The money market is regulated by the Reserve Bank of India. All the above mentioned What is Money Market?

money market transactions should be reported on the electronic platform called the Negotiated Dealing System (NDS). The money market provides investment avenues of short term tenor. Money market transactions are generally used for funding the transactions in other markets including Government securities market meeting short liquidity mismatches. definition, money market is for a As part and of the measures toterm develop the corporate debtBy market, RBI has permitted select entities maximum tenor of up tobanks one year. Within the one year, depending upon the tenors, money (scheduled commercial excluding RRBs and LABs, PDs, all-India FIs, NBFCs, mutual markethousing is classified into: funds, finance companies, insurance companies) to undertake repo in corporate debt securities. This is similar to repo in Government securities except that corporate debt securities are used as collateral for borrowing funds. Only listed corporate debt securities that are rated i. Overnight market - The tenor of transactions is to one working AA or above by the rating agencies are eligible be used forday. repo. Commercial paper, ii. Notice money market The tenor of the transactions is from 2 daysless to 14 days. certificate of deposit, non-convertible debentures of original maturity than one year are not iii. Term money market The tenor of the transactions is from 15 days to one year. eligible for the purpose. These transactions take place in the OTC market and are required to be reported on FIMMDA platform within 15 minutes of the trade for dissemination of information. They also be reported on themarket clearinginstruments? house of any of the exchanges for the purpose of Whatare are theto different money clearing and settlement. Money market instruments include call money, repos, Treasury bills, Commercial Paper, Certificate of Deposit and Collateralized Borrowing and Lending Obligations (CBLO).

Collateralized Borrowing and Lending Obligation (CBLO) Call money market

CBLO is another money market instrument operated by the Clearing Corporation of India Ltd. (CCIL), for the benefit of the entities who have either no access to the inter bank call money Call money market is a market for uncollateralized lending and borrowing of funds. This market market or have restricted access in terms of ceiling on call borrowing and lending transactions. is predominantly overnight and is open for participation only to scheduled commercial banks and CBLO is a discounted instrument available in electronic book entry form for the maturity period the primary dealers. ranging from one day to ninety days (up to one year as per RBI guidelines). In order to enable the market participants to borrow and lend funds, CCIL provides the Dealing System through Indian Financial Network (INFINET), a closed user group to the Members of the Negotiated Repo market Dealing System (NDS) who maintain Current account with RBI and through Internet for other entities doforward not maintain Current account with Repo orwho ready contact is an instrument for RBI. borrowing funds by selling securities with an agreement to repurchase the said securities on a mutually agreed future date at an agreed price which includes interest for the funds borrowed. Membership to the CBLO segment is extended to entities who are RBI- NDS members, viz., Nationalized Banks, Private Banks, Foreign Banks, Co-operative Banks, Financial Institutions, The reverse of the repo transaction is called reverse repo which is lending of funds against Insurance Companies, Mutual Funds, Primary Dealers, etc. Associate Membership to CBLO buying of securities with an agreement to resell the said securities on a mutually agreed future segment is extended to entities who are not members of RBI- NDS, viz., Co-operative Banks, date at an agreed price which includes interest for the funds lent. Mutual Funds, Insurance companies, NBFCs, Corporates, Provident/ Pension Funds, etc. It can be seen from the definition above that there are two legs to the same transaction in a repo/ By participating in the CBLO market, CCIL members can borrow or lend funds against the reverse repo. The duration between the two legs is called the repo period. Predominantly, repos collateral of eligible securities. Eligible securities are Central Government securities including are undertaken on overnight basis, i.e., for one day period. Settlement of repo transactions Treasury Bills, and such other securities as specified by CCIL from time to time. Borrowers in happens along with the outright trades in government securities. CBLO have to deposit the required amount of eligible securities with the CCIL based on which CCIL fixes the borrowing limits. CCIL matches the borrowing and lending orders submitted by the and notifies the securities as collateral are in custody of the CCIL, Themembers consideration amountthem. in theWhile first leg of the repo held transactions is the amount borrowed by the the beneficial interestOn of the lender on at the securities is recognized through proper documentation. seller of the security. this, interest the agreed repo rate is calculated and paid along with the consideration amount of the second leg of the transaction when the borrower buys back the security. The overall effect of the repo transaction would be borrowing of funds backed by the Commercial Paper (CP) collateral of Government securities. Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note. Corporates, primary dealers (PDs) and the all-India financial institutions (FIs)

that have been permitted to raise short-term resources under the umbrella limit fixed by the Reserve Bank of India are eligible to issue CP. CP can be issued for maturities between a minimum of 7 days and a maximum up to one year from the date of issue.

