UNIT-II
Money Market
The financial markets deal with financial products (securities) and financial services. Financial markets are divided into two categories: money markets and capital markets.
Meaning of money market
The money market is part of the financial market. A market for short-term funds. Handles all transactions of short-term securities. These transactions have a maturity of up to one year.
Examples include bills of exchange and government bonds. These short-term bills can be converted into money at low transaction costs and without significant losses. Therefore, the money market is the market for short-term financial securities equal to money.
According to Clauser, "money market is a collective term given to different companies and institutions that handle different grades of near money."
The money market is not a place. It is an activity. This includes all organizations and institutions that handle short-term financial products. However, depending on the location, the money market may be given a geographical name -Mumbai Money Market.
Money market features
The characteristics of the money market are as follows:
1. It is a market for short-term financial assets that are a close substitute for money.
2. Basically the telephone market.
3. Wholesale market for short-term debt products.
4. It is not a single market, but a collection of markets for several commodities.
5. It facilitates the effective implementation of the country's central bank's monetary policy.
6. Transactions are made without the help of a broker.
7. Establish a link between RBI and the bank.
8. Money market players are RBIs, commercial banks, and businesses.
Money market function
The money market performs the following functions:
1. Facilitate the adjustment of liquidity positions of commercial banks, businesses and other non-bank financial institutions.
2. Allow central banks to influence and regulate economic liquidity through market intervention.
3. Provide reasonable access to short-term fund users to meet requirements quickly at a reasonable cost.
4. Provide short-term funding to the government. Institution.
5. Allow businessmen to invest temporary surplus funds in a short period of time.
6. Facilitate the flow of funds to the most important uses.
7. Act as a coordinator between borrowers and lenders of short-term funds.
8. Help promote the liquidity and security of financial assets.
Money Market Objectives:
The purpose of money markets is to implement national monetary policy. Monetary policy has three main objectives: growth, fairness and price stability. The purpose of monetary policy in the first decade of the plan was to revive traditional financial management weapons.
Over the next decade, the focus has shifted to economic growth and the management of the money supply. From the 1970s to the 1980s, faster economic growth and price stability were emphasized. Credit policies, on the other hand, have evolved to meet the credit needs of developing economies, and on the other hand to curb inflation prices. This policy has become referred to as "controlled extension".
In addition, monetary policy handles the following promotional aspects:
- Financial integration of the country,
- Direct credit flow according to policy priorities.
- Supporting the mobilization of community savings,
- Promotion of capital formation and
- Maintain an appropriate structure of relative prices and demand restraints.
When the balance of payments situation gained a critical dimension in the mid-1990s-91, the RBI through monetary and credit policy measures aimed at reducing imports and curbing demand. Since then, the focus of monetary policy has changed in line with the comprehensive package of stabilization and structural reform measures launched in mid-1991.
Features of a developed money market
Characteristics of advanced financial markets
There are several types of money markets in every country. Some of them are highly developed, while others are underdeveloped. Economic development requires a well-developed and efficient money market. The following are the characteristics or prerequisites of an efficient money market developed.
1. Highly developed commercial banking system: Commercial banks are the core of all short-term funds. They serve as important links between central banks and various segments of the money markets. When a commercial banking system is developed or organized, a money market is developed.
2. The existence of a central bank: In the advanced money market, there is always a central bank. Central banks are needed to direct and manage money markets. The central bank absorbs surplus cash during the off-season and provides additional funding during the busy season. This is done through open market operations. The central bank is a banker's bank, so it holds a reserve for commercial banks. We provide economical accommodation when you need it. If the central bank is unable to influence the money market, it means that the money market is not developing. In short, money markets will not work without the support of central banks.
3. Existence of submarkets: Money markets are a group of various submarkets. Each submarket offers a variety of maturity products. There should be many submarkets. The larger the number of submarkets, the wider and more developed the structure of the money market. In addition, submarkets need to be interrelated and integrated with each other. If there is no adjustment and consolidation between them, different interest rates will prevail in the submarket.
