1. MONEY MARKET Chapter 3 “Financial Services” by R Shanmugham
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2. 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.

3. 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.

4. 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.

5. 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.

6. 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.

7. 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
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8. 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
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9. 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:
“Financial Services” by R Shanmugham
Copyright  2009 Wiley India Pvt. Ltd. All rights reserved.

10. 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
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11. 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
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12. 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.

13. 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.

14. 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.

15. 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.

16. 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.

17. 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
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18. 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
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19. 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.

20. 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.

21. 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.