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MONEY MARKET

DEEPAK R GORADAMOL KAKDEGIRISH SUVARNAPRATIK WASNIK

DATE: 6/3/2013

FINANCIAL MANAGEMENT

MONEY MARKET

INTRODUCTION

Money market means market where money or its equivalent can be traded.

Money is synonym of liquidity. Money market consists of financial institutions

and dealers in money or credit who wish to generate liquidity. It is better known

as a place where large institutions and government manage their short term

cash needs. For generation of liquidity, short term borrowing and lending is

done by these financial institutions and dealers. Money Market is part of

financial market where instruments with high liquidity and very short term

maturities are traded. Due to highly liquid nature of securities and their short

term maturities, money market is treated as a safe place. Hence, money market

is a market where short term obligations such as treasury bills, commercial

papers and bankers acceptances are bought and sold.

PURPOSE

Money Market transactions are used for the short- to medium-term investment

or borrowing of liquid funds.

FEATURES

The product types in the Money Market area are:

_ Fixed-Term Deposit

_ Deposit at Notice

_ Commercial Paper

The functions offered support the trading activities involved in preparing and

entering transactions in addition to the back office activities such as monitoring,

accounting, payment control and transaction analysis. Many steps in this

process chain are automated by the SAP R/3.

System and the status of a transaction can be evaluated and monitored at any

time. To access the Money Market module, proceed as follows:

Choose Accounting _ Treasury _ Treasury Management _ Money Market.

The following sections give you an overview of the Money market functions.

The collective processing function simplifies the transaction management

process by displaying a list of all the transactions with common selection

criteria. From here, you simply click a button to branch to the various

processing options. To speed up processing, there is a Fast entry function in

the Money Market and Foreign Exchange areas for the most common

transactions. The Money Market area also has a Fast processing function.

The trading area also includes some Utilities:

- Date check (to determine whether the requested due date falls on a workday).

- Option price calculator, which you use to compare the option prices requested

with your own calculations based on market data (only in the Foreign Exchange

and Derivatives areas).

- Securities account cash flow in the Securities area, which displays all the

flows for a security in a particular securities account.

The specific characteristics of certain products call for other activities, which

you can carry out in the trading area. These are order execution and order

expiration as well as knock-in/knock-out activities for OTC transactions. In the

Securities area, you can exercise different rights (conversion rights,

subscription rights, exercise warrants, and detach warrants).

IMPORTANCE

SOURCE OF CAPITAL

Money market is an important source of financing for trade and industry. The

short-term finances are made available through bills, commercial papers, etc.

The happenings in the money market influence the availability of finances

both for the national and international trade. Besides trade and industry,

money market offers to the government an important non-inflationary avenue

of raising short-term funds through bills that are subscribed by commercial

banks and the public.

IDEAL INVESTMENT

Money market offers an ideal source of investment for the commercial

banks. The market helps them invest their short-term surplus funds so as to

meet statutory reserve requirements. For instance, the requirements of Cash

Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) vary every

fortnight depending on banks’ Net Demand and Time Liability (NDTL).

EFFECTIVE MONETARY MANAGEMENT

An efficient money market being sensitive in nature allows for the effective

implementation of monetary policy of the central bank and thus paves way

for the efficient monetary management of the country. In fact, the money

market events serve as an important guide to the government in formulation,

revising and implementing its monetary policy. This is rightly so, given the

fact that the conditions prevailing in money market serve as an indicator of

monetary state of an economy.

The monetary authority uses the money market for diffusing the

effects of its actions throughout the banking system and the economy, so as

to promote economic growth with stability.

ECONOMIC DEVELOPMENT

Money market being an integral part of a country’s economy, contributes

substantially to the economic development of a country. A developed money

market is indispensable for the rapid development of the economy. In fact,

the stage of development of the economy will be reflected in the stage of

development of a money market. This is borne out by the fact that ill developed

nature of a money market is responsible for the primitive nature of

economic development of a country. The absence of a well-developed

money market would constrain the economies from making available, on a

continuous basis the supply of adequate funds.

EFFICIENT BANKING SYSTEM

The existence of a developed money market greatly facilitates the smooth

and efficient functioning of the banking and financial system. Such an

advantage contributes to the promotion of trade and industry in the economy.

Further the mediating role played by the commercial bankers ensures

delivery of credit at the most opportune time. Similarly, money market

enables the commercial banks to meet much of their unexpected needs for

funds quickly and cheaply. It is possible for the commercial banks to utilize

their funds profitably and with liquidity.

