Suyash Jain (C016)

Apoorva Jajoo (C017)

What is Money Market

A market for short terms financial assets
that are close substitute for money,
facilitates the exchange of money in primary
and secondary market, as per RBI.

Introduction

It deals with the lending and borrowing of short term funds

(less than one year).

Financial instruments with high liquidity and very short

maturities are traded.

It includes all individual, institution and intermediaries.

Provides short term liquidity to institutions.

Structure of Indian Money Market

I. ORGANISED STRUCTURE
1. Reserve bank of India.
2. DFHI (Discount And Finance House of India).
3. Commercial banks
i. Public sector banks
SBI with 7 subsidiaries
Cooperative banks
20 nationalised banks
ii. Private banks
Indian Banks
Foreign banks
4. Development bank
IDBI, IFCI, ICICI, NABARD, LIC, GIC, UTI etc.

II.

UNORGANISED SECTOR
1. Indigenous banks
2 Money lenders
3. Chits

III. CO-OPERATIVE SECTOR

1. State cooperative
2. State Land development banks

Features of Money Market

It is a wholesale market. The size of each transaction is very

large.

It deals with financial assets having a maturity period less

than one year only.

In Money Market transaction can not take place formally like

stock exchange. It does not have a physical location, but can
be done only through electronic form.

Features of Money Market

Transaction have to be conducted without the help of brokers.

This market is deregulated. Thus the interest rate on money

market instruments are determined by the supply & demand
rule.

The component of Money Market are the commercial banks,

acceptance houses & NBFC (Non-banking financial companies).

Objective of Money Market

To provide a parking place to employ short term surplus funds.

To provide room for overcoming short term deficits.

To enable the central bank to influence and regulate liquidity in

the economy through its intervention in this market.

Recommendations of
Full fledged LAF Maturity of CDs
Vaghul Committee
gradually shortened by
in June 2000
(1987).
April 2005

1987

1997-98

2000

Recommendations of an
Internal Working Group
(1997) and the
Narasimham Committee
(1998)

2003-04

2005

Introduction of
CBLOs

2006

2010

Negotiated
dealing system
(NDS)

Recommendations of Vaghul
Committee (1987).
(i) setting up of the Discount and Finance House of
India(DFHI) in 1988 to impart liquidity to money
market instruments and help the development of
secondary markets in such instruments.
(ii)introduction of instruments such as certificate of
deposits (CDs) in 1989 and commercial papers in
1990 and inter-bank participation certificates with
and without risk in 1988 to increase the range of
instruments.
(iii) Freeing of call money rates by May 1989 to
enable price discovery.

Recommendations of an Internal Working

Group (1997) and the Narasimham
Committee (1998)
(i) withdrawal of interest rate ceilings in the money
market.
(ii) introduction of auctions in treasury bills.
(iii) gradual move away from the cash credit system to a
loan-based system. Maturities of other existing
instruments such as CP and CDs were also gradually
shortened to encourage wider participation.
Post this,

efforts were made to transform the call money market

into primarily an inter-bank market, while encouraging
other market participants to migrate towards
collateralised segments of the market

Full fledged LAF in June 2000

June 2000, Reserve Bank introduced a full-fledged

liquidity adjustment facility (LAF) and it was operated
through overnight fixed rate repo and reverse repo from
November 2004.

helped to develop interest rate as an important

instrument of monetary transmission.

Provided greater flexibility to the Reserve Bank in

determining both the quantum of liquidity as well as the
rates by responding to the needs of the system on a daily
basis

Introduction of CBLOs

In order to facilitate the phasing out of corporate and

the non-banks from the call money market, new
instruments such as market repos and collateralized
borrowing and lending obligations (CBLO) were
introduced

short-term liquidity

Non-bank entities completely exited the call money

market by August 2005.

Negotiated dealing system

(NDS)

Improvement of transparency and efficiency in the

money market, reporting of all call/notice money market
transactions through negotiated dealing system (NDS)
within15 minutes of conclusion of the transaction was
made mandatory.

