IFS MFM - III

8/6/2019 IFS MFM - III

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Money Market inMoney Market inIndiaIndia

Course Leader:

K. SrinivasanDepartment of Management StudiesChrist University, Bangalore.


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Types of Financial Markets withinthe Financial System

The financial markets can be classified in different ways. Oneway of classifying this is to classify in respect of maturity of theinstruments. Accordingly, the financial markets can be classifiedinto two main parts. They are

a) Money Marketb) Capital Market

Money Market:Money market is aplace wherethematurityperiodof financial instruments issued ortraded is up to oneyear.

Capital Market: Capital marketis classified into 2 categories, wherethematurityperiod of financial instruments issued ortraded ismorethan oneyear.


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Financial Markets

Negotiable Non Negotiable

Money

Govt Non Govt

Debt

Primary Secondary

Equity

Capital

Financial Market


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Money Market

Money market is a wholesale market for short term debt instrument,where money or its equivalent Assets can be issued by Private &Government bodies.

Money Market is part of financial market where instruments with high

liquid securities and their short term maturities can be traded and it isconsidered as the safest place of investment

Money market is mainly characterised for high degree of safety, but onlyselected issuers have access to this market.

One of the important feature of the money market instruments is that theyare liquid with varying degree and can be traded in the money market atlow cost.


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Continued

Money market is an Integral part of a countrys economy and adeveloped money market is crucial for the rapid developmentof the economy.

If the market is underdeveloped, where the investors do nothave greater access towards the market of that particularcountry. Ex: Difficult & Pooling Short-term funds will bedifficult tasks for the Business, as well as to the Government

requirements. In advanced countries the money markets development will

have immediate effect on the entire economy


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Primary Dealers of Money

Market Primary Dealers (or) Depository Participants (PDs) in the GovernmentSecurities Market was introduced by RBI in 1995 to strengthen themarket infrastructure of Government Securities

DFHI (Discount & Finance House in India) was set up by RBI in March1988 to activate the Money Market.

DFHI got the status of dealing in market on February 1996. Over aperiod of time, RBI separate from its stake and DFHI became asubsidiary of State Bank of India (SBI).

SBI had also set up a subsidiary in 1996 for doing PD business namelySBI Gilts Limited.

Both these companies were merged in 2004 to become the largest PD inthe country (i.e.) DFHI & SBI


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Continued. Depository Participants can also be referred to as Merchant Bankers to

Government of India as only they are allowed to underwrite primary issuesof government securities other than RBI

PDs are allowed the following activities as core activities:

a) Providing broking services in Government securities.b) Dealing & underwriting in Corporate / PSU / FI bonds/ Govt.

Securities.

c) Lending in Call/ Notice/ Term/ Repo/ CBLO (Consortium forthe Barcode of Life market.

d) Investment in Commercial Papers & Certificates of Deposit &Interest Rate Derivatives.

e) Investment in debt mutual funds where entire corpus is invested indebt securities.


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Players of Money Market

Reserve Bank of India.

SBI & DFHI Ltd (Amalgamation of Discount & Finance House in India andSBI in 2004)

Acceptance Houses (CC/CH)

Commercial Banks, Co-operative Banks and Primary Dealers are allowed toborrow and lend.

Specified All-India Financial Institutions, Mutual Funds, and certain specifiedentities are allowed to access to Call/Notice money market only as lenders

Individuals, firms, companies, corporate bodies, trusts and institutions canpurchase the treasury bills, CPs and CDs.


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Negotiable Money Market

The following instruments are negotiable moneymarket instruments :

Treasury BillCommercial Paper

Certificate of Deposits

Bills DiscountedGovernment of India Securities ( GOI) of less

than 1 year maturity


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Non-Negotiable Money Market

The following instruments are non negotiable moneymarket instruments :

Fixed Deposits of maturity of less than 1 year;

Call Money Borrowing Receipt

Notice Money Borrowing Receipt

Repo Borrowing Receipt

MIBOR (Mid IBOR or Mumbai IBOR)linked debentures


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Treasury Bill

Treasury Bills commonly referred to as T-Bills and are issued by Governmentof India against their short term borrowing with the maturity period rangingbetween 7, 14, 28, 91, 182 to 364 days.

Treasury Bills are issued at discount to face value and at the end of maturitythe face value is paid. For example a Treasury bill of Rs. 100.00 face valueissued for Rs. 91.50 gets redeemed at the end of its tenure at Rs. 100.00.

