Discount Markets & DFHI

BY
DHEERAJ.P
According
to Crowther, "The
money market is a
name given to the
various firms and
institutions that deal in
the various grades of
near money."

Discount Market

Discount market refers to the
market where short-term genuine
trade bills are discounted by
financial intermediaries like
commercial banks. When credit
sales are effected, the seller draws
a bill on the buyer who accepts it
promising to pay the specified
sum at the specified period. The
seller has to wait until the maturity
of the bill for getting payment.
Objectives of Discount Market
Smoothening Liquidity
Integration
Market Maker
Promoting Market
Investment Avenue

DFHI
Discount and Finance House of India Ltd. (DFHI), a unique institution of
its kind, was set up in April 1988. The share capital of DFHI is Rs 200
crores, which has been subscribed by Reserve Bank of India (10.5%), Public
sector banks (62%) and Financial Institutions (26.6%). The discount has
been established to deal in money market instruments in order to provide
liquidity in the money market. Thus the task assigned to DFHI is to
develop a secondary market in the existing money market instruments.
The establishment of a discount House was recommended by a Working
Group on Money market. The main objective of DFHI is to facilitate the
smoothening of the short term liquidity imbalances by developing an active
money market and integrating the various segments of the money market
At preset DFHIs activities are restricted to:
1. dealing in 91 days and 364 days Treasury Bills
2. re-discounting short term commercial bills.
3. participating in the inert bank call money, notice money and
term deposits
4. Dealing in Commercial Paper and Certificate of deposits.
5. Government dated Securities

Importance of DFHI
Minimizing Liquidity balances.
Authorized institutions for
government securities.
REPO Facility.
Expansion of money market.
Developing Primary and Secondary
market in financial instruments.
Challenges of DFHI
Mounting Competition.
Uncertainties of interest rates.
Abundance of liquidity in the system.
Falling yields for government securities.
Rapid changes in market conditions and regulatory framework.
Role of DFHI

Functions as market maker
in Certificate of Deposits
market
Offers bid and offer rate for
Certificate of Deposits
Acts as an ideal conduct for
disinvestments of Certificate
of Deposits holdings
Engages in buying
Certificate of Deposits from
the bank at bid discount rate