WHAT IS FINANCIAL MARKET?
FUND SURPLUS FUND SCARCE
GROUPS / GROUPS /
INDIVIDUALS INDIVIDUALS
Exchange of money / money value instruments
With interest / dividend
FINANCIAL MARKET
The market of an economy, where funds are transacted between the Fund Surplus and Fund Scarce
individuals and groups is known as FINANCIAL MARKET
BUT, WHAT ABOUT DURATION ?
GENERAL CLASSIFICATION
Requirement of funds up Requirement of funds for
to 364 days 365 days and more
(< 1 year) (1 year and above)
Short term funds Long term funds
Money market Capital market
Financial market
Normally, borrowing for few days is call
money. But, there are specific names
Borrowing For Specific Name
1 day Call Money
2 to 14 days Notice Money
These are Part of Money Market
Normally, borrowing for up to 1 year is
Money Market. But, there are specific names
Borrowing For Specific Name
1 day Call Money
2 to 14 days Notice Money
15 days to 1 year Term Money
MONEY MARKET AND CAPITAL MARKET
I. MONEY MARKET
Treasury Bills
Cash Management Bills
Repo and Reverse Repos
Certificate of Deposits
Commercial Papers
Commercial Bills
Call Money Market
II. CAPITAL MARKET
1 2 3 4
Govt. Dated Industrial Development Finance Institutions Financial
Securities Securities Market (DFIs) Intermediaries
Market
IPO (for new All India Financial Institutions Investment Banks
stocks) i.e. IFCI, IIBI, etc..
Stock Sectoral Finance/Refinance Merchant Banks
Exchanges Institutions like SIDBI, NHB, Mutual Funds
(for old IIFCL, REC, PFC, IRFC, TFCI etc…
Though, Technically it is stocks) State Finance Corporations Leasing Companies
part of Capital Market, but
this Market along with Venture Capital
Treasury Bills & Cash
Management Bills is called
“ Govt. Securities Market”
and regulated By RBI.
INDIAN MONEY MARKET
SALIENT POINTS
Here money is traded between individuals or groups (Financial
Institutions, Banks or Govt. Companies).
Between cash surplus and cash scarce.
For short term lending up to 364 days.
Instruments which are traded can facilitate quick conversion to
money.
The interest rate depends on demand and supply of cash.
Money market takes care of the financial mismatch of day to
day operations of organizations, where as capital market is
used for creation of assets.
Vibrant money market is essential for any economy and co-
exists with capital market.
Organised money market in India is just more than 2 decades
old.
In 1985, Chakravarthi Committee underlined the need for
organised money market.
INDIAN MONEY MARKET
1. Treasury Bills (TBs)
2. Cash Management Bills (CMBs)
3. Repo and Reverse Repos
4. Certificates of Deposits (CDs)
5. Commercial Paper (CP)
6. Commercial Bill
7. Call Money Market
Let us discuss in brief…
Money Market
1. TREASURY BILLS
They are available in various forms since independence.
Got organized from 1986.
Issued by RBI on behalf of Central Government.
Used by the Central Government to fulfill short-term liquidity
requirements up to 364 days.
91-day, 182-day, 364-day TBs are issued by the Govt.
In addition to Governments, they also function as short term
investment avenues for Banks and Financial Institutions.
Trading is done on discounted rate, hence they are also called
discounted instruments.
Eligible as security for SLR.
Money Market
2. CASH MANAGEMENT BILLS
They are also discounted instruments like Treasury Bills,
issued by RBI on behalf of Central Govt.
They are for maturities less than 91 days.
They were introduced in 2010 by RBI for short term liquidity
Most of the features are similar to Treasury Bills.
Money Market
3. REPO AND REVERSE REPOS
These were introduced by RBI in December 1992 and November 1996
respectively.
We have already discussed about them in previous lectures
Money Market
4. CALL MONEY MARKET
It is short term financial market.
Transaction takes place on overnight basis.
Funds are transacted for a period between 1 to 14 days
normally.
All the Scheduled Commercial Banks, Co-operative Banks and
Primary Dealers (PDs) participate in the auction. (Regional
Rural Banks and Land Development Banks are not eligible to
participate.)
Interest rates are market driven.
Money Market
5. COMMERCIAL PAPER
Introduced in India in 1990.
It is a privately placed Instrument.
It is unsecured money market instrument issued in the
form of a promissory note.
Companies, Primary Dealers, Financial Institutions are
permitted to issue Commercial Paper.
Net worth of the company should not be less than Rs.4
crore.
Duration is from 7 days to 1 year.
Money Market
6. CERTIFICATE OF DEPOSIT
Introduced in 1989.
Can be issued by Scheduled Commercial Banks or FIs (as authorized
by RBI).
Minimum amount Rs.1 Lakh (further in multiples of Rs. 1 Lakh).
It is also a discounted instrument.
Time period... 7 days to 1 year (If issued by Commercial Banks)
1 year to 3 years (If issued by FIs)
Money Market
7. COMMERCIAL BILLS DISCOUNTING
These are the instruments that help companies to get advance
payment for the invoices they raise after making sales to their
customers.
They help companies to get money in advance for the sales they
make.
WHAT IS DFHI Ltd
It is Discount and Finance House of India Ltd.
It is one of the Primary Dealers (PDs) with majority shareholding by SBI.
It is established in 2004 with the merger of RBI promoted DFHI and SBI gilts Ltd.
It is one of the Primary Dealers dealing with Govt. Dated Securities, T-Bills, Call
Money etc.
WHAT IS CCIL Ltd?
It is The Clearing Corporation of India Ltd.
Commercial operations started from April, 2001.
SCBs, FIs and PDs have established CCIL jointly.
Primarily for providing exclusive clearing and settlements in money
market instruments, dated government securities and foreign exchange.
Headquarters is in Mumbai.
A SNAPSHOT ON MONEY MARKET INSTRUMENTS IN INDIA
TREASURY BILLS (T-BILLS) CERTIFICATE OF DEPOSITS
Issued by RBI. Introduced in 1989.
Discounted instruments. Commercial banks/FIs can issue CD
91 day, 182 day, 364 day are available. Minimum amount Rs.1 Lakh.
For short term liquidity requirements. 7 days to 1 year (if issued by banks), 1 year to 3 years (if issued by FIs).
Also discounted instruments.
CASH MANAGEMENT BILLS COMMERCIAL PAPER
Issued by RBI for the first time in 2010. Private unsecured money market instrument.
Discounted instruments. Introduced in 1990.
Issued up to the duration of 90 days only. Designed primarily for high rated corporate borrowers.
Features almost similar to treasury bills. Companies with minimum net worth of Rs. 4 crores, PDs, FIs are also
allowed.
7 days to 1 year.
Also a discounted instrument.
REPO AND REVERSE REPO CALL / NOTICE MONEY
Introduced in Dec 92 and Nov 96 respectively. Overnight borrowing.
RBI announces the rates through its monetary policy. 1 to 14 days.
Banks can resort to overnight lending subject to the limits. Interest is market driven.
The repo rate will have an impact on other interest rates. Commercial banks, co-operative banks, PDs are only allowed (RRBs
and LDBs are not allowed).
