Abhinav Bhansali (13020243001) Apurv Mehta (13020243033) Ashwin Jacob (13020243004) Nilesh Dayalapwar (13020243031) Ritu Singh (13020243019)

Sriharsha R (13020243025)

 As

per RBI definition : A market for short terms financial assets that are close substitute for money ,facilitates the exchange of money in primary and secondary market. The money market is a mechanism that deals with the lending and borrowing of short term funds. It doesnt actually deal in cash or money but deals with substitute of cash like trade bills,promissory notes. It includes all individual, institution and intermediaries.

 Development

of trade and industry. Development of capital market. Smooth functioning of commercial banks. Effective central bank control. Formulation of suitable monetary policy. Non inflationary source of finance to government.

 The

money market consists of number of submarkets : Call Money Market. Commercial bills market or discount market. Acceptance market. Treasury bill market. Instruments are : Certificate of Deposit (CD), Commercial Paper (CP), Repo rates, Treasury bills etc.

It is that part of the national money market where the dayto-day surplus funds, mostly of banks are traded in. The loans made in this market are of
Short-term nature Maturity varies between one day to a fortnight.

As these loans are repayable on demand and at the option of either the lender or borrowerThey are highly liquid.

Call loans in India are given:

To the bill market For the purpose of dealing in the bullion markets and stock exchanges Between banks Frequently to individuals of high financial status for ordinary trade purpose.

Call money market is used in India for the purpose of adjustment of reserves There are no discount houses in India, hence there is no parallel in India to the loans between commercial banks and discount houses in the UK. Call loans in India are unsecured

Transactions or trading on the call money market is characterised by seasonal variations The seasonal nature of the call money market would be reflected in two indicators
A decline in money at call and short notice should be greater in the slack season than the busy season of a given year. An increase in money at call and short notice should be greater in the busy season than in the slack season.

The need for call money borrowings is the highest around March every year Call money borrowings tend to increase when there is an increase in the CRR.

Following the acceptance of Vaghul committee recommendations, RBI allows the issue of CPs in 1990. CP is a short-term negotiable instrument, consisting of usance primary notes with a fixed maturity, indicating the short-term obligation of an issuer. Companies as a means of raising short-term debt issue it. It is issued on a discount to face value basis but can also be issued in interest bearing form. The issuer promises the buyer a fixed amount at a future date but pledges no assets. Participants: Are the corporate bodies, banks, mutual funds, UTI, LIC,GIC and others who have surplus funds and are on a lookout for opportunities for short-term investments. The DFHI also operates both in the primary and secondary markets for CPs by quoting its bid and offering prices RBI guidelines: A company can issue CPs if it conforms to the following conditions:
The tangible net worth of the company, as per the latest audited balance sheet is not less than Rs. 4 crores. Company has been sanctioned working capital limit by banks or financial institutions The borrowal account of the company is classified as a standard Asset by the financing institutions.

Few others 1. It must have fund based working capital of Rs. 25 crores. 2. The issuing company would need high credit rating. 3. CPs have to be issued in the denominators of Rs.5 lakhs and the minimum amount should be Rs. 1 crore. 4. The minimum maturity period is 7 days and a maximum upto one year from the date of issue. 5. It is issued in the form of usance promissory notes, negotiable by endorsement and delivery. The issuing company can freely determine the rate of discount. 6. The issues of CPs cannot be underwritten or co-accepted. 7. The total amount of CP proposed to be issued should be raised within a period of two weeks from the date on which the issuer opens the issue for subscription. CP may be issued on a single date or in parts on different dates provided that in the latter case each CP shall have the same maturity date. 8. Amount invested by a single investor should not be less than Rs. 5 lakh.

COD is a document title to a time deposit and can be distinguished from the conventional time deposit in respect of it free negotiability and hence marketable. CODs are a marketable receipt of funds deposited in a bank for a fixed period at a specified rate of interest. They are bearer instruments and are readily negotiable. As per the RBI scheme, the CODs can be issued only by scheduled commercial banks at a discount rate from the face value, and the discount rate can be freely determined. It means that there is no restriction on the rate of interest that can be paid to a depositor. The CODs can be issued to individuals, corporates, companies, trust funds, associations and so on.

1.

2.

3.
4. 5.

RBI Guidelines : The denominators of CODs is to be in the multiples of Rs. 5 lakhs, subject to a minimum size of an issue to a single investor being Rs. 25 lakhs. The maturity period to range from 3 months to one year. They are freely transferable by the endorsement and delivery after the initial lock in 45 days. Premature buy back is not permitted. The development financial institutions can issue CODs with the maturity period of more than one year.

