MONEY MARKET

amitjangid

Par 100 posts (V.I.P)
Money Market


Functions and Features

The money market is a market for short-term funds, i.e., up to
one-year maturity. Thus, it covers money, and financial assets that are
close substitutes for money. The money market is generally expected to perform three broad functions:
1) It should provide an equilibrating mechanism to even out demand
for and supply of short-term funds.
2) The money market should provide a focal point for central
bank
intervention for influencing liquidity and general level of
interest rates in
the economy.
3) It should provide reasonable access to providers and users of
short-term funds to fulfill their borrowing and investment
requirements at an
efficient market-clearing price.

RBI is the most important constituent in the money market. By
virtue of the
implication for the conduct of monetary policy, money market comes
within the
direct purview of RBI regulation. The primary aim of the Reserve
Bank of India's
operations in the money market is to ensure that the liquidity and
short-term
interest rates are maintained at levels consistent with the
monetary policy
objectives of maintaining price stability, ensuring adequate flow
of credit to
productive sectors of the economy and bringing about orderly
conditions in the
foreign exchange market. The Reserve Bank of India influences
liquidity and
interest rates through a number of operating instruments, viz.,
cash reserve
requirements of banks, operation of refinance schemes, conduct of
open market
operations, repo transactions, changes in the Bank Rate, and at
times through
foreign exchange swap operations.

Evolution of Money Market in India

The Committee to Review the Working of the Monetary System
(Chairman:
Shri.Sukhamoy Chakravarty) was the first to make several
recommendations in 1985 for the development of money market. As a
follow-up, the RBI set up a Working Group on Money Market under
the Chairmanship of Shri.N.Vaghul, which submitted its Report in
1987. Based on the recommendations, RBI initiated a number of
measures in the 'eighties to widen and deepen the money market.
The main initiatives were:
1) In order to impart liquidity to money market instruments and
help the
development of secondary market in such instruments, the Discount
and Finance
House of India (DFHI) was set up as a money market institution
jointly by the
Reserve Bank of India, public sector banks and financial
institutions in 1988.
RBI has since divested its shareholding and is only a minority
shareholder now.

2) To increase the range of money market instruments, Commercial
Paper, Certificates of Deposit, and Interbank Participation
Certificates were
introduced in 1988-89. There is a wide range of instruments now.
3) To enable price discovery, the interest rate ceiling on call
money was
freed in stages from October 1988.Currently, all the money market
interest rates are by and large determined by market forces.

Reform in the Money Market in the Nineties

In line with the deregulation and liberalization policies of
'nineties,
financial sector reform was undertaken in our country early in the
reform cycle.
Naturally, reform in the money market formed a part of the reform
process.

Call Money Market
The call/notice money market was predominantly an interbank market
until
1990, except for UTI and LIC, which were allowed to operate as
lenders since
1971. The RBI's policy relating to entry into the call/notice
money market was
gradually liberalized to widen and provide more liquidity. In the
absence of adequate avenues for deployment of short-term surpluses
of non-bank institutions, easier norms were announced by the RBI
for increasing the participants in the call and notice money
market. Entities that could provide evidence of surplus funds have
been permitted to route their lendings through PDs. This was also
meant to further help corporates, who had just moved to the term
lending discipline from the earlier system of cash credit, with
large balances to deploy their funds in the short-term and get
some return. Thus, as of now, broadly speaking, banks and PDs are
operating as both lenders and borrowers, while a large number of
financial institutions and mutual funds are operating only as
lenders. The behavior among banks in the call money market is not
uniform. There are some banks, mainly foreign banks and new
private sector banks, which are active borrowers and some public
sector banks that are major lenders. The RBI has been a major
player in the call/notice money market and has been moderating
liquidity and volatility in the market through repos and refinance
operations and changes in the procedures for maintenance of cash
reserve ratio.

Term Money Market
The term money market in India had been somewhat dormant.
Statutory pre-emptions on interbank liabilities, regulated
interest rate
structure, cash credit system of financing, high degree of
volatility in the
call money rates, availability of sector specific refinance,
inadequate
asset-liability management (ALM) discipline among banks and
scarcity of money
market instruments of varying maturities were usually cited as
factors that
inhibited the development of term money market.
RBI has gradually removed most of these constraints over the
years.

Commercial Paper
CP is a money market instrument, issued in the form of a
promissory note, by
highly rated corporates for a fixed maturity in a discounted form.
CP was
introduced in India in 1989 to enable highly rated corporate
borrowers to
diversify their sources of short-term borrowing and also to
provide an
additional instrument to investors. Terms and conditions for
issuing CP like
eligibility, modes of issue, maturity periods, denominations and
issuance
procedure, etc., are stipulated by the Reserve Bank. There are no
interest rate
restrictions on CP. With experience, refinements were made to the
instrument by
removing/easing number of restrictions on the maturity and size of
CP,
requirement of minimum current ratio, restoration of working
capital finance,
etc. Corporates, PDs and SDs are eligible for issuing CP for a
minimum period of
maturity of 15 days and maximum period of 1 year. It is
significant to note that
there is no lock-in period for CP.
The issuance of CP has been generally observed to be related
inversely to the
money market rates.

Certificates of Deposit
While deposits kept with banks are not ordinarily tradable, when
such
deposits are mobilized by a bank by issue of a CD, then such
deposits get
securitised and, therefore, become tradable. Thus, CDs represent
essentially
securitised and tradable term deposits. In India, CDs were first
introduced in 1989. The terms and conditions for issuing CDs like
eligibility, maturity periods, size, transferability,
applicability of reserve requirements, etc., are stipulated by the
Reserve Bank.
CDs in general represent relatively a high cost liability. Hence,
banks resort
to this source generally when the deposit growth is sluggish but
credit demand
is high.

