MONEY MARKET

PARTICIPANTS AND
INSTRUMENTS

A
PRESENTATION BY:
JAGDISH BUDHIRAJA

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 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”.
• No actual deal in cash or money.

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 Features of Money Market
• It is a market where banks lend or borrow short-terms funds or
financial assets called near money.
• It is the same as capital market except that equity txns long term
obligations customer loans are excluded.
• Maturity < one year. But it may not hold good, a bank treasuries
buy & sell securities of >1 year maturity also.
• Interest rates are deregulated – determined by forces of demand
& supply.
• Function : To provide liquidity & investment opening for
individuals and corporations holding surplus cash to meet short
term requirements of deficit units in financial system i.e. to
allocate funds from savings to investment -
• Instruments like trade bills, BE, CDs, promissory notes, bank
notes call/ notice money, Repos, CPs, Inter-bank Participatory
Certificates MMFF & govt T. Bills & Dated Securities
• OTC txns through oral and/ or written communication. No
concept of market driven by exchange like stock exchange.
• Not a homogeneous market, it comprises of several submarket
like call/ notice money market, , securities market, acceptance
& bill market.
• Regulated by RBI & SEBI.
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 Objectives of Money Market
• Parking short term surplus funds (earn reasonable income)
with quick liquidity.
• Overcoming short term deficit (avoid liquidity crisis and meet
CRR & SLR).
• Enable flow of short term funds from surplus participants to
deficit participants quickly, adequately & at reasonable cost
(low txn cost).
• It off-sets demand & supply imbalances and greatly influences
liquidity and level of interest rates in economy. Provides an
equilibrating mechanism for evening out short term surpluses
and deficits.
• As opposed to customer loans, markets are entirely objective
and free from persona considerations for pricing – from the
lowest price seller to the highest price bidders.
• Enable Central Bank (RBI) to influence and regulate liquidity –
augmenting or reducing supply of money through interest –
open market operations an liquidity adjustment facility (LAF).

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 PARTICIPANTS IN MONEY MARKET
• Some restriction in participation e.g. call money market is open
to only banks.
• Major participants : Central Govt, State Govt, PSUs, Scheduled
Commercial Banks, Corporates, Provident Funds, GICs, LIC,
Mutual Funds, NBFCs, Primary Dealers.
• (1) Central Govt :
• Issues Dated Govt. Securities & Treasury Bills With Zero Credit
Risk (Sovereign).
• Coupon Bearing And Non Coupon (Zero) Bearing Bonds.
• Fixed Coupon And Floating Rate.
• Benchmark For Other Financial Instruments.
• Average Daily Traded Volumes Vary From Rs. 3000-10000
Crores.
• (2) State Govt :
• Issue state development loans – medium/ long term bonds of
State Govts.
 Securities issued by the RBI on behalf of the State Govt.
 Auction based issues. Not actively traded as most of these
securities are held to maturity – small issue sizes.
 The major buyers are Banks, LIC and Provident funds
 The spreads are generally in the range of 25-40 basis over the
corresponding G-sec yield.
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 MONEY MARKET PARTICIPANTS
• (3) CENTRAL BANK (RBI)
• Over-all regulation of the market.
• Ensuring adequate liquidity & money supply through
interventions.
• Operates in Money market generally on behalf of Govt.
• As merchant banker to Govt, decides how best to raise/
maintain Govt borrowings economically.
• Maintain short term interest rates
• Maintain price stability
• Ensure adequate flow of credit for economic growth

• MANAGING LIQUIDITY, INTT RATE MONEY SUPPLY BY RBI

• Reserve requirements (CRR & SLR)
• Liquidity Adjustment Facility (LAF) – Repo & Reverse Repo
• Interest rates (Bank Rate, Repo Rates)
• Open Mkt Operation
• Refinance – quantum, intt rate & period
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 MAJOR PARTICIPANTS IN MONEY
MARKET
• (4) PSUs :
• Issue bonds (taxable & tax free).
• Issue CPs.
• Generate cash surpluses and invest in FDs, CDs, T. Bills.
• Some PSUs active in G. Sec also.
• (5) SCHEDULED COM. BANKS :
• Issue CDs (unsecured & negotiable).
• Period 7 days to one year.
• Participate in overnight call & term markets – both as lenders &
borrowers.
• Banks use these funds for liquidity mgt. Call money very
important to manage CRR commitments.
• Banks invest in Govt Sec to maintain SLR & invest surplus funds.
• Invest in PSU bonds as investors of surplus.
• Take trading position in G.Sec and PSU bonds to profit from rate
volatility.
• Participate in forex markets and derivative market for covering
merchant txns and for risk mgt.

