Money Market Market for Short-term loans or financial assets. Lending and borrowing of short term funds. It does not deal in cash/money but in liquid marketable securities. It does not refer to a particular place. Maturity period of short term securities are up to one year or within one year. It meets the short term term requirements of borrowers. Activity and all the trading is done through telephones. Honour of commitment and creditworthiness.
Dr. Ratnesh Chaturvedi, FMS, Session – 10-13
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Players in Money Market Governments Banks Financial Institutions
All of these have a recurring problem of liquidity management
Mutual Funds Business Firms, etc.
Expenditures
GAP
Why Because the timing of the expenditures rarely synchronies with that of the receipts. i.e. a gap due to mismatch between expenditure and receipt
Receipts
How Money market as a bridge to fill the gap.
Dr. Ratnesh Chaturvedi, FMS, Session – 10-13
By purchasing / selling of Short term securities 2
Distinction Between Money Market & Capital Market Money Market
Capital Market
Market for Short-term loans or financial assets for a period not exceeding one year.
Market for long term funds exceeding a period of one year.
Supplies funds for financing current business operations, working capital requirements of business and short period requirements of the government.
Supplies funds for financing the fixed capital requirements of business as well as the long term requirements of the govt..
In money market instruments are BOE, treasury bills, commercial papers, certificate of deposit, etc.
In money market instruments are shares, debentures, govt. bonds, etc.
Commercial banks are the major institutions.
Development banks play a dominant role in this market.
Money market instruments do not have secondary markets.
Capital market instruments generally have secondary markets.
Transaction mostly take place over-thetelephone and there is no formal place.
Transaction mostly take place at a formal place viz, stock exchange.
Dr. Ratnesh Chaturvedi, FMS, Session – 10-13
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Money Market Instruments Treasury Bills (T Bills) Commercial Paper Certificate Deposit Bills Rediscounting Fringe Markets
Dr. Ratnesh Chaturvedi, FMS, Session – 10-13
Bankers Acceptance
Term Money Commercial Bills Bank Deposits Call Money Market
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Money Market Instruments Treasury Bills (T Bills) One of the most important instruments in virtually all the money markets in the world. Issued by Govt. (Promissory note) for period ranging from 14 days to 364 days through regular auctions. (issued by RBI on behalf of govt. of India) Highly liquid instruments due to shorter tenure and demand is largely from banks, financial institutions and corporations. It is issued by Govt. to raise finance to meet its short term requirements. The investment in the TB is reckoned for the purpose of Statutory Liquidity Reserve requirements. The periodicity of the T Bills is 14 days, 28 days, 91 days, 182 days and 364 days. Periodically RBI comes out with the T-Bills auctions. It has secondary market, any participant of money market can sell it. Dr. Ratnesh Chaturvedi, FMS, Session – 10-13
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Money Market Instruments
DFHI – Discount & Finance House of India STCI – Securities Trading corporation of India ltd.
Categories of Treasury Bills (T Bills) 1. On-Top T-Bills :
2. Ad hoc T-Bills :
2. Auctioned T-Bills :
Can be bought from the RBI at any time at an interest yield of 4.663 percent. But, with the deregulation of the interest rates, they have lost much of their relevance. Are created to replenish the Govt.’s cash balances with the RBI. Thus, they essentially are just an accounting measures in RBI’s books. They have a maturity period of 91 days, but can be redeemed prior to the final date of maturity, because for them the dealing is only between the Govt. and RBI. First introduced in April, 1992 are the most active of the three categories. In effect, they are the only one among the three categories which can actually be called an active money market instrument.
T-Bills transactions are routed through the Special General Ledger (SGL) Accounts. Institutional investors like commercial banks, DFHI, STCI, etc., maintain a SGL accounts with the RBI. Investor not having SGL A/c may sell or purchase TB’s through DFHI. Dr. Ratnesh Chaturvedi, FMS, Session – 10-13
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Money Market Instruments Advantages of Treasury Bills (T Bills) Safety Liquidity Ideal Short-Term Investment Ideal Fund Management Statutory Liquidity Requirement – SLR, CRR Source of Short-Term Funds
Money Market Instruments Commercial paper : Introduced in Indian Money market in 1990, is a debt instrument for short term borrowing. Popular debt instrument of the corporate world CP is a form of usance promissory note, negotiable by endorsement and delivery. CP is issued at discount determined by the issuer company. The discount varies with the credit rating of the issuer company and the demand and supply position in the money market.
