MONEY MARKET Chapter 3 “Financial Services” by R Shanmugham Copyright  2009 Wiley India Pvt. Ltd. All rights reserved.

Learning Goals: To explain the structure of money market. To know the role of market participants To understand the characteristics of money market instruments To review the current developments in the debt market   “Financial Services” by R Shanmugham Copyright  2009 Wiley India Pvt. Ltd. All rights reserved.

INTRODUCTION Constituent of the financial market Fulfills short term financing needs Banks and financial institutions are the major players Corporates access the money market for working capital finance “Financial Services” by R Shanmugham Copyright  2009 Wiley India Pvt. Ltd. All rights reserved.

MONEY MARKET: CONCEPT Market for short term funds or short term securities No physical place; ‘telephonic’ market Deals with T-Bills, repos, CPs, CDs etc. Inter bank market (call loan market) Securities are relatively less risky ; earn nominal returns Instruments have a maturity period of less than 365 days “Financial Services” by R Shanmugham Copyright  2009 Wiley India Pvt. Ltd. All rights reserved.

Structure of the Money Market Inter bank market Treasury Bill market Commercial Bill Market Inter corporate deposit market Commercial Paper (CP) Market “Financial Services” by R Shanmugham Copyright  2009 Wiley India Pvt. Ltd. All rights reserved.

Money Market Participants RBI Commercial Banks Corporates, High Net Worth Individuals, Insurance companies, Mutual funds, Pension Funds, Provident Funds etc. Primary Dealers(PDs) are the money Market intermediaries; participate in G Sec auctions; provide liquidity in the secondary market operations. “Financial Services” by R Shanmugham Copyright  2009 Wiley India Pvt. Ltd. All rights reserved.

Activities of PDs : Case Study of SBIDFHI Ltd. Stand-alone PDs are allowed the following activities as core activities: 1. Dealing and underwriting in Government securities. 2. Dealing in Interest Rate Derivatives. 3. Providing broking services in Government securities. 4. Dealing and underwriting in Corporate / PSU / FI bonds/ debentures. Contd… “Financial Services” by R Shanmugham Copyright  2009 Wiley India Pvt. Ltd. All rights reserved.

5. Lending in Call/ Notice/ Term/ Repo/ CBLO market. 6. Investment in Commercial Papers. Investment in Certificates of Deposit. Investment in Security Receipts issued by Securitization Companies/ Reconstruction Companies, Asset Backed Securities (ABS), Mortgage Backed Securities (MBS). Investment in debt mutual funds where entire corpus is invested in debt securities. Contd… “Financial Services” by R Shanmugham Copyright  2009 Wiley India Pvt. Ltd. All rights reserved.

1. Investment / trading in equity and equity derivatives market. PDs are permitted to undertake the following activities under non-core activities: Activities, which are expected to consume capital, such as: 1. Investment / trading in equity and equity derivatives market. 2. Investment in units of equity oriented mutual funds 3. Underwriting public issues of equity SOURCE: www.sbidfhi.com “Financial Services” by R Shanmugham Copyright  2009 Wiley India Pvt. Ltd. All rights reserved.

Money Market Instruments 1. Treasury Bills: ‘IOU’s of the Government Used for short term borrowings Tenor of 91 days,182 days and 364 days Issued at discount Risk free Liquidity “Financial Services” by R Shanmugham Copyright  2009 Wiley India Pvt. Ltd. All rights reserved.

2. Dated Government Securities Govt. Bonds Sold through NDS Eligible as SLR securities Active secondary market Institutional participation New instruments : STRIPs “Financial Services” by R Shanmugham Copyright  2009 Wiley India Pvt. Ltd. All rights reserved.

3. Certificate of Deposits(CDs) Usance Promissory Notes issued by Banks Akin to Fixed deposits Negotiable Issuance of CDs help banks to mobilise resources Maturity ranges from 7 days to 1 year. Traded in secondary market. “Financial Services” by R Shanmugham Copyright  2009 Wiley India Pvt. Ltd. All rights reserved.

4. Commercial Papers(CPs) Unsecured Promissory Notes issued by Companies, Primary Dealers, and FIs Issued at discount to face value. Issuance is subject to certain conditions: Companies with a min. net worth of Rs 4 crores P2 rating Mutual funds are active investors in CPs NBFCs : major issuers “Financial Services” by R Shanmugham Copyright  2009 Wiley India Pvt. Ltd. All rights reserved.

Ready Forward Contracts or Repurchase Options 5. REPOs Ready Forward Contracts or Repurchase Options Used in Inter-bank market May be an overnight repo or term repo Seller of the security is the borrower and the buyer is the lender From the buyer’s angle it is called reverse repo “Financial Services” by R Shanmugham Copyright  2009 Wiley India Pvt. Ltd. All rights reserved.

Bills of Exchange arising in trade transactions 6. Commercial Bills Bills of Exchange arising in trade transactions Holder of the bill discounts the bills with commercial banks Banks in turn may rediscount to raise resources Active secondary market “Financial Services” by R Shanmugham Copyright  2009 Wiley India Pvt. Ltd. All rights reserved.

Debt Market : A Review Two segments of the govt. securities market : G-Sec market and Corporate debt market G-Sec market is larger than corporate debt market G-Sec market: T- Bills and all central govt. issued and state govt. issued securities are traded Corporate Debt market: PSU Bonds, Bonds issued by FIs and Bonds/Debentures issued by companies. “Financial Services” by R Shanmugham Copyright  2009 Wiley India Pvt. Ltd. All rights reserved.

How do the debt markets impact the economy Opportunity for investors to diversify Higher liquidity and control over credit. Better corporate governance Improved transparency. Encouraging low-risk investments: leads tinflow of funds in the economy. Contd… “Financial Services” by R Shanmugham Copyright  2009 Wiley India Pvt. Ltd. All rights reserved.

Implementation of a monetary policy. The government can raise funds at lower costs by issuing government securities Implementation of a monetary policy. Reduced role of banks and political intervention in use of funds, as banks have to follow norms laid down by the central bank. Contd… “Financial Services” by R Shanmugham Copyright  2009 Wiley India Pvt. Ltd. All rights reserved.

Features of G- Sec market Interest rate deregulation Institutional developments: FIMMDA and PDAI New Instruments: Zero coupon, Capital Indexed Bonds, FRBs Widening of Investor Base Interest Rate derivatives “Financial Services” by R Shanmugham Copyright  2009 Wiley India Pvt. Ltd. All rights reserved.

Corporate Bond market Corporate Bonds carry risks Risks depend up on company’s credit rating, market conditions Most of the bonds were issued through Private placement route Institutional investors play a key role FIMMDA brings out aggregate data on the. market Secondary market for corporate bonds is weak “Financial Services” by R Shanmugham Copyright  2009 Wiley India Pvt. Ltd. All rights reserved.

CONCLUSION Active Corporate bond market requires rationalisation of stamp duty structure and abolition of tax deduction at source. In periods of fall in equity prices corporate bond market offers opportunity for investors Potential for growth of the corporate bond market exists. “Financial Services” by R Shanmugham Copyright  2009 Wiley India Pvt. Ltd. All rights reserved.