Financial Markets: Money Markets, Capital Markets, Government Securities Market Commerce YouTube Lecture Handouts Part 1

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Financial Markets: Money Markets, Capital Markets, Government Securities Market | Commerce
Financial Markets in India

Money Market

  • A correlation for short-term funds
    • with maturity ranging from overnight to one year
    • including financial instruments
    • that are deemed to be close substitutes of money
  • The Indian money market consists of diverse sub-markets, each dealing in a particular type of short-term credit.
  • A money market is highly liquid as it has instruments that have a maturity below one year.
  • Most of the money market instruments provide fixed returns.
  • The money market fulfills the borrowing and investment requirements of providers and users of short-term funds, and balances the demand for and supply of short-term funds by providing an equilibrium mechanism.
  • It also serves as a focal point for the central bank՚s intervention in the market.

Instruments of Money Market

Instruments of Money Market

Treasury Bills or T-Bills

  • These are money market instruments,
    • are short term debt instruments
    • are government bonds or debt securities
    • with maturity of less than a year.
    • issued by the Government of India and
    • are offered with maturities of 28 days (one month) , 91 days (3 months) , 182 days (6 months) , and 364 days (one year) .
  • Treasury bills are zero coupon securities and
    • pay no interest before the expiry of the maturity period.
    • are sold in auctions at a discount from the par value of the bill.
  • T- bills are issued to meet short-term mismatches in receipts and expenditure.
  • Bonds of longer maturity are called dated securities.
  • Considered as negotiable instrument because it is freely transferable and guarantees the payment of a specific amount of money through demand or after stipulated time.

Cash Management Bills (CMBs)

  • Short term bills issued by central government
  • To meet its immediate cash needs.
  • The bills are issued by the RBI on behalf of the government.
  • Hence the CMBs are short-term money market instruments that
  • Help the government to meet its temporary cash flow mismatches.

Call/Notice/Term Money

  • Facilitates lending and borrowing of funds between banks and entities like Primary Dealers.
  • An institution which has surplus funds may lend them on an uncollateralized basis to an institution which is short of funds.
  • Used for inter-bank transactions.
  • Call Money’ is the borrowing or lending of funds for 1 day.
  • Money borrowed or lend for period between 2 days and 14 days it is known as ‘Notice Money’ .
  • Term Money’ refers to borrowing/lending of funds for period exceeding 14 days.

Commercial Paper

The introduction of Commercial paper as the short-term monetary instrument was the beginning of a reform in Indian Money market on the background of trend of Liberalization which began in the world economy during 1985 to 1990.

  • Issued in the form of promissory note acts as the debt instrument to be used by large corporate companies for borrowing short-term monetary funds in the money market.
  • Before 1990, the corporate companies had to depend upon the crude and traditional method of borrowing working capital from the commercial banks by pledging the inventory of raw materials as Collateral security.
  • It involved more loss of time for the borrowing companies in availing the short-term funds for day-to-day production activities.
  • The commercial paper has become effective instrument for these corporate companies to avail the short-term funds from the money market within shortest possible time limit by avoiding the hassles of direct negotiation with the commercial banks for availing the short-term loans.
  • The main issuers of Commercial paper in this market are incorporated manufacturers and the main subscribers to the Commercial papers are the banking companies.
  • Commercial Paper is issued by the issuers at a discount to face value of Commercial paper. The face value of Commercial Paper is in the denomination of ₹ 0.5 million and multiples thereof.
  • The maturity period of Commercial paper in the Commercial Paper market ranges between minimum of 15 days and maximum of 1 year from the date of issue.
  • The other issuers of Commercial paper in this market are Primary dealers and All India Financial Institutions. The other investors or subscribers to Commercial paper in this market are individuals, Non-Resident Indians and Foreign Institutional Investors.