4. Availability of credit products: The existence of a developed money market requires the continued availability of easily accepted negotiable securities (quasi-monetary assets). In addition to various commodities and securities, the money market needs to have many dealers (participants) in order to trade these securities. It is the securities dealers who actually bring the money market to life.
5. Secondary Market Existence: There should be an active secondary market for these credit products. The success of the money market always depends on the secondary market. As the secondary market develops, there will be active trading of commodities.
6. Sufficient resource availability: Sufficient funds must be available to fund transactions in the submarket. These funds may come from both domestic and international. There are not enough funds in the money markets of developed countries. Therefore, the availability of sufficient funds is essential for the smooth and efficient functioning of the money market.
7. Supply and demand of funds: The money market should have a large supply and demand of funds. This also depends on the number of participants and the government. Policies that encourage investment in various sectors and RBI monetary policy.
8. Other factors: There are several other factors that also contribute to the development of the money market. These factors include industrial development, volume of international trade, political stability, trade cycle, foreign investment and price stability.
Importance of Money market
A well-developed money market is essential for the development of the country. Properly and quickly provide short-term funding to trade and industry. Developed money markets support the smooth functioning of financial systems in any economy in the following ways:
1. Trade and Industry Development: Money markets are an important source of funding for trade and industry. Money markets fund trade and industry working capital requirements through bills, commercial papers and more. It affects the availability of funds in both domestic and international trade.
2. Capital Market Development: Money Market Available Funds and Money Market Interest Rates Affect Capital Market Resource Mobilization and Interest Rates. Therefore, the development of capital markets depends on the existence of developed money markets. The development of the foreign exchange market and the derivatives market also requires the money market.
3. Useful for commercial banks: Money markets help commercial banks invest in assets that can easily realize surplus funds. Banks get their money back immediately when needed. This facility is provided by the money market. In addition, money markets allow commercial banks to meet the statutory requirements of CRR and SLR. In short, money markets provide a stable source of funding in addition to deposits.
4. Help Central Banks: Money markets help a country's central bank implement its monetary policy effectively. Money markets help central banks to effectively manage their finances through indirect methods (repo transactions and open market operations). In short, a well-developed money market helps the central bank to function effectively.
5. Formulation of appropriate monetary policy: Money market conditions serve as a true indicator of the financial condition of the economy. Therefore, it acts as a guide to the government. In the formulation and revision of monetary policy. In short, the government. Monetary policy can be formulated in consideration of the situation of the money market.
6. Help the government: The developed money market helps the government. Raise short-term funds through Treasury short-term securities floating on the market. Government if there is no developed money market. You will be forced to issue more banknotes or borrow from a central bank. This raises the money supply beyond the needs of the economy. Therefore, a general price level It will rise (economic inflationary trend). In short, the money market is a device for the government. To balance cash inflows and outflows.
Therefore, a well-developed money market is essential for economic growth and stability.
Key takeaways:
- Money markets encompass shopping for and promoting large quantities of very brief-term debt merchandise consisting of overnight reserves and business paper.
- Individuals can make investments inside the market by using buying a market open-quit fund, buying a treasury invoice, or starting a marketplace account at a bank.
- Money marketplace investments are characterized by security and liquidity, with a goal of $ 1 for cash market fund shares.
- Money market debts are furnished by using banks and credit unions.
- They typically pay higher interest costs than normal financial savings money owed and often include debit playing cards and restrained check writing privileges.
- Many banks also offer high-yielding or excessive-interest checking accounts. This can pay a better charge than a money market account, but imposes greater regulations.
- Money markets are prepared exchanges in which individuals lend and borrow massive amounts of cash within a year.
- Traders are attracted to money marketplace merchandise because of their superior security and liquidity.
- Quick-term investment swimming pools include market mutual funds, government funding pools, and quick-time period investment inside the financial institution consider sector.
- Cash marketplace mutual budget are the foremost accessible to people.
