The Fundamentals Of Money

Market Instruments In India

VIDYUT JAIN
RESEARCH METHODOLOGY
Problem
statements
Literature reviews

Research methodology

Data collection

Primary Data Secondary

Data
Survey In-depth interviews

Data analysis

Recommendations and
Conclusion
Overview Of Financial Markets

FINANCIAL MARKET

Capital Mkt.
Money Mkt.
Debt Mkt. FOREX Mkt.
MONEY MARKET
It includes

Call/ Notice Repo

Treasury Bills Commercial Bill

Term Money Icd

Commercial
Certificate Of
Papers
Deposit
Debt Market
It includes Government Securities and
Bonds.

Government Security includes

• Central Govt. Securities
• State Govt. Securities
Bonds includes
• Foreign Investment Bonds
• PSU Bonds
• Corporate Securities
The Six Horses:Why,What,Who,Which,
How and Where

Why : The Need

What : The Definition
Who : The Players
Which & How : The Products and
Process
Where : The Resources
The Need
Need for short term funds by banks
Outlet for deploying funds on short
term basis
Need to keep the SLR & CRR as
prescribed
Optimize the yield on temporary
surplus funds
Regulate the liquidity & interest rates
The Definition
Money Market is “the centre for dealings,
mainly short term character, in money
assets.
It meets the short term requirements of the
borrowers & provides liquidity or cash to the
lenders.
Money Market refers to the market for short
term assets that are close substitutes of
money, usually with maturities of less than a
year.
The Players
RBI
SBI DFHI Ltd. (Amalgamation of Discount &
Finance House in India & SBI Gilts in 2004)
Commercial Banks, Cooperative Banks & Primary
Dealers are allowed to borrow and lend.
Specified All-India Financial Institutions, Mutual
Funds and certain specified entities are allowed to
access to Call/Notice money market only as
lenders.
Individuals, Firms, Companies, corporate bodies,
trusts & institutions can purchase the treasury bills,
commercial papers and certificate of deposits.
The Products & Process
Certificate of Deposit (CD)
Commercial Paper (C.P)
Inter Bank Participation Certificates
Inter Bank Term Money
Treasury Bills
Call Money
Banker’s Acceptance
REPO
Certificate Of Deposit (June,1989)
Short term borrowings in the form of
Usance Promissory Notes having a
maturity of not less than 15 days upto a
maximum of 1 year.

Subject to payment of Stamp Duty under

Indian Stamp Act, 1899 (Central Act)

They are like bank term deposit accounts,

freely negotiable instruments often referred
to as Negotiable CD.
Features Of CD

Can be issued by all scheduled commercial banks

except RRB’s
Minimum period 15 days, Maximum period 1 year
NRIs can subscribe to CDs on non-repatriable basis.
Minimum amount Rs.1 lac & in multiples of Rs.1 lac
Transferable by endorsement & delivery.
CRR & SLR are to be maintained.
CDs are to be stamped.
Advantages

Enable high return on short term

surpluses.
Enhances liquidity & allows resale.
For raising resources in times of need.
To improve lending capacity of the bank.
Commercial Paper

CP is an unsecured money market

instrument (short-term) issued in the
form of a promissory note.

Who Can Issue CP?

• Highly rated corporate borrowers,
primary dealers (PDs) & satellite
dealers (SDs) & all-India financial
institutions (FIs)
Features

Cheaper source of funds than limits set by banks.

Optimal combination of liquidity return.
Highly liquid instrument.
Transferable by endorsement & delivery.
Backed by liquidity & earnings of issuer.
Issued for a minimum period of 30 days and a
maximum up to one year
Issued at a discount to face value
Issued in demat form. (Compulsory demat from July
'01).
Types of CP
Direct Papers :-
Issued directly by company to investors
without any intermediary.

Dealer Papers :-
Issued by a dealer or merchant banker
on behalf of a client.
Eligibility for issue of CP
The tangible net worth-not less than Rs.4
crore;

the working capital (fund-based) limit-not

less than Rs.4 crore

& borrowal account- classified as a

Standard Asset by the financing banks.
Rating Requirement
All eligible participants should obtain the credit rating for
issuance of CP through the following--

Credit Rating Information Services Of India Ltd.