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 MAJOR PARTICIPANTS IN MONEY
MARKET
• (6) PRIMARY DEALERS :
• PDs conceived and permitted by RBI in 1995.
• Registered with RBI.
• ROLE :
• Deal in Govt securities both in primary & capital markets.
• Commit participation as Principals in Govt issues through
bidding in auctions.
• Underwrite issues and support development of underwriting
and market making for govt securities outside RBI.
• Offer firm buy-sell / bid ask quotes for T. Bills & dated Govt
securities to improve secondary market trading system. Help
price discovery, enhance liquidity & turnover and widen the
investor base.
• Strengthen the infrastructure in securities to make it vibrant,
liquid and broad based.
• To make PDs an effective conduit for RBI to conduct open
market operations.

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 MAJOR PARTICIPANTS IN MONEY
MARKET
• (7) CORPORATES (private) :
• Issue CPs & debentures to finance projects.
• Debentures could be fuly / partly convertible or non –
convertible.
• Bonds could be secured or unsecured.
• Interest could fixed or floating.
• Some corporates are very cash rich and active investors in FD,
CDs, T. Bills & other debt instruments.

• (8) PROVIDENT FUNDS :

• Invest their funds in short term and long term instruments as
per their internal guidelines.
• Apart from G. Sec, they invest in State Development Loans,
bonds of PSUs/ FIs.
• PFs can also invest in private sector bonds which are rated by
at lest two rating agencies at acceptable rating.

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 MAJOR PARTICIPANTS IN MONEY
MARKET
• (9) GENERAL INSURANCE COMPANIES :
• Have to maintain certain amt of funds in approved investment.
• Also invest in G. Sec, bonds, money market as lenders.

• (10) LIC :
• Invest in G. Sec, bonds & money markets.
• Certain pre-determined thresholds to invest in different
categories.

• (11) MUTUAL FUNDS :

• Required to invest in money market & debt instruments.
• Pattern/ quantum of investment vary as declared in schemes

• (12) NBFCs :
• Required to investment minimum 15% in SLR investments.
• Park their surplus funds in securities/ debts to earn income.
•
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 Call Money Market
• CALL MONEY IN INDIAN CONTEXT
• It is a market wherein the money is lent borrowed between
participants, permitted to operate in Call/ Notice money market,
tenors ranging from overnight to maximum 14 days
• Very short term funds generally overnight lending/ borrowing –
Pre-determined maturity.
• Rates generally hover around RBI Repo range. Interest is driven
by demand & supply of funds and determined on the basis of
market conditions.

• MIBOR-Mumbai Inter-bank Overnight Rate. It is taken as a

benchmark rate for short term borrowings.
• Notice Money: >1 day to 14 days – Undetermined maturity
repayable on notice of 2-3 days by lender
• Banks mostly rely on call money to meet reserves requirement.

• Earlier financial institutions were allowed as lender. However,

recently Call/ Notice money market has been made a pure inter-
bank market – Commercial Banks, Primary Dealers, Coop Banks
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 Call Money Market …. Contd
• Clean Lending (hence credit Risk) – no collateral. Each bank fixes
a prudential limit for counter party exposure i.e max amount it will
lend to a specified borrower.

• REGULATORY BORROWING/ LENDING LIMIT : In a reporting

fortnight, average borrowing by a bank cannot exceed 100% of its
Tier I + Tier II capital of the previous financial year & on any day
the borrowings should not exceed 125%.

• Similarly fortnight average lending should not exceed 25% of its

Tier I & II capital and on any day should not exceed 50% of the
same.

• Txns evidenced by call/ notice money receipt. Payment by a

banker cheque, cheques drawn on RBI or RTGS.

• On the following day, payment is made by borrower along with

interest and the lender returns the receipt duly discharged.
• I
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 TERM MONEY & FIXED DEPOSITS
• TERM MONEY :
• Inter bank borrowing/ lendings for tenors greater than 14 days.
• Reasons & other aspects same as call money market.

• FIXED DEPOSITS
• Fixed deposits are accepted by banks for tenor > 7 days.
• Rates of interest as fixed by individual banks.
• Fixed deposits are not transferable/ negotiable.
• Prepayment is possible on payment of prefixed penalty.
• Indeed this is not a money market as it cannot be traded. But
banks & FIs invest in fixed deposit when rates are favorable.

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 CERTIFICATES OF DEPOSITS (CDs)
 Negotiable Instrument Usance promissory notes issued at a
discount to face value in dematerialized form
 Issuers : Banks (excluding RRB & LAB) ,
Select AFIs – within umbrella limit fixed by RBI.

