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Organized Indian Money Market

Organized Indian Money Market

Call Money Market

  • This market deals in one-day loans, also known as call loans or call money. Such loans may or may not be renewed the next day.
  • The main participants, both on lending and borrowing site, in this market are banks. The deficit and surplus banks are brought together by the brokers. This market is very sensitive as the cash position of different banks and keeps on changing drastically. Thus, it acts as possibly the best available indicator of the liquidity position of the organized money marked.
  • During the 1980s, the Indian Banks Association (IBA) had put a ceiling of 10% on the call money rate. However, with the establishment of Discount and Finance House of India (DFHI) in 1988, DFHI was allowed operate both on the lender and borrower sides and was exempted from the ceiling rate set by IBA.
  • In May 1989, the ceiling on call money rate was withdrawn altogether. These measures were taken to correct the imbalance between supply and demand for funds in the call money market.

The Treasury Bill Market

  • The treasury bills are short term liability of the Central Government i.e. if the government needs funds temporarily (for not more than one year), it may get it by issuing treasury bill.
  • Treasury bills are of two types — ad hoc and ordinary. Ad hoc treasury bills are issued for providing investment outlets to state Governments, semi government departments etc. They are not sold to general public and are not marketable.
  • The ordinary treasury bills are freely marketable and can be sold to the public or banks.
  • The treasury bill market in India is not well developed. The very low treasury bill rate had kept the interest cost of treasury bill debt to government very low. Thus government was often tempted to raise funds in this manner. RBI, on the other hand, had to purchase all the ad hoc bills and rediscount all the ordinary bills.
  • This process had led to large scale “monetization of government debt”, thus expanding money supply in the economy and causing inflation.
  • Keeping in mind above harmful effect, since April 1997, wide ranging changes have been made in respect of the treasury bills. The system of ad hoc treasury bills was totally discontinued since 1977. In its place, ways and means advances were introduce to finance Central Government temporary deficits.
  • Some other types of treasury bills introduced by the Government in recent years are as follows:
  • 182-days Treasury Bills which are sold through fortnightly auctions. They carry attractive rates of interest and are safe. Thus, they are popular with commercial banks.
  • 364-days Treasury Bills were introduced in 1992 and are sold through fortnightly auctions.

The Repo Market

  • Repo transaction is a money market instrument under which securities are sold by their holders to an investor with an agreement to repurchase them at a predetermined rate at some future date.
  • Under reverse repo transaction, securities are purchased with a simultaneous commitment to resell at a predetermined rate and date.
  • The repo market has been widened by the RBI gradually, by allowing repo transactions in all government securities and treasury bills of all maturities.
  • At present, State Government securities, PSEs’ bonds and private corporate securities have been made eligible for repos to broaden the repo market.

Commercial Bill Market

  • The Commercial bills are issued by firms engaged in business. The basic purpose of these bills is to reimburse the seller while the buyer delays payment.
  • The seller becomes the drawer of the bill while the buyer becomes the drawee.
  • The drawer may carry the bill to the particular bank with this account and receive the payment due to him after deduction of some charges like interest on the remaining life of the bill. The interest rate charged is known as discount rate on bills.
  • These bills are very important device for providing short-term finance to trade and industry. This is provided by selling the bill by one bank to another.
  • At the time of selling the bill, the seller endorses the bill in favour of the buying bank. Thus, the buying bank is protected against the risk of default. In addition, since the drawee of the bill generally manages to recover the cost of goods from their sale, the bill acquires a self-liquidating character.
  • The Indian Commercial Bill market is not a well-developed one. Even the initiatives made by RBI through the new bill market scheme in 1970, have not been very successful mainly due to dominance of cash credit system of credit delivery where the onus of cash management rests with banks.

The Certificate of Deposits (CD) Market

  • CD is the certificate issued by a bank other bank or institutions who deposit funds on a short term basis. They are similar to the term deposits in nature except the fact that CDs are tradable in short term money market.
  • This instrument was introduced by RBI in 1989 to widen the range of money market instruments.
  • Initially only the commercial bank were allowed to issue CDs, but since 1993 six financial institutions — Industrial Development Bank of India, Industrial Finance Corporation of India, Industrial Credit and Investment Corporation of India, Indian Reconstruction Bank of India, Small Industries Development Bank of India and Export-Import Bank of India were allowed to issue CDs.

The Commercial Paper (CP) Market

  • CP is an instrument to raise short-term funds by the corporate sector. It was introduced in India in 1990.
  • The CPs can be issued by a listed company which has a working capital of not less than Rs.5 crore. Its maturity ranges from three months to six months and they are issued in multiples of Rs. 25 lakh. In accordance with the REV guidelines, to issue a CF, a company will have to obtain P2 rating from CRISIL or A2 rating from ICRA every six months.    Organized Indian Money Market

Money Market Mutual Funds (MMMF)

  • It is a kind of mutual funds in short-term where individual investor can invest mutually to get short-term returns. It was introduced by the RBI in 1992.
  • Since November 1995, banks, public financial institutions and private sector institutions were also allowed to set up MMFs. Since Apri11996, MMMFs are allowed to issue units to corporate enterprises and others.
  • During 1996-97, the scheme of MMMFs was made more flexible by bringing it on par with all other mutual funds by allowing investment by Corporates and others. Later the lock-in period was also decreased from 45 days to 15 days. In 1997-98, the MMMFs were permitted to make investments in rated corporate bonds and debentures with residual maturity of up to one year.  Organized Indian Money Market
  • Since March 2000, the MMFs have been brought under the purview of the SEBI regulations. Banks are now allowed to set up MMMFs only as a separate entity in the form of trust.

Money Market Developments in 2012-13

  • As a result of the reduction in the policy (repo) rate in the Annual monetary policy statement 2012-13 (released on April 17, 2012) and improvement in liquidity conditions, the average daily call money rate declined to 7.92 per cent in September 2012 from 8.14 per cent in June 2012 (9.17 per cent in March 2012). Call money rates in latter months have moved in a narrow range.
  • Interest rates on commercial paper and certificate of deposits also peaked in March 2012 and decelerated thereafter in line with the moderation in interest rates for other instruments.
  • Banks and primary dealers remained the major groups of borrowers in the collateralized segments, while mutual funds (MFs) remained the major group of lenders in the collateralized borrowing and lending obligation (CBLO) segment.
  • But, recently, the share of MFs in total lending has declined in the market repo segment, and nationalized banks have emerged as the major group of lenders in this segment. The collateralized segment continued to remain the predominant segment of the overnight money market; its share was around 78 per cent during the financial year (till December 2012).
  • The amount of outstanding CD declined from around Rs.4195 billion at end-March 2012 to around Rs.3030 billion at mid- December 2012, which indicates decline in net issuances. The weighted average effective interest rate (WAEIR) of CDs declined to 8.6 per cent at mid-December 2012 from 11.1 per cent at end- March 2012.  Organized Indian Money Market
  • During 2012-13 so far, the commercial paper (CP) market also picked up and the average size of fortnightly issuance increased significantly to Rs. 317 billion (till end December 2012). The weighted average discount rate decreased to 9.04 per cent in December 2012 from 12.2 per cent in March 2012.

 

 

Indian Economy

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