(CRISIL)

Investment Information & Credit Rating Agency of India

Ltd. (ICRA)

Credit Analysis & Research Ltd. (CARE)

DCR India

The minimum credit rating shall be P-2 of CRISIL or

such equivalent rating by other agencies.
Maturity
Issued for maturities between a minimum
of 30 days and a maximum upto one year
from the date of issue.

If the maturity date is a holiday, the

company would be liable to make payment
on the immediate preceding working day.
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).
Banker's Acceptance
It is a short-term credit investment. It is
guaranteed by a bank to make payments.
The Banker's Acceptance is traded in the
Secondary market.
Repo
Meaning of Repo

Transaction in which 2 parties agree to sell &

repurchase the same security. Under such an
agreement, the seller sells specified securities
with an agreement to repurchase the same at a
mutually decided future date and a price.

The Repo/Reverse repo transaction can only be

done at Mumbai between parties approved by
RBI & in securities as approved by RBI
(Treasury Bills, Central/State Govt. Securities).
Repo
Uses of Repo
• Helps banks to invest surplus cash
• Helps investors achieve money
market returns with sovereign risks.
• Raising funds by borrowers
• Adjusting SLR/CRR positions
simultaneously.
• For liquidity adjustment in the system.
Recent changes
All Govt. Securities are eligible for repos.
Primary dealers & non-bank participants
allowed to undertake such transactions.
Minimum 3 days period, for inter-bank
transactions has been removed.
Call Money Market

Integral part of Indian Money Mkt., 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 1 day in this mkt.

is known as “Call Money”, & if it exceeds 1
day (but less than 15 days), it is referred to
as “Notice Money”.
Call Money Market
Features
Deals in loans at call and short notices.
Deals with extreme form of short term
loans; 24 hours, 7-15 days maturity.
Recalled on demand or shortest possible
notice.
Normally, collaterals are not insisted upon.
In India, CMM provides facilities for inter-
bank tending.
Surplus suppliers of funds: UTI, SBI, LIC
Call Money Market

Banks borrow in this market for the

following purpose:
• To fill the gaps in funds.
• To meet CRR & SLR mandatory
requirements.
• To meet sudden demand for
funds
Gilt Edged Securities

The term Government securities

encompass all bonds & treasury bills
issued by the Central and the State
govt. These securities are normally
referred to, as “gilt-edged” as
repayments of principal as well as
interest are totally secured by sovereign
guarantee.
Features
These securities have a fixed coupon that is
paid on specific dates on half-yearly basis.

Maturity dates, from short dated (less than one

year) to long dated (upto twenty years).

Available in primary and secondary market.

High liquidity-securities can be sold in the

secondary market at prevailing rates.
Available in physical form or in demat
-maintained in Constituents Subsidiary
General Ledger (CSGL) a/c with any bank.

Securities held in CSGL a/c will have the

convenience of automatic credit of half
yearly interest and the
redemption proceeds on due date.

Reasonably good returns

Recent Changes
During last few years, Government of India
has issued new instruments such as Zero
Coupon Bonds, Floating Rates Bonds,
Partly-paid Stocks, Capital Index Bonds,
Tap Stock, etc.
Treasury Bills

T-Bills are issued by Govt. 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 eg: a T-Bill of Rs.100 face
value issued for Rs.91.50 gets redeemed
at the end of its tenure at Rs.100.
Features
Issued at a discount to face value.
Sovereign zero risk instruments.
Available in primary and secondary market.
No Tax Deduction at Source (TDS)
Highly liquid & attractive returns
Eligible securities for SLR purposes.
The 14/91/182/364-days bills are issued for a
minimum value of Rs.25,000 and multiples thereof.
Generally issued in the form of SGL (Subsidiary
General Ledger) – entries in the books of RBI &
not as securities.
Who can invest in T-Bill?
Banks, Primary dealers, State
Governments, Provident Funds,
Financial Institutions, Insurance
Companies, NBFIs, FIIs (as per
prescribed norms), NRIs can invest in T-
Bills.
Credit Card

Instrument that enables the cardholder to

obtain goods & services without actual
payment at the time of purchase – a “Pay
Later” card provided to a customer.
Features
Can be availed for a period of 30-45 days.
Card carries a pre-determined limit upto
which the holder can spend.
2-3% interest p.m. charged on outstanding
balance.
Discounts on purchases on gaining
additional points on regular use of card.
Types of Cards
Master card Secured Card
VISA Card Smart Card
Affinity Card Charge Card
Standard Card Rebate Card
Classic Card Co-branded Card
Gold/Executive Cash Card
Card Travel Card
Platinum Card Debit Card
Titanium Card
Recent Changes
Personal Accident Insurance
Cash withdrawal facility
Increase in credit
“Add-on” facility
Leveraged investment facility
Internationalization of Financial
Markets
With the ongoing financial liberalization,
each country now have a wider source of
funds.

