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???