Treasury Bills
Treasury Bills are instruments of short-term borrowing of the
government and
play a vital role in cash management of the government. Being
risk-free, their
yields at varied maturities serve as short-term benchmarks and
help pricing
varied floating rate products in the market. Treasury Bills market
has been the
most preferred by central banks for market interventions to
influence liquidity
and short-term interest rates, generally combined with
repos/reverse repos.
Hence, development of this market is very crucial for effective
open market
operations.
The Treasury bill issues now consist of weekly 14 day and 91-day
bill auctions and 364-day bill auctions on a fortnightly basis
combined with 14-day intermediate bills available for state
governments and foreign central banks. Development of Treasury
Bills market is at the heart of money market development and hence
the Reserve Bank has been paying special attention and
continuously reviewing the development of Treasury Bills market.

Repurchase Agreements (Repos)/ Ready Forward Transactions
Repo refers to a transaction in which a participant acquires funds
immediately by selling securities and simultaneously agreeing for
repurchase of the same or similar securities after specified time
at a given price. The transaction combines, elements of both a
securities purchase/sale operation and also a money market
borrowing/lending operation. The terms of contract is in terms of
a 'repo rate'
representing the money market borrowing/lending rate. As in the
case of other
instruments, repos also help equilibrating between demand and
supply of
short-term funds. Internationally, repurchase agreement (Repo) is
a
versatile and perhaps the most popular money market instrument.
In our market, two types of repos are currently in operation -
interbank
repos and the RBI repos. Interbank repos are permitted under
regulated
conditions. After the irregularities in securities transactions in
1992,
eligible participants and instruments have generally been
restricted but
liberalized gradually. RBI repos are used for absorption/injection
of liquidity.

RBI has been using its repo instrument effectively for absorbing
excess
liquidity and for infusing funds to ease the liquidity.

Refinance from Reserve Bank of India
Rediscount/Refinance is used by central banks to relieve liquidity
shortages
in the system, control monetary and credit conditions and direct
credit to
selective sectors. The fundamental principle is that refinance
facility in terms of
both cost and quantum has to be adjusted to reflect the monetary
policy stance
in response to market conditions and such facilities should not be
construed as
permanent sources of funding from the Reserve Bank.

Money Market Mutual Funds
Money Market Mutual Funds (MMMFs) were introduced in India in
April 1991 to
provide an additional short-term avenue to investors and to bring
money market
instruments within the reach of individuals. The portfolio of
MMMFs consists of short-term money market instruments. Investment
in such funds provides an opportunity to investors to obtain a
yield close to short-term money market rates coupled with adequate
liquidity.

The linkage between the Money Market and Monetary Policy in
India:

A central bank seeks to influence monetary conditions through
management of
liquidity by operating in varied instruments. In an administered
or controlled
regime of money and financial markets, the management of liquidity
is
essentially through direct instruments, like varying cash reserve
requirements,
limits on refinance, administered interest rates and quantitative
and
qualitative restrictions on credit. Thus, the cost, availability,
and direction
of funds flow come under the direct influence of the central bank.
The
success of market based indirect instruments, of course, depends
upon the
existence of a vibrant, liquid and efficient money market, well
integrated with
the other segments of financial market, in particular the
government securities
and foreign exchange markets. Such an integrated and efficient
market is
necessary, for monetary policy impulses, sent through money market
interventions to be reflected in the monetary conditions, through
the transmission channel of the general level of interest rates.
The degree of operational freedom of the Reserve Bank has been
enhanced with the elimination of Central Government's automatic
access to Reserve Bank credit. However, a major constraint in the
conduct of monetary policy is the inadequate depth and liquidity
in the secondary market for government securities and money market
instruments. The Reserve Bank, therefore, still relies on cash
reserve ratio as an important operating instrument. Open Market
operations have also been increasingly used, especially in the
current year, to bring about
contraction of liquidity in the system. Since April 1997, the Bank
Rate is also
being used as a signaling mechanism of the stance of policy.

LIBOR (London InterBank Offered Rate)

LIBOR stands for the London Interbank Offered Rate and is the rate
of interest at which banks borrow funds from other banks, in
marketable size, in the London interbank market. The British
Bankers' Association (BBA) LIBOR is the primary benchmark used by
banks, securities houses and investors to fix the cost of
borrowing in the money, derivatives and capital markets around the
world. It is compiled by the BBA and released to the market at
about 11.00 each day.
LIBOR is the base interest rate paid on deposits between banks in
the Eurodollar market. A Eurodollar is a dollar deposited in a
bank in a country where the currency is not the dollar. The index
is quoted for one month, three months, six months as well as
one-year periods.
The LIBOR rate quoted in the Wall Street Journal is an average of
rate quotes from five major banks: Bank of America, Barclays, Bank
of Tokyo, Deutsche Bank and Swiss Bank.
BBA LIBOR is fixed for the following currencies:
GBP, CAD, EUR, USD, AUD, YEN, CHF.




MIBOR (Mumbai Interbank Offered Rate)
This represents interbank call rates. MIBOR is purely driven by
market forces and reflects economic reality. However, an area of
concern is in virtual absence of a term market for interbank funds
in India. Thus, only an overnight MIBOR rate is available and
quotes of 3 month, 6 month MIBOR, etc. are hard to come by in the
absence of a liquid market for such periods. Overnight MIBOR is
highly volatile.
Inspite of these inherent limitations, MIBOR is the most suitable
floating rate benchmark available in India.
 

aky

New member
hey thanks you its nice details
can u provide me wid details related to credit rating to these securitites pls
 

thakor

New member
hi i m chandansinh form skpimcs and i m alos interested in other mater like marketing finance etc.
 

thakor

New member
hey thanks you its nice details
can u provide me wid details related to credit rating to these securitites pls
 
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