Money Market in India

Course Leader: K. Srinivasan Department of Management Studies Christ University, Bangalore.

Types of Financial Markets within the Financial System

The financial markets can be classified in different ways. One way of classifying this is to classify in respect of maturity of the instruments. Accordingly, the financial markets can be classified into two main parts. They are a) Money Market b) Capital Market  Money Market: Money market is a place where the maturity period of financial instruments issued or traded is up to one year .  Capital Market: Capital market is classified into 2 categories, where the maturity period of financial instruments issued or traded is more than one year.

Financial Markets
Fin n l M rk t a cia a e
Mn y oe
N g tia le eo b N nN g tia le o eo b Db et

Cp l a ita
Eu q ity

Gv ot

N nG v o ot

P a rimry

S co d ry e na

Money Market
 Money market is a wholesale market for short term debt instrument, where money or its equivalent Assets can be issued by Private & Government bodies.  Money Market is part of financial market where instruments with high liquid securities and their short term maturities can be traded and it is considered as the safest place of investment  Money market is mainly characterised for high degree of safety, but only selected issuers have access to this market.  One of the important feature of the money market instruments is that they are liquid with varying degree and can be traded in the money market at low cost.

Continued
 Money market is an Integral part of a countrys economy and a developed money market is crucial for the rapid development of the economy.  If the market is underdeveloped, where the investors do not have greater access towards the market of that particular country. Ex: Difficult & Pooling Short-term funds will be difficult tasks for the Business, as well as to the Government requirements.  In advanced countries the money markets development will have immediate effect on the entire economy

Primary Dealers of Money Market

 Primary Dealers (or) Depository Participants (PDs) in the Government Securities Market was introduced by RBI in 1995 to strengthen the market infrastructure of Government Securities  DFHI (Discount & Finance House in India) was set up by RBI in March 1988 to activate the Money Market.  DFHI got the status of dealing in market on February 1996. Over a period of time, RBI separate from its stake and DFHI became a subsidiary of State Bank of India (SBI).  SBI had also set up a subsidiary in 1996 for doing PD business namely SBI Gilts Limited.  Both these companies were merged in 2004 to become the largest PD in the country (i.e.) DFHI & SBI

Continued.
 Depository Participants can also be referred to as Merchant Bankers to Government of India as only they are allowed to underwrite primary issues of government securities other than RBI  PDs are allowed the following activities as core activities: a) Providing broking services in Government securities. b) Dealing & underwriting in Corporate / PSU / FI bonds/ Govt. Securities. c) Lending in Call/ Notice/ Term/ Repo/ CBLO (Consortium for the Barcode of Life market. d) Investment in Commercial Papers & Certificates of Deposit & Interest Rate Derivatives. e) Investment in debt mutual funds where entire corpus is invested in debt securities.

Players of Money Market

 Reserve Bank of India.  SBI & DFHI Ltd (Amalgamation of Discount & Finance House in India and SBI in 2004)  Acceptance Houses (CC/CH)  Commercial Banks, Co-operative Banks and Primary Dealers are allowed to borrow and lend.  Specified All-India Financial Institutions, Mutual Funds, and certain specified entities are allowed to access to Call/Notice money market only as lenders  Individuals, firms, companies, corporate bodies, trusts and institutions can purchase the treasury bills, CPs and CDs.

Money Market Instruments

Money Market

Negotiable

Non

Negotiable

Negotiable Money Market

The following instruments are negotiable money market instruments : Treasury Bill Commercial Paper Certificate of Deposits Bills Discounted Government of India Securities ( GOI) of less than 1 year maturity

Non-Negotiable Money Market

The following instruments are non negotiable money market instruments : Fixed Deposits of maturity of less than 1 year; Call Money Borrowing Receipt Notice Money Borrowing Receipt Repo Borrowing Receipt MIBOR (Mid IBOR or Mumbai IBOR)linked debentures

Treasury Bill
 Treasury Bills commonly referred to as T-Bills and are issued by Government of India against their short term borrowing with the maturity period ranging between 7, 14, 28, 91, 182 to 364 days.  Treasury Bills are issued at discount to face value and at the end of maturity the face value is paid. For example a Treasury bill of Rs. 100.00 face value issued for Rs. 91.50 gets redeemed at the end of its tenure at Rs. 100.00.  Treasury bills are available for a minimum amount of Rs.25,000 and are issued at a discount and are redeemed at par.  Since the T-Bill is issued by the Government, it would indicate the risk free rate for that maturity and helps the market to determine the Risk Free Yield Curve.

