MONEY MARKET SUBMITTED BY: SUKESHINI S. PATIL MARCH 2013
UNDER THE GUIDANCE OF: PROF. PRAJAKTA
SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR QUALIFYING BBI SEMESTER-V EXAMINATION
CHIKITSAK SAMUHA’S
SHANKAR NARAYAN COLLEGE OF ARTS, COMMERCE
Project Report On
MONEY MARKET By Sukeshini S. Patil
ACKNOWLEDGEMENT
It gives me an enormous pleasure in submitting the project of “Money Market” I would like to take this opportunity to sincerely thank Prof. Prajakta Pawade. My project guide, for extending their support, guidance and co-operation which helped me in completing this project successfully. successfully. I would also like to thank my sister for her kindly support & encouragement throughout throughout my project to complete the project on time. I am also thankful to our college as well as our college librarian for availing me the required books on “INDIAN BANKING” BANKING” who have made my efforts into success by living me all the possible help & support in my project. I am also thankful to my friends for helping me in my project.
Content TOPIC Synopsis Chapter-1 1.1 Financial Market 1.2 Organized Money Market Chapter-2 2.1 Introduction of Money Market 2.2 Definitions of Money Market 2.3 Features of Money Market 2.4 Objective of Money Market 2.5 Importance of Money Market Chapter-3 3.1 Money Market & Capital Market Chapter-4 4.1The Players – Money Market Chapter-5 5.1 Components of Money Market Chapter-6 6.1 Sub-Markets of Money Market Chapter-7 7.1 Characteristics of A Developed Money Market Chapter-8 8.1 Importance of Developed Money Market Chapter-9 9.1 Indian Money Market Chapter-10 10.1 Money Market Instrument in India – Present Day Developments 10.2 Money Market Position
Page No.
10.3 Objectives Chapter-11 11.1 Instrument Trade in Indian Money Market 11.2 Greek Money Market Instrument 11.3 Greek Government Debt Chapter-12 12.1 Discount and Financial House of India(DFHI) Chaper-13 13.1 The Foreign Exchange Market 13.2 Participants of FOREX Market 13.3 Foreign Exchange Rates Chapter-14 14.1 Measure Taken to develop the Money Market Chapter-15 15.1 Comparison of London, New York and Indian Money Market 15.2 London Money Market 15.3 New York Money Market 15.4 Indian Money Market ANNEXVRE Case Study Bibliography Quaternary
SYNOPSIS
Money Market refers to the activity rather than place. This activity covers lending and borrowing of short – term funds. The market deals in call and notice deposit, short-term bills, promissory notes and government paper, etc., which are drawn for short periods. These days money market instrument are many, such as Treasury Bills, Commercial Paper, Certificate of deposits, Commercial Bills, etc.
Objective of Money Market
Feature of Money Market
Money Market & Capital Market
The Player of Money Market
Components of Money Market
Sub-markets of Money Market
Money Market Instrument in India
DFHI
Develop the Money Market
Comparison
Chapter-1
1.1 Financial Market
Money Market-for short-term funds (less than a year)
Organized (Banks)
Unorganized (money lenders, chit funds, etc.)
Capital Market-for long-term funds
Primary Issue Market
Stock Market
Bond Market
Call Money Short Notice Term Money Commercial Paper Certificates of Deposits Money Market Mutual Funds Commercial Bills Treasury Bills Inter Corporate Funds
Primary Market Consists of: Public Corporate, existing Stock holder other entities Handles Instruments Like: Stock/Shares/Debentures/Bonds/ Warrants Collective Instruments Like: Venture Capital Funds, Global Depository Receipts, Foreign Currency Convertibles Bonds
Capital Market 1. Primary 2. Secondary
1.2 Organized money market
Call money market
Bill Market
Treasury Bills
Commercial Bills
Bank Loans(short-term)
Organized money market comprises RBI, Banks (commercial and co-operative)
Chapter-2
2.1 Introduction of Money Market
Money market refers to the activity rather than a place. This activity covers lending and borrowing of short – term funds. The market deals in call and notice deposit, short-term bills, promissory notes and government paper, etc., which are drawn for short-periods. These days money market instrument are many, such as Treasury Bills, Commercial Paper, Certificate of deposits, Commercial Bills, etc., however, these securities and instruments should have maturity period of less than one year.