Treasury bills are available for a minimum amount of Rs.25,000 and areissued at a discount and are redeemed at par.

Since the T-Bill is issued by the Government, it would indicate the risk freerate for that maturity and helps the market to determine the Risk Free YieldCurve.


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Continued

Rate of discount and the corresponding issue price are determined at eachand every auction.

On behalf of Central Government, the RBI acts as a lead manager to issueand carry out the borrowing process.

RBI announces that the borrowing under the T-Bill scheme and marketdiscount price information and the same is reflected in the market interestrate.

At present the Government of India issues three types of treasury bills

(On tap bills, Ad hoc bills, and Auctioned T-Bills) through auctions,namely, 91-day, 182-day and 364-day. There are no treasury bills issuedby State Governments.

RBI auctions 91-day T-Bills on a weekly basis, 182-day T-Bills & 364-day T-Bills on a fortnight basis on behalf of the Central government


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Investors in Treasury-Bill

Individuals, Private Limited Company, Partnership Firm, Banks, PrimaryDealers, State Governments, Provident Funds, Financial Institutions,Insurance Companies, NBFCs, FIIs (as per prescribed norms) & NRIscan invest in T-Bills.

T-Bills are mostly issued in the Demat form and the amount is credited inthe SGL account or CSGL (Constituent Subsidiary General Ledger)account to eliminate the process of bad delivery and fraudulenttransaction.

T-Bills are used as promissory note issued at a discount to the face value.It is also a negotiable instrument which increases the liquidity of thesecurity at the hand of the investor.


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CommercialPaper

Commercial Paper (CP) was introduced in India in the year 1990 as per therecommendation by Vagul Committee.

CP is an unsecured money market instrument issued in the form of a promissorynote with a discounted rate, but during the period of maturity the investor canavail the benefit of getting face value.

Rating to be obtained from either from CRISIL, ICRA, CARE or any otherrating agencies as specified by RBI.

The minimum credit rating should be P-2 of CRISIL or such equivalent byother agencies. The issuers shall ensure at the time of issuance of CP that therating is current and has not fallen due for review.

Short-term borrowings by corporate, financial institutions and primary dealersfrom the money market can be issued in the physical form or Demat form. If thephysical form of securities are negotiable by endorsement and delivery and hence,highly flexible


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Continued Minimum currency denomination will be Rs. 5 Lakh & in multiple of

Rs. 5 lacs thereof.

Minimum maturity period is 7 days and a maximum of upto one yearfrom the date of issue. The maturity date of CP should not go beyond

the date up to which the credit rating of the issuer is valid. CP can be issued either in the form of a promissory note or in a

dematerialised form through any depositories approved by andregistered with SEBI. Presently , banks and others companies and

individuals can invest in CP only in Demat Forms. CP will be issued at a discounted price to a face value as may be

determined by the issuer.


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Eligibility for Issuing CP

Tangible net worth of the company should not be less thanRs. 4 Crore, as specified by RBI.

Working capital (Fund-based) limit of the company fromthe banking system should not less than Rs.4 Crore

All eligible participants should obtain the credit ratingcertificate for issue of Commercial Paper

The minimum credit rating shall be P-2 of CRISIL or suchequivalent rating by other agencies


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Role andResponsibilities ofCreditRating Agencies (CRA)

SEBI guideline for the rating would be applicable

CRA should clearly indicate the date for review of the rating

CRA should also mention the amount of the issue size.

Highly Rated Corporate entities, Primary dealers, Depository Participants,Satellite dealers and All-India financial institutions (FIs) that have beenpermitted to raise short-term resources under the umbrella limit fixed byRBI

Who can Issue CommercialPaper


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Limit & Amount of issue ofCP

Aggregate amount of CP from an issuer shall be within the limit as approved by itsBoard of Directors or the quantum indicated by the Credit Rating Agency for the

specified rating, whichever is lower.

Financial Institutions can issue CP within the overall umbrella limit fixed by RBI.

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 in different dates provided that in the

latter case, each CP shall have the same maturity date.

Every CP issue should be reported to Chief General Manager, RBI through the

Issuing and Paying Agent (IPA) within three days from the date of completion ofthe prescribed format.


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Disadvantage ofCommercialPaper

When a company raises the fund through CP, it will pay discount rate which is dependedon money market rate at the date of issuance.

