What is Money Market?

Money Market refers to market of transaction maturity upto 1 year. Money market transactions are
generally used for funding the transactions in other markets including G-Secs market and meeting
short term liquidity mismatches.

Money Market is generally expected to perform following functions:

 Provide a balance mechanism to even out demand for and supply of short term funds
 Help borrowing/investor in meeting/deploying short term funding requirement/surplus.

Well functioning short term market helps in development of long term market. Generally, long term
rates are derived from short term rates.

Within the one year, depending upon the tenors, money market is classified into:
i. Overnight (Call ) market - The tenor of transactions is one working day.
ii. Notice money market – The tenor of the transactions is from 2 days to 14 days.
iii. Term money market – The tenor of the transactions is from 15 days to one year.

In India, Money Market is mainly governed by Reserve Bank of India (RBI). RBI ensures required level
of liquidity in market and strive to maintain short term rates consistent with monetary policy
objectives.

RBI can influence market liquidity in several forms like Reserve requirements (CRR, SLR), Open
Market Operations (buy or sale of securities), change in policy (repo rate) and at times by conducting
Fx transactions (Selling USD in market would reduce INR liquidity in market and vice versa).

What are the different money market instruments?

 Interbank money (unsecured borrowings)
 Repo/Reverse repo (including Tri-party Repo)
 T- Bills (including Cash Management Bills and MSS securities)
 Commercial Paper
 Certificate of Deposit
 Interbank-Participation Certification
 Bills rediscounting
Sources of fund raising for various participants
Interbank money market (unsecured lending/borrowing)
 Call/Notice/Term money market is a market for uncollateralized lending and borrowing of
funds.
o Help in managing short term liquidity mismatches
o This market is predominantly overnight and is open for participation only to
scheduled commercial banks and the primary dealers.
o Deals are conducted on CCIL assisted platform called ‘NDS Call’ (Negotiated Dealing
System)
 Deals conducted outside platform (i.e. in OTC market) also need to be
reported on NDS call within 15 minutes.
o Market timing 9:00 AM to 5:00 PM (most liquidity in initial 30 minutes and post 4:00
PM)
o Deals can be done for T+0, T+1/2 settlement for tenor upto 1 year
 Participant : All scheduled commercial banks, primary dealers, Cooperative banks, Small
Finance bank, Payments banks
 Cash Reserve Requirement (CRR) for the Banks and modalities
o Maintenance on fortnightly average basis
o Daily balance can go upto 90% (or as may be specified by RBI from time to time) of
the requirement during applicable fortnight
 Average daily volume ~ INR 150 Billion to INR 250 Bio
o Has been increasing historically
 Rates
o In India, benchmark rate for call money transaction is MIBOR (Mumbai Interbank
offer rates).
 MIBOR – Overnight, 14 days, 1-month and 3 month
o Typically overnight rates move near to RBI policy rates
o Several factors affects movement in call rates (i.e. overnight rate)
 Market liquidity
 Central Bank’ action to affect the liquidity in market
 Turn of year, Turn of quarter
 Govt payments (like Tax)
 Credit/Deposits growth in bank leading to funding surplus or shortfall
situation
 Large borrowings by Banks to meet CRR requirement on particular days
 Limits -Banks
o Average borrowing over fortnight – upto 100% of capital fund
 On any day borrowings can go upto 125% of capital fund
o Average lending over fortnight – upto 25% of capital fund
 On any day lending can go upto 50% of capital funds
 Limit- Primary Dealer
o Borrowings upto 200% of net owned fund at end of March of previous year
o Lend upto 25% of net owned fund at end of March of previous year
Repo (Repurchase Agreement) and Reverse repo

 Repo (or ready forward contact) is an instrument for 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.
 The reverse of the repo transaction is called ‘reverse repo’ which is lending of funds against
buying of securities with an agreement to resell the said securities on a mutually agreed
future date at an agreed price which includes interest for the funds lent.
 It can be seen from the definition above that there are two legs to the same transaction in a
repo/ reverse repo. The duration between the two legs is called the ‘repo period’.
 The consideration amount in the first leg of the repo transactions is the amount borrowed
by the seller of the security. On this, interest at 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 collateral of G-Secs.
 Predominantly, Repo market for overnight. Market term repo in nearly illiquid, while RBI
conduct 7-days and 14-days term repo periodically.

Example

--Refer class discussion

--Know difference between Repo rate and Margin/Haircut on collateral deposited for repo
transaction

 The difference between market value of collateral deposits and borrowed amount is called
haircut
 The difference between borrowed amount (first leg) and repaid amount (second leg)
represents ‘Repo rate’.

