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    Chapter 2

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    Siddhartha Patra
    The document discusses financial markets and the money market. It defines a money market as a market for short-term debt instruments like certificates of deposit, commercial papers, treasury bills, and call/notice money. It describes these instruments and how they work. The document also discusses how the Reserve Bank of India uses tools like repo and reverse repo rates to inject and absorb liquidity in the banking system and money market to manage short-term interest rates and control inflation.

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    Chapter 2

    Uploaded by

    Siddhartha Patra
    80 views10 pages
    The document discusses financial markets and the money market. It defines a money market as a market for short-term debt instruments like certificates of deposit, commercial papers, treasury bills, and call/notice money. It describes these instruments and how they work. The document also discusses how the Reserve Bank of India uses tools like repo and reverse repo rates to inject and absorb liquidity in the banking system and money market to manage short-term interest rates and control inflation.

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    The document discusses financial markets and the money market. It defines a money market as a market for short-term debt instruments like certificates of deposit, commercial papers, treasury bills, and call/notice money. It describes these instruments and how they work. The document also discusses how the Reserve Bank of India uses tools like repo and reverse repo rates to inject and absorb liquidity in the banking system and money market to manage short-term interest rates and control inflation.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    80 views10 pages

    Chapter 2

    Uploaded by

    Siddhartha Patra
    The document discusses financial markets and the money market. It defines a money market as a market for short-term debt instruments like certificates of deposit, commercial papers, treasury bills, and call/notice money. It describes these instruments and how they work. The document also discusses how the Reserve Bank of India uses tools like repo and reverse repo rates to inject and absorb liquidity in the banking system and money market to manage short-term interest rates and control inflation.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 10

    FINANCIAL MARKETS

    FINANCIAL MARKET
    Is an important component of financial system. A
    mechanism for the trading of financial products under a
    policy framework. The participants in the financial
    market are the borrowers, lenders and financial
    intermediaries.

    TYPES OF FINANCIAL MARKET


    Money Market

    Capital Market
    MONEY MARKET
    A Money Market is a market for short term debt
    instruments. Its a highly liquid market wherein
    securities are bought and sold in large denominations.

    Major Instruments of Money Market


    Certificate of Deposits

    Commercial Papers

    Treasury Bill

    Call/Notice Money
    Certificate of Deposits
    CDs are very much similar to FDs barring one
    difference . CDs being in bearer form are transferable
    and tradable while FDs are not. These are unsecured,
    negotiable, short term instruments in Bearer form issued
    by Commercial Banks & Development Financial
    Institutions. These can be issued to Individuals,
    Corporations, Companies, Trusts, Funds, Associations
    etc.
    Commercial Papers
    A Commercial Paper is an unsecured, Short term
    promissory note issued at a discount by creditworthy
    corporates, primary dealers and all India Financial
    Institutions. Minimum size for issuing CP is Rs 5 Lakh.
    The CPs can be issued to individuals, Bank, Corporate,
    NRIs and FIIs.
    Treasury Bill
    Popularly known as T-Bills, these are short term
    instruments used by Government to raise short term
    funds. Main participants in Treasury Bill markets are
    RBI, Banks, Mutual Funds, Financial Institutions,
    Foreign Banks etc.
    Call/Notice Money
    Commercial Banks borrow money without collateral
    from other Banks to maintain a minimum cash balance
    known as Cash Reserve Requirements. This interbank
    borrowing has led to the development of call money
    market. Under call money market, funds are transacted
    (borrowed/lent) on overnight basis. Notice Money,
    another category facilitates borrowing and lending of
    funds for a period between 2-14 days.
    All Scheduled Commercial Banks, all Co-operative
    Banks and Primary Dealers can participate in Money
    Market.
    Repo Rates
    It is the rate at which the central Bank of a country (RBI
    for India) lends money to commercial banks in the event
    of any shortfall of funds. Repo rate is used by
    Policymakers to control inflation.

    Reverse Repo Rates


    A rate at which RBI borrows money from Commercial
    Banks with in the country. It is a monetary policy
    instrument which can be used to control the money
    supply in the country.
    Tools for managing liquidity in Money Market
    1. Reserve Requirements CRR and SLR

    2. Interest Rates

    3. Base Rate

    4. Under Liquidity Adjustment Facility, which


    became operational since June 2000, two policy
    rates namely the repo and reverse repo rate are
    specified for lending and borrowing of funds by the
    RBI. By accepting repo bids from Banks and
    primary dealers, liquidity is injected while liquidity
    is absorbed from the Banking system through
    acceptance of reverse repo bid.
    Repo
    Repo is a transaction in which the borrower gets funds
    against the collateral of securities placed with the
    lender. The maturity period of repos range from 1- 14
    days.
    Reverse Repo
    A transaction where lender buys securities with a
    commitment to sell it back to borrower.

    How RBI controls Liquidity in Market with the help


    of Repo Rates???

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