Money Market

Introduction
• The money market is a market for financial
assets that are close substitutes (trade bills,
promissory note) for money. (not actually deal in
cash/money).
• It is a market for overnight to short term funds
and instruments having a maturity period of one
or less than one
year
• They can easily be converted
Into cash at low transaction cost.
 Objectives
• To provide a parking place to employ short term
surplus funds
• To provide room for overcoming short term
deficits
• To enable Central bank to influence & regulate
liquidity in the economy through its intervention
in this market.
• To provide a reasonable access to users of
short term funds to meet their requirements
quickly, adequately & at reasonable costs.
 Features
1. It is not a single Homogeneous market
but a group of Markets
 Features
2. Market for purely short term funds or
financial assets having a maturity period
up to one year only.
3. It deals with only those assets which can
be easily converted into cash without
loss & with minimum transaction cost.
4. Honour where the creditworthiness of the
participants is important.
5. Transactions have to be conducted
without the help of the brokers.
6. Transactions can take place on phone
(oral communication).
 7.Main Players
• Commercial banks (major player)
• Reserve Bank of India (RBI)
• Discount and Finance House of India (DFHI)
• Mutual Funds
• Banks
• Corporate Investors
• Non-Banking Financial Companies (NBFC’s)
• State Governments
• Provident Funds
• Primary Dealers
• Securities Trading Corporation of India (STCI)
• Public Sector Undertakings
• Non-resident Indians
 Characteristics of a developed
Money Market.
Prof. S N. Sen has described -
• Highly organized banking system
• Presence of Central bank
• Availability of proper credit instruments
• Existence of sub-markets
• Ample resources
• Existence of secondary markets
• Demand & supply of funds
 Functions

Focal point for cent- Reasonable access

Balancing Mechanism
ral bank intervention to suppliers and users
Benefits / Importance of an Efficient
Money Market
 Development of trade & industry
 Development of capital market
 Provides a stable source of funds to Commercial banks
 Encourage development of non-bank entities
 Facilitates government market borrowing
 Makes effective monetary policy actions
 Helps in pricing the different floating interest products
 Effective Central Bank control
The Indian Money Market
 DEFICIENCIES OF INDIAN MONEY
MARKET
 Existence of Unorganized Sector
 Absence of Bill payment
 Absence of Integration
 Diversity in Money Rates of
Interest
 Seasonal stringency of funds
 No Contact with Foreign Money
Markets
 DEFICIENCIES……

• Limited Instruments

• Limited Secondary Market

• Limited Participants
 STEPS/REFORMS TAKEN PLACE TO
DEVELOP THE MONEY MARKET IN
INDIA
• 1980’s
• Integration of Unorganised Sector
with the Organised Sector

• Widening of Call Money Market

• Introduction of Innovative Instruments

• Offering of Market Rates of Interest

 STEPS/REFORMS..….
• 1990’s
• Entry of Money Market Mutual Funds (MMMF)

• Setting up of Credit Rating Agencies

• Adoption of Suitable Monetary Policy

• Establishment of Discount & Finance House(DFHI)

• Setting up of Securities Trading Corporation of

India Ltd.
ROLE OF RBI IN MONEY MARKET

• Maintaining Price Stability

• Adequate Flow of Money

• Bring Order in the Foreign

Exchange Market
Money Market Intermediaries
The Discount and Finance House of
India (DFHI)

Set up in April, 1988

Motive – Deepening and Activating Money
Market
Commenced operations from July 28, 1988
The DFHI is a Joint Stock Co. jointly owned by
RBI, public sector banks and all-India financial
institution

These have contributed to its paid up capital of Rs.

200 crores in proportion 5:3:2

Also, refinance facility from RBI and credit of Rs.

100 crores from 28 public sector banks on
consortium basis are the sources of its funds
 Role of the DFHI

• Functions as a specialised money market

intermediary
• Undertakes short-term buy-back
operations in the government and
approved dated securities
• Mobilises funds/resources from banks,
financial institutions
 Features of DFHI

• Categorised as an eligible institution under

relevant provisions of RBI Act
• Also it is an authorised institution to
undertake repo transaction
• Since November 13, 1995, it is an
accredited primary dealer and now it acts
as a market maker
DFHI deals in following:
• Treasury bills
• Commercial papers (CP)
• Certificate of Deposit (CD)
• Commercial Bills (CB)
• Short term deposits
• Call/Notice money market
• Government Securities
DFHI’s presence has helped corporate
entities, banks and financial institutions to
raise short term money and invest short
term surpluses
It also extends the repos ie, buy back facility
upto 14 days to banks and financial
institutions
• In a span of 9 yrs, DFHI’s turnover has
increased four-fold
• Major part of turnover was in call money
followed by government dated securities
and treasury bills
• Its business in CDs and CPs was
negligible
• Its business in CBs declined sharply in
1990s
• DFHIs main concentration was on call
money market
• Reserve Bank divested its shareholders in
favour of existing ones in march 2003
• The SBI became the major shareholder
and DFHI inturn became a subsidiary of
SBI from march 31, 2003
• In April 2004, SBI Gilts ltd., a subsidiary of
SBI, was merged with DFHI ltd. and
merged entity was named as SBI DFHI ltd.
Link between the money market
and the monetary policy in India
Reserve Bank is the monetary authority in
India
Objectives of monetary policy:
- Price Stability and Growth
These objectives are pursued by ensuring
credit availability with stability in rupee
value with overall financial stability
• Monetary policy actions are transmitted to
the economy through changes in financial
prices (eg. Interest rates, exchange rates)
and financial quantities (money supply,
credit aggregates etc.)

• Instruments for management of liquidity:

- Direct and Indirect market based
instruments
• Direct Instruments
- Varying cash reserve requirement
- Limits on refinance
- Administered interest rates
- Qualitative and Quantitative restriction
on credit
• Indirect Instruments
- Open market operation
- Repos
• The Reserve Bank has set up a framework of
the Interim Liquidity Adjustment Facility (ILAF)
which helps in injecting liquidity through
following facilities:
- Collateralised lending facility (CLF)
- Export credit refinance to banks
- Liquidity support to primary dealers
• All these facilities were formula based and
depended on bank rate
During the 1990s, the indirect instruments
(open market operation and repos
operation) emerged for the first time and
gained a lot of importance
These are used to bring a contraction of
liquidity
Fixed rate repos were introduced by the
reserve bank to absorb liquidity
• Market based instruments help in
minimizing volatility in the money market

• Thus, in the 1990s, the monetary policy

emerged as an independent instrument of
economic policy
 Overview of Money Market
• Money market basically deals with short
term debt securities that mature in an year
• Money market trades in short-term
financial instruments commonly called
“papers”
• It is a very secured market as compared to
bonds market
• Security comes at the cost of very low
rates of return
• These securities are extremely liquid
issued by government, financial institution
or large corporations
• MM Securities are traded over phone or
any electronic system
• Simplest way to gain access to the money
market is through the money market
mutual funds or money market bank a/c
 Question to be asked
• Discuss the features of a developed money
market and bring out its importance
• Discuss the various components of a money
market and bring out their features.
• Give the Structure of the Indian Money
market and point out its deficiencies.
• What steps have been taken in recent years
to make the Indian money market a
developed one?
 Cont…..

• Give detailed information about the DFHI.

• Explain the monetary policy of india
related to money market?