Money Market

Characteristics of Money Market

Wholesale market of short term debt instruments

Principal feature is honour

Need-based market

Interest rates are market determined

Main players are: RBI, Mutual funds, banks, DFHI, corporates, NBFCs, STCI, state governments, PFs, PSUs, primary dealers and NRIs

Money Market Instruments

Treasury bills

Call/Notice money market- Call(overnight) and short notice (up to 14 days)

Certificates of deposit

Commercial bills

Commercial paper

Treasury bills

Short-term instruments issued by RBI on behalf of the governmentRepaid at par on maturity, issued at a discount Negotiable and highly liquid securities Absence of default risk Assured yield, low transaction cost Security for SLR purposesTreasury bills can be purchased by any one (including individuals).

An unsecured short-term promissory note issued at a discount Issuers

creditworthy corporatesprimary dealers All India financial institutions

Discount is freely determined by market forcesMaturity period 7 days to upto one year.Can be issued to individuals, banks, companies etc.An attractive source of working capital funds for corporate as the rates are less.Rating requirement min. P2 of CRISIL.Minimum 5 lakhs and multiples.

Commercial Paper

Deepak Nitrite issues commercial paper of Rs 30 crore Jul 17, 2015 at 15:10 | Source: Moneycontrol.com Deepak Nitrite has informed that the Commercial Paper

of Rs 30 crore issued on April 17, 2015, has been repaid on July 16, 2015. Further, the Company has issued Commercial Paper (CP) for Rs 30 crore value dated July 17, 2015. This has been subscribed by SBI Fund Management Private Limited having maturity on October 15, 2015.

Deepak Nitrite issues commercial paper of Rs 30 crore

Jul 17, 2015 at 15:10 | Source: Moneycontrol.com

Deepak Nitrite has informed that the Commercial Paper of Rs 30 crore issued on April 17, 2015, has been repaid on July 16, 2015. Further, the Company has issued Commercial Paper (CP) for Rs 30 crore value dated July 17, 2015. This has been subscribed by SBI Fund Management Private Limited having maturity on October 15, 2015.

A short-term, negotiable and self liquidating instrument with low risk.

Bills of exchange are negotiable instruments drawn by the seller on the buyer for the value of the goods delivered to him. Such bills are called trade bills.

When trade bills are accepted by commercial banks, they are called commercial bills.

Bank discounts this bill by keeping a certain margin and credit the proceeds.

Maturity period of bill varies from 30 days, 60 days or 90 days.

Commercial Bills

An unsecured, negotiable, short- term time deposit issued by commercial banks and development financial institutions. Issued at a discount to face value. Minimum amount Rs 1 lakh and in multiples thereof Maturity period

15 days to one year for banks1 to 3 years for FIs

Transferable by endorsement Banks to maintain appropriate reserve requirement on issue of CDs. Issued in demat form Investors– individuals, corporations, Mutual Funds

Certificates of Deposit

Banks borrow/lend money for a period ranging between 1 and 14 days.When borrowed or lent-

for 1 day- overnight/call moneyfor 2 to 14 day- notice money

No collateral security required

Highly liquid, risky, and volatile market

Banks trade money to adhere to CRR requirement

Call rate is freely determined by market forces

RBI intervenes in call money market through repo transactions

Inverse relationship between call rates and short term money market instruments

Call/Notice Money Market

Table 2: Interest Rates in the Money Market(Percent per annum: Annual Averages)

 Rep

o Rate

Call Rate

CBLO

Rate

Market Repo Rate

91 day T-Bills

364-day T Bills

CPRate

CD Rate

1 2 3 4 5 8 9 6 7

2000-01 11.2 9.1 - - 9.0 9.8 10.8 9.62001-02 8.5 7.2 - - 7.0 7.3 9.2 8.02002-03 7.7 5.9 - - 5.8 5.9 7.7 6.62003-04 7.0 4.6 - - 4.6 4.7 6.1 5.32004-05 6.0 4.7 - - 4.9 5.2 5.8 5.02005-06 6.2 5.6 5.3 5.4 5.7 6.0 6.7 6.12006-07 7.0 7.2 6.2 6.3 6.6 7.0 8.5 7.92007-08 7.8 6.1 5.2 5.5 7.1 7.5 9.3 9.12008-09 7.4 7.1 6.1 6.5 7.1 7.2 10.7 9.22009-10 4.8 3.2 2.7 2.8 3.6 4.4 5.3 5.42010-11 5.9 5.7 5.4 5.5 6.2 6.6 8.7 7.72011-12 8.0 8.1 7.8 7.9 8.4 8.4 10.1 9.6

2013-14 (so far) 8.0 8.1 7.9 8.0 8.2 8.1 9.3 9.0

To provide

a balancing mechanism for demand & supply

the focal point for central bank for influencing liquidity and interest rates

reasonable access to short-term funds

serves as a benchmark for long term interest rates

Functions of Money Market

Objectives of the monetary policy Price stability Growth

Instruments of Monetary Policy Reserve requirements: CRR (4.75%) & SLR(24%) Interest rates

Bank rate :9%(Long-term rate) Repo rate: 8% Reverse repo rate: 7% Refinance from RBI

open market operationsRepo

Link Between Money Market and Monetary Policy in India