2.2 DEFINATIONS OF MONEY MARKETING
(I) According to RBI report,” Money market is the centre for dealings mainly of short-term character, in money assets; it meets short-term requirements of borrowers and provide liquidity or cash to the lenders”.
(II) It is the place where short-term surplus investible fund at the disposal of financial and other institutions and individuals are bid by borrowers, again comprising institutions and individual and also the government itself.
(III) We can define money market as, “the market in which the highly liquid short-term bills are dealt with mainly by government, business concerns and private individuals”.
(IV) Instrument of Liquidity adjustment by Central Bank.
FORM OF FINANCI AL MARKET S
FINANCIAL MARKETS
MONEY MARKET
CAPITAL MARKET
2.3 MARKET FEATURES OF MONEY
Transactions have to be conducted without the help of brokers.
It is not a single homogeneous market, it comprises of several submarket like call money market, acceptance & bill market.
The components of Money Market are the commercial banks, acceptance house & NBFC (Non-banking financial companies.)
In money market transaction cannot take place formal like stock exchange. Only through oral communication, relevant document and written communication transaction can be done.
2.4 OBJECTIVE OF MONEY MARKET
To provide a reasonable access to users of short-term fund to meet their requirement quickly, adequately at reasonable cost.
To provide a parking place to employ short term surplus fund.
2.5 IMPORTANCE OF MONEY MARKET
Development of Trade & Industry.
Development of Capital Market.
Smooth functioning of Commercial Banks.
Effective Central Bank Control .
Formulation of suitable monetary policy.
Non Inflationary source of Finance to Government.
Chapter-3
3.1 MONEY MARKET AND CAPITAL MARKET
1. Term of Finance Provides short-term finance (Usually up to one year).
Provides long-term Finance.
2. Nature of Requirements
Provides for the requirement of working capital.
Provides for the Requirements of fixed Capital.
3. Instruments Dealt with Bills of Exchange, Treasury Bills, Call Loan, Bills, Short -term Government Securities,
Shares, Debentures of industrial concerns, Bond and other long-term
Commercial paper, Certificate of deposit, etc.
securities of Government.
4. Assistance
Help solving liquidity problem Banks as well as Government.
assist in sourcing long-term financial needs of industry and
Government.
5. Main Institutions
Foreign banks, development Financial Institutions like IDBI, ICICI, IFC, etc. Central Bank, Commercial Banks, Co-operative Banks, etc.
Investment Banks like IDBI, IFCs, SFCs, ICICI, Insurance Companices, Financial Instituitions, etc.
These two markets work together and are possibly interdependent. Some institutions like commercial banks operate in both markets. Basically, money market and capital market are the segments of one market called market of credit.
Chapter-4
4.1 THE PLAYERS – MONEY MARKET
Reserve Bank of India
SBI DFHI Ltd (Amalgamation of Discount & Finance House in India and SBI Gilts in 2004)
Commercial Banks, Co-operative Banks and Primary Dealers are allowed to borrow and lend.
Specified All-India Financial institutions, Mutual funds. and certain specified entities are allowed to access to Call/Notice money market only as leaders
Individual, firms. Companies, corporate bodies, trusts and institutions can purchase the treasury bills, CPs and CDs.
Chapter-5
5.1 COMPONETS OF MONEY MARKET The various institution in the money market generally includes the following :(The present day Indian Money Market as regulated by Reserves Bank is discussed in paragraphs 5.7 and 5.8 below).
Centr al B ank: It is naturally to be the leader of all banks. It is the 1. Centr
bank, which is entrusted with the task of controlling the issue of money and funds to the market and regulates credit facilities provided by various other institutions.
Commer cial B anks 2. Comme : They play a vital role in the money the
promissory notes and the like. They also also take help of the market in market. They make advances, discount bills and lend against solving their liquidity problem.
ouses: Discount houses are special institution for 3. D i scoun t H ouses
rediscounting the bills of exchange. They usually deal in three k kinds of bills.
