The money market is a market for overnight to short-term money and financial assets that are close substitutes for money short-term means period upto one year”close substitute for money” denotes any financial assets that can be quickly converted into money with minimum transaction cost and without loss in value.
The function of the money market are to provide.
(i) An equilibrating mechanism for short-term surplus and deficiency
(ii) A focal point of central bank(RBI) intervention for influencing liquidity in the economy
(iii) A reasonable access to the users of short-term fund to meet their requirements at realistic reasonable cost.
- Call money and short-term deposits-This money market product in India deals with the (borrowed and lent) over-night one day (call) money and notice money for periods upto 14 days.Its primarily serves the purpose of balancing the short-term liquidity position of banks.
->When money is borrowed/lent for a day .It is known as call(overnight) money
->When money is borrowed /lent for more than a day and upto 14 days.It is known as notice money call money is required by bank to meet thier CRR requirements daily.The call market is now a pure inter bank market,lending of a bank on a fortnightly average basis should not exceed 25 percent of its owned fund or a 2 percent of its aggregate deposits on any day during a fortnight the ceiling on borrowing 125 percent.
The interest rate paid on call loans is known as the call rate.The call rate varies from day to day and often from hour to hour.The call rates are influenced by number of factors.
->Easy tight liquidity condition in the market affect the call rate.When liquidity condition are easy call rates moves around repo rate .during tight liquidity condition call rates tend to rise towards the bank rate.
->Reserve requirements relating to the maintance of CRR affect the call rate an increase in CRR increases call rates
->Asymmetrical nature of participants in the call market in terms of few lenders and large chronic borrowers also result in fluctuation in call rates.
->Volatile forex market condition also affect call rates banks fund foreign currency position by with drawing from the call market leading to a hike in the call rates.
- Commercial Bills-Commercial bill is a short-term negotiable and self liquidating instrument with low risk.It is a written instrument containing an 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 bill of exchange or drawn by the seller(drawer
) on the buyer(drawee) for the value of the goods delivered by him.Such bill one called trade bills when trade bills are accepted by commercial bank they are called commercial bills.If the seller gives sometime for programme the bill is payable at a future date(usuance bill).During the currency of the bill the seller is in need of funds he may approach his bank for discounting the bill one of the method used by banks for providing credit to customer is by discounting commercial bill at a negotiated discount rate.The bank receives the maintaining proceeds of discounted bills from the drawee ,if the bank receives the maturing proceeds of discounted bills from the drawee meanwhile if the bank receives the maturing proceeds is in needs of funds.it can re discount the bills already discounted in the commercial bill discounted market.
Bill rediscounting is an important segment of the money market and the bill,as a product provides short-term liquidity to the banks in need of fund.
The development of bill finance/culture not only facilitates an efficient payment system but also ensures the liquidity of the assets/funds of the banks.The factors hindering the development of bill finance/culture.
i)Reluctance on the part of the users to move towards bill culture owing to the element of strict financial discipline.
ii)Lack of an active secondary market.
iii) Administrative problems relating to the physical scrutiny of invoices phy
sical presentation of bills for payment endorsements/re-endorsement at the time of re discounting .
iv)Absence of specialised credit information agencies
v)System of cash credit which is more convenient and cheaper than bill financing as the procedure for discounting/re discounting are complex and time-consuming
vi)Small size of the foreign trade
vii) Absence of specialized discounting institutions.
- Treasury bills(T-bills)->A T-bills is basically an instrument of short-term borrowing by the government of India.It is a particular kind of finance bill a bill which does not arise from any genuine transaction in goods or a promissory note issued by the RBI on seasonal/temporary gaps between receipts(revenue and capital) and expenditure of the government of India.
