Banking II Chap 2 Money Market

MONEY
MARKET
Erum Hussain
Department of Commerce
Dr. D. Y. Patil Arts, Commerce & Science
College, Pimpri, Pune-18
Money Market
 Money market is a place for trading in money and short
term financial assets that are close substitutes of money.
 Provides an opportunity for balancing the short term

surplus funds of investors with short term requirements of
borrowers.
 Market for short term loans i.e. less than one year.
 Do not deal in money but near money assets.
 Money market is not a place but an activity.
 The transactions are carried out by telephone, mail

etc. among people who may have never met one
other.
 Example: Bombay money market, New York money

market
The centre for dealings, mainly short term
character, in monetary assets; it meets the
short term requirements of borrowers and
provide liquidity and cash to the lenders.
Characteristics of Money Market
 RBI occupies an important position in the money market.
 Provides short term funds to various borrowers.
 Efficient mechanism for cost control, credit control.
 Enables businessmen to invest their temporary surplus

Characteristics of a
developed money Market
Developed commercial banking system
Presence of a central bank
Availability of ample resources
Near money assets

Sub markets
Players in Indian Money
Market
 RBI
 Commercial banks
 Financial institutions
 Brokers
 Corporate units
 Discount and finance house of India
Functions Of Money Market
1. Economic development of the country:
 Provide short term funds
 Ensures regular supply of funds through its sub- markets

and instruments
 Helps in economic development by providing financial

assistance to trade, commerce and industry.
2. Profitable investment:
o Helps commercial banks to use their excess reserves in
profitable investments. Maximize profits by investing
their excess reserves.
o Excess reserves are invested in near money assets which

are highly liquid and can be easily converted into cash.
3. Help to government: Borrows short term funds at very
low interest rates.
4. Help to commercial Bank: the banks with deficit of

funds can raise funds from money market at a low rate of
interest.
5. Encouragement to Savings and investment: it

encourages saving and investment by transferring funds
from one sector to another sector.
Money
Market
Components Institutions Instruments

Collateral
Acceptance
loan
Market
Market
Call money
Bill Market
Market
Components
1. Call Money Market
 It is the market for very short term funds, also called money at
call and short notice.
 These loans are given for a very short period not exceeding 7
days.
 More often from day to day or for overnight only i.e. 24 hours.
 Highly liquid market
 Loans are unsecured

2. Collateral loan market
 Backed by the securities, stocks and bonds.
 Collateral securities may be in the form of some valuable say

govt. bonds which are easily marketable and do not fluctuate
much in prices.
 The collateral is returned to the borrower when the loan is

repaid
 Once the borrower is unable to repay the loan, the collateral

becomes the property of the lender.
 These loans are given for few months.

3. Acceptance Market
 Bankers’ acceptance is a draft drawn by an individual or a
firm upon a bank and accepted by the bank whereby it is
ordered to pay to the order of a designated party or to
bearer a certain sum of money at a specified time in future.
 The market where the bankers’ acceptance are easily sold

and discounted is known as acceptance market.
A banker’s acceptance can be easily discounted in the

money market because they carry signature of the bankers.
4. Bill Market
 Itis a market in which short term papers or bills
are bought and sold.
Short
Bills of Treasury
term
exchange bills
papers
A bill of exchange is a written unconditional order which
is signed by the drawer requiring the drawee to pay on
demand or at fixed future time, a definite sum of money.
 Treasury bills are government papers securities for a short

period usually of 91 days duration.
 Treasury bills are promissory notes of the government to

pay a specified sum after a specified period.
MONEY
MARKET
INSTITUTIONS
1. Commercial Banks
 These are the backbone of the money market.
 These banks use their short term deposits for financing

trade and commerce for short period.
 Theyinvest their surplus funds in discounting bills of

exchange.
 Commercial banks put their excess reserves in different

forms or channels of investments which satisfy their
liquidity and profitability needs.
2. Central bank
 Plays a vital role
 Monetary authority
 Acts as an apex institution
 Lender of last resort
 Controller and guardian of money market
 Raisesor reduces the money supply and credit to ensure

economic stability in the economy.
3. Acceptance Houses
 Functions as intermediaries between importers and
exporters and between lenders and borrowers in the
short period.
 Specialize in acceptance of commercial bills/trade

bills.
4. Non-banking financial
intermediaries
 Resort to lending and borrowing of short term funds
in the money market.
 E.g. Insurance companies, investment houses,