Continued
 Rate of discount and the corresponding issue price are determined at each and every auction.  On behalf of Central Government, the RBI acts as a lead manager to issue and carry out the borrowing process.  RBI announces that the borrowing under the T-Bill scheme and market discount price information and the same is reflected in the market interest rate.  At present the Government of India issues three types of treasury bills (On tap bills, Ad hoc bills, and Auctioned T-Bills) through auctions, namely, 91-day, 182-day and 364-day. There are no treasury bills issued by State Governments.  RBI auctions 91-day T-Bills on a weekly basis, 182-day T-Bills & 364day T-Bills on a fortnight basis on behalf of the Central government

Investors in Treasury-Bill
 Individuals, Private Limited Company, Partnership Firm, Banks, Primary Dealers, State Governments, Provident Funds, Financial Institutions, Insurance Companies, NBFCs, FIIs (as per prescribed norms) & NRIs can invest in T-Bills.  T-Bills are mostly issued in the Demat form and the amount is credited in the SGL account or CSGL (Constituent Subsidiary General Ledger) account to eliminate the process of bad delivery and fraudulent transaction.  T-Bills are used as promissory note issued at a discount to the face value. It is also a negotiable instrument which increases the liquidity of the security at the hand of the investor.

Commercial Paper
 Commercial Paper (CP) was introduced in India in the year 1990 as per the recommendation by Vagul Committee.  CP is an unsecured money market instrument issued in the form of a promissory note with a discounted rate, but during the period of maturity the investor can avail the benefit of getting face value.  Rating to be obtained from either from CRISIL, ICRA, CARE or any other rating agencies as specified by RBI.  The minimum credit rating should be P-2 of CRISIL or such equivalent by other agencies. The issuers shall ensure at the time of issuance of CP that the rating is current and has not fallen due for review.  Short-term borrowings by corporate, financial institutions and primary dealers from the money market can be issued in the physical form or Demat form. If the physical form of securities are negotiable by endorsement and delivery and hence, highly flexible

Continued
 Minimum currency denomination will be Rs. 5 Lakh & in multiple of Rs. 5 lacs thereof.  Minimum maturity period is 7 days and a maximum of upto one year from the date of issue. The maturity date of CP should not go beyond the date up to which the credit rating of the issuer is valid.  CP can be issued either in the form of a promissory note or in a dematerialised form through any depositories approved by and registered with SEBI. Presently , banks and others companies and individuals can invest in CP only in Demat Forms.  CP will be issued at a discounted price to a face value as may be determined by the issuer.

Eligibility for Issuing CP

 Tangible net worth of the company should not be less than Rs. 4 Crore, as specified by RBI.  Working capital (Fund-based) limit of the company from the banking system should not less than Rs.4 Crore  All eligible participants should obtain the credit rating certificate for issue of Commercial Paper  The minimum credit rating shall be P-2 of CRISIL or such equivalent rating by other agencies

Role and Responsibilities of Credit Rating Agencies ( CRA)

SEBI guideline for the rating would be applicable CRA should clearly indicate the date for review of the rating CRA should also mention the amount of the issue size.

Who can Issue Commercial Paper

Highly Rated Corporate entities, Primary dealers, Depository Participants, Satellite dealers and All-India financial institutions (FIs) that have been permitted to raise short-term resources under the umbrella limit fixed by RBI

Limit & Amount of issue of CP

 Aggregate amount of CP from an issuer shall be within the limit as approved by its Board of Directors or the quantum indicated by the Credit Rating Agency for the specified rating, whichever is lower.  Financial Institutions can issue CP within the overall umbrella limit fixed by RBI.  Total amount of CP proposed to be issued should be raised within a period of two weeks from the date on which the issuer opens the issue for subscription.  CP may be issued on a single date or in parts in different dates provided that in the latter case, each CP shall have the same maturity date.  Every CP issue should be reported to Chief General Manager, RBI through the Issuing and Paying Agent (IPA) within three days from the date of completion of the prescribed format.

