Basics of Indian Money Market

GROWTH OF MONEY MARKET IN
INDIA.
Presented by:
Amarish A. Agashe (02)
Mayur K. Bawankar (04)
Amey D. Bhagat (05)
Amruta V. Tirodkar (37)
Prachi V. Khochare (56)
Money Market
Money market is a mechanism which deals with lending
and borrowing of short term funds.
Banks and other financial institutions are the major

players of the money market with important sectors like
the industry, services and agriculture as their customers.
The money market is under the control of the “ Reserve

Bank of India”.
The major function of the money market is to provide

liquidity.
Money Market
Post reforms period in India has witnessed tremendous
growth of the Indian money markets with Decision of the
government to allow the private sector banks to operate
Money market denotes inter-bank market where the banks

borrow and lend among themselves to meet the short term
credit and deposit needs of the economy
Market forces generally indicate the need for borrowing or

liquidity and the money market adjusts itself to such calls
Money Market
To overcome the liquidity crunch in the Indian money
market, the RBI has released more than Rs 75,000
crore with two back-to-back reductions in the CRR in
2008-09
The money market has now also linked with the

FOREX market, through the process of covered
interest arbitrage
Mutual Funds
 Mutual Fund is an instrument of investing money that
pools money from investors and invests it in stocks,
bonds, short- term money market instruments and
other securities
Money market mutual funds (mmmfs) were introduced

in April 1991 to provide an additional short-term
avenue for investment and bring money market
investment within the reach of individuals
Advantages
An investor’s money is invested by the mutual fund in
a variety of shares, bonds and other securities
It is less expensive to invest in a mutual fund
Investors get regular information on the value of your
investment in addition to disclosure on the specific
investments made by your scheme and the fund
manager's investment strategy and outlook.
Mutual fund allows investors to liquidate their
holdings as and when they want.
Disadvantages
The mutual fund industries charge extra cost under
layers of jargon
Funds have small holdings across different companies,
high returns from a few investments often don’t make
much difference on the overall return.
Sometimes may gain less than if had invested directly
in a single security
Call money market.
A new concept of Call Money Market had been included
by Sukhumoy Chakravarty Committee, which was set up
in 1982 to review the working of the monetary system.
Call and notice money market refers to the market for
short -term funds ranging from overnight funds to funds
for a maximum tenor of 14 days.
The size of the market for these funds in India is between
Rs 60,000 million to Rs 70,000 million, of which public
sector banks account for 80% of borrowings and foreign
banks/private sector banks account for the balance 20%.
Call Money Market
Non-bank financial institutions like IDBI, LIC, and GIC
etc participate only as lenders in this market
The participants in the call markets increased in the
1990s
Then from 1991 onwards, corporates were allowed to
lend in the call markets
In 1996, PDs apart from DFHI and STCI were allowed to
lend and borrow directly in the call markets
The minimum amount corporates had to lend was
reduced from Rs. 20 crore, in a phased manner to Rs. 3
crore in 1998
Recommendations to CMM
The Chakravarty Committee recommended that
additional non-bank participants may be allowed to
participate in call money market.
Participants in the CMM
As lenders & borrowers-
Banks and institutions such as commercial banks, both Indian and
foreign, SBI, Cooperative Banks,DFHL and Securities Trading
Corporation of India (STCI).
As lenders-
LIC, UTI, General Insurance Corporation (GIC), IDBI, NABARD,
specified institutions already operating in bills rediscounting market,
and entities/corporates/mutual funds.
RBI withdrew the permission of non banking institution to play in

money market wef 6th Aug 2005
The corporates which were allowed to route their transactions

through PDs, were phased out by end June 2001.
No of participants in CMM
As stated in the report of the Technical Group on
Phasing Out of Non-banks from Call/Notice Money
Market, March 2001--
Category Bank PD FI MF Corporate Total
I. Borrower 154 19 - - - 173
II. Lender 154 19 20 35 50 277

Factors influencing CMM rates
On the supply side--
 The call deposit mobilization of banks, capital flows,
and banks reserve requirements
on the demand side--
 Call rates are influenced by tax outflows, government
borrowing programme, seasonal fluctuations in credit off
take.
Treasury Bills (T-Bills)
 Treasury bills, commonly referred to as T-Bills are issued by
Government of India against their short term borrowing
requirements
 Treasury bills are short-term money market instrument that

mature in a year or less than that
 T-Bills are discounted securities and their purchase value is

less than the face value. The Purchase value is determined by
a bidding process, that too in auctions
 At maturity the government pays full face value to the

investor
At present, the Government of India issues three types
of treasury bills through auctions, namely, 91-day, 182-
day and 364-day.
There are no treasury bills issued by State