Certificate of Deposit (CD)

Certificate of Deposit (CD) is a negotiable money market instrument and issued in dematerialised form or as a Usance Promissory Note, for funds deposited at a bank or other eligible financial institution for a specified time period. Banks can issue CDs for maturities from 7 days to one a year whereas eligible FIs can issue for maturities 1 year to 3 years.

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1. Types of Money Market Instruments in India

o

Money market instruments provide for borrowers' short-term needs and gives needed liquidity to lenders. The types of money market instruments are treasury bills, repurchase agreements, commercial papers, certificate of deposit, and banker's acceptance.

Treasury Bills (T-Bills)

o

Treasury bills began being issued by the Indian government in 1917. They are short-term instruments issued by the Reserve Bank of India. They are one of the safest money market instruments because they are risk free, but the returns from this instrument are not very large. The primary as well as the secondary markets circulate this instrument. They have 3-month, 6-month and 1-year maturity periods. T-bills are issued with a separate price from their face value. The face value is achieved upon maturity, as is the interest earned on the buy value. The buy value is set by a bidding process in auctions.

Repurchase Agreements
o

Repurchase agreements are also known as repos. They are short-term loans that buyers and sellers agree to sell and repurchase. As of 1992, repo transactions are allowed only between RBI-approved securities such as state and central government securities, T-bills, PSU bonds, FI bonds and corporate bonds. Repurchase agreements are sold by sellers with a promise of purchasing them back at a given price and on a given date in the future. The buyer will also

purchase the securities and other instruments in the repurchase agreement with a promise of selling them back to the seller.

Commercial Papers
o

Commercial papers are promissory notes that are unsecured and issued by companies and financial institutions. They are issued at a discounted rate of their face value. They have a fixed maturity of 1 to 270 days. They are issued for financing of inventories, accounts receivables, and settling short-term liabilities or loans. Commercial papers yield higher returns than T-bills. They are usually issued by companies with strong credit ratings, as these instruments are not backed by collateral. They are usually issued by corporations to raise working capital and are actively traded in the secondary market. Commercial papers were first issued in the Indian money market in 1990.

Certificate of Deposit
o

A certificate or deposit is a short-term borrowing note, like a promissory note, in the form of a certificate. It enables the bearer to receive interest. It has a maturity date, a fixed rate of interest and a fixed value. It usually has a term between 3 months and 5 years. The funds cannot be withdrawn on demand, but it can be liquidated on payment of a penalty. The returns are higher than T-bills as the risk is higher. Returns are based on an annual percentage yield (APY) or annual percentage rate (APR). In APY, interest is gained by compounded interest calculation, whereas in APR simple interest calculation is done to calculate the return.The certificate of deposit was first introduced to the money market of India in 1989.

Banker's Acceptance
o

A banker's acceptance is a short-term investment plan created by a company or firm with a guarantee from a bank. It is a guarantee from the bank that a buyer will pay the seller at a future date. A good credit rating is required by the company or firm drawing the bill. The terms for these instruments are usually 90 days, but this period can vary between 30 and 180 days. Companies use the acceptance as a time draft for financing imports, exports and other trade

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Money Market Instruments

Money Market means market where money or its equivalent can be traded. Money is synonym of liquidity. Money Market consists of financial institutions and dealers in money or credit who wish to generate liquidity. It is better known as a place where large institutions and governments manage their short term cash needs. For generation of liquidity, short term borrowing and lending is done by these financial institutions and dealers. Money Market is part of financial market where instruments with high liquidity and very short term maturities are traded. Due to highly liquid nature of securities and their short term maturities, money market is treated as a safe place. Hence, money market is a market where short term obligations such as treasury bills, commercial papers and banker's acceptances are bought and sold.