(a) The domestic bills
(b) The foreign bills (c) The government treasury bills
The discount house borrows huge funds from f rom the commercial banks and RBI Sinvest Sinvest them in discounting bills. But before discounting a trade bill of exchange, the Discount House insists that it should be accepted by an Acceptance House.
cceptan ce H ous ou ses 4. A cceptan : Acceptance House are institutions which
specialize in accepting bills of exchange. Generally they are merchant bankers. They act act as second signatories signatories on the bills of exchange. That is they guarantee the bills of a trader whose financial standing is not known, for making the bill negotiable. They maintain correspondents in important towns of various places within and outside the country to the customers, who seek the assistance of the Acceptance Houses. For their service, they charge a small amount of commission but ensure great security for the bills discounted by the Discount Houses.
okers 5. Bil l Br oke “ intimately know their customers and : The “Bills Broker “intimately
act as intermediaries between the sellers and buyers of bill for a small commission. Sometimes, these bill brokers discount bills on their own account.
Chapter-6
6.1 SUB-MARKETS OF MONEY MARKET Money Market
Call Money Market
Acceptance Mark
Bill Market
Collateral Loan Market
(1)Ca (1)Call ll M oney oney M arket: arket:
The Market for extremely short period loans.
Money at call and short notice
The rate is determined by the demand and supply of funds.
Money is lent mainly to the bill brokers and stock exchange dealers.
MERITS
The money can be taken when needed.
Earn interest by quick lending of idle cash.
Promote stock exchange transactions.
(2)Acceptance M arket:
The market for the acceptance of trade bills.
The main operators in this market are the „Acceptance houses‟ and the commercial banks.
MERITS
Promotes the operations of discount houses.
Marketing the bills negotiable.
(3)Bil l M arket:
Market for short-term bills.
Buying and selling of short dated papers, bills, etc.
It includes commercial bill market and Treasury bill market.
MERITS
Helps the government by marketing of treasury bills.
Helps the others sectors as well.
(4)Coll ateral L oan M arket:
Important section of the money market.
It takes the form of loans over draft, cash credits.
The loans and advances are covered by collaborates like government securities, gold silver, of stock corporations, merchandises, etc.
Chapter-7
7.1 CHARACTERISTICS OF A DEVELOPED MONEY MARKET The developed money market as in the countries of England and U.S.A. have the following characteristics:
i. ii.
Existence of Central Bank
Highly organized commercial Banking System
iii.
Healthy competition in sub-markets
iv.
Existence of sub-markets
v.
Integrated structure of money market
vi. vii. viii. ix. x. xi.
Availability of proper credit instruments
Adequacy and Elasticity of funds
International attraction
Uniformity of interest rates
Stability of prices and
Highly developed Industrial system
(i )Ex istence of Centr al B ank:
In the developed money market, the role of Central Bank is notable. It controls the entire money market operations by making the availability of funds depending upon the economic cycles. It can be done through its open market operations.
(i i )H i ghl y organi zed Ban ki ng System:
As they are the main dealers in short-term funds, the commercial banks are considered as nervous system of the money market. Therefore, a well developed money market will have a highly organized and developed commercial banking system.
(i i i ) Ex i stence of sub-mark ets:
In a developed money market the various sub-markets there should be a reasonable and healthy competition. That is, in developed money market will have a developed sub-market such as bill market, call money market, acceptance market, discount market, etc. Ti can be said that the larger the number of submarkets, the broader and more developed will be the structure of the money market.
( i v)Prevalence of heal thy competi ti on :
In each sub-market there should be a reasonable and healthy competition. That is, in a developed money market, there are a large number of borrowers, leaders and dealers. They only each market will be activates of one sub-market should crate effects in the other markets also.
(v)I ntegrati on of sub-mark ets :
In the developed money market there will be a perfect integration among various sub-markets of the market. Their functioning are interdependent. The funds flow from one sub-market to another and the activities of one sub-market should crate effects in the other markets also.
(vi)Avail abil i ty of proper credit i nstr uments:
The developed money market should have the necessary credit instruments such as treasury bills, promissory notes, bills of exchange, etc. They should be freely available.
(vii )F l exi bil ity and adequacy of fu nds :
In a developed money market, there must be ample resources. The flow of funds into the money market should also be flexible enough, i.e., the flow of funds can be increased or decreased depending upon the demand for funds.
(vii i)I nter national attr action:
The developed money markets attract funds from foreign countries also. The dealers, borrowers and lenders of foreign countries are eagerly coming forward to participate in the activities of developed money market.
(i x)U ni f ormi ty of i nter est r ates:
Prevalence of uniformity in interest rates in different parts of the country is the characteristic feature of a developed money market.