Governments
Treasury bills are available for a minimum amount of

Rs.25,000 and in multiples of Rs. 25,000
Banks, Primary Dealers, State Governments, Provident
Funds, Financial Institutions, Insurance Companies,
NRIs can invest in T-Bills
Treasury Bill is highly liquid money market

instruments and also it is one of the safest money
market instruments with very less market risk
Commercial Paper
Commercial Paper (CP) is an unsecured, negotiable
money market instrument issued in the form of a
promissory note.
It was introduced in India in 1990.
Corporate, primary dealers (PDs) and the All-India
Financial Institutions (FIs) are eligible to issue CP.
CP can be issued for maturities between a minimum of
15 days and a maximum up to one year from the date
of issue.
CP can be issued in denominations of Rs.5 lakh or
multiples thereof.
Only a scheduled bank can act as an IPA for issuance
of CP
Individuals, banking companies, other corporate

bodies registered or incorporated in India and
unincorporated bodies, Non-Resident Indians (NRIs)
and Foreign Institutional Investors (FIIs) etc. can
invest in CPs
Commercial papers yield higher returns than T-bills

Role and responsibilities of the Issuer/Issuing and Paying Agent and Credit Rating Agency
Issuer:
 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 the 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 (Schedule III).
Issuing and Paying Agent
 IPA would ensure that issuer has the minimum credit
rating as stipulated by the RBI and amount mobilized
through issuance of CP is within the quantum indicated by
CRA for the specified rating.
 IPA has to verify all the documents submitted by the
issuer viz., copy of board resolution, signatures of
authorized executants (when CP in physical form) and
issue a certificate that documents are in order. It should
also certify that it has a valid agreement with the issuer
(Schedule III).
 Certified copies of original documents verified by the IPA
should be held in the custody of IPA.
Credit Rating Agency
 Code of Conduct prescribed by the SEBI for CRAs for
undertaking rating of capital market instruments shall be
applicable to them (CRAs) for rating CP.
 Further, the credit rating agency have the discretion to
determine the validity period of the rating depending upon
its perception about the strength of the issuer. Accordingly,
CRA shall at the time of rating, clearly indicate the date
when the rating is due for review.
While the CRAs can decide the validity period of credit
rating, CRAs would have to closely monitor the rating
assigned to issuers vise-a-vise their track record at regular
intervals and would be required to make its revision in the
ratings public through its publications and website
Growth of money market in India
Money Market is the mechanism which deals with
lending & borrowing of short term funds.
Govt. allowed the private sectors banks to operate
providing healthy competition in market resulting in
fair improvement in their functioning.
Money market denotes the interbank market where
bank borrow & lend among themselves to meet short
term credit & deposit needs of the economy.
Helps the banks tide over temporary mismatch of
funds with them.
Provides the avenue to the players in the market to
strike the equilibrium between the surplus funds with
lenders & required funds from borrower.
Important function: Provide the focal point of
interventions of RBI to influence the liquidity in financial
system & implement other monetary policy measures.
Depending on the economic situation & available market
trends i.e.
In liquidity crunch RBI has option to reduce cash reserve
ratio
The recent RBI has relesed Rs.75,000 Crore in theCRR.
The corporate sectors issues fix deposits to public for
shorter duration contributing to money market mechanism
selectively.
Money market is linked with foreign exchange market in
which forward premium act as bridge in between domestic
& foreign rates.
Diverse Functions:
Instead of ensuring the money market in India regulates
the flow of credit & credit rate, the mechanism has
emerged the important policy tool with govt & RBI
monetary policy, money supply, credit creation &
control, inflation & overall economic policy of state.
Monetary policy has long term perspective & aims at
correcting the imbalance in economy.
Credit policy & Monetary policy both complement each
other to achieve long term goals determined by govt.
Inflation is one of the serious economic problem.
Money market rate plays the important role in
controlling the prices.
Higher rates reduces liquidity & vice-versa.
Future of open Market:
Financial openness is said to be a situation under which
residents of one country are in a position to trade their
assets with the resident of another country.
In other words It is the financial integration of two or
more economies.
The idea is not only to regulate economy & money
market for overall economic development but also
attract more & more foreign capital in to the country.
Foreign investment results in increased economic
activity, income & employment generation in the
economy.
It has the mixed effects, growth rates of country has
scored new high level around 20% where it is having
relatively lesser growth of social sector.

Basics of Indian Money Market

Uploaded by

Copyright:

Available Formats

Basics of Indian Money Market

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Basics of Indian Money Market

Uploaded by

Copyright:

Available Formats

GROWTH OF MONEY MARKET IN

Banks and other financial institutions are the major

The money market is under the control of the “ Reserve

The major function of the money market is to provide

Money market denotes inter-bank market where the banks

Market forces generally indicate the need for borrowing or

The money market has now also linked with the

Money market mutual funds (mmmfs) were introduced

RBI withdrew the permission of non banking institution to play in

The corporates which were allowed to route their transactions

Category Bank PD FI MF Corporate Total

I. Borrower 154 19 - - - 173

II. Lender 154 19 20 35 50 277

 Treasury bills are short-term money market instrument that

 T-Bills are discounted securities and their purchase value is

 At maturity the government pays full face value to the

There are no treasury bills issued by State

Treasury bills are available for a minimum amount of

Treasury Bill is highly liquid money market

Individuals, banking companies, other corporate

Commercial papers yield higher returns than T-bills

You might also like

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.