Ex: A company wants to raise Rs 5 crores through CP ( having a rating of P1+) for90 days on 1st September 2009, the discount rate to be paid on the CP woulddepend on the call money rate or MIBOR rate prevailing on 1st September

2009.This discount rate is fixed for the company for the entire tenure of 90 daysfrom 1st September 2009.

For example if the call money rate is 5% p.a. and a (P1+) CP would attract adiscount rate of 0.75% above the MIBOR rate , then the discount rate to be paid bythe company would be 5.75% p.a. for 90 days from 1st September 2009.

If the call money rate goes down to 4.75% on September 15th 2009 , if the companycould have raised the fund at that point of time at an interest rate of 5.50% p.a. for90 days.


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Certificate of Deposit CDs are negotiable money market instruments and are issued in

dematerialised form or a used as promissory note for raising fundsfor Banks and Financial Institutions for a specified time period.

They are like bank term deposits accounts, unlike traditional timedeposits these are freely negotiable instruments and are oftenreferred to as Negotiable Certificate of Deposits.

Scheduled Commercial banks (Excluding Regional Rural Banks)

have the rights to come out with CDs. Select Financial Institutions (FI) have been permitted to raise

short-term resources under the umbrella limit fixed by RBI.

Rating Requirements are not compulsory for the CDs .


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ContinuedCDs are short-term borrowings introduced in 1989, and all

scheduled banks are freely transferable by endorsement anddelivery.

Maturity of not less than 7 days and maximum up to a year.

Financial institutions are allowed to issue CDs for a periodbetween 1 year and upto 3 years.

Subject to payment of stamp duty under the Indian StampAct 1899.

Issued to individuals, corporations, trusts, funds andassociations

They are issued at a discount rate freely determined by themarket/investors


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Features ofCD

Minimum and Maximum period 15 days & 1 YearMinimum Amount Rs 1 Lakh and in multiples of Rs. 1 LakhCDs held in physical form will be freely transferable by

endorsement and delivery . CD held in the demat form can be

transferred as per the procedure applicable to other dematsecurities. There is no lock in periods for CDs. Bank has to maintain CRR & SLR on the issue price of the

CDAs per the current RBI guidelines, CD should be issued at a

discount to the face value. The parties to contract are free todetermine the discount rate.


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Continued

Banks/FIs cannot grant loans against CDs. Banks/FI scannot buy-back their own CDs before maturity. Nopremature cancellation of the CD is allowed.

CDs may be issued at discount on face value

If maturity date of CD falls on a holiday declared underthe RBI Act , it would be payable on the immediate

preceding working day. The place of payment for thepurpose of interpretation of the place would be where theCD is payable as stated on the CD.


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Commercial BillCommercial bill is a short term, negotiable instrument with low risk. It

enhances the liability to make payment in a fixed date when goods are bought oncredit. According to the Indian Negotiable Instruments Act 1881, bill orexchange is a written instrument containing an unconditional order, signed by themaker, directing to pay a certain amount of money only to a particular person, orto the bearer of the instrument. Bills of exchange are negotiable instrumentsdrawn by the seller (drawer) on the buyer (drawee) or the value of the goodsdelivered to him. Such bills are called trade bills. When trade bills are acceptedby commercial banks, they are called commercial bills. The bank discounts thisbill by keeping a certain margin & credits the proceeds. If Banks are in need ofmoney, they can rediscount their bills by financial institutions such as LIC, UTI,GIC, ICICI and IRBI. The maturity period of the bills varies from 30 days, 60days or 90 days, depending on the credit extended in the industry.


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Bills Discounted

Bill discounting is a product where a part of the receivablecan be financed. Once the assessment of the company is carriedout, a portion of the assessed limit representing part of the

receivable can be financed through bill discounting mode. Nowdays, this method of financing became very much popular forSmall and Medium Enterprise (SME) financing. Much largecompany outsourced their production facility to SMEs. These

SMEs may not be financially strong enough to attract verycompetitive interest rate from the bank.


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Continued

Bills of Exchange

Rs ______________/- Date:

Please Pay ________________ ( Payee) or Order a sum of Rs -

(Rupees ________________only ) on 90 days ( Credit Period) from the date of thisdocument.

---------------------------- --------------------------( Name & Address of Drawer) (Name & Address of Drawee)


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Government of India Securities

Government securities (G-secs) are Sovereign securities which areissued by the Reserve Bank of India on behalf of Government of India.The term Government Securities includes:

Central Government Securities.