(x)Stabil i ty of pr ices:
Stability of prices all over the country will be an outcome of the effective functioning of a developed money market.
(xi )H i ghl y devel oped indu str ial system:
The money market will function smoothly and can achieve the basic purpose of its existence only when there is a highly developed industrial system. Developed money market demands for such a system.
Chapter-8
8.1 Importance of a Developed Money Market A developed money market is essential for the economic progress of a country. The significance of the developed money market can be summarized as follows:
(A) It provides finance to trade and industry when needed.
(B) It provides profitable outlet for the short-term funds of the commercial banks.
(C)It helps the Government to raise necessary short-term funds by sales of treasury bills
(D)It helps the central Bank in the following ways:
(i) Helps to formulate and implement the monetary policy
(ii) Helps to carryout its open market operations on a large scale (iii) Provides commercial bills to the Central Bank for rediscount
(iv) Helps in the regulation of the movement of funds in the money market
(E) Attracts foreign funds.
Chapter-9
9.1 Indian Money Market In India the money market plays a vital role in the progress of economy. But, it is not well developed when compared to American and London money markets. In this market short-term funds are borrowed and lent among participant permitted by RBI.
Before knowing the features of Indian money market let us have a look on its organizational structure.
STRUCTURE OF INDIAN MONEY MARKET
Organised Sector
Unorganised Sector
Co-operative Sector
1. Or gani zed sector
(1.1) Reserve Bank of India (1.2) Commercial Banks (I) Public Sector (a) SBI & its 7 subsidiaries (b) Co-operative Banks
(c) 20 Nationalised Banks (II) Private Sector (a) Indian Banks (b) Foreign Banks
(1.3) DFHI Primary Dealers
(1.4) Development Banks: IDBI, IFCI, ICICI, NABARD, SFCs, EXIM. BANK, LIC, GIC, UTI, etc.
2. Unor gani zed Sector
(2.1) Indigenous Bankers
(2.2) Moneylenders
(2.3) Chits
(2.4) Nidhis
3. Co-operati ve Sector
(3.1) State Co-operative Sector
(I) Central Co-operative Banks
(a)Primary agriculture Credit Societies
(b) Primary (Urban) Co-operative Banks
Chapter-10
10.1 Money Market Instruments in IndiaPresent Day Developments
Investment in Money Market is done through money market instruments. Money Market Instruments meet short term requirements of the borrowers and provides liquidity to the lenders.
10.2 Money Market Position
As already mentioned Money Market refers to all the Institutions which deal in short-term funds, usually up to one year. There is no single meeting place of Money Market Like stock market or commodity market. The institutions which have short-term surplus funds and those who require short-term funds (borrowers) get in touch with one another either directly or through agents / brokers over telephone/computer network and exchange funds by writing down cheques / pay orders, etc.
10.3 Objectives (i)Money ensures those institutions which have surplus funds earn certain returns on the surplus.
(ii)Otherwise these funds will be idle with the institution.
(iii)Similarly, the money market ensures funds for the needy at reasonable interest.
(iv)This way liquidity position is assured by money market operations.
Chapter-11
11.1 Instruments Trade in Indian Money Market
The type of financial instruments traded in Indian money market can be shown in the following chart.
INSTRUMENTS TRADED INDIAN MONEY MARKET
Call Money
Commercial Bills
Treasury Bills
Commercial Papers
Certificate of Deposit
'Repo' Instruments
InterCorporate Deposit
Inter-banks Participation Certificates
Let us now discuss the various money market instruments in India. In India the Money Market is regulated by RBI. Hence, the instruments traded and the players in the market require to be approved by RBI. The instruments currently traded are as follows: (I)Call Money
(II) Notice Money / Short-term Money
(III) Treasury Bills
(IV) Commercial Bills
(V) Commercial Paper
(VI) Certificate of Deposits
(VII) Inter-Bank Participation Certificates
(VIII) Inter-Corporate Deposit
(IX) „Repo‟ Instruments
(I )Call M oney Call Money is a method of borrowing and lending for one day. This is also called overnight money. The rate of interest used to be decided by RBI earlier. After 1989, the interest rate was deregulated and now the liquidity position (availability of funds) maintained the rate of interest. The lender issues a cheque or pay order on its account maintained with RBI in favour of borrower Accordingly, RBI transfer funds by debit to lender‟s account borrower‟s account. On repayment, the process is reversed through RBI. In times of tight money, situation or liquidity crunch, the call money interest rate goes up even beyond 50 percent per annum. Only permitted organization like scheduled commercial banks, large co-operative banks, DHFI, Primary dealers, NABARD are permitted to borrow funds through call money market. However, funds can be provided or lent even by other entities like LIC, GIC, large corporate, big mutual funds, etc.
