Money Market

1. By
Dr. Divya Vijay
Faculty, Department of Management Studies
Madurai Kamaraj University College, Madurai

2. As per RBI definitions “ A market for short
terms financial assets that are close
substitute for money, facilitates the exchange
of money in primary and secondary market”.

3. The money market is a mechanism that deals
with the lending and borrowing of short term
funds (less than one year).
A segment of the financial market in which
financial instruments with high liquidity and
very short maturities are traded.

4.  According to Madden and Nadler, “ a money
market is a mechanism through which short
term funds are loaned and borrowed and
through which a large part of the financial
transaction of a particular country or of the
world are cleared.”

5.  The main components of Indian money
market are:
 Organized money market
 Unorganized money market:
 Sub market:

6.  These markets have standardized and
systematic rules, regulations and procedures
to govern the financial dealings .Organized
money market are governed and regulated by
Government and Reserve Bank of India.

7. Unorganized market consists of indigenous
bankers and money lenders. They collect
deposits and lend money.

8. It consists of call money market and bill
market. Bill market consists of commercial
bill market and Treasury bills market,
certificates of deposits, and commercial
papers.

9. Instruments

10. Money
Market
Call Money
Treasury
Bills
Commercial
Paper
Certificate
of deposit
Repos
Banker’s
Acceptance
Money
Market
Mutual
Funds

11. Treasury Bills (T-Bills)
The Treasury bills are issued by the Central
Government and known to be one of the safest
money market instruments available.
They carry zero risk, so the returns are not attractive.
Also, they come with different maturity periods like 1
year, 6 months or 3 months and are also circulated
by primary and secondary markets.
The central government issues them at a lesser price
than their face-value.
There are three types of treasury bills issued by the
Government of India currently that is through
auctions which are 91-day, 182-day and 364-day
treasury bills.

12. Call Money Market
 Call Money is short term finance used for inter-bank
transactions. It has a maturity period of one day to fifteen
days.
 The loans are of short-term duration varying from 1 to 14
days, are traded in call money market.
 The money that is lent for one day in this market is known
as "Call Money", and if it exceeds one day (but less than 15
days) it is referred to as "Notice Money".
 Term Money refers to Money lent for 15 days or more in
the Inter Bank Market.

13. Bills of exchange or commercial bills
 A bill of exchange is a written order used primarily in
international trade that binds one party to pay a fixed
sum of money to another party on demand or at a
predetermined date.
 Bills of exchange are similar to cheque and can be
drawn by individuals or banks and are generally
transferable by endorsements (Legal Transfer).

14.  Repo is a form of Short Term or Overnight borrowing and is used
by those who deal in government securities.
 They are usually very short term repurchases agreement, from
overnight to 30 days of more.
 The short term maturity and government backing usually mean
that Repos provide lenders with extremely low risk.
 Repos are safe collateral for loans.
 The implicit interest rate on these agreements is known as the
repo rate, a proxy for the overnight risk-free rate.

15.  A banker’s acceptance (BA) is a short-term credit investment
created by a non-financial firm.
 BA’s are guaranteed by a bank to make payment.
 Acceptances are traded at discounts from face value in the
secondary market.
 BA acts as a negotiable time draft for financing imports,
exports or other transactions in goods.
 This is especially useful when the credit worthiness of a
foreign trade partner is unknown.

16.  Indian Government appointed a committee under the
chairmanship of Sukhamoy Chakravarty in 1984 to review the
Indian monetary system. Later, Narayanan Vaghul working
group and Narasimham Committee was also set up.
 As per the recommendations of these study groups and with
the financial sector reforms initiated in the early 1990s, the
government has adopted major reforms in the Indian money
market.

17. Money Market Mutual Fund (MMMFs) :
In order to provide additional short-term investment revenue,
the RBI encouraged and established the Money Market Mutual
Funds (MMMFs) in April 1992.
MMMFs are allowed to sell units to corporate and individuals.
The upper limit of 50 crore investments has also been lifted.
Financial institutions such as the IDBI and the UTI have set up
such funds.

18. Liquidity Adjustment Facility (LAF) :
Through the LAF, the RBI remains in the money
market on a continue basis through the repo
transaction. LAF adjusts liquidity in the market
through absorption and or injection of financial
resources.

19. Electronic Transactions :
In order to impart transparency and
efficiency in the money market transaction
the electronic dealing system has been
started. It covers all deals in the money
market. Similarly it is useful for the RBI to
watchdog the money market.

20.  Deregulation of the Interest Rate : In recent period the
government has adopted an interest rate policy of liberal
nature. It lifted the ceiling rates of the call money market,
short-term deposits, bills rediscounting, etc.
 Commercial banks are advised to see the interest rate
change that takes place within the limit. There was a
further deregulation of interest rates during the economic
reforms. Currently interest rates are determined by the
working of market forces except for a few regulations.

