a need-based market wherein the demand and supply of money shape the market.

Functions of Money market

transfer of large sums of money transfer from parties with surplus funds to parties with a deficit allow governments to raise funds help to implement monetary policy determine short-term interest rates Provide a balancing mechanism to even out the demand for and supply of short term funds.

Benefits of Efficient Money market

Reliability and security Easy to adopt Economical and affordable Higher rate of return in short run Lack of risk Provides a stable source of funds to bank Encourage development of non-bank entities Source of finance for the government Makes an effective monetary policy actions

 To ensure that liquidity and short term interest rates are maintained at levels consistent with the monetary policy objectives of maintaining price stability. To ensure an adequate flow of credit to the productive sectors of the economy and To bring about order in the foreign exchange market

Instruments of Indian money market

Call money and notice money Commercial bills Treasury bills Commercial papers Certificate of deposits Inter bank participator certificate Repo instruments Inter corporate deposits

Treasury Bills
These are short term instruments used by the government to raise short-term funds Features of T-Bills

1. 2. 3. 4. 5. 6.

Negotiable securities Highly liquid Absence of default risk Assured yield, low transaction cost At present 91 days, 182 days, and 364 days T-Bills in vogue These are available for minimum amount of Rs. 25000 and in multiple thereof

Types of T-Bills
On-tap T-Bills Ad hoc T-Bills Auction T-Bills 91 day T-Bills 182 day T-Bills 364 day T-Bills 14 day T-Bills

Commercial Paper
it is an unsecured short-term promissory note, negotiable and transferable by endorsement and delivery with a fixed maturity period. It is generally issued at a discount by the leading creditworthy and highly rated corporates to meet their working capital requirements. Depending upon the issuing company, a commercial paper is also known as finance paper, industrial paper or corporate paper Some times they can also be issued by primary dealers and all India financial institutions.

Commercial Bills
These are negotiable instruments drawn by the seller on the buyer which are, in turn, accepted and discounted by commercial banks

Types of Commercial Bills

Demand Bill Usance Bill Clean Bill Documentary Bill Inland Bill Foreign Bill Hundi Derivative Usnace promissory note

Certificate of Deposit
Certificate of deposit are short term tradable time deposits issued by commercial banks and financial institutions

Call/Notice Money Market

The call money market is a market for very short-term funds repayable on demand and with a maturity period varying between on day to a fortnight. When money is borrowed or lent for a day, it is known as call money

when money is borrowed or lent for more than a day and up to 14 days, it is known as notice money. no collateral security is required to cover these transactions. It is highly liquid market

Explanations of Terms
Call rate MIBOR Call rate volatility Collateralized Borrowing and Lending Obligation (CBLO) Interest rate Bank rate Money Market Derivatives Interest rate swap Plain vanilla Interest rate swaps Forward Rate Agreements Plain vanilla forward rate Agreements

Repos
Repo is a transaction in which the borrower gets funds against the collateral of securities placed with the lender The maturity period of repos range from 1-14 days, At the maturity, the securities revert to the borrower, after he repays the dues. Types of Repos 1. Inter bank repos 2. RBI repos

Money Market Intermediaries

The Discount and Finance House of India (DFHI) Money Market Mutual Funds (MMFs)

Capital Market

Capital market
It is the market for long term funds- both equity and debt- and funds raised within and outside country Primary market Secondary market

Functions of capital market

Mobilize long term savings Provide risk capital Provide liquidity Lower the cost of transactions Quick valuation of financial instruments Derivative trading Direct the flow of funds into efficient channels through investment, disinvestment and reinvestment Integration

Primary market
The primary market is a market for new issues. Flow of funds from surplus sector to the govt. or corporate sector Capital formation

Nature of fund raising

Domestic
Equity issues by
corporates (primary) Financial intermediaries (secondary)

Debt issues by
Government Corporate Financial intermediaries

Contd.
External
Equity issue through issue of
Global depository receipts and American depository receipts

Debt instruments through

External commercial borrowing

Contd.
Other external borrowing
Foreign direct investment (FDI)
Equity and debt form

Foreign institutional investment (FII)

Portfolio investment

Non-resident Indian deposits

Short term and medium term deposits

FDI
More than 10% stake in a companys equity Sectors like pharma, consumer durables, engineering, financials services, telecom, banking, insurance Either wholly owned subsidiary or joint venture Bridges large savings and investment gap, modern technologies, create employment 100% caps in airport, power trading, petroleum marketing, alcohol, captive mining, industrial explosives, hazardous chemicals

FII
Portfolio investment Bridges short to medium savings-investment gap FII can invest only up to 24% in a company Needs approval from companys board May not be stable as there can be sudden outflow

Secondary market
Market for outstanding securities Facilitates only liquidity and marketability of outstanding debt and equity instruments Contributes to economic growth Channelize funds into most efficient channel through disinvestment and reinvestment Provides liquidity, price discovery and risk transfer Wealth effect

Indian secondary market

For corporate and financial intermediary
Recognized stock exchange NSE Over the counter exchange of India (OTCEI) Interconnected stock exchange of India (ISE)

For govt. securities and bonds

Subsidiary general ledger (SGL) Wholesale debt market (WDM)

Major reforms in capital market

Free Pricing Introduction of book building Electronic Trading Instruments and Market Participants Improvement in Trading, Clearing and Settlement Systems Increased Dematerialization Near Elimination of Counter Party Risk Circuit Breakers / Price Bands Structure of Informational Flows Emphasis on Fair Trading Practices

Major SCAMS
Harshad Mehta scam Ketan Parekh Scam

Thank You