Muskaan Bhadada 20396 FM Money Market

Download as docx, pdf, or txt
Download as docx, pdf, or txt
You are on page 1of 6

Financial Market

Financial Market refers to a marketplace, where creation and trading of financial


assets, such as shares, debentures, bonds, derivatives, currencies, etc. take place.
It plays a crucial role in allocating limited resources, in the country’s economy.
It acts as an intermediary between the savers and investors by mobilising funds
between them.

Classification of financial market

Money Market
 Money market is a financial market where short-term financial assets
having liquidity of one year or less are traded.
 The component of Money Market are the commercial banks, acceptance
houses & NBFC (Non-banking financial companies).
 It doesn’t actually deal in cash or money but deals with substitute of cash
like trade bills, promissory notes & govt papers which can convert into cash
without any loss at low transaction cost.
  High liquidity and short maturity are typical features which are traded in
the money market.
 In Money Market transaction cannot take place formal like stock exchange,
only through oral communication, relevant document and written
communication transaction can be done.

What are Money Market Instruments?


Money market instruments are those instruments, which have a maturity period
of less than one year. The most active part of the money market is the market for
overnight call and term money between banks and institutions and repo
transactions. Call Money / Repo are very short-term Money Market products. The
below mentioned instruments are normally termed as money market
instruments:
658
 Certificate of Deposit (CD)
 Commercial Paper (CP)
 Inter Bank Participation Certificates
 Inter Bank term Money
 Treasury Bills
 Bill Rediscounting
 Call/ Notice/ Term Money

1. Treasury Bills (T-Bills)


Treasury bills or T- Bills are issued by the Reserve Bank of India on behalf of the
Central Government for raising money. They have short term maturities with
highest upto one year. Currently, T- Bills are issued with 3 different maturity
periods, which are, 91 days T-Bills, 182 days T- Bills, 1 year T – Bills.

T-Bills are issued at a discount to the face value. At maturity, the investor gets the
face value amount. This difference between the initial value and face value is the
return earned by the investor. They are the safest short term fixed income
investments as they are backed by the Government of India.

Types of T-bills

a. 14-day Treasury bill


These bills complete their maturity on 14 days from the date of issue. They are
auctioned on Wednesday, and the payment is made on the following Friday.
The auction occurs every week. These bills are sold in the multiples of Rs.1lakh
and the minimum amount to invest is also Rs.1 lakh.

b. 91-day Treasury bill


These bills complete their maturity on 91 days from the date of issue.  They
are auctioned on Wednesday, and the payment is made on the following
Friday. They are auctioned every week. These bills are sold in the multiples of
Rs.25000 and the minimum amount to invest is also Rs.25000.

c. 182-day Treasury bill


These bills complete their maturity on 182 days from the date of issue.  They
are auctioned on Wednesday, and the payment is made on the following
Friday when the term expires. They are auctioned every alternate week. These
bills are sold in the multiples of Rs.25000 and the minimum amount to invest is
also Rs.25000.

d. 364-day Treasury bill


These bills complete their maturity 364 days from the date of issue. They are
auctioned on Wednesday, and the payment is made on the following Friday when
the term expires. They are auctioned every alternate week. These bills are sold in
the multiples of Rs.25000 and the minimum amount to invest is also Rs.25000.

2. Commercial Papers
Large companies and businesses issue promissory notes to raise capital to meet 
short term business needs, known as Commercial Papers (CPs). These firms have
a high credit rating, owing to which commercial papers are unsecured, with
company’s credibility acting as security for the financial instrument.

Corporates, primary dealers (PDs) and All-India Financial Institutions (FIs) can
issue CPs.

CPs have a fixed maturity period ranging from 7 days to 270 days. However,
investors can trade this instrument in the secondary market. They offer relatively
higher returns compared to that from treasury bills.

3. Certificates of Deposits (CD)


CDs are financial assets that are issued by banks and financial institutions. They
offer fixed interest rate on the invested amount. The primary difference between
a CD and a Fixed Deposit is that of the value of principal amount that can be
invested. The former is issued for large sums of money ( 1 lakh or in multiples of 1
lakh thereafter).

Because of the restriction on minimum investment amount, CDs are more popular
amongst organizations than individuals who are looking to park their surplus for
short term, and earn interest on the same.

The maturity period of Certificates of Deposits ranges from 7 days to 1 year, if


issued by banks. Other financial institutions can issue a CD with maturity ranging
from 1 year to 3 years.

4. Repurchase Agreements
Also known as repos or buybacks, Repurchase Agreements are a formal
agreement between two parties, where one party sells a security to another, with
the promise of buying it back at a later date from the buyer. It is also called a Sell-
Buy transaction.

The seller buys the security at a predetermined time and amount which also
includes the interest rate at which the buyer agreed to buy the security. The
interest rate charged by the buyer for agreeing to buy the security is called Repo
rate. Repos come-in handy when the seller needs funds for short-term, s/he can
just sell the securities and get the funds to dispose. The buyer gets an opportunity
to earn decent returns on the invested money.

Call Money Market


The call money market is an essential part of the Indian Money Market, where the
day-to-day surplus funds (mostly of banks) are traded. The money market is a
market for short-term financial assets that are close substitutes of money. The
most important feature of a money market instrument is that it is liquid and can
be turned into money quickly at low cost and provides an avenue for equilibrating
the short-term surplus funds of lenders and the requirements of borrowers.

The loans are of short-term duration varying from 1 to 14 days, are traded in call
money market. The money that is lent for one day in this market is known as "Call
Money", and if it exceeds one day (but less than 15 days) it is referred to
as "Notice Money". Term Money refers to Money lent for 15 days or more in the
Inter Bank Market.

Banks borrow in this money market for the following purpose:

To fill the gaps or temporary mismatches in funds


To meet the Cash Reserve Ratio(CRR) &  Statutory Liquidity Ratio(SLR) mandatory
requirements as stipulated by the RBI
To meet sudden demand for funds arising out of large outflows.
Thus call money usually serves the role of equilibrating the short-term liquidity
position of banks

Participants in the Call Money Market:


As the RBI guideline, the participants in call/notice money market currently
include scheduled commercial banks (excluding RRBs), Development Financial
Institutions, Co-operative banks (other than Land Development Banks)
and Primary Dealers (PDs), both as borrowers and lenders.
Interest Rate:
Eligible participants are free to decide on interest rates in call/notice money
market. Calculation of interest payable would be based on the methodology given
by the Fixed Income Money Market and Derivatives Association of India
(FIMMDA).

5. Banker’s Acceptance

A financial instrument produced by an individual or a corporation, in the name of


the bank is known as Banker’s Acceptance. It requires the issuer to pay the
instrument holder a specified amount on a predetermined date, which ranges
from 30 to 180 days, starting from the date of issue of the instrument. It is a
secure financial instrument as the payment is guaranteed by a commercial bank.

Banker’s Acceptance is issued at a discounted price, and the actual price is paid to
the holder at maturity. The difference between the two is the profit made by the
investor.

You might also like