Money Market
06/08/2020
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INTRODUCTION
❑ Its a market for financial assets that are close substitutes for money
❑ It is a market for overnight to short-term funds and instruments having a
maturity period of one or less than one year
❑ A collection of markets for several short term debt instruments
❑ Wholesale market
❑ Principal feature is honour
❑ Need -based market in the money market can be both secured and unsecured
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Functions of Money Market
❑ Provide balancing mechanism for demand and supply of short term fund
❑ Provide focal point for central bank intervention for influencing liquidity
and interest rates in the economy
❑ It facilitates the development of a market for longer-term securities
❑ To ensure an adequate flow of credit to the productive sectors of the
economy
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Money Market Instruments
❑ Treasury bills
❑ Commercial Paper
❑ Commercial Bills
❑ Certificates of Deposit
❑ Call/Notice money market
❑ Collateralised Borrowing and Lending Obligation
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Treasury Bills
❑ T-Bills are short-term instruments used by the government (RBI) to
raise short-term funds
❑ Repaid at par on maturity
❑ The difference of purchase price and the amount received on maturity
represents the interest amount on T-bills and is known as the discount.
❑ Tax deducted at source (TDS) is not applicable on T-bills
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Features of T-bills
❑ Negotiable and highly liquid securities
❑ Absence of default risk
❑ Assured yield, low transaction cost
❑ Security for SLR purposes
❑ Not issued in scrip form
❑ Currently there are 91-days, 182-days and 365 day T-bills
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Sale of T - bills
❑ The sale of T-bills is conducted through an auction
❑ Method helps in price discovery
❑ Competitive Bid: participants submit their bids to the Reserve Bank who then
decides the cutoff yield/price and makes the allotment
❑ Non-competitive Bid: participants are not allowed to bid, as they do not have
the expertise in bidding and are allotted bids at the weighted average price
determined in competitive bidding. (5 per cent of the notified amount)
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https://www1.nseindia.com/products/content/debt/ncbp/about_ncbp.htm
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Types of Auctions
Multiple-price Auction:
❑ Each winning bidder pays the price it bid
❑ The bank then decides the cutoff price at which the issue would be
exhausted
❑ Advantage of this method is that the Reserve Bank obtains the maximum
price each participant is willing to pay
❑ Disadvantage is Cautious bidding and winner’s curse
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Uniform-price Auction
❑ Each winning bidder pays the uniform price decided by the Reserve Bank
❑ Reserve Bank invites bids in descending order and accepts those that fully
absorb the issue amount
❑ Each winning bidder pays the same (uniform) price as decided by the Reserve
Bank
• Advantages: tend to minimize uncertainty and encourage broader
participation
• Disadvantage: need for the auction?, irresponsible bidding or of collusion
in a uniform price auction
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Implicit Yield at Cut-off Prices
❑ Treasury bills are sold at a discount.
❑ The difference between the sale price and the redemption value is the return
on the treasury bills or the treasury bill rate.
❑ If a T-bill(91 days) with a face value of Rs. 100 is issued at Rs. 98, then the
implicit yield is
❑ 8.16%
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Cash Management Bills
❑Short term Bills to meet the mis-match of cash flow of government
❑Has generic characteristics of T-bills but issued for matuarities less than
91 days
❑No Non-competitive bidding
❑But Tradable
❑SLR for banks
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bills/articleshow/76002019.cms?from=mdr
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Commercial Paper (CP)
❑ An unsecured short term promissory note issued at a discount
❑Negotiable and transferable by Endorsement and delivery with a fixed
maturity period.
❑ Issuers – Creditworthy corporates, Primary dealers and all India financial
institutions
❑Usually largest issuers of cps –leasing and finance companies
❑Privately placed with investors
❑ Attracts stamp duty
Process for issuing CP
❑ A resolution to be passed by the Board of Directors
❑ CP issue to be rated
❑ Select an Issuing and Paying Agent for verification of documents
❑ Arrange for dealers for placement of CP
❑ Report to the RBI regarding the issue
Guidelines relating to CPs
❑ Corporates, primary dealers and all India financial institutions eligible to
issue a CP
❑ Minimum credit rating P2 of Crisil
❑ Maturity period of minimum of 7 days and maximum upto one year from
the date of issue.
❑ Minimum of Rs 5 lakh and multiples
❑ To be issued in demat form
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Commercial Bills
Working Capital Requirement Of Business Firms Is Provided By Banks
Through Cash-credits/Overdraft And Purchase/Discounting Of Commercial
Bills
Commercial bills are negotiable instruments drawn by the seller on the buyer
which are, in turn, accepted and discounted by commercial banks.
A commercial bill is a short-term, negotiable, and self-liquidating instrument
with low risk
Bills of exchange are negotiable instruments drawn by the seller (drawer) on
the buyer (drawee) for the value of the goods delivered to him.
Such bills are called trade bills.
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…Commercial Bills
When trade bills are accepted by commercial banks, they are called
commercial bills.
The bank discounts this bill by keeping a certain margin and credits the
proceeds.
Banks, when in need of money, can also get such bills rediscounted by
financial institutions such as LIC, UTI, GIC, ICICI, and IRBI.
The maturity period : 30 days, 60 days, or 90 days, depending on the credit
extended in the industry.
