Money Market

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Features of Money Market

  • Money market deals with all the transactions in short term instruments with a period of maturity of 0-364 days.
  • It is based on the Management of liquidity
  • It is largely regulated by RBI and to an extent by SEBI
  • It is a market where low risk, unsecured and short term debt instruments that are highly liquid are issued and actively traded every day.
  • One of the important functions of a well-developed money market is to channel savings into short term productive investments like working capital.
  • Call money market, treasury bills market, and markets for commercial paper and certificate of deposits are some of the examples of a money market.

MONEY MARKET INSTRUMENTS:

Treasury Bills (T-Bills)

  • An Instrument of short-term borrowing by the Government of India maturing less than one year.
  • These are also known as Zero Coupon Bonds. These are issued by RBI on behalf of Government of India to meet its short term requirement of funds
  • They are issued in the form of Promissory notes.
  • T-Bills are highly liquid and have assured yield with negligible risk of default.
  • They are issued in discount but then paid at par.
  • T-Bills are available for a Minimum amount of Rs. 25,000/- and in the multiple thereof.

Call Money Market

  • The call Money market forms a part of the national money market, where day-to-day surplus funds, mostly that of the banks are traded.
  • The call money loans are of very short term in nature and the maturity period of these loans vary from 1 to 15 days.
  • In this market, any amount could be lent or borrowed at a convenient interest rate, which is acceptable to both borrower and lender.
  • The loans are considered as highly liquid, as they are repayable on demand at the option of either the lender or the borrower.
  • Commercial Banks maintain CRR as per the directives of RBI. By using Call Money, banks borrow from each other to be able to maintain the CRR.
  • A rise in Call Money rates makes other sources of finances like CoDs and CPs cheaper.

Commercial Papers

  • Commercial Papers are short term, unsecured promissory notes issued at a discount to face value by well-known companies that are financially strong and carry high credit rating.
  • They have the maturity of 15 days to 1 year
  • They are sold directly by the issuers to the investor or else placed by borrowers through agents like merchant banks and security houses.
  • They are sold at discount and redeemed at par.
  • The flexible maturities at which they can be issued are one of the main attractions for borrowers and investors since issues can be adapted to the needs of both.
  • CPs are negotiable instrument transferable by endorsement and delivery.
  • The commercial paper market has the advantage of giving highly rated corporate borrowers cheaper funds than they obtain from the banks while still providing the institutional investor with higher interest earnings that they could obtain from the banking system. They can be used as an alternative to bank borrowings.
  • Funds raised through Commercial Paper are used to meet the floatation costs.
  • The issue of Commercial Paper imparts a degree of financial stability to the system as the issuing company has an incentive to remain financially strong.

Certificates of Deposits

  • Certificate of deposits is defined as short term deposit by way of usance promissory notes having a short maturity of not less than three months and not more than one year.
  • They are bank deposits which are transferable to one party to the other. They are different from conventional time deposits due to their free negotiability.
  • Due to this negotiable nature, they are also known as negotiable certificates of deposits.
  • They are issued in the period of tight liquidity when the deposits by individuals and households in less but demand for credit is high.
  • They help to mobilize large amounts of money in short time period.

Money Market Mutual Funds

  • Money Market Mutual Funds that invest primarily in money market instruments of very high quality and of very short maturity.
  • Commercial banks, RBI and public financial institutions can set it either directly or through their existing mutual funds subsidiaries.
  • The scheme offered by MMMF can either be open-ended or closed-ended.
  • In case of open-ended schemes, the units are available on continuous basis and the MMMF would be willing to repurchase the units, while a close ended scheme is available for subscription for a limited period and is redeemed at maturity.

Commercial Bills

  • Commercial Bill is a short-term, self-liquidating,negotiable instrument used for financing credit sales of a firm.
  • When Goods are sold on credit, the buyer becomes liable to make a payment on a specified date in future. The seller could wait till the specified date or make a use of a bill of exchange.
  • If the seller draws a Bill of Exchange on Buyer who accepts it then it becomes marketable instrument known as trade bills.
  • When a seller presents this to a bank and accepts it and gives funds against it to the seller, it becomes a commercial bill.

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