Benefits

and

functions

of

Money

Market

Money Markets exist to facilitate efficient transfer of short-term funds between holders and borrowers of cash assets. For the lender/investor, it provides a good return on their funds. For the borrower, it enables rapid and relatively inexpensive acquisition of cash to cover short-term liabilities. One of the primary functions of Money Market is to provide focal point for RBI's intervention for influencing liquidity and general levels of interest rates in the economy. RBI being the main constituent in the Money Market aims at ensuring that liquidity and short term interest rates are consistent with the monetary policy objectives. Money Market & Capital Market:

Money Market is a place for short term lending and borrowing, typically within a year. It deals in short term debt financing and investments. On the other hand, Capital Market refers to stock market, which refers to trading in shares and bonds of companies on recognized stock exchanges. Individual players cannot invest in money market as the value of investments is large, on the other hand, in capital market, anybody can make investments through a broker. Stock Market is associated with high risk and high return as against Money Market which is more secure. In case of money market, deals are transacted on phone or through electronic systems as against capital marketwheretradingisthroughrecognizedstockexchanges. Treasury Bills:Treasury Bills are Money Market instruments to finance the short term requirements of the Government of India. These are discounted securities and thus are issued at a discount to face value. The return to the investor is the difference between the maturity value and issue price Treasury Bills or T-Bills as they are known are issued by the Government of India to meet their short-term requirement. T-Bills are issued for 91-day, 182-day and 364-day maturities. T-Bills are issued at a discount to their face value and redeemed at par. 364-day T-Bills forms part of the government borrowing programme.There are three types of Treasury Bills.

91-day T-bill - maturity is in 91 days. Its auction is weekly on every Wednesday. 182-day T-bill - maturity is in 182 days. Its auction is on every alternate Wednesday other than a reporting week. 364-Day T-bill - maturity is in 364 days. Its auction is on every alternate Wednesday in a reportingweek. Features of T-Bills auction
x x

All T-Bills auctions are Price-based. All T-Bills are auctioned on Multiple-Price basis.

The RBI auctions 91-day T-Bills every Wednesday, 182-day T-Bills on every alternate wednesday and 364-day T-Bills on the Wednesday of the reporting Friday week. Commercial Papers: Commercial Paper is a low-cost alternative to bank loans. It is a short term unsecured promissory note issued by corporates and financial institutions at a discounted value on face value. They are usually issued with fixed maturity between one to 270 days and for financing of accounts receivables, inventories and meeting short term liabilities. Say, for example, a company has receivables of Rs 1 lacs with credit period of 6 months. It will not be able to liquidate its receivables before 6 months. The company is in need of funds. It can issue commercial papers in form of unsecured promissory notes at discount of 10% on face value of Rs 1 lacs to be matured after 6 months. The company has strong credit rating and finds buyers easily. The company is able to liquidate its receivables immediately and the buyer is able to earn interest of Rs 10K over a period of 6 months. They yield higher returns as compared to T-Bills as they are less secure in comparison to these bills. Chances of default are almost negligible but are not zero risk instruments. Commercial Paper being an instrument not backed by any collateral, only firms with high quality credit ratings will find buyers easily without offering any substantial discounts. They are issued by corporates to impart flexibility in raising working capital resources at market determined rates. Commercial Papers are actively traded in the secondary market since they are issued in the form of promissory notes and are freely transferable in demat form.

Certificate

of

Deposit:

It is a short term borrowing more like a bank term deposit account. It is a promissory note issued by a bank in form of a certificate entitling the bearer to receive interest. The certificate bears the maturity date, the fixed rate of interest and the value. It can be issued in any denomination. They are stamped and transferred by endorsement. Its term generally ranges from three months to five years and restricts the holders to withdraw funds on demand. However, on payment of certain penalty the money can be withdrawn on demand. The returns on Certificate of Deposits are higher than T-Bills because it assumes higher level of risk. While buying Certificate of Deposit, return method should be seen. Returns can be based on Annual Percentage Yield (APY) or Annual Percentage Rate (APR). In APY, interest earned is based on compounded interest

calculation. However, in APR method, simple interest calculation is done to generate the return. Accordingly, if the interest is paid annually, equal return is generated by both APY and APR methods. However, if interest is paid more than once in a year, it is beneficial to opt APY over APR. Advantages of Certificate of Deposit as a money market instrument
1. Since one can know the returns from before, the certificates of deposits are considered much safe.

2. One can earn more as compared to depositing money in savings account.

Disadvantages of Certificate of Deposit as a Money Market instrument:

1. As compared to other investments the returns is less. 2. The money is tied up along with the long maturity period of the Certificate of Deposit. Huge penalties are paid if one gets out of it before maturity.

Repo

Reverse

Repo:

A repo agreement is the sale of a security with a commitment to repurchase the same security as a specified price and on specified date while a reverse repo is purchase of security

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