CONTENTS

Definition
Features
Objective
Instruments
Disadvantage
Summary

DEFINITION
As per RBI definitions A market for
terms financial assets that are
substitute for money, facilitates
exchange of money in primary
secondary market.

short
close
the
and

It doesnt actually deal in cash or money

but deals with substitute of cash like trade
bills, promissory notes & govt papers which
can converted into cash without any loss at
low transaction cost.

A money market is a market for

borrowing and lending of short-term
funds. It deals in funds and financial
instruments having a maturity period
of one day to one year.
The Reserve Bank of India is the most
important constituent of Indian
money market

2 ! Features of Money Market?

Short term instruments

Pure discount securities

Contracts up to 1 year

Huge volume and vigorous competition

No physical place

Continued..

Essentially for professionals ( banks,

financial institutional investors, brokerage
firms, companies)

Liquidity ( fine spreads based on interest

rate of lending and borrowing)

Creditworthiness (risk and return)

3 ! Objective of Money Market?

To provide a parking place to employ short

term surplus funds.

To provide room for overcoming short term

deficits.

To enable the central bank to influence

and regulate liquidity in the economy
through its intervention in this market.

To provide a reasonable access to

users of short-term funds to meet their
requirement quickly, adequately at
reasonable cost.

6 ! Instrument of Money Market?

Money at call and short notice in the call

loan market.
Treasury bills
Certificate Of Deposits
Commercial Papers
Repurchase Obligation ( Repo )

Call Money Market

The call money market deals in short

term finance repayable on demand,
with a maturity period varying from
one day to 14 days.

The interest rate paid on call money

loans, known as the call rate, is
highly volatile.

It is the most sensitive section of the

money market and the changes in
the demand for and supply of call
loans are promptly reflected in call
rates.
There are two call rates in India: the
Interbank call rate' and the lending
rate of DFHI.

Treasury Bills (T-Bills)

Treasury bills are instrument of short-term

borrowing by theGovernment Of India,
issued
as
promissory
notes
under
discount.

T-bills are purchasedfor a price that is less

than their par (face) value; when they
mature,
the
government
pays
the
holderthe fullpar value.

T-Bills are so popular among money

market instruments because of
affordability to the individual
investors.

TheReserve Bank Of Indiahas been

issuing only 91-day and 364-day
treasury bills.

There are two types of T-Bills:

ADHOC Bills and REGULAR Bills

The Ad-hoc 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.
Ad-hoc bills were abolished in April
1997.
The treasury bills sold to the public and
banks are called regular treasury bills.
They are bought and sold on discount
basis.

Certificate of deposit (CD)

A CD is a time deposit with a bank.

Like most time deposit, funds can not
withdrawn before maturity without
paying a penalty.
CDs have specific maturity date,
interest rate and it can be issued in any
denomination.
The main advantage of CD is their safety.
Anyone can earn more than a saving
account interest.

Acertificate of deposit(CD) is
atime deposit, a financial product
commonly sold in the United States
by banks,thrift institutions, andcredit
unions.
CDs are similar tosavings account in
that they are insured and thus
virtually risk free; they are "money in
the bank".

They are different fromsavings

accounts in that the CD has a
specific, fixed term (often monthly,
three months, six months, or one to
five years), and, usually, a
fixedinterest rate.

Commercial paper (CP)

A commercial paper in India is the

monetary instrument issued in the form of
promissory note.
CP is a short term unsecured loan issued
by a corporation typically financing day to
day operation.
CP is very safe investment because the
financial situation of a company can easily
be predicted over a few months.

It acts as the debt instrument to be

used by large corporate companies
for borrowing short-term monetary
funds in the money market

Very short term (max 270 days, most

60days or less)

Only company with high credit rating

issues CPs.

Repurchase agreement (Repos)

Repo is an abbreviation forRepurchase

Agreement, which involves a simultaneous
"sale and purchase" agreement.

They are usually very short term

repurchases agreement, from overnight to
30 days of more.

When banks have any shortage of funds,

they can borrow it fromthe Reserve Bank
of Indiaor from other banks.

The rate at which the RBI lends

money to commercial banks is called
Repo rate, a short term for
Repurchase Agreement.

A reduction in the repo rate will help

banks to get money at a cheaper
rate. When the repo rate increases
borrowing from RBI becomes more
expensive.

8 ! Disadvantage of Money Market

Purchasing power of your money goes

down, in case of up in inflation.
Absence of integration.
Absence of Bill market.
No contact with foreign Money
markets.
Limited instruments.
Limited secondary market.
Limited participants.

11 !

Summary

Themoney market specializes in debt

securities that mature in less than one year.

Money market securities are very liquid, and

are considered very safe. As a result, they
offer a lower return than other securities.

T-billsare short-term government securities

that mature in one year or less from their
issue date.

T-bills are considered to be one of the safest

investments.

Continued.

Acertificate of deposit (CD) is a time deposit

with a bank.

CDs are safe, but the returns aren't great, and

your money is tied up for the length of the CD.

Commercial paper is an unsecured, short-term

loan issued by a corporation. Returns are higher
than T-bills because of the higherdefault risk.

Repurchase agreement (repos) are a form of

overnight borrowing backed by government
securities.

Thank you