FINANCIAL MARKETS

THE MONEY MARKET

By: Dr. Swati Gupta
Contents

Introduction
Define Money Market
Characteristics of the Indian Money Market
Organized and unorganized Money Markets
Money Market Instruments
Conclusion
Introduction
Financial markets are places for trading of
financial instruments. A financial market is a
market in which people and entities can trade
financial securities, commodities, and other
fungible items. Securities include stocks and
bonds, and commodities include precious metals
or agricultural goods.
There are two types of financial markets:
Money market and Capital market
Money Market
Money market is the market for short term borrowing and
lending of funds. Short term refers to a period of less than
one year
It is the market for short-term debt securities, such as
banker's acceptances, commercial paper, repos, negotiable
certificates of deposit, and Treasury Bills with a maturity of
one year or less then one year. Money market securities are
generally very safe investments
According to RBI (Reserve bank of India) money market is
the centre for dealings, mainly of short term character, in
money assets; it meets the short term requirements of
borrowers and provides liquidity or cash to the lenders.
It is the place where the short term surplus investible funds,
at the disposal of financial and other institutions and
individuals, are bid by the borrowers, again comprising
institutions and the government itself.
Money market is an important part of the economy. Various
financial instruments are used for transactions in a money
market. There is perfect mobility of funds in a money market.
The transactions in a money market are of short term
nature.
Money Market
Characteristics of the Indian Money
Market
Some characteristics of Indian money market are-
RBI plays an important role in the Indian money
market. The organized money market is in full
control of the RBI.
Interest rates in Indian money market are based
on demand and supply of funds. Interest rates are
different in both organized and unorganized
segment of Indian money market.
It is the market for short term borrowing and
lending of funds. Short term refers to a period of
less than one year



The players in the money market are
commercial banks, private firms and the
government.
The demand of money in Indian money market
is of a seasonal nature. In India, the demand
for money is generated from the agricultural
operations, as India is a agricultural
predominant country.
Characteristics of the Indian Money
Market
Organized and unorganized money
market
In India, RBI, commercial banks and foreign banks is the
part of the organised money market. Non-banking
financial institutions namely Life Insurance Corporation,
General Insurance Corporation and its subsidiaries and
Unit Trust of India operate indirectly through banks in the
market. RBI has a full control on organised money market.

The unorganised sector of Indian money market
consists moneylenders, indigenous bankers and
unregulated financial intermediaries. People who borrow in
this money market include non-corporate and corporate
small business.




Money Market Instruments
Treasury bills, commercial paper, certificate of deposits,
bill of exchange and repo are the money markets
instruments with which operations are conducted in
money market. It fulfill the borrowers short-term needs
and provide liquidity to lenders.

Treasury Bills(T-Bills)- Treasury bills are issued by RBI
on behalf of the government of India. These were first
issued in India in 1917. It is a promissory note at a
discounted value to meet its short term requirement. T-
Bills are highly secured and highly liquid because they
are guaranteed by the central government. T-Bills are
issued in 4 tenures-14 days, 82 days, 91 days and 364
days through auctions.


The Reserve Bank of India announces the issue
details of T-bills through a press release every
week.
Provident funds, state-run pension funds and
state government can participate in the auction
either as competitive bidders or as non-
competitive bidders. Participation as non-
competitive bidders means that they need not
quote the price at which they desire to buy these
bills. These organisations do not face any
uncertainty in purchasing the desired amount of
T-bills from the auctions.

T-Bills contd..
RBI invites bids every fortnight and decides the
cut- off rate on the bids. T-bills auctions are held
on the Negotiated Dealing System (NDS) and
the members electronically submit their bids on
the system.
The payment by successful bidders is made on
the issue date, as specified in the auction
notification, usually the working day.
Thus T-bills are a good choice as it reflects the
risk-free rate of return and highly secure.
T-Bills contd..
Commercial paper was first introduced in
January 1990 in India. It is unsecured, short-
term promissory note issued by a large
corporation at a discounted rate to the face value.
It meets the corporations short term liabilities.
CPs maturity period is 7 days to one year.
The issuers of Commercial papers in Indian
money market are broadly classified into Leasing
and Finance companies, Manufacturing
companies and financial institutions.

Commercial Paper
CP is issued in the denomination of Rs 5 lakh
or multiples. CPs issued in international
financial markets are known as euro-
commercial papers. CPs issue size should
not more then the working capital of the
issuing company and the tangible worth of the
issuing company should be Rs 4 crore or
more. The issuers of Commercial paper are
required to maintain relatively higher Credit
rating as it is unsecured debt instrument in
Indian money market. The company should
have a minimum credit rating of P2 and A2.


Commercial Paper contd.
The main agencies are Credit Rating
Information Services of India Limited
(CRISIL), Credit Analysis and Research
Limited (CARE), Investment Information and
Credit Rating Agency of India Limited (ICRA).
CPs are negotiable by endorsement and
delivery and hence they are flexible as well as
liquid instruments. It gives higher returns than
from risk-free investments.

Commercial Paper contd.
A certificate of deposit (CD) is a time deposit and
a short-term instrument issued by the scheduled
commercial banks and financial institutions.
CDs are similar to savings accounts and risk free
instrument. It is the certificate issued for the
amount deposit in the bank for a specified period
at a specified rate of interest. CDs are insured by
the Federal Deposit Insurance Corporation (FDIC)
for banks and by the National Credit Union
Administration (NCUA) for credit unions.
CDs are different from savings accounts in the
sense that it has a specific, fixed term (often
monthly, three months, six months, or one to five
years), and, usually, a fixed interest rate.
Certificate of deposit
The investors and the bankers both get benefit
from the CDs as before the maturity date,
bankers need not worry about cashing of the
deposit as well as if the investor require the
money, he can sell the CDs in the secondary
market.
CDs are issued in the multiples of Rs 1 lakh and
it is issued at discounted rate which depends on
the market conditions.
They are freely transferable by endorsement and
delivery and do not have lock-in period
Certificate of deposit contd.
A bill of exchange is essentially an order made by
one person to another to pay money to a third
person. A bill of exchange requires three
partiesthe drawer, the drawee, and the payee.
The person who draws the bill is called the
drawer. He gives the order to pay money to the
third party. The party upon whom the bill is drawn
is called the drawee. The party in whose favour
the bill is drawn or is payable is called the payee.
According to the Indian Negotiable Instruments
Act, 1881, it is a written instrument containing an
Bills of exchange
Unconditional order, signed by the maker directing a
certain person to pay a certain amount of money only
to, or to the order of the bearer of the instrument.
This is a negotiable instruments freely transferable
by endorsement and delivery and accepted by
banks.
Classification of bills of exchange- There are two
kinds of bills of exchange-
1-Documentary bills of exchange-
These types of bills are documents related to
the export of goods to the buyer's bank . The buyer
can get these document back after payment and it
depends on terms and condition on what and when it
will be given back to buyer.





Bills of exchange contd.
Repo is a transaction in which a seller sells
security to buyer with an agreement to
repurchase it at a specified date and interest rate.
The maturity of repo is from 1 day to 1 year. In
repos credit risk and interest rate risk is low
because lending period is short. It has low
liquidity risk also because the seller has surplus
funds.
Reverse repo is a transaction of cash in which
the lender purchases an asset from the borrower
as a guarantee that he can get the loan repaid at
the specified date and specified interest rate. It
was started to earn additional income on idle
cash.




Repo and Reverse repo
Thus money market instruments take care of
borrower short term needs and provide the
sufficient liquidity to the lenders.

Conclusion