Screenbased negotiated quote-driven system for all

dealings in the call/notice and the term money markets
(NDS-CALL), developed by the Clearing Corporation of
India Limited (CCIL), was operationalised in September
2006 to ensure better price discovery.

Significant Developments

Most significant development was the growth of the collateralised

market vis-a-vis the uncollateralised market.

Over the last decade, while the daily turnover in the call money
market either stagnated or declined, that of the collateralised
segment, market repo plus CBLO, increased manifold

MIN.
TRANSACTION
SIZE (in INR)

PARTICIPANT
INSTRUMENTS
S
MATURITY
Call Money
Banks
1 day
Notice Money
Banks
2-14 days
Financial
Treasury Bills
92; 182; 364 days 25k and multiples
Institutes
Insurance
Commercial Bills
30-180 days

Companies
1 lakh and
Certificate of Deposits
NBFC
7-365 days
multiples
Commercial Papers
Individual
15-365 days
5 lakh
A few days
Repo (Repurchase
Mutual Funds (specified End
agreement)
date)
Inter-Bank
Participation

91-180 days

Certificate

Instruments of Money Market

The most important feature of money market
instrument is that it is liquid and can be turned
into money quickly.
A variety of instrument are available in a developed money market.
In India till 1986, only a few instrument were available. They were:
Treasury
Money

bills

at call and short notice in the call loan market.

Commercial

bills, promissory notes in the bill market.

New Instruments
Now, in addition to the above the following new instrument are
available:
Commercial
Certificate

of deposit.

Repurchase
Money

papers.
agreement

Market mutual fund

CALL/NOTICE MONEY
MARKET
DEALING

SESSION

Deals in the call/notice money market can be done up to 5.00 pm on

weekdays and 2.30 pm on Saturdays or as specified by RBI from time
to time.
LOCATION

OF CALL MONEY MARKET IN INDIA

Mumbai, Calcutta, Chennai, Delhi, and Ahmadabad.

TYPES

Call Money means deals in overnight funds.

Notice Money means deals in funds for 2-14 days

Call and Notice money market is that part of the national

money market

Day to day surplus funds, mostly of banks, are traded in

They are highly liquid

Short term loans

Banks borrow from other banks in order to meet a sudden

demand for funds, large payments, large remittances, and to
maintain cash or liquidity with the RBI.

TREASURY BILLS MARKET

Treasury bills (TBs), offer short-term investment opportunities, generally up to

one year.

Banks and PDs are the main traders and investors of T-bill market.

Treasury bills are highly liquid because there cannot be a better guarantee of
repayment then the one given by the government and because the central bank
of country is always willing to purchase them.

T-bills auctions are held onthe Negotiated Dealing System (NDS)and the
members electronically submit their bids on the system.

At present, RBI isuues 3 types of T-bills:

91- Day, 182- day and 364- day

91- DAY Treasury Bill

Treasury bills are not self-liquidating in the way genuine

trade bills are, although the degree of their liquidity is
greater than that of trade bills.

If we were to arrange short-term financial instruments

according to their liquidity, the descending order would be :

Commercial
bills

T-bills

Cash
Loans

Cash

182- DAY Treasury Bill

In November 1986, a major innovation in the form

of new money market instrument- the 182-day
Treasury bill was introduced :
To widen the short-term money market
To providing more outlets for temporary surplus fund

The 182-day bill was quit liquid because of the

availability of refinance facility against it and the
existence of the secondary market in it.

It used to be sold in the market by the RBI in

auctions which were monthly in the beginning;
they were made fortnightly from July 1988.

364- DAY Treasury Bill

Upon discounting the 182-day Treasury bill the authorities

introduced a new money market instrument, namely 364day TBs with effect from April 1992.

It is being auction regularly every fortnight.

Its features are very similar to those which the 182-day bill
had.

The RBI dose not purchase and rediscount this bill.

Type of

Day of

Day of

T-bills

Auction

Payment*

91-day

Wednesday

Following Friday

182-day

Wednesday of non- Following Friday

reporting week

364-day

Wednesday of
reporting week

Following Friday

TYPES OF TREASURY
BILLS

Ordinary TBs
The treasury bills sold to the public and banks are called regular treasury bills.
They are freely marketable and commercial banks buy entire quantities of such
bills, issued on tender. They are bought and sold on discount basis.