The traditional instruments in the

international bond market are known as
Foreign bonds.
Foreign bonds are sold in the foreign
countries and are denominated in that
country’s currency.
Internationalization of Financial
Markets
Foreign bonds:
German auto maker sales a foreign
bond in US denominated in US dollar.
Euro Bond:
Bonds denominated in a currency
other than that of the country in
which it is sold.
Euro bond:
A bond denominated in US dollar and
sold in London.
Internationalization of Financial
Markets
However, A bond denominated in euro is
called Euro Bond if it is sold outside the
countries that adopted Euro as their
currencies.
Euro Currencies:
A variant of euro bond is euro
currencies. Foreign currencies
deposited in banks outside the home
country. US dollar deposited in Banks
outside US.
Money market mutual funds
Introduced in June,1996

Pooled short maturity, high quality investments

which buy money market securities on behalf of
retail or institutional investors
Municipal notes - (in the U.S.)
Short-term notes issued by municipalities in
anticipation of tax receipts or other revenues.

Federal funds - (in the U.S.)

Interest-bearing deposits held by banks and
other depository institutions at the Federal
Reserve; these are immediately available
funds that institutions borrow or lend, usually
on an overnight basis. They are lent for the
federal funds rate.
 Instrument Principal Borrowers

Federal Funds Banks

Discount Window Banks
Negotiable Certificates of Deposit (CDs) Banks
Eurodollar Time Deposits and CDs Banks
Repurchase Agreements Securities dealers, banks, non financial
corporations, governments
(principal participants)

Treasury Bills government

Municipal Notes State and local governments
Commercial Paper Non financial and financial businesses
Bankers Acceptances Nonfinancial and financial businesses
Government-Sponsored Enterprise Farm Credit System, Federal Home Loan
Securities Bank System, Federal National Mortgage
Association

Shares in Money Market Instruments Money market funds, local government

investment pools, short-term investment
funds

Futures Contracts Dealers, banks (principal users)

Futures Options Dealers, banks (principal users)
Swaps Banks (principal dealers)
Money market and the financial
world
The money available to consumers, investors, etc. to spend
or invest in products is known as the money supply of the
market.

High money supply high → increased demand for products

in the products market → inflation (rising prices).

To enable the monetary authorities to guard against this kind of

inflation, a few options are available where use is made of the
money market, two of which are ---- Selling money market
instruments & Increasing interest rates by offering less money
Current Reports
Special repo for 140.3 bn rupees to enable
banks to meet liquidity needs of mutual
funds: RBI. The repo rate is now 7.5%.
Summary
1. Efficient financial markets are required to
channel funds from surplus-spending units
(savers) to deficit-spending units. Typically,
such securities entitle the holder to a stream
of periodic future cash payments.

2. Financial intermediaries allow economies of

scale to be realized when matching surplus-
spending units with deficit-spending units.
Greater opportunities for portfolio
diversification and money management can
be gained.
Major findings
various segments of the financial market in India
have achieved market efficiency
the 91-day Treasury bill rate is the appropriate
'reference rate' of the financial sector in India
the financial markets in India are largely integrated
at the short-end of the market, and
the long-end of the market is integrated with the
short-end of the market.
The above findings suggest that monetary
policy should rely more on interest rate and asset
price channels to control inflation.
Conclusion
The money market is a vibrant market, affecting
our everyday lives. As the short-term market for
money, money changes hands in a short time
frame and the players in the market have to be
alert to changes, up to date with news and
innovative with strategies and products
 .

In brief, various policy initiatives by the

Reserve Bank have facilitated development of
a wider range of instruments such as market
repo, interest rate swaps, CDs and CPs. This
approach has avoided market segmentation
while meeting demand for various products.
These developments in money markets have
enabled better liquidity management by the
Reserve Bank.
The Resources

RBIs site http://rbi.org.in

SBI DFHI’s site http://sbidfhi.com/
Website of R Kannon
http://www.geocities.com/kstability/lea
I.M. Pandey (Book)
Indian Institute Of Banking & Finance
http://www.iibf.org.in