Money Markets

Money Markets 12 Sep, 2009

MONEY MARKETS 



A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. The money market is used by participants as a means for borrowing and lending in the short term, from several days to just under a year. Money markets are markets for financing the short term fund requirements of Government, Banks, Corporate and other Financial Institutions. The instruments in the market are to a great extent governed by Central Bank’s policies regarding supply of money in the economy and the rates of interest.

Example IDBI Bank needs to pay SBI Rs.10 Crores balancing figure at the end of the day. This transaction happens by requesting RBI to increase the account balance of SBI by 10 Crores and corresponding decrease in the account balance of IDBI. Now with this the balances or total money with IDBI reduces. But it might be requiring that money for transactions with its other customers. This means a IDBI wants to borrow money now. There might be another institution that might be having surplus money that it does not require in the near future, say ICICI Bank having surplus money for15 days (the same duration that IDBI wants it for). So we have ICICI loaning IDBI Rs.10 Crores for 15 days at an agreed rate. This was a MONEY MARKET transaction.

MONEY MARKET INSTRUMENTS  Deposits

and loans  Repurchase agreements  Treasury bills  Bankers’ acceptances  Commercial paper  Certificates of deposit







Treasury bills backed by central government have the lowest default risk, creating the deepest market segment of homogeneous, highly liquid paper - with consequently the lowest yield. Bankers' Acceptances are also very safe investments as they carry the obligation to honour payment by both a corporate and a bank, and in addition, because they usually represent a business transaction with specific underlying goods. Certificate of Deposit is a savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate and can be issued by scheduled commercial banks and FIs.





Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note. Corporates, primary dealers (PDs) and the FIs are eligible to issue CP. Repo is a money market instrument, which enables collateralised short term borrowing and lending through sale/purchase operations in debt instruments. Under a repo transaction, a holder of securities sells them to an investor with an agreement to repurchase at a predetermined date and rate.

When does Banks participate in Money Market 



Take Debt  When they fall short of statutory Reserve requirements may be due to a change in rates  When they fall short of funds to meet withdrawal requirements from customers  When they fall short of funds to lend at more attractive rates Loan Debt  When they have surplus idle funds.

Can individual investors invest in Money markets? 

One of the main differences between the money market and the stock market is that most money market securities trade in very high denominations and so individual investors have limited access to them. The easiest way for individual investors to gain access to the money market is with a money market mutual fund, or sometimes a money market bank account. These accounts and funds pool together the assets of thousands of investors and buy the money market securities on their behalf. Although, some money market instruments like treasury bills may be purchased directly or through other large financial institutions with direct access to these markets.