(I I ) Notice M oney / Short-term M oney Under notice/Short-term Money Market, funds are borrowed and lent for a maximum period of 14 days. Repayment requires a formal notice or demand from the lender. Interest rate is decided by the market forces. The market is similar to call money market explained above.
(I I I ) Treasur y Bi ll s (TB) It is the most important money market instrument for the central government. Treasury Bills are short-term promissory notes issued by RBI on behalf of Central Government for raising funds to meet shortfalls in revenue collections, i.e., to meet revenue expenditure. These are issued at discount to face value. RBI auctions these Treasury Bills depending upon their maturity are auctioned by RBI. These are 14day TB, 28-day TB, 91-day TB, 182-day TB and 364 day TB. Any person can invest in TB. These are very high liquid and safe instruments. TB are approved securities for investment by banks under SLR requirement.
(I V) Commer cial Bi ll s Banks are discounting Commercial Bills drawn by business entities/organizations. Banks can get such discounted bills rediscounted in Money Market. It is not necessary for banks to
rediscounted bill. Banks can certify the large number of bills intended to be rediscounted through a single document known as “Derivative Usance Promissory Note” (DUPN). In other words, „DUPN‟ is a money market instrument backed by genuine commercial bills. Banks can get the value of DUPN discounted and obtain funds. This way banks can borrow funds without transferring the bills. It is necessary that the original bills in the portfolio of banks should not be drawn for period exceeding 120 days. The maturity of DUPN, however, should not exceed 90 days.
(V) Commer cial Paper Commercial Paper (C.P.) is a short-term money market instrument issued by eligible corporate for raising funds to meet working capital needs. It was introduced in 1989. The C.P. is in nature of negotiable usance promissory notes issued at a discount to face value. The C.P. should have fixed maturity period of not less than 30 days and not more than one year. Corporate having fund-based working capital facility of Rs.4 crore or more from banks are only eligible to issue C.Ps. Aggregate value of C.Ps. which can be issued by a corporate is limited to the maximum working capital facility fixed by the banks. Investors in C.ps should have a minimum investment of Rs. 10lakh and multiples of Rs.5lakh thereafter. The RBI decides about the eligibility criteria for corporate to raise funds through C.Ps. on the basis of working capital fund limit (Rs.4crore or more); minimum current ratio (1.33); and minimum credit rating (P2 of CRISIL or A2 of ICRA, etc.). Primary Dealer are also recently permitted to issue C.Ps. Funds raised through C.Ps. should normally be cheaper as compared to bank funds. Hence, corporate raise funds through issue of C.Ps. only when the money market interest rates are fairly low.
(VI ) I nter -Bank Par ticipation Cer tif icates Inter-Bank Participation Certificates or simply Participation Certificates (P.C) are short-term papers issued by scheduled commercial banks to raise funds from other banks against big loan portfolios. When banks are short of liquidity to carry on their immediate operations and need short-term funds, they may approach other banks to share/ participate in their leading portfolios. In other words, part of the specified loans and advances of the burrowing bank will be passed on to the lender-bank against cash. This will have the effect of reducing the exposure of borrower-bank on its particular loan portfolio and increase in the portfolio of lender-bank when the participation is without recourse basis. Borrower-banks can have access to the facility only, up to certain percentage (currently 40%) of their standard or performing assets, i.e., Loans and Advance which are being serviced without default. P.Cs. can be issued only for a maximum period of 180 days and not less than a 90-day period.
(VI I ) Cer tif icate of D eposit It is another form of short-term time deposit. The receipt issued for such a deposit is called C.D. Banks can raise shortterm funds, say for 3or 6 months at rate of interest different from its normal Time Deposit rate through issue of C.Ds. Interest is paid from the date of purchases till maturity. Banks issue C.Ds. to manage liquidity and to raise funds at marginally varying rate of interest as compares to short-term deposit rates. As per RBI regulations C.Ds. can be issued for a minimum maturity of 3 months and maximum period of 1 year. Minimum investment should be of Rs.10lakh and further
investments should be in multiple of Rs.5lakh.These are issued at discount to face value. In India this instrument was first introduced in 1989.
