• The money market is an organized exchange market
where participants can lend and borrow short-term, high-quality debt securities with average maturities of one year or less. Investors
Financial Institutions Participants Corproations
Government 1. Central Banks Example: Reserve Bank of India (RBI), Federal Reserve (U.S.) Role: Central banks control the money supply and interest rates, influencing the overall liquidity in the market. They participate in money markets through operations like open market operations (buying and selling government securities) and repo agreements. 2. Commercial Banks Role: Commercial banks are the largest participants in the money market. They lend and borrow short-term funds, primarily through instruments like Certificates of Deposit (CDs), interbank lending, and repos. They also manage liquidity by investing in treasury bills and other money market securities. 3. Government Role: Governments issue Treasury Bills (T-bills) to manage short-term financing needs and cash flow imbalances. They also act as a borrower to fund their deficit through short-term debt instruments. 4. Corporations Role: Large companies issue Commercial Papers (CPs) to meet their short-term funding needs, typically for working capital or inventory financing. Corporations also invest their surplus cash in money market instruments to earn returns with minimal risk. 5. Mutual Funds and Investment Companies Role: Money market mutual funds pool investments from individuals and institutions to invest in highly liquid and safe money market instruments like T-bills, CPs, and repos. These funds provide short-term returns with high liquidity, making them popular among investors. 6. Insurance Companies and Pension Funds Role: Insurance companies and pension funds invest in money market instruments to maintain liquidity for meeting short-term obligations while earning a safe return on their surplus cash. 7. Brokers and Dealers Role: These intermediaries facilitate the buying and selling of money market instruments between participants, including banks, corporations, and governments. They help maintain liquidity in the market by matching buyers and sellers. 8. Non-Banking Financial Institutions (NBFIs) Role: NBFIs such as finance companies, investment banks, and microfinance institutions participate in the money market to raise short-term funds through instruments like Commercial Papers and Certificates of Deposit. 9. Individuals (Retail Investors) Role: Although retail investors do not directly participate in the money market, they invest in money market mutual funds, which provide access to the money market's low-risk returns. 10. Foreign Investors Role: Foreign institutions and investors may also participate in the domestic money markets, primarily by purchasing short-term government securities like Treasury Bills, attracted by liquidity and low risk. Features • High Liquidity • Secure Investment • Fixed Returns Functions of Money market • Provides Funds • Central Bank Policies • Helps Government • Helps in Financial Mobility • Promotes Liquidity and safety • Economy in Use of Cash Instruments • Call Money Market • T- Bills- • Commercial papers • Certificate of Deposits • Banker’s Acceptance • Repurchase Agreement Call and Notice Money Maturity - Call - Overnight - Notice - 2 to 14 days Uncollateralised Participants - Scheduled Commercial Banks (SCBs), Co-operative Banks and Primary Dealers (PDs) T Bills Are instruments of short-term borrowings of Govt.
Are Promissory Notes issued at a discount and redeemed at par
Serves as a bench mark for short-term securities
Maturity - 91, 182 and 364 days
(14 day bills discontinued since May 2001)
Issued through auction by RBI (1992)
Maintained in the form of SGL entries
Commercial papers • Introduced in 1990 • Issued by corporates, PDs and select all-India FIs (within the umbrella limit) • Subject to eligibility criteria • Unsecured in the form of a promissory note – subject to stamp duty • Maturity – 15 days (Min.) to 364 days(Max.) • Minimum size of issues – Rs. 5 lakh and in multiples ofRs. 5 lakh • Investors - Individuals, banks, corporate bodies including unincorporated bodies, NRIs, FIIs • Issued at discount redeemed at par. • FIMMDA, in consultation with market players, depositories and RBI, prepares related guidelines • Large Corporations with good credit rating can issue commercial paper.