FACILITATING TRADE

Money market is of immense help to the business community in the

following ways:

1. Providing an ideal payment mechanism making it possible for

expeditious transfer of large sums of money.

2. Meeting the working capital requirements for carrying out the

production and marketing activities.

3. Making efficient investment of surplus funds into near-money assets

which can be quickly converted into money as and when needed.

HELPFUL TO GOVERNMENT

The government uses the money market as an arena in which short-term

funds are raised by floating treasury bills. It helps the government manage its

monetary position smoothly through the central bank of the county.

FUNCTIONS

INVESTMENT FUNCTION

The money market provides an ideal source for investment of the funds for a

short period of time for commercial banks, non banking financial concerns,

business corporations and other investors. It enables businessmen, with

temporary surplus funds, to invest them for a short period.

FINANCING FUNCTION

Money market provides an ideal source for short-term financing for

businessmen, industrialists, traders, etc to meet their day-to-day requirements

of working capital. Funds are available for borrowing by the government and

its agencies also.

FACILITATING FUNCTION

Money market provides an ideal play ground for the central monetary

authority of the country to carry out various regulatory operations relating to

the banking and financial system of the country. The sensitive nature of the

money market helps the central bank to make it an ideal arena for the

execution of various credit control measures.

TRADING USE

The trading area contains the main functions for entering financial transactions.

You can enter transactions, call up information on existing transactions, or

make changes to transactions at a later date.

In the Money Market, Foreign Exchange, and Derivatives areas, you can also

give notice on and roll over transactions.

PREREQUISITES

You have to enter the master data before you can create a financial transaction

in the trading area. In the Money Market, Foreign Exchange, and Derivatives

areas, this means entering master data for the respective business partner in

the role of Treasury partner. Before you create a securities order, you must

enter the issuer, the depository bank, and the securities class data in the

Securities area.

INSTRUMENTS

Investment in money market is done through money market instruments. Money

market instrument meets short term requirements of the borrowers and

provides liquidity to the lenders. Some common Money Market Instruments are

as follows:

TREASURY BILL

Treasury Bills, one of the safest money market instruments, are short term

borrowing instruments of the Central Government of the Country issued through

the Central Bank (RBI in India). They are zero risk instruments, and hence the

returns are not so attractive. It is available both in primary market as well as

secondary market. It is a promise to pay a said sum after a specified period. T-

bills are short-term securities that mature in one year or less from their issue

date.

GOVERNMENT SEQURITY

Government Securities are securities issued by the Government for raising a

public loan or as notified in the official Gazette which are issued by RBI on

behalf of Govt. of India (GOI). GOI uses these borrowed funds to meet its fiscal

deficit, while temporary cash mismatches are met through treasury bills of 91

days.

REPOS

The term Repo is used as an abbreviation for Repurchase Agreement or

Ready Forward. A Repo involves a simultaneous “sales and repurchase”

agreements.

BENEFITS & FEATURES

1. Interest Rate Being collateralized loans, repos help reduce counter

party risk & therefore, fetch a low interest rate.

2. Contract The Repo contract provides the seller – bank to get money

by partying with its security and the buyer – bank in turn to get the

security by parting with its money. It becomes a Reserve Repo deal for

the purchaser of the security. Securities are sold first to a buyer bank

and simultaneously another contract is entered in to with buyer to

repurchase them at a predetermine date and price in future. The price

of the sale and repurchase of securities is determined before entering

into deal.

3. Safety Repo is an almost risk free instrument used to even out

liquidity changes in the system. Repos offer short-term outlet for

temporary excess cash at close to the market interest rate.

4. Hedge tool As purchaser of the repo requires title to the securities for

the term of agreement and as the repurchase price is locked in at a time

of sale itself. It is possible to use repos as an effective hedge-tool to

arrange the others repos or to sell them outright or to deliver them to

another party to fulfill the delivery commitment in respect of a forward

or future contract or a short sale or a maturing reverse repo.

5. Period The minimum period for Ready Forward Transaction Bill will

be 3 day. However, RBI withdraws this restriction for the minimum

period with the effect from October 30, 1998.

6. Liquidity Control The RBI uses Repo as a tool of liquidity control

for absorbing surplus liquidity from the banking system in a flexible

way and thereby preventing interest rate arbitraging. All Repo

transaction are to be effected at Mumbai only and the deals are to be

necessary put through the subsidiary General Ledger (SGL) account

with the Reserve Bank of India.

