Money Market - 15 Mints Seminar Notes

Money Market - 15 Mints Seminar Notes

The money market is a component of the economy which provides short-term funds. The money market deals in short-term loans, generally for a period of a year or less. The money market refers to trading in very short-term debt investments that are low risk and highly liquid. It is primarily used by governments and corporations to keep their cash flow steady, and for investors to make a modest profit.

DEBT MARKET: 

Money market is a called debt market where it seeks investment from investors as a debt as they provide interest on the investment made. Debt instruments are assets that require a fixed payment to the holder, usually with interest. Debt securities are negotiable financial instruments, meaning they can be bought or sold between parties in the market. They come with a defined issue date, maturity date, coupon rate, and face value. Debt securities provide regular payments of interest and guaranteed repayment of principal.

Participants of Money Market:

The money market consists of financial institutions and dealers in money or credit who wish to either borrow or lend. Participants borrow and lend for short periods, typically up to twelve months. Small Retail investors can also participate in money market only through a variety of securities. In India retail investors can do the transactions through RBI (Reserve Bank of India).

    
Instruments of Money Market:
1.    Treasury bill.
2.    Commercial paper.
3.    Certificate of Deposit market.                                      {5 Major Instruments
4.    Cash Management Bill (CMB).
5.    Repurchase Agreement (Repo & Reverse Repo) market. 
6.    Call/Notice/Term money market.
7.    Corporate Bonds.
8.    Bankers Acceptance

Treasury Bill

Issued By: RBI on behalf of GOI

Introduced: 1917

Instrument Type: Discounted

Interest Rate: 3.43% to 3.81%   

Treasury bills are money market instruments issued by the Government of India as a promissory note with guaranteed repayment at a later date. These bills are auctioned by RBI. They are issued at a discount to the published nominal value of government security. At present, the Government of India issues four types of treasury bills, namely, 14-day, 91-day, 182-day and 364-day.T-bills are available for a minimum amount of Rs.25,000 and in multiples of Rs. 25,000. T-bills are issued at a discount and are redeemed at par. Treasury bills are zero coupon securities and pay no interest.

 

Certificate of Deposit(CD)

Issued By: Financial Institutions (individuals, banking companies, other corporate bodies registered or incorporated in India)

Introduced: 1989

Instrument Type: Discounted

Interest Rate: 6% to7.5%

Certificate of Deposit or CD is a fixed-income financial instrument governed under the Reserve Bank and India (RBI) issued in a dematerialized form. A CD can be issued by any All-India Financial Institution or Scheduled Commercial Bank. They are issued at a discount provided on face value. RRB (Regional Rural banks) cannot issue CD’s. The interest yield rate of CD’s varies from bank to bank (6% to7.5%). Minimum deposit of Rs.1 lakh and in subsequent multiples of it. The tenure for CD’s issued by commercial banks varies from 7 days to 1 year

 

Cash Management Bill (CMB)

Issued By: RBI on behalf of GOI

Introduced: 2010

Instrument Type: Discounted

In 2010, Government of India, in consultation with RBI introduced a new short-term instrument, known as Cash Management Bills (CMBs), to meet the temporary mismatches in the cash flow of the Government of India. The CMBs have the generic character of T-bills but are issued for maturities less than 91 days. CMB’s are issued at a discounted and redeemed at face value at maturity

Repurchase Agreement (Repo & Reverse Repo) market

Issued by: RBI

Introduced: Dec 1992

Instrument Type: Discounted

Interest Rate: Repo (4%), Reverse Repo (3.35%) for 1 to 28 days, Long Term (4.25%)

Repo is an abbreviation for repurchase agreement which involves a simultaneous "sale and purchase" agreement. When banks have any shortage of funds, they can borrow it from Reserve Bank of India or from other banks. The rate at which the RBI lends money to commercial banks is called repo rate, a short term for repurchase agreement. A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate increases borrowing from RBI becomes more expensive. The repurchase agreement can be 1 day to 1 year depending upon the banking institutions

Bankers Acceptance

Issued By: Any Banking Institution under RBI (Commercial Banks)    

Introduced: 1989

Instrument Type: Discounted

Bankers Acceptance is mostly used in international import and export business where a transaction takes place between two unknown parties as it ensures safer transactions as the banks acts as intermediate to make the transactions.

Bankers Acceptance (BA) is basically a document promising the payment which is guaranteed by the commercial bank. Bankers acceptance features a maturity period ranging from 30 days to 180 days. It is a short time credit instrument where it is mostly used in the transaction when unknown parties enter into transaction. Unlike other instruments BA’s specify all the information like (the amount of Money, Date, and the person to which the payment is due)  

Commercial  Paper

Issued By: Financial Firms (individuals, banking companies, other corporate bodies registered or incorporated in India also NRI’s and FII)

Introduced: 1990

Instrument Type: Negotiable

Interest Rate: Less than 6%

A commercial paper in India is the monetary instrument issued in the form of promissory note. It acts as the debt instrument to be used by large corporate companies for borrowing short-term monetary funds (eg: payroll) and is backed only by an issuing bank or company promise to pay the face amount on the maturity date specified on the note. It is introduced in 1990. CP can be issued for maturities between a minimum of 7 days and a maximum of up to 1 year from the date of issue. However, the maturity date of the CP should not go beyond the date up to which the credit rating of the issuer is valid.

Call/Notice/Term money market

Issued by: Entities of RBI (Scheduled Commercial Banks, Co-operative, Primary Dealers)

Introduced: In May 1990 by RBI

Instrument Type: Negotiable

Call money market deals in short term finance repayable on demand, with a maturity period varying from one day to 14 days which is repayable on demand. It is used for inter-bank transactions. The money that is lent for one day in this market is known as "call money" and, if it exceeds one day, is referred to as "notice money” or “Term Money” if it exceeds more than 15 days. In India, the purpose of Call Loans are to deal in the Bullion Market and Stock Exchanges.

Corporate Bonds

Issued By: Public and Private Corporations regulated by SEBI

Instrument Type: Negotiable

Interest Rates: 6.90% to 9.45% Paid half-yearly

Corporate bonds are debt obligations (or IOUs) issued by companies to the general public and institutional investors to raise capital. As bond investor, you will be entitled to a steady stream of coupon payments because the interest rates are fixed. The bond is then repaid in full at maturity date. Most of the corporate bonds pays only simple interest. Compared to foreign bond market, India have a very less investors in bond market.

Presented by,

Naveen Kumar

Banking Student

Magme School of Banking