MONEY MARKET INSTRUMENTS (Constituents) or Structure of Indian money Market
The entire money market can be
divided into two parts. They are
a) Organised
money market
b) Unorganized
money market.
Organised money markets are also
known as authorised money market and unorganized money markets are known as
unauthorized money market. Both of these components comprises off several
components which are illustrated below with the help of a chart:
After
studying above organizational chart of the Indian money market it is necessary
to understand various components or sub markets within it. They are explained
below:
1.
Call Money: Call/Notice money is an amount borrowed or
lent on demand for a very short period. If the period is more than one day and
up to 14 days it is called 'Notice money' otherwise the amount is known as Call
money'. Intervening holidays and/or Sundays are excluded for this purpose. No
collateral security is required to cover these transactions:
Features of Call Money:
i.
The call market enables the banks and
institutions to even out their day-to-day deficits and surpluses of money.
ii.
Commercial banks, Co-operative Banks and
primary dealers are allowed to borrow and lend in this market for adjusting
their cash reserve requirements.
iii. Specified
All-India Financial Institutions, Mutual Funds and certain specified entities
are allowed to access Call/Notice money only as lenders.
iv. It is a
completely inter-bank market hence non-bank entities are not allowed access to
this market.
v.
Interest rates in the call and notice money
market are market determined.
2.
TREASURY BILLS MARKET: In the
short term, the lowest risk category instruments are the treasury bills. RBI
issues these at a prefixed day and a fixed amount. These are four types of
treasury bills.
i.
14-day Tbill- maturity is in 14
days. Its auction is on every Friday of every week. The notified amount for
this auction is Rs. 100 crores.
ii.
91-day Tbill- maturity is in 91
days. Its auction is on every Friday of every week. The notified amount for
this auction is Rs. 100 crores.
iii.
182-day Tbill- maturity is in 182
days. Its auction is on every alternate Wednesday (which is not a reporting
week). The notified amount for this auction is Rs. 100 crores.
iv.
364-Day Tbill- maturity is in 364
days. Its auction is on every alternate Wednesday (which is a reporting week).
The notified amount for this auction is Rs. 500 crores.
A considerable part of the government's borrowings happen through
Tbills of various maturities. Based on the bids received at the auctions, RBI
decides the cut off yield and accepts all bids below this yield.
3. INTER-BANK TERM MONEY:
Interbank market for deposits of maturity
beyond 14 days and up to three months is referred to as the term money market.
The specified entities are not allowed to lend beyond 14 days. The development
of the term money market is inevitable due to the following reasons
i.
Declining
spread in lending operations
ii.
Volatility in
the call money market
iii.
Growing
desire for fixed interest rates borrowing by Corporates
iv.
Move towards
fuller integration between forex and money market
v.
Stringent guidelines by
regulators/management of the institutions
4. CERTIFICATE OF DEPOSITS: After treasury bills, the next lowest
risk category investment option is the certificate of deposit (CD) issued by
banks and FIs. CDs are issued by banks
and FIs mainly to augment funds by attracting deposits from Corporates, high
net worth individuals, trusts, etc. the issue of CDs reached a high in the last
two years as banks faced with reducing deposit base secured funds by these
means. The foreign and private banks, especially, which do not have large
branch networks and hence lower deposit base use this instrument to raise
funds.
The rates on these deposits are determined by various factors. Low
call rates would mean higher liquidity in the market. Also the interest rate on
one-year bank deposits acts as a lower barrier for the rates in the market.
5. INTER-CORPORATES DEPOSITS MARKET: Apart from CPs, Corporates also have
access to another market called the inter- Corporates deposits (ICD) market. An
ICD is an unsecured loan extended by one Corporates to another. Existing mainly
as a refuge for low rated Corporates, this market allows funds surplus
Corporates to lend to other Corporates. Also the better-rated Corporates can
borrow from the banking system and lend in this market. As the cost of funds
for a Corporates in much higher than a bank, the rates in this market are
higher than those in the other markets. ICDs are unsecured, and hence the risk
inherent in high. The ICD market is not well organised with very little
information available publicly about transaction details.
6. COMMERCIAL PAPER MARKET
(CP): CPs is negotiable short-term unsecured promissory notes with fixed
maturities, issued by well rated companies generally sold on discount basis.
Companies can issue CPs either directly to the investors or through banks /
merchant banks (called dealers). These are basically instruments evidencing the
liability of the issuer to pay the holder in due course a fixed amount (face
value of the instrument) on the specified due date. These are issued for a
fixed period of time at a discount to the face value and mature at par.
7. READY FORWARD CONTRACT: It is a transaction in which two parties agree
to sell and repurchase the same security. Under such an agreement the seller
sells specified securities with an agreement to repurchase the same at a
mutually decided future date and a price. Similarly, the buyer purchases the
securities with an agreement to resell the same to the seller on an agreed date
in future at a predetermined price. Such a transaction is called a Repo when
viewed from the prospective of the seller of securities (the party acquiring fund)
and Reverse Repo when described from the point of view of the supplier of
funds.
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