& ROLE OF CENTRAL BANK

* MONEY MARKET

PRESENTED TO:

PRESENTED BY: ADIP SHETTY W.UMESH NANDA ALOK VISHAVKARMA DHANASHREE

MISHAL

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What

Features

Recent Development

Objective

Characteristic Features

Importance

Disadvantage

Composition

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Structure Instruments 3/26/12

* 1!

What is Money Market?

As per RBI definitions 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 (less than one year). Asegment of the financialmarket in which financial instruments with high liquidity and very short maturities are traded.

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* MONEY MARKET

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* CONTINUED..

It doesnt actually deal in cash or money but deals with substitute of cash like trade bills, promissory notes & government papers which can converted into cash without any loss at low transaction cost. It includes all individual, institution and intermediaries.

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*2 !

Features of Money Market?

Transaction have to be conducted without the help of brokers. It is not a single homogeneous market, it comprises of several submarket like call money market, acceptance & bill market. The component of Money Market are the commercial banks, acceptance houses & NBFC (Non-banking financial companies). In Money Market transaction can not take place formal like stock exchange, only through oral communication, relevant document and written communication transaction can be done.

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*3 !

Objective of Money Market?

To provide a reasonable access to users of short-term funds to meet their requirement quickly, adequately at reasonable cost. To provide a parking place to employ short term surplus funds.

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*4 !

Importance of Money Market?

Development of trade & 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.

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COMPOSITION OF MONEY MARKET

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*6 !

Instrument of Money Market?

A variety of instrument are available in a developed money market. In India till 1986, only a few instrument were available. They were Treasury bills Money at call and short notice in the call loan market. Commercial bills, promissory notes in the bill market.
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* New instrument
Now, in addition to the above the following new instrument are available: Commercial papers. Certificate of deposit. Inter-bank participation certificates. Banker's Acceptance Repurchase agreement Money Market mutual fund

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* Commercial paper (CP)

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. Only company with high credit rating issues CPs.

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(T-bills) are short term debt obligation issued by government (T-bills) are the most marketable money market security.

* Treasury Bills (T-Bills)

They are issued with 91 days (or 13 weeks, about 3 months), 182 days (or 26 weeks, about 6 months), and 364 days 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.

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A CD is a time deposit with a bank.

* Certificate of deposit (CD)

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. CDsof less than$100,000 are called "small CDs"; CDs for more than $100,000 are called "large CDs" or "jumbo CDs". Almost all large CDs, as well as some small CDs, are negotiable.

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Repo is a form of overnight borrowing and is used by government securities.

* Repurchase agreement (Repos) in those who deal

They are usually very short term repurchases agreement, from overnight to 30 days of more. The short term maturity and government backing usually mean that Repos provide lenders with extremely low risk. Repos are safe collateral for loans. For the party selling the security (and agreeing to repurchase it in the future) it is a repo; for the party on the other end of the transaction, (buying the security and agreeing to sell in the future) it is a reverse repurchase agreement.

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* Banker's Acceptance

A bankers acceptance (BA) is a short-term credit investment created by a non-financial firm. BAs are guaranteed by a bank to make payment. Acceptances are traded at discounts from face value in the secondary market. BA acts as a negotiable time draft for financing imports, exports or other transactions in goods. This is especially useful when the credit worthiness of a foreign trade partner is unknown. Acceptances sell at a discount from the face value:

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Face Value of Banker's Acceptance Minus 2% Per Annum Commission for One Year Amount Received by Exporter in One Year $1,000,000 -$20,000 $980,000 3/26/12

*MONEY MARKED MUTUAL FUND

money market mutual fund) is an open-endedmutual fundthat invests in short-term debtsecurities such asUS Treasury billsandcommercial paper. Money market funds are widely (though not necessarily accurately) regarded as being as safe as bank deposits yet providing a higher yield. Regulated in the US under the Investment Company Act of 1940, money market funds are important providers ofliquidityto financial intermediaries.

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*7 !

Structure of Indian Money Market?