 UMBRELLA LIMIT FOR AFIs : An FI may issue CDs within

the overall umbrella limit fixed by RBI. CDs together with
other instruments Term money, term deposits, com.papers
and ICDs not to exceed 100% of Net owned funds as per
latest audited balance sheet.

 Issue Amount – Rs 1 lakh or multiples.

 Subscribers – Individuals, Corps, Trusts, Funds, Assns, &
NRIs (Non-Repatriable).
 Maturity – 7 days to 1 year (FIs 1-3 years) – no min lock in.

 Interest : As determined between the parties. No cap on

interest rates.
 Transferability – Endorsement and Delivery. Currently, as
per RBI guidelines, issued in demat form.
 Loan facility against CD available. Buy back of own CDs
before maturity not permitted.
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COMMERCIAL PAPER (CPs)
 Unsecured Negotiable Usance promissory note Instrument
issued at a discount to face value or issued in demat form
through DPs approved by SEBI.
 Banks & PDs can hold CPs only In demat form as RBI
guidelines.

 Issuers : Corporates, AIFIs (issue or investment within

umbrella limit) and PDs
 Tangible Net Worth of issuer not <Rs. 4 crores,
 Sanctioned working capital limits of corporates should be
available.

 Classification of asset : Standard.

 CP can be issued as a stand alone product also within overall
limit fixed by its Board of Directors or quantum indicated by
Rating Agency.

 CPs may be issued on single date or different dates within a

fortnight but with same maturity date.
 Every issue including renewal is treated as fresh issue.
 Issue Amount – minimum Rs 5 lakhs or multiples.
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COMMERCIAL PAPER (CPs)
Contd
 Subscribers – Individuals, Banks, Corps, NRIs, FIIs,
 Rating Compulsory – Min P-2 of CRISIL or its equivalent by
ICRA, CARE or FITCH Rating India P Ltd or other agencies
approved by RBI.
 Maturity – 7 days to 1 year.

 Transferability – Endorsement and Delivery or through

Depositories.
 No Underwriting or Co-acceptance – Credit Enhancement
Possible by way of standby assistance/ credit.

 Non banking companies permitted to provide guarantee for

credit enhancement. Guarantor’s rating should be one notch
higher. Full disclosures as per SEBI guidelines to be made.
 Every issuer must appoint an IPA (Issue & Pay Agent) which
could only a bank.

 CP is to be stamped as per rates of Indian Stamp Act.

 CPs are issued to meet short term requirements.

 Issue should be as per guidelines of RBI.

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BILLS REDISCOUNTING SCHEME
(BRDS)
 To provide liquidity and to promote bills culture, RBI
formulated a scheme known as BRDS whereby bank may
raise funds from RBI or other banks & permitted financial
entities by issue of Usance Promissory Notes in convenient
lots & maturity on the strength of genuine unencumbered
trade bills discounted by it.
 Trade bill holding is furnished by way of certificate that the
bank holds unencumbered eligible bills of equal amount
arising out of bonafide commercial or trade txns not fallen
due for payment. The bank availing this facility maintains a
register containing full particulars of bills for verification.
 Tenor : Minimum 15 days to 90 days. The unexpired tenor of
bills should not be >90 days.
 Advance is shown on lender’s (refinancing) books and gets
reduced on the books of borrowing bank.
 Interest is calculated on actual/365 basis.
 Interest calculated on front-end & rounded off to rupees.
 Borrower receives principal minus interest.
 Lender receives back principal amt on maturity.
 Effective yield is higher than the discount rate (being front
ended).
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 INTER BANK PARTICIPATION
CERTIFICATES (IBPCs)
 In this, a Bank can sell loan on its books, participation basis,
to another bank for temporary period.
 IBPC could be with risk sharing basis or non risk sharing.
 The period of IBPC can be 91 days to 180 days on risk
sharing basis and for non risk sharing basis, total period is
limited to 90 days.
 Maximum participation in loan / cash credit : 40% of
outstanding amt or of limit whichever is lower. Account to be
standard asset only.
 The security documents executed by the borrower should
have a suitable enabling clause for shifting the loan to
another bank.
 Interest market determined.
 Both banks to execute participation contract.
 IBPC are not transferable and cannot be redeemed before
maturity.
 If balance of borrower comes down, the issuer bank must
repay the excess amount so that participation is not >40%.
 Unless the risk has materialized (in case of risk sharing),
issuing bank makes payment along with agreed interest on
due date.
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 COLLATERALIZED BORROWING &
LENDING OBLIGATIONS (CBLO)
 CBLO is approved by RBI.
 This product is developed by CCIL (Clearing Corporation of
India Ltd) for those financial entities who have been phased
out of call money market or have restricted participation in
terms of ceiling on call money borrowing & lending.
• Collateralized Borrowing and Lending Operations against G.
Sec placed with CCIL.
• Counter-party: CCIL who provides Dealing System through
INFINET, a closed user group to the members of Negotiated
Dealing System (NDS).
• Membership of CBLO segment to Banks/ PDs/ Mutual Funds/
Insurance Companies, NBFCs, etc.
• Members are required to open Constituent SGL A/c with CCIL
for depositing securities which are offered as collateral/
margin for borrowing lending.
• Associate members are required to open a CA with a
settlement designated by CCIL.
• Very Low Credit Risk as there is exchange of securities while
borrowing.
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 COLLATERALIZED BORROWING &
LENDING OBLIGATIONS (CBLO)
 Issued by C. Govt through RBI to raise funds to meet liquidity
mismatch.
 It is issued on discount to its face value of (usually) Rs. 100/-
 The tenors of these securities are 14 days, 28 days, 91 days / 182
days / 364 days.
 Auctioned by Reserve Bank every week (Wednesday 91 d) &
alternating week (Wednesday 182 & 364 d).