Emerged as a Money Market instrument in the 70s but by 80s it became negligible. Revived in a modified form of evening out short term liquidity, esp at times were imbalances affecting maturity mix of bank assets. 2 types of IBPs mainly
Risk Sharing.

Without risk sharing.

Issued for 91-180 days. The aggregate amount of IBPs at the time of issue should not exceed 40% of outstanding in the account. Rate of Interest decided by the Issuing and the Participating bank; the minimum interest stipulation was later removed on Oct 1993

Tenure of 90 days only. Issuing bank shows participation as Borrowing and participating banks shows as Advances to banks.

Advantages & Disadvantages.

Treasury bills are claims against the Government; issued since the days of inception of the banks. They were issued for 91 days. Negotiable Securities- they can be rediscounted with the banks, highly liquid. Advantages
Absence of Default risk Easy availability Assured yield Low transaction cost

91 Days T Bills
Ordinary:
The treasury bills sold to the public and banks. They are freely marketable. commercial bank buy entire quantity of such bills issued on tender. They are bought and sold on discount basis. Bills are issued for investment by the state governments, semi government departments and foreign central banks for temporary investment. They are not sold to banks and general public.

Adhoc:

They are sold on tap since 1965 to commercial banks and public at fixed rates.

 Tbills are repaid on par at maturity.

Discount is the Amount paid by tenderer at purchase and the amount received on maturity.

364 days

Introduced on April 1992. Auction takes place on fortnightly basis Short term investment opportunity for banks and other parties. Safe avenue for investors, the auction gave good response. These bills are not rediscount able with RBI. They are offered periodic sale on an auction basis by RBI in Mumbai. The gross borrowing by the end of March 1997 was Rs 7383crores.

 Scheduled

commercial banks are permitted to borrow to the extent of 125% of their capital funds in the call/notice money market, however their fortnightly average borrowing outstanding should not exceed more than 100% of their capital funds. At the same time SCBs can lend to the extent of 50% of their capital funds on any day, during a fortnight but average fortnightly outstanding lending should not exceed 25 per cent of their capital funds. The average daily turnover in the call money market is around Rs. 12,000-13,000 cr every day and trading occurs between 9.30 am to 5.00 pm on Monday to Friday and 9.30 am to 2.30 pm on Saturday. The repayment of the borrowed money also takes place through the RTGS system on the due date of repayment.

money market instrument that represents an obligation between a borrower and a lender as to the terms and conditions of the loan. (CBLOs) are used by those who have been phased out of or heavily restricted in the interbank call money market. CBLOs were developed by the Clearing Corporation of India (CCIL) and Reserve Bank of India (RBI). Borrowers in CBLO have to deposit the required amount of eligible securities with the CCIL based on which CCIL fixes the borrowing limits.

 The

details of the CBLO include an obligation for the borrower to repay the debt at a specified future date and an expectation of the lender to receive the money on that future date, and they have a charge on the security that is held by the CCIL. Membership to the CBLO segment is extended to entities who are RBINDS members, viz., Nationalized Banks, Private Banks, Foreign Banks, Cooperative Banks, Financial Institutions, Insurance Companies, Mutual Funds, Primary Dealers, etc. By participating in the CBLO market, CCIL members can borrow or lend funds against the collateral of eligible securities.

 ICBC

Bill Department/bill outlets buy the commercial draft from the counterparty.The fully endorsed draft should be legitimate,against true transaction and not yet due. Target Client All classes of financial institutions qualified to engage in bill business. Features and Advantages (I) Flexible for financial institutions to buy/sell and adjust the scale of credit asset for better loan-to-deposit ratio; (II) Effective way for financial institutions to adjust cash positions, increase asset liquidity while getting higher asset yield; (III) An option for financial institutions to adjust asset/liability ratio, improve asset allocation efficiency and existing asset structure; (IV) Good for financial institutions to reduce the fund-raising cost and asset risk

Documents Required:: (I) Applicants Business License and photocopy of the Financial Permit (required for first-time application, once every year after annual audit); (II) Applicants Certificate of Qualification in engaging the business; (III) Letter of authorization (affixed with company seal and duly signed or stamped by the agent); (IV) Original ID card of the person-in-charge, photocopy of the identity cards of the person-in-charge and the legal person of the financial institution; (V) Original and photocopy (front and back) of the commercial draft; (VI) Photocopy of the discount voucher (the voucher showing the bill discounted directly from the previous bearer), for commercial acceptance drafts, all the vouchers showing the bill discounted between financial institutions; (VII) Photocopies of the inquiry letter and reply letter (stamped with counterpartys business seal (red seal)); (VIII) Application form (affixed with company seal and signed by the legal representative or stamped with his/her personal stamp, first-time application only); (IX) Inter-bank discount voucher (stamped with the same company seal or financial stamp reserved in ICBC); (X) Other documentation stipulated by ICBC Bill Department/bill outlets