The main features of T-bills are
i) They are negotiable securities
ii)They are issued at discount and are repaid at par on maturity .The difference between the price at which they are sold and their redemption value is the effective return on T-bills.
iii) High liquidity on account of short tenure (91days and 364 days) and inter bank repos
iv) Absence of default risk due to government and RBI’s willingness to always purchase ,negligible capital depreciation.
v) Assured yield
vi)Low transaction cost
vii)Eligibility for inclusion in SLR.
viii)Purchase/sales affected through the SGL(subsidiary general ledger) account with RBI.
The development of t-bills is at the heart of the growth of the money market .The t-bills play a vital role in the cash management of the government being a risk free instrument.
Types of t-bills->There are two types of t-bills
91 day t-bills ->The RBI issued 91-day t-bills on the basis of weekly auctions.The auctions system was replaced by on top basis since 1965 at a discount rate (bill rate) related to change in the bank rate till 1974.A scheme for the issue of 91 day t-bills was introduced in 1992-93 on the basis of auction system with a predetermined amount.The major holder of auctioned .91-day t-bills are the RBI state governments and bank.In a non-competitive bid.The participants are not allowed to bid and they have to put their application and are allowed t-bills at the weighted average price .The participants in the competitive bid are banks ,mutual funds, financial institutions,foreign banks,corporate Fii and so on.ii)364 day t-bills-These t-bills were introduced by the government in april 1992 to stabilise the money market .They are sold on the basis of a fortnightly auction but the amount ,however is not specified in advance since the RBI does not extend re discounting facility to such bills.The 364 day t-bills become extremely popular due to their higher yield coupled with liquidity and safety and are being used as a benchmark by the financial institutions for determining the ate of interest floating bonds /notes.
The t-bills are zero coupon bond issued by the RBI.The RBI presently issues t-bills only in two maturities 91 days t-bills and 364 day t-bills are auctioned and second and fourth Wednesday of the month using are uniform price based auction.
T-bills-T-bill have primary as well as secondary market RBI auction T-bills the dealer bids through the negotiated dealing system (NDS) the already issued T-bills are traded in by banks financial institution and mutual fund.4)Commercial paper(CPs)-The cp is a short-term unsecured negotiable instrument consisting of usance promissory notes with a fixed maturity ,thus indicating the short-term obligation of an issuer .It is generally issued by companies as a means of raising short-term debt and by a process of securitisation, intermediation of h bank is eliminated.The issuer promises the buyer a fixed amount at feature date but pledges no assets its liquidity and earning power are the only guarantee .A cp can be issued by a company directly to the investor rather than use a securities dealers as an intermediary ,the cp is called a direct paper.such companies borrowers announce the current rates of CPs of various maturities when CPs are issued by security dealer/dealers an behalf of their corporate customer they are called dealer paper5) Certificate of deposits(CDs)-A CD is a document of tittle to a time deposit and can be distinguished from a conventional time deposit in respect of its free negotiability and hence market ability .In other words .CD are a marketable receipt of funds deposited in a bank for a fixed period at a specified rate of interest .They are bears document instruments and are readily negotiable.
The CDs as a money market product are issued within the framework of the RBI guidelines .The main elements of these are discussed below.|
->A CD is a negotiable money market instrument issued in a demat form or as a usance promissory note for funds deposited at a bank/other eligible financial institution (FIs) for a specified time period.
->The CDs can be issued by
i) Commercial banks(excluding )the RBI local area bank(LABs)
ii)Select all India FIIs permitted by the RBI to raise short-term resource within the umbrella limit fixed by it.
->The minimum amount of a CD should be Rs.1 lakh that is the minimum deposit that could be accepted from a style subscriber should not be less than Rs.1 lakh and in multiple of rs.1 lakh .
->The CDs can be subscribed by individual /corporation/companies/trust/fund associated and so on.
->The maturity period of CD issued by a bank should be between 7 days and one year (maximum).The FIs can issue CDs with maturity of 1-3 year.
->Bank have to maintain the approach SLR and CRR on the issue price of the CD.
->Loans against CDs and buy-back of CD by the issuers before maturity are not permitted.