• Liquidity. • Attracts issuance stamp duty in primary issue • Its held in Demat form • Bank and FI’s are prohibited from issuance and underwriting of CP’s. • Can be issued for a maturity for a minimum of 15 days and a maximum upto one year from the date of issue. Certificate of Deposits (CDs) Introduced in 1989 Are securitized, tradable term deposits issued in ‘demat’ form or as a UP Note (effective June 2002) Maturity - Banks – 3 months -1 year . Fis can Issue CDs between 1 to 3 years. Minimum size of issues – Rs. 1 lakh and in multiples of Rs. 1 lakh (from June 2002) • CDs can be transferred and there is no lock in period. FIs can issue for periods not less than 1 year and not exceeding 3 years Investors – Individuals, Corporates, Trusts, NRIs (on non- repatriable basis) Provides an avenue for investment at better rate in the banking sector FIMMDA has issued standardised procedure, documentation and operational guidelines for issue of CDs (June 2002) Repos • Are Re-purchase Agreements or Ready Forward Contracts • Where the parties agree to sell and buy back the same security at an agreed price at a future date • Is a combination of security trading (purchase / sale) and money market (lending / borrowing) operations • All Government securities are eligible • Repos are governed by SCRA, 1956 Operationalised as a money market instrument by CCIL from January 2003 - 155 members For Non bank entities restricted to enter Collateralised call money market. Borrowing & Anonymous, order driven, electronic Lending trading and online matching facilitating price discovery and Obligation transparency (CBLO) Maturity – 1 day (Min.) to 1 year (Max.)
Collateralised CBLO… • Cooperative banks, commercial banks, insurance companies, mutual funds, and primary dealers who are the members of the negotiated dealing system (NDS) are allowed to participate in CBLO transactions. • NBFCs, pension funds, provident funds and trusts are also allowed to participate in CBLO segments • CBLO is a discounted instrument available in electronic book entry form for the maturity period of 1 day to 19 days. Treasury Bills Repurchase (TRePs) • a short-term investment instrument used by mutual funds, banks, and financial institutions. • a party sells treasury bills to another, promising to repurchase them later at a preset price. • the Securities and Exchange Board of India (SEBI) directs mutual funds to allocate a minimum of 5% of their assets in liquid assets like TRePS. Benefits Explanation
TRePS involve the purchase of government-issued
Safety securities, making them a secure investment choice.
Quick and easy conversion to cash, allowing for
Liquidity better management of idle resources.
Depending on market conditions, particularly
Attractive Returns higher interest rates, TRePS can offer good returns.
Recognised by SEBI as liquid assets, aiding in
Regulatory Compliance adherence to regulatory guidelines.
Provides a safe and liquid option to diversify a
Diversification portfolio, reducing overall risk. Money Market Capital Market Definition A random course of financial institutions, bill A kind of financial market where the company or brokers, money dealers, banks, etc., wherein government securities are generated and dealing on short-term financial tools are being patronised with the intention of establishing long- settled is referred to as Money Market. term finance to coincide with the capital necessary is called Capital Market.
Market Nature Money markets are informal in nature. Capital markets are formal in nature. Instruments involved Commercial Papers, Treasury Certificate of Bonds, Debentures, Shares, Asset Secularisation, Deposit, Bills, Trade Credit, etc. Retained Earnings, Euro Issues, etc.
Investor Types Commercial banks, non-financial institutions, Stockbrokers, insurance companies, Commercial central bank, chit funds, etc. banks, underwriters, etc. Market Liquidity Money markets are highly liquid. Capital markets are comparatively less liquid. Money Market Capital Market Risk Involved Money markets have low risk. Capital markets are riskier in comparison to money markets. Maturity of Instruments Instruments mature within a year. Instruments take longer time to attain maturity Purpose served To achieve short term credit requirements of the To achieve long term credit requirements of trade. the trade. Functions served Increasing liquidity of funds in the economy Stabilising economy by increase in savings
Return on investment achieved
ROI is usually low in money market ROI is comparatively high in capital market