 The

call/notice/term money market is a market for trading very short term liquid financial assets that are readily convertible into cash at low cost. An institution which has surplus funds may lend them on an uncollateralized basis to an institution which is short of funds. The period of lending may be for a period of 1 day which is known as call money and between 2 days and 14 days which is known as notice money. The entities permitted to participate both as lender and borrower in the call/notice money market are Scheduled Commercial Banks (excluding RRBs), Co-operative Banks other than Land Development Banks and Primary Dealers

 Scheduled

commercial banks are permitted to borrow to the extent of 125% of their capital funds in the call/notice money market, however their fortnightly average borrowing outstanding should not exceed more than 100% of their capital funds. At the same time SCBs can lend to the extent of 50% of their capital funds on any day, during a fortnight but average fortnightly outstanding lending should not exceed 25 per cent of their capital funds. The average daily turnover in the call money market is around Rs. 12,000-13,000 cr every day and trading occurs between 9.30 am to 5.00 pm on Monday to Friday and 9.30 am to 2.30 pm on Saturday. The repayment of the borrowed money also takes place through the RTGS system on the due date of repayment.

Repo/ready forward/repurchase(buy-back) transaction/deal is an agreement between a seller and a buyer. Under repo transaction there are two counter parties: Lender Borrower. It is a short term loan to the seller with securities issued as collateral. Buyer purchases the securities with an agreement to sell the same back to the seller . For the buyer of securitiesreverse repo deal or buy-back arrangement. Both sale and repurchase prices are determined prior to entering into the deal. Repo enable short term funds at competitive rates. It is a secured form of lending,the underlying securities being collateral.

the credit worthiness of the borrower liquidity of the collateral comparable rates of other money market instruments.

Other factors affecting the repo rate include:

Apart from inter-bank repos,the RBI has been using this instrument for its liquidity management. Thus,repos and reverse repos are sorted to by the RBI as liquidity control tools in the system.

PRICING

In a repo transaction where there are two legs of transactions viz. selling of the security and repurchasing of the same In the first leg of the transaction for a nearer date, sale price is usually based on the prevailing market price for outright deals. In the second leg, which is for a future date, the price will be structured based on the funds flow of interest and tax elements of funds exchanged.

This is on account of two factors.

First, as the ownership of securities passes on from seller to buyer for the repo period, legally the coupon interest accrued for the period has to be passed on to the buyer. Thus, at the sale leg, while the buyer of security is required to pay the accrued coupon interest for the broken period, at the repurchase leg, the initial seller is required to pay the accrued interest for the broken period to the initial buyer.

Transaction-wise, both the legs are booked as spot sale/purchase transactions If the repo rate and coupon are equal, then the repurchase price will be equal to the sale price of security If the repo rate is greater than the coupon, then the repurchase price is adjusted upward If the repo rate is lower than the coupon then, the repurchase price is adjusted downward

A banker's acceptance (BA) is a short-term credit investment. The bankers acceptance is traded in the secondary market. Corporations use banker's acceptance to finance imports, exports and other merchandise transactions. Bankers' acceptances are especially useful when the creditworthiness of a foreign trade partner is unknown. Banker's acceptance are traded at a discount from face value and can be sold in the secondary market prior to maturity. Of course, in that case, their return isnt guaranteed.

MONEY MARKETS @

Volume (One Leg)

Weighted Average Rate

Range

A.

Overnight Segment (I+II+III+IV)

I. Call Money II. Collateralised Borrowing and Lending Obligation (CBLO) III. Market Repo IV. Repo in Corporate Bond B. Term Segment I. Notice Money** II. Term Money@@ III. CBLO IV. Market Repo V. Repo in Corporate Bond

10,582.77 357.17 10,225.60 0.00 0.00

7.50 6.86 7.52

5.50-8.75 5.50-7.50 6.00-8.75 -

8.00 0.00 0.00 0.00

6.00 -

6.00-6.00 -

0.00

The information is based on provisional Reserve Bank of India (RBI) / Clearing Corporation of India Limited (CCIL) / Fixed Income Money Market and Derivatives Association of India (FIMMDA) Data. Not Applicable / No Transaction Relates to uncollateralized transactions of 2 to 14 days tenor. Relates to uncollateralized transactions of 15 days to one year tenor

** @@

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