- Treasury short-term securities are issued frequently through the us treasury to refinance the troubles of the early t bill that has reached maturity and to assist the federal government enhance its deficit.
The money market is made up of several submarkets. All submarkets collectively form a money market. Each submarket deals with specific financial products. The main components or components or submarkets of the money market are:
1. Call the money market
2. Commercial bill market
3. Ministry of Finance short-term securities market
4. Certificate of Deposit Market
5. Commercial paper market
6. Acceptance market
7. Collateral loan market
1. Call the money market
Call money is mainly needed by banks. Commercial banks borrow money from other banks without collateral to maintain a minimum cash balance called the reserve requirement ratio (CRR). This interbank borrowing has led to the development of the call money market.
The money market is a very short-term loan market. When rented for a day, it is called call money. If the money is lent out for 1 to 14 days, it is called a short-term notice. Therefore, the call money market is a market where loan maturities fluctuate between 1 and 14 days. In the call money market, surplus funds of financial institutions and banks are traded. No collateral is required for call money.
In India, the call money market is mainly located in large industrial and commercial centers such as Mumbai, Kolkata, Chennai, Delhi and Ahmadabad.
Call Money Market Participants or Players
1. Scheduled commercial banks and RBI
2. Unplanned commercial bank
3. Cooperative
4. Foreign banks
5. Indian Discount and Finance House
6. Primary dealer
The above players are allowed to operate as both lenders and borrowers.
(1) LIC (2) UTI (3) GIC (4) IDBI (5) NABARD (6) Specific investment trusts, etc. The above participants are allowed to act as lenders.
2. Commercial bill market
The commercial bill market is another segment of the money market. A market for buying and selling commercial buildings (short term). Commercial buildings are an important tool. They are widely used in both domestic and foreign trade to fulfil business obligations (or to resolve business obligations). Discounts are the main process in this market. Therefore, the commercial bill market is also known as the discount market.
There is a specialized agency known as a discounter for discounting commercial bills accepted by a reputable accepting company. The RBI allows financial institutions, mutual funds, commercial banks, and co-operative banks to enter the commercial bill market.
3. Ministry of Finance short-term securities market
The Ministry of Finance short-term securities market is a market that handles short-term securities of the Ministry of Finance. Treasury short-term securities are bought and sold in this market. Treasury short-term securities are an important means of short-term borrowing by the government. These are promissory notes or a type of fiscal bill issued by the government. A fixed period not exceeding one year. Treasury short-term securities are used by the government. Raise short-term funding to meet the caretaker government. Deficit. Therefore, it represents government short-term borrowing.
Benefits or importance of the treasure building market benefits to issuers / governments.
1. Government can raise short-term funding to cover a temporary budget deficit.
2. Through the issuance of T-bill in the market, it is possible to absorb the excessive liquidity of the economy.
3. It does not lead to inflationary pressure.
Benefits for buyers / investors
1. It is a ready market for buyers or investors.
2. Investing is a safe haven.
3. Treasury short-term securities are securities subject to SLR requirements.
4. The market provides hedging function.
4. Certificate of Deposit Market
The CD market is a market that handles CDs. CDs are short-term deposit products for raising large amounts of money. These are short-term deposits that can be transferred from one party to another. Banks and financial institutions are the major publishers of CDs. These are short-term negotiable means.
Benefits of the CD market
1. This allows depositors to get higher returns on short-term surpluses.
2. The market offers maximum liquidity.
3. Banks can raise funds when they need them. This will improve your lending capacity.
4. The market provides banks with the opportunity to invest their surplus funds.
5. CD transaction costs are low.
5. Commercial paper market
The commercial paper market is another segment of the money market. This is a market for commercial paper. Commercial paper is an unsecured short-term promissory note issued by a large, well-established company with a high credit rating. These are issued at a discounted price. Commercial papers are now available to primary dealers and all Indian financial institutions. They can be issued (or purchased) to individuals, banks, businesses, and other registered Indian business entities. (Investor in CP)
RBI's role in the commercial paper market
The 1987 Money Market Working Group (Vaghul Committee) proposed the introduction of commercial paper (CP) in India.