State Government SecuritiesTreasury bills

The Central Government borrows funds to finance its 'fiscal deficit'.The market borrow funds from the Central Government to raise the issue

of dated securities and 364 days T-Bills by auction. These do not formpart of the borrowing programme of the Central Government.


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Call/Notice Money Market

Call/Notice money is the money borrowed or lent on demand for avery short period. When money is borrowed or lent for a day, it is knownas Call (Overnight) Money. Intervening holidays and Sunday are excludedfor this purpose. Thus money, borrowed on a day and repaid on the next

working day, is "Call Money". When money is borrowed or lent for morethan a day and up to 14 days, it is "Notice Money". No collateral securityis required to cover these transactions. The rate at which funds areborrowed in this market is called `Call Money rate'. The size of themarket for these funds in India is between Rs 60,000 million to Rs70,000 million, of which public sector banks account for 80% ofborrowings and foreign banks/private sector banks account for thebalance 20%.


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Repo Rate

Whenever the banks have any shortage of funds they can borrow it from RBI.Repo rate is the rate at which our banks borrow rupees from RBI. A reduction in therepo rate will help banks to get money at a cheaper rate. When the repo rate increasesborrowing from RBI becomes more expensive. When RBI lends money to bankersagainst approved securities for meeting their day to day requirements or to fill short term

gap. It takes approved securities as security and lends money. These types of operationsare generally for overnight operations.

The Reserve Bank of India has revised the repo rate from 5.5% to 5.75%, it is dueto asymmetric raise in rates narrows the LAF (Liquidity Adjustment Facility) corridor.

The policy statement said that non-food inflation has risen while food price inflation hasmoderated.

Dr. D. Subba Rao, Governor, RBI (First Quarter Review of 2010-11)


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Status ofRepo Rate in India

Year Repo Rate Year Repo Rate

26-Oct-2005 6.25 20-Oct-2008 8.00

24-Jan-2006 6.50 3-Nov-2008 7.50

8-Jun-2006 6.75 8-Dec-2008 6.50

25-Jul-2006 7.00 5-Jan-2009 5.50

30-Oct-2006 7.25 5-March-2009 5.00

31-Jan-20077.50

21-April-20094.75

30-Mar-2007 7.75 19-March-2010 5.00

12-Jun-2008 8.00 20-Apr-2010 5.25

25-Jun-2008 8.50 02-July-2010 5.50

30-Jul-2008 9.00 27-July 2010 5.75


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Reverse Repo Rate

Reverse Repo rate is the rate at which Reserve Bank ofIndia (RBI) borrows money from banks. Banks are alwayshappy to lend money to RBI since their money are in safe hands

with a good interest. An increase in Reverse repo rate can causethe banks to transfer more funds to RBI due to this attractiveinterest rates.

Due to this fine tuning of RBI using its tools of CRR,Bank Rate, Repo Rate and Reverse Repo rate our banks adjusttheir lending or investment rates for common man.


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Status ofRepo Rate in India

Year Reverse Repo Rate29-Apr-2005 5.00

26-Oct-2005 5.25

24-Jan-2006 5.50

8-Jun-2006 5.7525-Jul-2006 6.00

8-Dec-2008 5.00

5-Jan-2009 4.00

5-March-2009 3.50

21-Apr-2009 3.25

19-March-2010 3.50

20-Apr-2010 3.75

02-July-2010 4.00

27-July 2010 4.50


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MarketsWelcome Rate hike

The markets have reacted positively to the monetary policy measures announced by thecentral bank at its quarterly policy review meet held this afternoon. The Sensex ended at18077, higher by 57 points, and the Nifty ended at 5430, up 12 points.

Reserve Bank of India hiked the repo rate by 25 basis points to 5.75% and the reverserepo rate by 50 basis points to 4.5%, while keeping the cash reserve ratio (CRR)unchanged at 6%.

Inflation stubbornly holding on to the 10% mark for the past five months, the rate hikeseems to be an attempt at striking a balance between inflation and growth expectations.

The RBI also revised the GDP forecast from 8% to 8.5% for the year ended March2011, taking into account the progress of monsoons and the prevailing macroeconomicscenario on the global front.

The market breadth was mildly negative. Out of 3000 stocks traded on the BSE, therewere 1369 advancing stocks as against 1520 declines.


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Documents

IFS MFM - III