(VI I I ) I nter - Corporate Deposits Inter-Corporate Deposits or ICD is another money market instrument for corporate to park their temporary surplus funds with other corporate. What a participation certificate for banks is an inter-corporate deposits between corporate. Under ICD, corporate lend temporary funds generally to their own group companies, otherwise the credit risk will be higher. Any corporate can issue the instrument without there being any prescription about minimum size of such lending and borrowings.
(IX) ‘Repo’ Instruments „Repo „or Repurchase Transactions. RBI conducts „Repo‟ truncations to influence short-term interest level in money market. By Repo operation the RBI transmit interest rate signals to the market. When it announces a fixed rate Repo for certain number of days/period it conveys its intention to the market about the desirable level of a short-term interest rate. Due to greater level of integration among money market, foreign exchange market and Treasury Bill Market, the Repo transactions ensure stability of short term rates in all the three markets. At the same time Repo transactions of RBI provide an opportunity to banks to part their surplus funds with a minimum rate of return. You may understand that when RBI conducts „repo‟, the shortterm interest rate in the money market may not go below the RBI repo rate as, if rate of interest is lower on other markets, holders of funds may go for „Repos‟ whit RBI.
11.2 Greek Money Market Instrument
Money market papers are securities with a short maturity. Classical money market instrument in Greece are certificates of deposit, medium term notes and term deposits.
Of particular importance for short-term investments abroad are US money market instruments or paper, usually with terms of 3 to 6 months (Treasury bill, banker‟s acceptances, commercial paper, finance paper and certificates of deposits issued in New York, as well as London certificates of deposit).
Greek short-term debt instruments account for EUR 3.8bn, which represents 0.05% of the total amount of outstanding short-term debt in the Euro zone (EUR 798.2bn-July 2003).
11.3 Greek Government Debt
Since becoming the latest country to join the Euro, the Greek bond market developed significantly. The demand for Greek Government paper has increased drastically, thus the primary market for government paper was marked by an increase in securities issues. Factors such as the substantial increase in the public sector‟s gross borrowing requirement and the upgrading of the country‟s cr edit rating contributed to these developments.
The nominal value of all types of government paper issued in 2002 rose to 32.1 billion, from 24.2 billion in 2001 and 26.8 billion in 2000.
Chapter-12
12.1 Discount and Financial House of India (DFHI) The DFHI was set up in April 1998 by the Reserve Bank of India to help develop the money market in India. Money market refers to an activity in which financial transactions take place in short-term financial assets which are close substitutes for money. The instruments traded in the money market will have maturity period less than a year. Some of such assets are call money (overnight money), notice money (1 to 14 days), inter-bank term deposits/loans (15 days and over), commercial bills and treasury bills, certificate of deposits, etc. With a view to Impart increased liquidity in the money market instruments the DFHI was set up. It would deal with treasury bills of different maturities and rediscount short-term commercial bills. DHFI operates with emphasis on high turn over of money market assets and provides two way quotes for funds (bid and offer) with a thin spread. DHFI participates both as lender and borrower in the money market since 28th July 1988.
Chapter-13
13.1 The Foreign Exchange Market
The Foreign Exchange Market is the market where the currency is exchanged for the currency of another country.
Most currency transactions are channeled through the worldwide interbank market.
Interbank Market is the wholesale market in which major banks trade with each other.
13.2 Participant of FOREX Market
Speculators
Arbitrageurs
Traders
Hedgers
13.3 Foreign Exchange Rates
A foreign exchange rate is the price one currency quoted terms of another currency
Direct Quote
Indirect Quote
A cross rate is an exchange rate between the currencies of two countries that are not quoted against each other, but are quoted against one common currency.
The spot exchange rate is the rate at which a currency cab be bought or sold for immediate delivery which is within two business days after the day of the trade.
Bid-ask spread is the difference between the bids and ask rates of a currency.
The Forward Exchange Rate is the rate that is currently paid for the delivery of a currency at some future date.
The forward rate may be at a premium or at a discount.