Dr. Ratnesh Chaturvedi, FMS, Session – 10-13
CP can be issued by companies either directly to the investors or through banks/merchant bankers. 7
Money Market Instruments Commercial paper : An unsecured promissory note issued with a fixed maturity by a company approved by RBI
RBI Guidelines for issue of Commercial paper : Introduction Who can Issue CP : A corporate would be eligible to issue CP provided (a) the tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs. 4 crores; (b) company has been sanctioned working capital limit by bank/s or all India Financial institution/s; and (c) the borrowal account of the company is classified as a Standard Asset by the financing bank/s/institution/s. Dr. Ratnesh Chaturvedi, FMS, Session – 10-13
Rating Requirement : All eligible participants have to obtained the credit rating for issuance of CP by CRISIL/ICRA/CARE/ or other credit rating agency as may be specified by the RBI. Maturity : CP can be issued for maturities between a minimum of 15 days and a maximum up to one year from the date of issue. The maturity date should not cross the credit rating valid period. Denomination : CP can be issued in denominations of Rs. 5 lakhs or multiples thereof. (minimum 5 lakhs) Limits and the amount of Issue : Who can act as issuing and paying agent (IPA) : Only a scheduled bank can act as an IPA for issuance of CP.
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Process of Issue of Commercial Paper
Obtained Credit Rating
Obtained W/C Limit
Net worth not less than 4 crores
Issuer Company
Redeem CP on Maturity
Issue CP at Discount
Investor/ Bank/ Company Dr. Ratnesh Chaturvedi, FMS, Session – 10-13
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Money Market Instruments Commercial paper : Investment in CP : CP may be issued to and held by individuals, banking companies, other corporate bodies registered or incorporated in India and unincorporated bodies, Non Resident Indians and Foreign Institutional Investors. FII’s investment within the limitation as prescribed by SEBI. Mode of Issuance : (a) It can be issued either in the form of a promissory note or in a dematerialised form through any of the depositories (authorised by SEBI), (b) CP will be issued at a discount to face value as may be determined by the issuer and (c) No issuer shall have the issue of CP underwritten. Dr. Ratnesh Chaturvedi, FMS, Session – 10-13
Preference for Dematerialised Form : Now it is Payment of CP : Crossed account payee cheque for discounted value of CP to issuer (through IPA) from investor. In case of demat form, redeemed by depository and payment from IPA. Procedure for issuance : Every issuer must appoint an IPA for issuance of CP. The issuer should disclose to the potential investors its financial position as per the standard market practice. After the exchange of deal confirmation between the investor and issuer, issuing company shall issue physical certificates to the investor or arrange for crediting the CP to the investor’s account with a depository. Investors shall be given a copy of IPA certificate to the effect that the issuer has a valid agreement with the IPA and documents are in order, in the prescribed form. 10
Money Market Instruments Certificate of Deposit (CD’s) :
Premature closure of CD’s is not permitted and buy-back of the CD’s is prohibited.
CD’s can be subscribed by an individual, as well as, by an institution
The CD’s should fall due for payment on a working day. If it falls on a holiday then payment is to be made on the previous working day.
It is a usance promissory notes issued at a discount and are negotiable in character.
No advance can be taken against the security of CD’s.
There is a lock-in-period of 15 days after which they can be sold.
There is no limit for investment in CD’s by the Banks.
The minimum size of the deposit is Rs. 5 lakhs and thereafter in multiples of Rs. 5 lakhs.
Any Scheduled Commercial Banks excluding Regional Rural Banks, can issue CD’s for a period of not less than three months and up to a period of not more than one year. FI’s authorised by RBI may issue CD’s for a period not below one year and not above three years duration.