Ad hoc TBs
The adhoc bills are issued for investment by the state governments, semi
government departments and foreign central banks for temporary investment.
The government issued these bills to replenish their cash balance.
They are not sold to banks and general public.
Ad-hoc bills were abolished in April 1997.

COMMERCIAL BILLS
MARKET

Funds for working capital required by commerce and industry are

mainly provided by banks through cash credits, overdrafts, and
purchase/discontinuing of commercial bills.

The terms for these instruments are usually 90 days, but this period
can vary between 30 and 180 days.

Under the bill market schemes introduced by RBI in 1952, banks are
required to select the borrowers after careful examination of their
means, respectability and dealings,

BILL OF EXCHANGE
It is used for financing a transaction in goods that takes some
time to complete.
It shows the liquidity to make the payment on a fixed date
when goods are bought on credit.
Accordingly to the Indian Negotiable Instruments Act, 1881,
it is a written instrument containing as unconditional order,
signed by the maker, directing a certain person to pay a certain
sum of money only to, or to the order of, a certain person, or to the
bearer of the instrument.

INLAND BILLS

Be drawn or made in India, and must be payable in India

Be drawn upon any resident in India

FOREIGN BILLS

Drawn outside India and may be payable in and by a party

outside India, or may be payable in India or drawn on a party
resident in India
Drawn in India and made payable outside India.
A related classification of bills is export bills and import bills

COMMERCIAL PAPER

Commercial Paper (CP) is an unsecured money market instrument

issued in the form of a promissory note.

It was introduced in India in 1990, to:

enable highly rated corporate borrowers/ to diversify their sources of
short-term borrowings
provide an additional instrument to investors.

Only company with high credit rating issues CPs

Subsequently, primary dealers and satellite dealers were also permitted

to issue CP to enable them to meet their short-term funding
requirements for their operations.

Primary dealers (PDs) and the All-India Financial Institutions (FIs) are
eligible to issue CP.

CP can be issued for maturities between a minimum of 15 days and a

maximum up to one year from the date of issue.

Issue of CP together with other instruments , should not exceed 100 per
cent of its net owned funds, as per the latest audited balance sheet.

Individuals, banking companies, other corporate bodies registered or

incorporated in India and unincorporated bodies, Non-Resident Indians
(NRIs) and Foreign Institutional Investors (FIIs) etc. can invest in CPs.

Amount invested by single investor should not be less than Rs.5 lakh
(face value).

CERTIFICATES OF DEPOSIT

Certificates of Deposit (CDs) were introduced in India in 1989.

Certificate of Deposit (CD) is a negotiable money market

instrument

Issued in dematerialised form or as a Usance Promissory Note

against funds deposited at a bank or other eligible financial
institution.

MINIMUM SIZE
Minimum amount of a CD should be Rs.1 lakh, and in the multiples of Rs.
1 lakh thereafter.

INVESTORS

CDs can be issued to individuals, corporations, companies, trusts, funds,

associations, etc. Non- Resident Indians (NRIs) may also subscribe to CDs

MATURITY

The maturity period of CDs issued by banks should be not less than 7
days and not more than one year.

The FIs can issue CDs for a period not less than 1 year and not exceeding
3 years from the date of issue.

REPO
Repos, short for repurchase agreements, are contracts for the
sale and future repurchase of a financial asset
On the termination date, the seller repurchases the asset at the
same price at which he sold it, and pays interest for the use of the
funds
They are usually very short-term, from overnight to 30 days or more
than 30 days sometimes

A contract in which the seller of securities,

such as Treasury Bills, agrees to buy them back
at a specified time and price.

INTER BANK PARTICIPATION

CERTIFICATE

Issued by scheduled commercial banks to another, against

standard loan assets .

The amount raised through IBPC should not exceed 40 % of the

outstanding advance at time of issue.

Not transferable.

Only banks are allowed to issue

Rate of interest is freely decided.

Thank you