 Interest is rate is market determined. Market participants have to

bid for discounted price and the cut off is determined by RBI
where the notified amount is fully bid for.
 The 91 days and 364 days treasury bills taken as benchmark for
short-term loans to corporates.
 Secondary market for T bills is moderately active and trades on
yield basis.

 Transfer of T Bills is through SGL mechanism.

 Of late T Bills is also included as part of Market Stabilization
Scheme (MSS). This scheme was introduced to enable the RBI to
mop up excess liquidity from the market.
 Instrument for parking surplus liquidity for investors.
 Reckoned for SLR investment. Safe investment.
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 REPURCHASE AGREEMENT (REPO)
 Repo is a money market mechanism which enables
collateralized short term borrowing and lending between
money market participants through sale/purchase operations
against the underlying G.Sec, PSU bonds, Corporate bonds,
equity ,etc.
 It is not a instrument but a process/ mechanism & is also
called a “READY FORWARD” txn. The holder of securities
sells them to the investor with an agreement to repurchase
back the same securities for the same at predetermined date.
• Structured as sell-buy transaction of securities with
agreement to repurchase on predetermined maturity.
 Essentially a lending & borrowing txn at agreed rate of
interest known as Repo. Forward clean price of bond is set at
a price which includes interest payable by borrower.
 The discount/ Repo rate is market determined - generally
lower than unsecured inter bank borrowings.
 Credit-worthiness of borrower, liquidity of collateral and
prevailing rates of other money market instruments also
influence the repo rate.
 A reverse repo is reverse image of Repo – depends on who
initiated first leg of txn.
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 REPURCHASE AGREEMENT (REPO)
 When reverse repo txn matures, the counterparty receives its
cash with spread and returns the securities.
 READY FORWARD TXN : so called because it is a means of
funding by selling security on spot (ready) basis and
repurchasing the same on forward basis.

 DOUBLE READY FORWARD : When an entity sells a security to

another entity on repurchase agreement basis and
simultaneously purchases some other security from the same
entity on resell basis is called a double ready forward txn.

 LIQUIDITY ADJUSTMENT FACILITY (LAF) :

 (a) REPO is also undertaken by RBI to control liquidity in the
market as also to help banks in need of liquidity.
 (b) Reverse Repo for RBI (repo lending against securities) is
known as LIQUIDITY ADJUSTMENT FACILITY
 (c) LAF is a monetary tool in the hands of RBI to ease or
control liquidity by changing interest rate frequently.

 REPO can be between banks & FIs; NBFCs can also lend to
other eligible counterparties (but not borrow).
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 REPURCHASE AGREEMENT (REPO)
 REPO PRICING :
 Two legs of txn : selling and purchasing back securities. Txn
is complete when SGLs are complete or transfer in demat
form is complete.

 (a) Ready leg proceeds : Prevailing market price of security

plus accrued interest on security
 (b) Forward leg proceeds : Ready leg price + Repo interest
amount

 FOUR TYPES OF REPO : Buy-sell back repo, classic repo,

bond borrowing and lending, & tripartite repo.

 (TO BE COMPLETED)

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THANK YOU

A
PRESENTATION BY:
JAGDISH BUDHIRAJA

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