Introduced by RBI
The rate of interest is determined by the parties to the transaction freely. The instrument is to be stamped according to the rates prescribed by the Indian Stamp Act. Dr. Ratnesh Chaturvedi, FMS, Session – 10-13
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Money Market Instruments
RBI Guidelines for Certificate of Deposit (CD’s) :
Eligibility Minimum size of issues and denominations : Earlier minimum amount of CDs was to be of Rs. 5 lakhs, i.e., the minimum deposit that can be accepted from a single subscriber. CDs above Rs. 5 lakhs was to be in multiple of Rs. 1 lakh. But in order to increase the investor base, it has been decided to reduce the minimum size of certificates of deposits to a single investor from the existing level of Rs. 5 lakh to Rs. 1 lakh and in multiples of Rs. 1 lakh thereafter. The amount relates to maturity value of CDs. Subscribers to CDs : By individuals, corporations, companies, trusts, associations, etc. There is no prohibition on banks investing in CDs of other banks/FIs. Maturity : Minimum maturity period is 15 days. Dr. Ratnesh Chaturvedi, FMS, Session – 10-13
Discount : CDs should be issued at a discount on face value. The issuing bank is free to determine the discount rate. Stamp Duty : As per provision of Indian Stamps Act. Reserve Requirements : Banks have to maintain CRR and SLR on the issue price of the CDs. Transferability : Minimum lock-in-period 15 days. But now it is decided to remove this restriction. Loans/buy-backs : Banks can not grant loans and buy-back against CDs. Format : CD will be in the form of a usance promissory note and will attract stamp duty. No grace period for payment. 12
Money Market Instruments
RBI Guidelines for Certificate of Deposit (CD’s) :
Application Forms : It is desirable that banks prescribe an appropriate application form for issue of CD’s. Security Aspect : Since CDs are freely transferable by endorsement and delivery,must signed by two or more authorised signatories. Payment of Certificate : As the CDs are transferable instruments the certificate may be presented for payment by the last holder and the payment should be made to him only by a crossed cheque.
Reporting : Banks should include the amount of CDs in the fortnightly return under section 42 of the RBI Act and also separately indicate the amount so included by way of a footnote in the return. Issue in demat form : With effect from June 30, 2002, banks and FIs should issue CDs only in the dematerialised form.
Accounting : (a) Banks may account the issue price under the head “CDs issued” and show them under deposits. Accounting entries towards discount will be made as in the case of “Cash Certificates”. (b) Banks should maintain a register of CDs issued with complete particulars. Dr. Ratnesh Chaturvedi, FMS, Session – 10-13
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Money Market Instruments Commercial Bills : Purchase and Discounting Funds for working capital It is a written instrument containing unconditional order signed by the maker, directing to pay a certain amount of money only to a particular person, or to the bearer of the instrument.
Sec. 5 of the Negotiable Instruments Act defines a “BOE is an instrument in writing containing an 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.”
It is a negotiable self –liquidating instrument with low degree of risk. The spread between the face value of the bill and ready money paid is the discount rate. Till the bill matures, the banks can use the same process of discounting to get ready cash. Dr. Ratnesh Chaturvedi, FMS, Session – 10-13
It should arise out of a genuine trade transaction. Maturity period should fall within 90 days from the date of discounting. By Commercial Banks 14
Money Market Instruments Bills Rediscounting :
Bills rediscounting Scheme :
Eligible Institutions : All licensed scheduled banks will be eligible to offer BOE to the RBI for rediscount.
Limit Fixation : Eligible banks should apply to the RBI in a prescribed proforma for sanction of limits for rediscounting of bills. Limits will be sanctioned/renewed for one year (1st Nov. to 31st Oct.). For renewal, renewal application to RBI before expiry of the existing limit.
Eligibility of Bills : i) The BOE should be a genuine trade bill and should have arisen out of sale of goods. ii) The BOE should normally have a maturity of not more than 90 days from the date of rediscounting. (e.g. 120 days may eligible if ……) iii) The BOE should bear at least two good signatures ( sig. of licensed scheduled bank) iv) A licensed schedule bank may accept BOE from any other bank but RBI will provide rediscounting only BOE offered by licensed schedule bank. 15
Dr. Ratnesh Chaturvedi, FMS, Session – 10-13
Money Market Instruments Bills Rediscounting : c)
Bills rediscounting Scheme :
Eligibility of Bills : v) The RBI will not rediscount BOE arising out of sale of such commodities as may be indicated by it from time to time.