Disadvantage of Commercial Paper

 When a company raises the fund through CP, it will pay discount rate which is depended on money market rate at the date of issuance. Ex: A company wants to raise Rs 5 crores through CP ( having a rating of P1+) for 90 days on 1st September 2009, the discount rate to be paid on the CP would depend on the call money rate or MIBOR rate prevailing on 1st September 2009.This discount rate is fixed for the company for the entire tenure of 90 days from 1st September 2009. For example if the call money rate is 5% p.a. and a (P1+) CP would attract a discount rate of 0.75% above the MIBOR rate , then the discount rate to be paid by the company would be 5.75% p.a. for 90 days from 1st September 2009. If the call money rate goes down to 4.75% on September 15th 2009 , if the company could have raised the fund at that point of time at an interest rate of 5.50% p.a. for 90 days.

Certificate of Deposit
 CDs are negotiable money market instruments and are issued in dematerialised form or a used as promissory note for raising funds for Banks and Financial Institutions for a specified time period.  They are like bank term deposits accounts, unlike traditional time deposits these are freely negotiable instruments and are often referred to as Negotiable Certificate of Deposits.  Scheduled Commercial banks (Excluding Regional Rural Banks) have the rights to come out with CDs.  Select Financial Institutions (FI) have been permitted to raise short-term resources under the umbrella limit fixed by RBI.  Rating Requirements are not compulsory for the CDs .

Continued
 CDs are short-term borrowings introduced in 1989, and all scheduled banks are freely transferable by endorsement and delivery.  Maturity of not less than 7 days and maximum up to a year. Financial institutions are allowed to issue CDs for a period between 1 year and upto 3 years.  Subject to payment of stamp duty under the Indian Stamp Act 1899.  Issued to individuals, corporations, trusts, funds and associations  They are issued at a discount rate freely determined by the market/investors

Features of CD
 Minimum and Maximum period 15 days & 1 Year  Minimum Amount Rs 1 Lakh and in multiples of Rs. 1 Lakh  CDs held in physical form will be freely transferable by endorsement and delivery . CD held in the demat form can be transferred as per the procedure applicable to other demat securities. There is no lock in periods for CDs.  Bank has to maintain CRR & SLR on the issue price of the CD  As per the current RBI guidelines, CD should be issued at a discount to the face value. The parties to contract are free to determine the discount rate.

Continued
 Banks/FIs cannot grant loans against CDs. Banks/FI s cannot buy-back their own CDs before maturity. No premature cancellation of the CD is allowed.  CDs may be issued at discount on face value  If maturity date of CD falls on a holiday declared under the RBI Act , it would be payable on the immediate preceding working day. The place of payment for the purpose of interpretation of the place would be where the CD is payable as stated on the CD.

Commercial Bill
Commercial bill is a short term, negotiable instrument with low risk. It enhances the liability to make payment in a fixed date when goods are bought on credit. According to the Indian Negotiable Instruments Act 1881, bill or exchange 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. Bills of exchange are negotiable instruments drawn by the seller (drawer) on the buyer (drawee) or the value of the goods delivered to him. Such bills are called trade bills. When trade bills are accepted by commercial banks, they are called commercial bills. The bank discounts this bill by keeping a certain margin & credits the proceeds. If Banks are in need of money, they can rediscount their bills by financial institutions such as LIC, UTI, GIC, ICICI and IRBI. The maturity period of the bills varies from 30 days, 60 days or 90 days, depending on the credit extended in the industry.

Bills Discounted
Bill discounting is a product where a part of the receivable can be financed. Once the assessment of the company is carried out, a portion of the assessed limit representing part of the receivable can be financed through bill discounting mode. Now days, this method of financing became very much popular for Small and Medium Enterprise (SME) financing. Much large company outsourced their production facility to SMEs. These SMEs may not be financially strong enough to attract very competitive interest rate from the bank.

Continued
Bills of Exchange Rs ______________/Date: -

Please Pay ________________ ( Payee) or Order a sum of Rs

(Rupees ________________only ) on 90 days ( Credit Period) from the date of this document.