Following the Commission's recommendations, the RBI introduced a commercial paper in January 1990. The Commission suggested that:
(A) CPs must be issued directly to investors or through banks.
(B) The CP issuer must have a net worth of Rs or higher. 5 rolls.
(C) The issuer's shares must be listed on the stock exchange.
(D) The minimum issuance amount must be Rs. Minimum face value of 1 rupee and Rs. 50,000 rupees
(E) The CP issuance cost must not exceed 1% of the procurement amount.
(F) RBI is the only authority to determine the size and timing of issuance.
(G) Financial instruments should not be subject to stamp duty at the time of issuance and should not be subject to withholding tax deductions.
(H) Interest on CP shall be determined by the market.
(I) The issuing company is required to obtain credit rating certification every 6 months, and "A" rated companies may be allowed to enter the market.
6. Acceptance market
The acceptance market is another element of the money market. It's a market for bankers to accept. Acceptance occurs for both domestic and foreign trade. A bank check is a draft created by a company at a bank and approved by that bank. You need to pay a specific amount to a specific party's order or owner on a specific date in the future. It is typically used to settle payments in international trade. Therefore, the acceptance market is a market where bankers' acceptance is easily sold and discounted.
7. Collateral loan market
The mortgage loan market is another important sector of the money market. The mortgage loan market is a market that handles mortgage loans. Collateral means what was pledged as collateral for loan repayment. Therefore, a mortgage loan is a loan backed by mortgage securities such as stocks and bonds. The mortgage loan will be offered for several months. The collateral will be returned to the borrower when the loan is repaid. If the borrower is unable to repay the loan, the collateral becomes the property of the lender. Borrowers are usually stocks or stock dealers.
Key takeaways:
- Money markets are not a single homogeneous market. It consists of several submarkets that collectively make up the money market.
- Competition must occur within each submarket and between different submarkets.
- Below are the main submarkets of the money market.
- Call the money market.
- Commercial building market or discount market.
- Acceptance market.
4. Treasury short-term securities market.
5. India's money market was tightly regulated and characterized by a limited number of participants.
6. Limited types and instruments were available. Interest rates on financial instruments were under the control of the Federal Reserve Bank of India.
7. When the government began reforming the financial sector, serious efforts were made to develop the money market.
8. The money market is a short-term, liquid bond market. These examples include banker consent, repos, certificates of deposit, and Treasury short-term securities with a maturity of one year or less, often 30 days or less.
9. Money market securities are generally very safe investments and are relatively profitable.
10. Low interest rates most suitable for temporary cash storage or short-term needs.
Money market instruments
Money markets are involved in buying and selling short-term commodities. Through these means, players or participants borrow or lend money on the money market. There are various products in the money market. The important money market products are: ---
- Phone and short-term notification
- Commercial building
- Ministry of Finance short-term securities
- Certificate of deposit
- Commercial paper
- Repo contract
- Money Market Mutual Fund.
- ADR / GDR
These products will be issued for a short period of time. These are interest-bearing securities. These devices are described in detail :
1. Telephone and short-term notice
These are short-term loans. Their maturity varies between 1 and 14 days. When you borrow or lend money for a day, it's called call money or overnight money. If you borrow or lend money within 1 to 14 days, it is called a short-term notice.
Surplus funds from commercial banks and other institutions are usually provided as call money. Banks are both borrowers and lenders of call money. Banks borrow call funds in a short period of time to meet the requirements for the reserve requirement ratio (CRR). If the requirements are met, the bank will repay the call fund. The interest paid on a demand loan is understood because the call rate. It is a highly volatile rate. It varies from day to day, hour to hour, and sometimes minute to minute.
Features of Call and Short Notice Money
- These are very liquid.
- Interest rates (call rates) fluctuate very much.
- These will be repaid on request.
- Money is borrowed or lent for a very short period of time.
- There is no collateral required for these loans. This means they are not protected.
- The associated risks are high.