BOE should be given in bunches (to avoid number of small bills).
The rediscounting facilities will, for the present, be available at banking departments of the RBI at Calcutta, Chennai, Mumbai and New Delhi.
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Money Market Instruments Call Money Market : Market for extremely short period loans One day to fourteen days Call money transactions – overnight funds – returnable next day
Advantage : Market for extremely short period loans Maintenance of SLR
Notice money – more than two days but generally for a maximum of fourteen days In both the cases transaction is unsecured. Rate is determined on market condition The document by which the call/notice money are carried out is the call/notice money receipt which is exchanged against banker’s cheque. The following day or on a day fixed according to the notice, the reversal takes place by repayment from the borrower to the lender against return of the call/notice money receipt duly discharged by the lender Dr. Ratnesh Chaturvedi, FMS, Session – 10-13
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Money Market Instruments Bank Deposits : Banks are permitted to keep deposits with other banks for a period of 15 days and above Rate of interest mutual negotiation Not reckoned for the purpose of CRR requirements
Term Money : RBI has permitted some of the financial institutions like IDBI, ICICI, IFCI, IIBI, SIDBI, NABARD, EXIM Bank, etc. to borrow from the market for a period of 3 months up to a period of not more than 6 months within the stipulated limits.
Transactions are evidenced by Deposit Receipt.
Rate of interest mutual negotiation.
Deposits are not transferable but they could be prematurely closed at the discretion of the lender.
Transactions are evidenced by Term Deposit Receipt.
Unsecured and limit is fixed by RBI
Bankers Acceptance : BA is a draft against a bank ordering the bank to pay some specified amount at a future date. Dr. Ratnesh Chaturvedi, FMS, Session – 10-13
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Money Market Instruments Repurchase Agreements (Repos) : Sell of security by one party to another with an agreement to buy it back at a specified time and price. Repos are active between the commercial banks Pledge transactions Payment at a mutually agreed price after a specified period. This period ranges between 1-14 days. The difference between the sale and buyback price is interest cost. Risk free short-term instrument – against security For short term liquidity needs. Dr. Ratnesh Chaturvedi, FMS, Session – 10-13
Inter-Bank Participation Certificate (IBPC) : Issued by scheduled commercial banks to raise or deploy money On Risk Sharing Basis / Without Risk Sharing Basis Minimum Period 91 days with maximum of 180 days on Risk Sharing Basis and in case of Non-risk Sharing Basis it is limited to 90 days. Interest rates are determined between issuing bank and the participating bank. Participation contract – in the prescribed format Not transferable and can not be redeemed before the due date. Issuing bank will pay with interest to participating banks. 19
Money Market Instruments Fringe Market :
Primary Dealers :
Disorganised Money Market
Concept introduced by RBI
Include everything that is outside the scope of the money market.
To reduce the growing resistance from banks to subscribe to the issue of govt. securities
Include activities like the Inter-Corporate Deposit, financing of investments in the stock market, etc. High Risk and high interest rates
Primary dealers have two major roles to play that of an underwriter in the primary market and that of a market maker in the secondary market for the govt. instruments. DFHI, STCI, ICICI securities, SBI Gilts, PNB Gilts and Gilt Securities Trading Corporation are acting as PDs.
Dr. Ratnesh Chaturvedi, FMS, Session – 10-13
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Securities Trading Corporation of India Ltd. (STCI) : Incorporated as a public ltd. Company under the companies act, 1956, on 10th May’1994 Jointly setup by the RBI, public sector banks and all India financial institutions Play a role of market-maker in Govt. securities Treasury Bills & Govt. Securities
Discount and Finance House of India : Set up by RBI, 25th April, 1988 Jointly owned by the RBI, public sector banks and all India financial institutions which have contributed its paid-up capital of Rs. 150 crores The main objective is to strengthen the short term money market and making short term resources available to the institutions. Play role as a smoothing of short term liquidity imbalances by developing active primary and secondary money markets. DFHI operations cover presently the 182 days treasury bills, commercial bills, call money, commercial papers and certificates of deposits.
Dr. Ratnesh Chaturvedi, FMS, Session – 10-13
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