For a direct quote, the annualized forward discount or premium can be calculated as follows: Spot rate-Forward * 360 Forward premium = Spot rate *Days
Chapter-14
14.1 Measures Taken to Develop the Money Market 1. The government remitted stamp duty to encourage the use of commercial bills. However, the availability of cash credit prevents the use of commercial bills despite the incentive given by the government.
2. In 1989, the money market interest rates were deregulated. From that time onwards RBI has been trying to impart flexibility to the interest rate structure by incorporating modifications as and when necessary. In 2003-04 RBI advised the banks to determine the “Benchmark Prime Lending Rate” (BPLR). It has to be based on the cost of funds, operating expenses and minimum margin to cover the regulatory requirement. The new system has been introduced to reduce the rigidity in the downward movement in the lending rates of commercial banks.
3. A number of reforms were introduced in the call money market. Many non-banking financial institutions (NBFCs) and mutual funds were allowed to operate in the call money market as lenders. Many restrictions, which were imposed earlier, were removed to active to activate the market.
4. Many new instruments were introduced in the last one-decade. Four important instruments introduced were 182 days treasury bills, 364 days treasury bills, certificate of deposits and commercial paper. The Discount and Finance House of India (DHFI) systematically promotes the treasury bills market. The commercial paper and certificate of deposits enable the business firms and the commercial banks to mobilize substantial funds. It also provides an opportunity to the investor to get good returns.
5. In 1992, the Government introduced Repos. It refers to repurchase agreement. A Repo is an instrument of repurchase agreements between RBI and Commercial banks. They are used by banks to manage their short-term liquidity. The fluctuate widely. It is a very popular instrument. It can be effected between banks and financial institutions and between banks themselves.
6. The Central Bank uses the Market Stabilization Scheme and the Liquidity Adjustment Facility to regulate liquidity in the money market. Capital flows are regulated by the Central Bank through open market operations and repo operations. Under the Liquidity Adjustment Facility cash reserve ratio is also employed by the Central Bank to ensure monetary stability.
7. In 1991, money market mutual funds were introduced. They provide an opportunity for the investors to park their funds for a short period.
These mutual funds mainly offer short-term instruments. IDBI, UTI and private sector mutual funds are operating in the money market.
8. In 1988, the government constituted the discount and Financial house of India (DHFI). It main function is to bring the operations of commercial banks, foreign banks, cooperative banks and financial institutions into the fold of the money market. This was expected to help in bringing about equilibratium between demand and supply of funds and improving the working of money market.
9. Electronic Dealing Systems are being introduced by the RBI to ensure transparency and efficiency in money market operations.
10. The Clearing Corporation of India Limited (CCIL) was registered under the Companies Act in 2001. State Bank of India is the chief promoter. The CCIL clears all transactions in government securities, repos and rupee/dollar foreign exchange spot and forward deals.
Chapter-15
15.1 Comparisons of London, New York and Indian Money Market
A lesser level comparison of London, New York and Indian Money Market may be understood. The money market comparisons is a various part Period of Development, Nature of Growth, Control over the Money Market, Weapons used to Control Money Market, Specialized Institutions, Competition among Institutions, System of Banking, Number of Central Banks, Operation of Bill Market, Variation of Interest Rate, Attraction of Foreign Funds etc,.
15.1 London Money Market
1. Per iod of Development London money market has enjoyed the supreme position till the beginning of First World War period.
2. Natur e of Gr owth Highly organized and well developed .
3. Contr ol over the M oney M arket The Bank of England controls the money market through traditions, Conventions and Persuasions.
4. Weapons used to Contr ol M oney M arket Bank rate and open market operations.
5. Specialized I nstitutions The acceptance house, Discount Houses, etc. are playing main role in the money market.
6. Competition among I nstituti ons The functions of the specialized institutions like discount houses, Bill brokers, Commercial banks, etc., are all complementary and these institutions do not compete among themselves for funds.
7. System of B anking In U.K. branch banking prevails. The banking system is mainly under the control of “Big five” banks. All banks have their branches in London.
8. Number of centr al bank In England there is only central bank of “The bank of England” for the entire country.
9. Oper ation of Bil l M arket In U.K. there is a well developed bill market. Commercial banks do not directly discount the bills from customers.
10. Attr action of F oreign F unds Highly developed and attracts the foreign funds.
15.3 New York money Market 1. Per iod of D evelopment It has come into prominence only during the Second World War period.