I :- ORGANISED STRUCTURE 1. Reserve bank of India. 2. DFHI (discount and finance house of India). 3. Commercial banks i. Public sector banks SBI with 7 subsidiaries Cooperative banks 20 nationalized banks ii. Private banks Indian Banks Foreign banks 4. Development bank Click to edit Master subtitle style IDBI, IFCI, ICICI, NABARD, LIC, GIC, UTI etc.
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* Continued..
II. UNORGANISED SECTOR 1. Indigenous banks 2 Money lenders 3. Chits 4. Nidhis III. CO-OPERATIVE SECTOR 1. State cooperative i. central cooperative banks Primary Agri credit societies Primary urban banks 2. State Land development banks central land development banks Click Primary land subtitle style banks to edit Master development
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*8 !

Disadvantage of Money Market

Purchasing power of your money goes down, in case of up in inflation. Dichotomized and loosely integrated Irrational structure of interest rates Highly volatile market Seasonal stringency of loan able funds Lack of funds in the money market Inadequate banking facilities

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*9!

Characteristic features of a developed money Market?

Highly organized banking system Presence of central bank Availability of proper credit instrument Existence of sub-market Ample resources Existence of secondary market Demand and supply of fund
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* 10 !

Recent development in Money Market

Integration of unorganized sector with the organized sector Introduction of innovative instrument Offering of Market rates of interest Promotion of bill culture Entry of Money market mutual funds Setting up of credit rating agencies Adoption of suitable monetary policy Establishment of DFHI Setting up of security trading corporation of India ltd. (STCI)

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* CENTRAL BANKS
* India * U.S.A. * U.K. * Pakistan
Reserve Bank of India. Federal Reserve bank. Bank of England. Bank of Pakistan.

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* CENTRAL BANKS: THE BIG QUESTIONS:

What is the role of the central bank? What are central bank objectives? How are successful central banks organized?

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*ESTABLISHMENT OF RBI
* It is the Indias central bank * Established in 1April 1935 under
the RESERVE BANK OF INDIA ACT with a share capital of Rs. 5 corers. * Nationalized in the year 1949. * Initially established in Calcutta but permanently moved to Mumbai in 1937. * Its head quarters Is in Mumbai (Maharashtra). * Its present governor is Duvvuri Subbarao. * It has 22 regional offices, most of them in State capitals * Website: http://www.rbi.org.in

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*IMPORTANCE
* To control credit. * To issue Paper currency. * To iron out economic crisis.

!!!!

* To implement Monetary and financial Policies.

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*FUNCTIONS OF CENTRAL BANK

MONETARY
* Issue of Currency Notes * Bankers to Government * Bankers Bank * Credit Controller * Custodian of Forex
Reserves

NON-MONETARY
* Banks Supervision * Development Functions * Data Collection * Research * Clearness

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*CREDIT CONTROL MEASURES

GENERAL CREDIT CONTROLSRate * Bank * Open market operations * Cash Reserve Ratio * Statutory Liquidity Ratio

* Ceiling on Credit * Margin Requirements SELECTIVE CREDIT * Directives CONTROLS * Moral Suasion

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ROLE OF CENTRAL BANK

Central banking is largely 20th century phenomenon. In 1900,only 18 countries had central bank Manage the finance of government They create money Control the availability of money and credit Monetary policy-expansionary/tight
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*1.Governments bank

*ROLES OF CENTRAL BANK

q

*2. The Bankers Bank

Three important day-to-day functions of the central bank

Manage the payments system (settle inter-bank payments). Provide loans during times of financial stress (the lender of last
resort).

Oversee commercial banks and the financial system to ensure

confidence in their soundness.

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* THE PRIMARY OBJECTIVE OF ALL CENTRAL BANKS

low and stable inflation high stable growth, with high employment stable financial markets interest rate stability exchange rate stability

* Conflicting goals implies trade-off

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* CENTRAL BANK OBJECTIVES

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Low and Stable Inflation

Moneys usefulness as a store of value and a unit of account and is reduced by inflation. High rates of inflation are less predictable and bad for growth. * The higher inflation is, the less predictable it is wider variation. Makes long-term planning difficult Home Mortgage Retirement planning.

