Money Market's Instruments

Participants in the Money Market
• Central Government-------G-Secs, T-bills

• State Government
• Public Sector Undertakings
• Scheduled Commercial Banks (SCBs)
• Private Sector Companies
• Provident Funds
• General Insurance Companies
• Life Insurance Companies
• Mutual Funds
• Non-Banking Finance Companies
Structure of Money Market in India
• Call Money Market
• Bill Market
a) Treasury bills
b) Commercial bills
• Commercial Papers
• Bank loans (short-term)
 Organised money market comprises RBI,
banks (commercial and co-operative)
Call Money Market…….
• Money at Call
• Inter Bank
• Few Hours to 14 days
• Call Rate
• Harshad Mehta Scam
Call money market (1)
 Is an integral part of the Indian money market
where day-to-day surplus funds (mostly of
banks) are traded.
 The loans are of short-term duration (1 to 14
days). Money lent for one day is called ‘call
money’; if it exceeds 1 day but is less than 15
days it is called ‘notice money’. Money lent
for more than 15 days is ‘term money’
 The borrowing is exclusively limited to banks,
who are temporarily short of funds.
Call money market (2)
 Call loans are generally made on a clean basis- i.e.
no collateral is required
 The main function of the call money market is to
redistribute the pool of day-to-day surplus funds of
banks among other banks in temporary deficit of
funds
 The call market helps banks economise their cash
and yet improve their liquidity
 It is a highly competitive and sensitive market
 It acts as a good indicator of the liquidity position
Call Money Market Participants
 Those who can both borrow and lend in the
market – RBI , banks and primary dealers
 Once upon a time, select financial institutions
viz., IDBI, UTI, Mutual funds were allowed in
the call money market only on the lender’s
side
 They were phased out and call money
market is now a pure inter-bank market
(since August 2005)
Treasury Bill
• Promissory notes or financial bills issued by the
RBI on behalf of the Government of India.
• Two types---(a) Ordinary or Regular Treasury Bills
• (b) Ad Hoc Treasury Bills
• Maturity Period:- 14 days to 364 days.
• Zero risk instruments
• Interest rate are not very attractive.
• Treasury Bills sold on discount to face value and
face value paid on maturity
• Treasury Bills are sold by bidding.
Commercial Bill Market
o Still Underdeveloped in India
o Agriculture or Industrial Goods
o Bill payable in 30,60 or 90 days.
o Bill drawn by seller on buyer-----Buyer’s bank
will make promise of payments after receiving
some commission------that bill can be sold in
market at discount.
Market for Commercial Papers
• Introduced by government in 1990.
• Issued by a listed company having working
capital of more than or equal to Rs. 5 Crore.
• CP can be issued in multiple of Rs. 25 lakhs.
• However minimum subscription of Rs. 1 crore.
• Maturity period of minimum 3 months and
maximum 6 months.
Market for Commercial Papers………
• When issued by banks called Certificate of
Deposits (CDs)
• Interest rate is more than savings account.
• Heavy penalty is required to be paid if
withdrawal is before maturity.
Purpose of the money market
 Banks borrow in the money market to:
 Fill the gaps or temporary mismatch of funds
 To meet the CRR and SLR mandatory
requirements as stipulated by the central bank
 To meet sudden demand for funds arising out of
large outflows (like advance tax payments)
 Call money market serves the role of

equilibrating the short-term liquidity position
of the banks
Bill Market
 Treasury Bill market- Also called the T-Bill market
 These bills are short-term liabilities (91-day, 182-day,
364-day) of the Government of India
 It is an IOU of the government, a promise to pay the
stated amount after expiry of the stated period from
the date of issue
 They are issued at discount to the face value and at
the end of maturity the face value is paid
 The rate of discount and the corresponding issue price
are determined at each auction
 RBI auctions 91-day T-Bills on a weekly basis, 182-
day T-Bills and 364-day T-Bills on a fortnightly basis
on behalf of the central government
Money Market Instruments (1)
 Money market instruments are those which
have 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
Money Market Instruments(2)
 Certificates of Deposit
 Commercial Paper
 Inter-bank participation certificates
 Inter-bank term money
 Treasury Bills
 Bill rediscounting
 Call/notice/term money
 CBLO
 Market Repo
Certificates of Deposit
 CDs are short-term borrowings issued by all scheduled
banks and are freely transferable by endorsement and
delivery.
 Introduced in 1989
 Maturity of not less than 7 days and maximum up to a
year. FIs are allowed to issue CDs for a period between
1 year and up to 3 years
 Subject to payment of stamp duty under the Indian
Stamp Act, 1899
 Issued to individuals, corporations, trusts, funds and
associations
 They are issued at a discount rate freely determined by
the market/investors
Commercial Papers
 Short-term borrowings by corporates, financial institutions,
primary dealers from the money market
 Can be issued in the physical form (Usance Promissory
Note) or demat form
 Introduced in 1990
 When issued in physical form are negotiable by
endorsement and delivery and hence, highly flexible
 Maturity is 7 days to 1 year
•Unsecured and backed by credit rating of the
 issuing company
 Issued at discount to the face value

Market Repos
 Repo (repurchase agreement) instruments enable
collateralised short-term borrowing through the selling of
debt instruments
 A security is sold with an agreement to repurchase it at a
pre-determined date and rate
 Reverse repo is a mirror image of repo and reflects the
acquisition of a security with a simultaneous commitment
to resell
 Average daily turnover of repo transactions (other than
the Reserve Bank) increased from Rs.11,311 crore
during April 2001 to Rs. 42,252 crore in June 2006
Collateralised Borrowing and
Lending Obligation (CBLO)
 Operationalised as money market instruments by
Clearing Corporation of India Ltd. (CCIL)
 and Reserve Bank of India (RBI) in 2003.
Follows an anonymous, order-driven and online
 trading system
On the lenders side main participants are mutual
 funds, insurance companies.
Major borrowers are nationalised banks, PDs and
 non-financial companies
The average daily turnover in the CBLO segment
increased from Rs. 515 crore (2003-04) to Rs. 32,
390 crore (2006-07)
Collateralised Borrowing and Lending
Obligation (CBLO)
• The CBLO is a money market segment where
short-term loans can be secured by financial
institutions in order to cover their transactions.
• To gain access to these funds, the financial
institution must provide eligible securities
as collateral.
• Eligible securities for collateral include Central
Government securities, such as Treasury Bills,
with at least six months left to the maturity date.
Developments in Money Market
 Prior to mid-1980s participants depended heavily on

the call money market
 The volatile nature of the call money market led to
the activation of the Treasury Bills market to reduce
dependence on call money
 Emergence of market repo and collateralised
borrowing and lending obligation (CBLO)
instruments
 Turnover in the call money market declined from Rs.
35,144 crore in 2001-02 to Rs. 14,170 crore in
2004-05 before rising to Rs. 21,725 crore in 2006-07

Money Market's Instruments

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Money Market's Instruments

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Participants in the Money Market

• Central Government-------G-Secs, T-bills

 Call money market serves the role of

 Prior to mid-1980s participants depended heavily on

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