2. Commercial building
If the item is sold in credit, the seller draws a bill of exchange in the amount payable to the buyer. The buyer will accept it immediately. This means that he agrees to pay the amount listed there after a particular date. After receiving the invoice, the buyer returns it to the seller. This bill is called a trade bill. Sellers can keep their invoices until maturity or due date, or receive discounts from some bankers and receive cash immediately. When trade bills are accepted by commercial banks, they're called commercial bills. The bank will deduct a fixed amount (discount) to discount this invoice and the balance will be paid.
A bill of exchange includes a written order from a creditor (seller) to a debtor (buyer) to pay a certain amount to a particular person after a certain period of time.
According to the Bill of Exchange Act of 1881, a bill of exchange is a written product containing an unconditional order signed by a manufacturer, giving a specific amount to a specific person only to a specific person, or to a specific person. Instruct to pay for the order. Or to the owner of the instrument. "
Features of commercial banknotes
- These are negotiable bills.
- These are usually issued between 30 and 120 days. Therefore, these are short-term credit products.
- These are low-risk self-clearing products.
- These can be discounted at the bank. When the bill is discounted at the bank, the owner receives cash immediately. This means that the bank will provide credit to its customers. Credits will be repaid at maturity of the invoice. If funds are needed, banks can redistribute invoices and prepare money in the money markets.
- These are used to settle payments in domestic and foreign trade.
- The creditor who creates the invoice is called the withdrawal, and the debtor who accepts the invoice is called the addressee.
Bill type
There are many types of bills in circulation in the bill market. They are broadly classified as follows.
1. Demand Building and Time Building: -Demand Building can be paid on demand. You have to pay immediately after seeing the presentation or drawing. Demand buildings are also called site buildings. Time invoices will be paid on the specified future date. The time bill is also known as the usage bill.
2. Clean invoices and documentary invoices: When an invoice needs to be accompanied by a document of ownership of goods such as rail receipts or bills of lading, the invoice is called a documentary invoice. Creating an invoice without a document is called a clean invoice. In such cases, the documents will be sent directly to the addressee.
3. Inland and Foreign Invoices: -Inland invoices are invoices withdrawn to persons residing in India and are paid in India. Foreign invoices are invoices withdrawn outside India and can be paid within or outside India.
4. Accommodation and Supply Bills: -In the case of accommodation, the two will draft each other's bills purely for the purpose of mutual economic accommodation. These invoices are discounted with the banker and the proceeds are shared among the banker. On the due date, the parties will pay the bank. Accommodation costs are also known as "wind power" or "kites". Supply bills are drawn by government suppliers or contacts the division. The e-goods supplied to them. These bills are not considered negotiable means.
3. Ministry of Finance short-term securities
Treasury short-term securities are short-term securities issued by RBI on behalf of the government. These are short-term credit products for periods ranging from 91 to 364. These are negotiable items. Therefore, they are freely transferable. These are issued at a discounted price. These will be repaid at the same time as maturity. These are considered safe investments.
Therefore, Treasury short-term securities are credit products used by the government. Raise short-term funding to cover the budget deficit. Treasury short-term securities are commonly referred to as T-Bill.
The difference between the amount paid by the bidder at the time of purchase (less than face value) and the amount received at maturity represents the amount of interest on T-bill and is called a discount.
Features of T-Bill
- They are negotiable securities.
- They are very liquid.
- There is no default risk (risk free). This is because it is issued by the government.
- There is a certain yield.
- The cost of issuance is very low. There is no stamp duty.
- These are available at a minimum of Rs. 25000 and its multiples.
Types of T-Bill
There are two categories of T-Bill. They are:
1. Regular or regular T-Bill: These are issued to the general public, banks, and other institutions to raise funds to meet the government's short-term financial needs. These are freely available for sale. You can buy and sell these at any time.
2. Ad Hock T-Bills: These are issued in support of RBI only. Not sold in bids or auctions. They are purchased by RBI with a tap. RBI is allowed to issue banknotes to it.