2. Natur e of Gr owth Organized and well developed but next to London Money Market.
3. Control over the M oney M ark et
The Federal Reserve Banks control the Money Markets through statutory powers.
4. Weapons used to contr ol M oney M arket The Federal Banks use more direct Weapons of credit controls as variation of cash reserve ratios, etc.
5. Specialized I nstutions It does not have such institution. Commercial bank performs these functions.
6. Competition among I nstituti ons In this Market various institutions function independently and hence compete for funds in the Money Market. But the compedition is healthy.
7. System of banking In U.S.A. until banking is prevailing, since there are numerous banks of small size, they do not have their banks in Washington.
8. Number of Centr al Banks
In U.S.A. there are 12 “Federal Reserve Banks” for different regions. With Federal Reserve System at the apex level.
9. Oper ation of bill M arket U.S.A. there is no well developed bill market. Commercial banks directly discount their bills from the customers.
10. Attr action of F oreign F unds More attraction of foreign funds.
15.4 Indian Money Market 1. Per iod of Development It has become popular after independence specifically after nationalization of banks in 1969.
2. Natur e of Gr owth Fast catching up worth matured market since 1992.
3. Contr ol over the M oney M arket RBI has control over the market and regulates liquidity through DHFI, Primary Dealers, Open Market Operations, (OMO) etc.
4. Weapons used to Control M oney M arket CRR, „Repo‟ transactions, Moral suasion OMO of Treasury Bills, etc.
5. Specialized I nstitutions DFHI, Primary Dealers Development Financial Institutions, Money Market Mutual Funds, etc.
6. Competition among I nstituti ons Healthy competition is gaining ground. RBI determines the players in the market-large number of lenders, including financial institutions, mutual funds, big corporate (through DFHI, etc.). However borrowers are restricted to commercial Banks and few institutions like DFHI primary dealers.
7. System of B anking In India branch banking is popular. Even then many private sector banks are small in size.
8. Number of Centr al Banks In India there is only “RBI” for the entire central banking operations.
9. Oper ation of bill M arket Bill market is not developed in India. Commercial banks discount the bills of the customer but rediscounting of bills are not popular.
10. Attr action of F oreign F unds Underdeveloped due to the restrictions over foreign exchange transactions. Capital account convertibility is required to attract foreign funds.
ANNEXURE
CASE STU DY Greater competition will invigorate equity release 21 February 2013.
: I am receiving more interest in equity release from The problem client but I feel the lack of competition is holding it back. What is the outlook for the equity release market?
: Certainly, the credit crunch hit providers hard and it Th e Solution would be fair to say that it has taken some time fir equity release to recover; however, the figures recently released by Equity Release Council go some way to underlining the positive drivers that are now shaping the market. In 2012, the total value of the equity released by 17 % up from Euro 788.6m to Euro 925.7m-it will not take a genius to work out that anything close to this level of improvement in 2013 will take the figures through the Euro 1 bn barrier. Were we to see 17% growth these years then I suspect may more potential providers will be taking a long hard look at the sector and potentially not just expressing an interest in equity release but looking for more active involvement?
The sector would certainly benefit from new entrants plus greater competition and choice for customers.
Bibliography (A) 1. BOOKS NAME: Indian Banking 2. PUBLICATION: S. Chand 3. AUTHOR NAME: S. Natrarajan R. Parameswaran
(B) 1. BOOKS NAME: Indian Economy 2. PUBLICATION: Vipul Prakashan 3. AUTHOR NAME: Saraswathy Swaminathan
(C) 1. BOOKS NAME: Security Analysis and Portfolio Management 2. PUBLICATION: Vipul Prakashan 3. AUTHOR NAME: P.K. Bandgar.
Websites www.google.com www.wickipedia.com
Quaternary 1. Money market deals with (a) (b) (c) (d)
Short Term Funds Long Term Fund Medium Term Fund Bills
Answer: Short Term Funds
2. Main reason for the popularity of London money market is the (a) (b) (c) (d)
existence of Acceptance house Discount house Acceptance & Discount house None
Answer: Acceptance & Discount House
3. The lender of the Indian money market is: (a) Government of India (b) Ministry of Financial (c) Indian Bank Association (d) Reserve Bank of Indian Answer: Reserve Bank of Indian