7. Cash Management Tool The Repo arrangement essential serves as a

short – term cash management tool as the bank receive cash from the

buyer of the securities in return for the securities. This helps the banker

meet temporary cash requirement. This also makes the repo a pure

money lending operation. On the maturity of the ‘repos’ the security is

purchased back by the seller bank from the buyer-bank by returning

the money to the buyer.

MONEY MARKET ACCOUNT

It can be opened at any bank in the similar fashion as a savings account.

However, it is less liquid as compared to regular savings account. It is a low risk

account where the money parked by the investor is used by the bank for

investing in money market instruments and interest is earned by the account

holder for allowing bank to make such investment. Interest is usually

compounded daily and paid monthly. There are two types of money market

accounts:

Money Market Transactional Account By opening such type of account,

the account holder can enter into transactions also besides investments,

although the numbers of transactions are limited.

Money Market Investor Account By opening such type of account, the

account holder can only do the investments with no transactions.

MONEY MARKET INDEX To decide how much and where to invest in

money market an investor will refer to the Money Market Index. It provides

information about the prevailing market rates. There are various methods of

identifying Money Market Index like:

Smart Money Market Index It is a composite index based on intraday

price pattern of the money market instruments.

Salomon Smith Barney’s World Money Market Index Money market

instruments are evaluated in various world currencies and a weighted

average is calculated. This helps in determining the index.

Banker’s Acceptance Rate As discussed above, Banker’s Acceptance is a

money market instrument. The prevailing market rate of this instrument

i.e. the rate at which the banker’s acceptance is traded in secondary

market, is also used as a money market index.

LIBOR/MIBOR London Inter Bank Offered Rate/ Mumbai Inter Bank

Offered Rate also serves as good money market index. This is the

interest rate at which banks borrow funds from other banks.

GROWTH OF MONEY MARKET IN INDIA ARTICLE

Capital investment is the backbone of every developing economy. It is also

considered to be one of the most important determinants of the rate of growth of

an economy and the governments in the developing countries strive very hard

to ensure that the level of capital investment is kept high. To augment the

internal investment potential, the governments in the Developing countries aim

at achieving higher inflows of foreign investment, both as FDI as well as FII.

Money Market Operations as on February 25, 2013

(Amount in ` crore, Rate in per cent)

MONEY MARKETS @

Volume Wtd.Avg.Rate Range

(One Leg)

A. Overnight Segment

(I+II+III+IV)

100,082.47 7.80 6.40-7.95

I. Call Money 19,322.47 7.85 6.40-7.95

II. CBLO 50,189.00 7.73 7.65-7.85

III. Market Repo 30,571.00 7.87 7.70-7.95

IV. Repo in Corporate

Bond

0.00 - -

B. Term Segment

I. Notice Money** 343.99 7.43 6.40-7.65

II. Term Money@@ 1,695.00 - 7.75-9.65

III. CBLO 0.00 - -

IV. Market Repo 1,800.00 8.25 8.25-8.25

V. Repo in Corporate Bond

0.00 - -

RBI OPERATIONS

Amount

Outstanding Rate

C. Liquidity Adjustment Facility

(i) Repo (1 day) 128,425.00 7.75

(ii) Reverse Repo (1 day) 25.00 6.75

D. Marginal Standing Facility (1 day) 0.00 8.75

E. Standing Liquidity Facility Availed from

RBI 25,609.62 7.75

of which

(i) Special Refinance Facility^ 0.00

(ii) Refinance under the forex swap ~ 5,743.95

RESERVE POSITION @

F. Cash Reserves Position of Scheduled Commercial Banks

(i) Cash balances with RBI as on # 21/02/2013 259,586.00

(ii) Average daily cash reserve requirement for the fortnight ending

22/02/2013 276,960.00

@ The information is based on provisional Reserve Bank of India (RBI) / Clearing Corporation of India Limited

(CCIL) / Fixed Income Money Market and Derivatives Association of India (FIMMDA) Data.

- Not Applicable / No Transaction

** Relates to uncollateralized transactions of 2 to 14 days tenor

@@ Relates to uncollateralized transactions of 15 days to one year tenor

# The figure for the cash balances with RBI on Sunday is same as that of the previous day (Saturday).

^ Under Section 17(4-J) of the RBI Act 1934.

~ Under Section 17(3-A) of the RBI Act 1934.

Ajit Prasad Assistant General Manager

Press Release : 2012-2013/1435