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* CENTRAL BANK OBJECTIVES:

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High & Stable Real Growth
Support maximum sustainable growth Stable countries grow faster Unstable growth creates risk Unstable growth drives up interest rates Higher interest rates mean lower borrowing Less borrowing means less investment

Less investment means less growth *

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* CENTRAL BANK OBJECTIVES:

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Interest-Rate Stability Interest-Rate Stability Stable interest rates make economic decisions easier Stable short-term interest rates reduce risk premium on longterm interest rates Exchange-Rate Stability The more open an economy, the more important it is Makes cost of imports and revenue from exports more predictable

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* PRINCIPLES OF CENTRAL BANK DESIGN

Independence Decision-making by Committee Accountability, transparency and Communication

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*
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CENTRAL BANK DESIGN

Independence To keep inflation low, monetary decisions must be made free of political pressure. Financial independence Policies can not be reversed. FOMC policies can not be overridden. Political business cycle. Central banks need to be independent of political pressure Politicians have an incentive to create short-term prosperity at the expense of inflation tomorrow. Longer time horizon needed to avoid inflation bias

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* CENTRAL BANK DESIGN:

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Decision-Making Framework: Should policy be made by an individual or by a committee? Pooling the knowledge of a number of people yields better decisions than decision making by an individual. Transparency: Policymakers must clearly communicate their objectives, decisions, and methods to the public. Accountability: Policymakers must be held accountable to elected representatives and the public they serve. U.S. - Full Employment Act of 1946 ECB - price stability England Click to edit Master subtitle style Explicit price targets

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* FORMULATE MONETARY POLICY :

Objective: Maintain price stability and ensuring adequate flow of credit in the economy. What R.B.I does. It formulates, implements and monitors the monetary policy. Instruments: qualitative & quantitative.
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* INSTRUMENTS
QUANTITATIVE MEASURES BANK RATE also called discount rate.it also includes repo rate. OPEN MARKET OPERATIONS buying and selling of government securities. VARIABLE RESERVE RATIO it includes C.R.R and S.L.R QUALITATIVE MEASURES : Qualitative measures Margin Requirements Moral Suasion Rationing of Credit

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Objective: To Maintain Public confidence in the system, protect depositors interest & provide cost effective banking services to the public.

* REGULATE & SUPERVISE THE FINANCIAL SYSTEM

What R.B.I does.. Prescribes broad parameters of banking operations within which the country's banking and financial system functions. The Reserve Bank of India performs this function under the guidance of the Board for Financial Supervision (BFS). Lender of last resort

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* Manager of Foreign Exchange

Objective: To facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India. What R.B.I does.. It acts as a custodian and Manages the Foreign Exchange Management Act, 1999. RBI buys and sells foreign currency to maintain the exchange rate of Indian Rupee v/s foreign currencies like the US Dollar, Euro, Pound sterling and Japanese yen. Dollar Deposits - LIBOR

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* DEVELOPMENTAL ROLE
Objective : To develop the quality of banking system in india. What R.B.I does Performs a wide range of promotional functions to support national objectives. To establish financial institutions of national importance, for e.g: NABARD,IDBI etc.

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* CENTRAL BANKS AND FISCAL POLICY

While the ultimate goals of fiscal and monetary policy makers are the same conflicts can arise. Fiscal policymakers tend to ignore the long-term inflationary effects of their actions. In the early days of central banking, a government that needed money told the bank to print it. Independent central banks leave fiscal policy makers with two options for financing government spending.

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*CONCLUSION
* Central Bank is not a Profit Hunting Institution. * Profit is its secondary objective. * Its Primary function is to stimulate economic growth of the
Country.

* It reveals complete Transparency, & Prudence in Nations

Economy.

* So it clearly Justifies the Need & Importance of The Central

Bank.
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*THANK YOU

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