provident funds etc.
Money
market
instruments
Treasury bills
Call and
Commercial short notice
Bills money
market
Instruments
REPO Certificate of
deposits
Commercial
Paper
1. Commercial bills
 Written instrument containing an unconditional order
 Signed by the drawer
 Directing a certain person to pay a certain sum of
money only to, or order of a certain person, or to
bearer of an instrument at a fixed time in future or on
demand
 Bill drawn when goods are sold on credit
 Buyer accepts the bill and return to seller
 The seller may either retain the bill or get it
discounted
2. Treasury Bills
 It is a short term government security
 Usually of 91 days, 180 days or 365 days duration
 Sold by central bank on behalf of government
 No fixed rate of interest payable
 Sold on basis of competitive bidding

3. Call and short notice money
 Call money refers to money given for very short period
 Taken for a day or overnight but not exceeding seven

days in any circumstances.
 Notice money refers to a money given for upto 14 days
 If the loan is given for 1 day – Money at call
 Ifloan cannot be called back on demand and will require

notice of atleast 3 days – Money at short notice
4. Certificate of deposit
 These are marketable receipts in bearer or registered form
of funds deposited in a bank for a specified period at
specified rate of interest
 Freely transferable
 Liquid and riskless in terms of default of payment of

interest and principal.
5. Commercial Papers
 These are short term usance promissory notes
 Issued by reputed companies with good credit rating

and having sufficient tangible assets
 Negotiable by endorsement and delivery
 Normally issued by banks, public utilities, insurance

and finance companies.
6. REPO
 Under REPO, holder of securities sells them to an
investor with an agreement to repurchase at
predetermined date and rate.
 Also called ready forward transaction as it involves

selling a security on spot basis and repurchasing the
same on forward basis.
Defects in Indian money market
a
• Existence of unorganized money market
• Seasonal diversity of money market
nb
• Lack of integration
Nn • Disparity in interest rates
• Lack of very well organized banking system

Defects in Indian money market
a
• Shortage of funds
• Narrow bill market
nb
• Wasteful Competition
Nn • Inadequate control by RBI
• No contact with Foreign money market

Reforms in Indian Money Market
Development Permission
Deregulation
of money Institutional to foreign
of interest
market development institutional
rates
instruments investors

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MONEY

 Provides an opportunity for balancing the short term

 Do not deal in money but near money assets.

 Money market is not a place but an activity.

 The transactions are carried out by telephone, mail

 Example: Bombay money market, New York money

 Provides short term funds to various borrowers.

 Efficient mechanism for cost control, credit control.

 Enables businessmen to invest their temporary surplus

Presence of a central bank

Availability of ample resources

Near money assets

 Ensures regular supply of funds through its sub- markets

 Helps in economic development by providing financial

o Excess reserves are invested in near money assets which

4. Help to commercial Bank: the banks with deficit of

5. Encouragement to Savings and investment: it

Components Institutions Instruments

 Highly liquid market

 Loans are unsecured

 Collateral securities may be in the form of some valuable say

 The collateral is returned to the borrower when the loan is

 Once the borrower is unable to repay the loan, the collateral

 These loans are given for few months.

 The market where the bankers’ acceptance are easily sold

A banker’s acceptance can be easily discounted in the

 Treasury bills are government papers securities for a short

 Treasury bills are promissory notes of the government to

 These banks use their short term deposits for financing

 Theyinvest their surplus funds in discounting bills of

 Commercial banks put their excess reserves in different

 Acts as an apex institution

 Lender of last resort

 Controller and guardian of money market

 Raisesor reduces the money supply and credit to ensure

 Specialize in acceptance of commercial bills/trade

 E.g. Insurance companies, investment houses,

 Usually of 91 days, 180 days or 365 days duration

 Sold by central bank on behalf of government

 No fixed rate of interest payable

 Sold on basis of competitive bidding

 Taken for a day or overnight but not exceeding seven

 Notice money refers to a money given for upto 14 days

 If the loan is given for 1 day – Money at call

 Ifloan cannot be called back on demand and will require

 Liquid and riskless in terms of default of payment of

 Issued by reputed companies with good credit rating

 Negotiable by endorsement and delivery

 Normally issued by banks, public utilities, insurance

 Also called ready forward transaction as it involves

• Seasonal diversity of money market

Nn • Disparity in interest rates

• Lack of very well organized banking system

• Narrow bill market

Nn • Inadequate control by RBI

• No contact with Foreign money market

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