 Market repo rate typically range near to RBI repo rate. However, the repo rate may be
affected by several factors like:
o Higher tenor of borrowings – higher is the rate
o Quality of collateral – higher the quality, lower the rate
o If collateral is in high demand, the rate would be lower
o Rate would also be affected by prevailing rates in other market instruments like
interbank
 The haircut/margin of collateral deposited in repo transaction is affected by following
factors:
o Higher the quality of collateral – lower is haircut
o If collateral is delivered to lender, lower is haircut
o If collateral is in high demand, lower is haircut
o Higher Credit quality of borrower lowers the haircut

RBI repo:
 RBI provides followings repo or reverse repo facilities
o Liquidity Adjustment facility (LAF):
 Repo can be done upto 0.25% of NDTL (net Demand and term liabilities)
during 9:00 AM to 3:00 PM. Rate is RBI Repo rate (Currently 5.40%)
  Reverse repo can be done for surplus amount with the Bank during 5:30 PM
to 7:30 PM (closing activity). Applicable rate is ‘Reverse repo’ rate (currency
5.15%)
o Marginal standing facility (MSF)
 Repo can be done upto surplus securities during 5:30 PM to 7:30 PM
 Applicable rate is higher than repo rate (currency 5.65%)
 This is used for day end funds adjustment (contingency funding source)
Triparty Repo
 "Tri-party repo" means a repo contract where a third entity (apart from the borrower and
lender), called a Tri-Party Agent, acts as an intermediary between the two parties to the
repo to facilitate services like collateral selection, payment and settlement, custody and
management during the life of the transaction. Funds borrowed under repo including tri-
party repo in government securities shall be exempted from CRR/SLR computation and the
security acquired under repo shall be eligible for SLR provided the security is primarily
eligible for SLR as per the provisions of the Act under which it is required to be maintained.
 Tri Party Repo Dealing System (TREPS) facilitates, borrowing and lending of funds, in Triparty
Repo arrangement. CCIL is the Central Counterparty to all trades from TREPS and also
perform the role and responsibilities of Triparty Repo Agent. All the repo eligible entities are
entitled to participate in Triparty Repo. The entity type admitted include, Public Sector
Banks, Private Banks, Foreign Banks, Co-operative Banks, Financial Institutions, Insurance
Companies, Mutual Funds, Primary Dealers, Bank cum Primary Dealers, NBFCs, Corporates,
Provident/ Pension Funds, Payment Banks, Small Finance Banks, etc.
 TREPS Dealing System is an anonymous order matching System provided by CCDS (Clearcorp
Dealing Systems (India) Ltd) to enable Members to borrow and lend funds. It also
disseminates online information regarding deals concluded, volumes, rate etc., and such
other notifications as relevant to borrowing and lending under Triparty Repo by the
members.
Volume
 In India, Repo can be Market repo or repo with RBI. Average daily volume
o Av Daily volume in Repo market is ~ INR 2.0 trillion
o TREPS covers about 75% trades of market volume
Treasury Bills
 Treasury bills are issued by Central Govt of India. State Govt cannot issue T-bills.
 Presently issued in three tenors, namely, 91 day, 182 day and 364 day.
 Treasury bills are zero coupon securities and pay no interest. Instead, they are issued at a
discount and redeemed at the face value at maturity. For example, a 91 day Treasury bill of
₹100/- (face value) may be issued at say ₹ 98.20, that is, at a discount of say, ₹1.80 and
would be redeemed at the face value of ₹100/-. The return to the investors is the difference
between the maturity value or the face value (that is ₹100) and the issue price.

Primary Market
 The Reserve Bank of India conducts auctions usually every Wednesday. Settlement for the T-
bills auctioned is made on T+1 day i.e. on the working day following the trade day.
o Bid can be min INR 1 lakh and multiple thereof
o Prices are market determined
o Banks (including Small finance bank, scheduled cooperative bank), primary dealers
can participate in auction)
 Participants can place competitive bids or non-competitive (i.e. without
mentioning bid price) bids
 Limited amount of non-competitive bids are allowed by RBI
o Multiple price based auction
o T-bills can be issued from Overnight tenor to upto 1 year period.
 The Reserve Bank releases a quarterly calendar of T-bill issuances for the upcoming quarter
in the last week of the preceding quarter. e.g. calendar for April-June period is notified in the
last week of March.
 Currently, outstanding T-bills would be approx. INR 5.25 trillion

Secondary Market
 Traded on ‘NDS OM’ platform, OTC (telephonic) and NDS OM –web (internet based for Gilt
Account Holder), stock exchanges (BSE/NSE)
 All trades reported on NDS OM
 Reasonable liquidity

Other aspects
 T-bills are claim against Govt and hence does not require any grading. Other important
aspects of T-bills
 Highly liquid and negotiable instrument (i.e. ownership can be change vis transfer only)
 Eligible for SLR, LCR and repo (borrowing) from RBI or Market repo
 Absence of default risk
 Assured return and low transaction cost
 Negligible Capital requirement
 On-the Run (Most recent issued security) and Off-the run security
o Liquidity risk is lower for On-the-run security
 T-bills under Market Stabilization Scheme
o Market Stabilization scheme (MSS) is a monetary policy intervention by the RBI to
withdraw excess liquidity (or money supply) by selling government securities in the
economy.
o The MSS was introduced in April 2004. Main thing about MSS is that it is used to
withdraw excess liquidity or money from the system by selling government bond
 o It was used massively post demonetization (Nov 2016), wherein market was flushed
with excel liquidity to the tune of INR 15 Trillion
o Securities issued under MSS are owned by Govt, but issued by RBI
o The money obtained under MSS should be kept with the RBI. It should not be
transferred to the government. This is because, if it is transferred, government will
spend the money in the economy thereby adding to liquidity

T+1 basis settlement in both primary and secondary market

T-bills are traded in secondary market as well. Platform : NDS OM, OTC (telephonict), NDS OM-web,
Stock exchange

How is the yield of a T- Bill calculated?

It is calculated as per the following formula