21.  The government has consistently tried to introduce new short-term
investment instruments.
Examples: Treasury Bills of various duration, Commercial papers,
Certificates of Deposits, MMMFs, etc. have been introduced in the Indian
Money Market.
 These are major reforms undertaken in the money market in India. Apart
from these, the stamp duty reforms, floating rate bonds, etc. are some
other prominent reforms in the money market in India.
Thus, at the end we can conclude that the Indian money market is
developing at a good speed.

22. 1980s : A committee formed under the chairmanship of Sukhamoy
Chakravorty to develop the money market Instruments.
1988 : Discount and Finance House of India (DFHI) was set up as a
money market institution jointly by RBI , Public Sector Banks and
Financial institutions to provide liquidity to money market
instruments.
1989: Introduced money market instruments such as 182 day,
treasury bill, certificate of deposit and inter bank participation.

23. 1991 : The government set a high level committee in august 1991 to
examine all aspects related to structure, organisation, functions and
procedures of financial system.
1994 : The securities Trading Corporation of India was set up to provide an
active secondary market in government dated securities and public
sector bonds.
1995: Primary dealer system and satellite dealer system set up to inject
liquidity in the market.
 TREASURY BILLS of varying maturities and RBI repos were introduced.
 AUCTIONED TREASURY BILLs were introduced leading to market
determined interest rates.
1998: Strategy of combining auctions, private placements, and money
market operations are introduced.

24. 2000: Liquidity Adjustment Facility were introduced in April, 2000
(LAF)
2003 : (CBLO) COLLATERAL BORROWING AND LENDING
OBLIGATION was operationalised as money market instrument
through the clearing corporations of India Limited. (CCIL)
2004: Real Time Gross Settlement System was implemented after
LAF.
2005 : Prudential Limits on exposure of banks to call market are
introduced.
 Maturity of Certificate of deposit shortened by April 2005.
 Transformation of call money into pure inter-bank market.

25. 2007: Widening of collateral base by making state government
securities eligible for LAF operations.
2010: Repo in corporate bonds allowed.
2012: Operationalization of a screen based negotiated system for
all dealings in call/notice. The reporting of such transactions
made compulsory in Nov, 2012.
2014: The SEC ( Securities and Exchange Commission) issued new
rules for the management of money market funds.
NEW RULES : New rules plays tighter restrictions on portfolio
holdings while enhancing liquidity and quality requirements.

26.  Retail investors will continue to be able to invest in the full
range of taxable & tax-exempt money market funds.
 Designation of the Prime Money Market Fund and six tax-
exempt funds as retail funds that seek to maintain a stable
NAV.
 Reopening of Federal Money Market Fund—which also
seeks to maintain a stable NAV—to all investors. The fund
won't be subject to the liquidity fee or redemption gate
requirements.

27.  Liquidity Fees : If a funds weekly liquid assets fall below 30%, a fee
of upto 2% may be put in place on all redemptions if the funds'
board deems that the fee is the best interest of the funds.
 Gates : If the funds weekly liquid assets fall below 30% the funds
board has the power to temporarily suspend redemptions if the
board of director finds that the imposing a gate is in the funds best
interest.

28.  Absence of Integration
 Multiple rate of interest
 Sufficient Funds or Resources
 Shortage of Investment Instruments
 Shortage of Commercial Bill
 Lack of Organized Banking System
 Less number of Dealers

29.  The activities of the money lender and chit fund should
brought under control.
 Banking facilities should be extended, especially in the
unbanked and neglected areas.
 The number of clearing house should be increased
 Adequate and easy remittance facilities should be provided
to the businessman.
 Harmony between sub-markets and co-ordination of their
activities must be achieved .

30.  The money market specializes in debt securities that mature in less than one year.
 Money market securities are very liquid, and are considered very safe. As a result, they
offer a lower return than other securities.
 The easiest way for individuals to gain access to the money market is through a money
market mutual fund.
 T-bills are short-term government securities that mature in one year or less from their
issue date.
 Commercial paper is an unsecured, short-term loan issued by a corporation. Returns are
higher than T-bills because of the higher default risk .
 A certificate of deposit (CD) is a time deposit with a bank. CDs are safe, but the returns
aren't great, and your money is tied up for the length of the CD.

31.  Repurchase agreement (repos) are a form of overnight borrowing
backed by government securities.
 Banker’s acceptance (BA) are negotiable time draft for financing
transactions in goods.
The rate of discount fixed by the central bank of the country for the
rediscounting of eligible paper is called the bank rate. It is also the rate
charged by the central bank on advances on specified collateral to
banks.
 MMMFs bridge a gap between small individual investors the money market.
MMMFs mobilises savings from small investors and invests them in short-
term debt instruments or money market instruments.