---------------------------( Name & Address of Drawer)

-------------------------(Name & Address of Drawee)

Government of India Securities

Government securities (G-secs) are Sovereign securities which are issued by the Reserve Bank of India on behalf of Government of India. The term Government Securities includes: Central Government Securities. State Government Securities Treasury bills The Central Government borrows funds to finance its 'fiscal deficit'. The market borrow funds from the Central Government to raise the issue of dated securities and 364 days T-Bills by auction. These do not form part of the borrowing programme of the Central Government.

Call/Notice Money Market

Call/Notice money is the money borrowed or lent on demand for a very short period. When money is borrowed or lent for a day, it is known as Call (Overnight) Money. Intervening holidays and Sunday are excluded for this purpose. Thus money, borrowed on a day and repaid on the next working day, is "Call Money". When money is borrowed or lent for more than a day and up to 14 days, it is "Notice Money". No collateral security is required to cover these transactions. The rate at which funds are borrowed in this market is called `Call Money rate'. 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%.

Repo Rate
Whenever the banks have any shortage of funds they can borrow it from RBI. Repo rate is the rate at which our banks borrow rupees from RBI. 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. When RBI lends money to bankers against approved securities for meeting their day to day requirements or to fill short term gap. It takes approved securities as security and lends money. These types of operations are generally for overnight operations. The Reserve Bank of India has revised the repo rate from 5.5% to 5.75%, it is due to asymmetric raise in rates narrows the LAF (Liquidity Adjustment Facility) corridor. The policy statement said that non-food inflation has risen while food price inflation has moderated. Dr. D. Subba Rao, Governor, RBI (First Quarter Review of 2010-11)

Status of Repo Rate in India

Year
26-Oct-2005 24-Jan-2006 8-Jun-2006 25-Jul-2006 30-Oct-2006 31-Jan-2007 30-Mar-2007 12-Jun-2008 25-Jun-2008 30-Jul-2008

Repo Rate
6.25 6.50 6.75 7.00 7.25 7.50 7.75 8.00 8.50 9.00

Year
20-Oct-2008 3-Nov-2008 8-Dec-2008 5-Jan-2009 5-March-2009 21-April-2009 19-March-2010 20-Apr-2010 02-July-2010 27-July 2010

Repo Rate
8.00 7.50 6.50 5.50 5.00 4.75 5.00 5.25 5.50 5.75

Reverse Repo Rate

Reverse Repo rate is the rate at which Reserve Bank of India (RBI) borrows money from banks. Banks are always happy to lend money to RBI since their money are in safe hands with a good interest. An increase in Reverse repo rate can cause the banks to transfer more funds to RBI due to this attractive interest rates. Due to this fine tuning of RBI using its tools of CRR, Bank Rate, Repo Rate and Reverse Repo rate our banks adjust their lending or investment rates for common man.

Status of Repo Rate in India

Year
29-Apr-2005 26-Oct-2005 24-Jan-2006 8-Jun-2006 25-Jul-2006 8-Dec-2008 5-Jan-2009 5-March-2009 21-Apr-2009 19-March-2010 20-Apr-2010 02-July-2010 27-July 2010

Reverse Repo Rate

5.00 5.25 5.50 5.75 6.00 5.00 4.00 3.50 3.25 3.50 3.75 4.00 4.50

Markets Welcome Rate hike

 The markets have reacted positively to the monetary policy measures announced by the central bank at its quarterly policy review meet held this afternoon. The Sensex ended at 18077, higher by 57 points, and the Nifty ended at 5430, up 12 points.  Reserve Bank of India hiked the repo rate by 25 basis points to 5.75% and the reverse repo rate by 50 basis points to 4.5%, while keeping the cash reserve ratio (CRR) unchanged at 6%.  Inflation stubbornly holding on to the 10% mark for the past five months, the rate hike seems to be an attempt at striking a balance between inflation and growth expectations.  The RBI also revised the GDP forecast from 8% to 8.5% for the year ended March 2011, taking into account the progress of monsoons and the prevailing macroeconomic scenario on the global front.  The market breadth was mildly negative. Out of 3000 stocks traded on the BSE, there were 1369 advancing stocks as against 1520 declines.