Based on periodicity, T-bill can be classified into four categories. They are:
- 91 days of T-Bill
- 14-day T-Bill
- 182 days of T-Bill:-These were introduced in November 1986 and provided financial institutions and others with opportunities for short-term investment.
- 364-day T-Bill
4. Certificate of Deposit (CD)
The RBI has allowed banks to issue certificates of deposit to give investors more flexibility in developing short-term surplus funds. The CD was introduced in June 1989. A CD is a certificate in the form of a promissory note issued by a bank for a short-term deposit of a company or institution received by the bank. Simply put, it is a time deposit with a specific maturity and is easily transferable. Document with the title of time deposit. It is issued as a bill and can be negotiated in the market. I will pay on a fixed day. The maturity is 3 to 12 months. Issued at a discount rate that varies between 13% and 18%. The discount rate is determined by the issuing bank and the market. All planned banks, with the exception of local regional banks and planned co-operative banks, are eligible to issue CDs for up to 7% of their deposits. It can be issued to individuals, companies, companies, trusts, funds and organizations.
CDs are issued by banks at relatively high interest rates during times of tight liquidity. Banks rely on this source when deposit growth is low but credit demand is high. They can be issued to individuals, businesses, trusts, funds, associates and more.
The main difference between fixed deposits and CDs is that CDs can be easily transferred from one party to the other, while FDs cannot.
Features of the CD
- An unsecured promissory note issued by a bank or financial institution.
- These are short-term deposits with a specific maturity similar to fixed deposits.
- These are negotiable (freely transferable with approval and distribution)
- These are generally risk-free.
- Interest rates will be higher than T-bill or time deposit.
- These will be issued at a discounted price
- These will be repaid on a fixed date.
- Stamp duty is required for these.
CD issuance guidelines
CDs are negotiable money market products. These are issued for a specified period of time for bank or financial institution deposits. RBI publishes some guidelines for issuing CDs. The following are the RBI guidelines.
- The CD can be issued by planned commercial banks (excluding RRB and Local Area Banks) and some Indian financial institutions.
- The minimum value of CD must be Rs. 10,000 rupees, that is, the minimum deposit amount that can be accepted from one subscriber must be at least Rs. 10,000 rupees and multiples of Rs. Then 10,000 rupees.
- CDs can be issued to individuals, businesses, businesses, trusts, funds, and organizations. NRI can also subscribe to the CD, but only on a refundable basis.
- The maturity of the bank-issued CD must be at least 7 days and within 1 year. Financial institutions can issue CDs for a period of 1 to 3 years from the date of issue.
- The CD may be issued at a par value discount. Bankers / Fls are also allowed to issue CDs on a floating rate basis, provided that the floating rate is objective, transparent and market-based.
- Banks need to maintain the right ones Meets CRR and SLR requirements for CD issuance prices.
- Physical CDs can be freely transferred by approval and distribution. Demat CDs can be transferred according to the procedures applicable to other Demat securities. There is no CD lock-in period.
- Bank / Fls cannot grant loans to CDs. You cannot buy back your CD before it expires.
- Bankers / Fls should only issue CDs in dematerialized format. However, according to the Depositary Authority Act, 1996 investors have the option of looking for a certificate in physical form.
- The CD is transferable, so the last owner may present a physical certificate for payment.
5. Commercial paper (CP)
Commercial paper was introduced to the market in 1989-90. It is a financial document like a short-term security of the Ministry of Finance. This is an unsecured and negotiable promissory note. The maturity is a fixed period of 3 to 6 months. It is generally issued by a nationally reputed, creditworthy and highly rated company. It is very safe and fluid. It will be issued in bearer format at a discounted price. Also known as industrial paper or corporate paper. CP can be issued in multiples of R. 50,000 rupees subject to the minimum issue size of Rs. 500,000 rupees.
Therefore, CP is an unsecured short-term promissory note issued by a top-notch, creditworthy and acclaimed company to meet working capital requirements. In short, CP is a short-term unsecured promissory note issued by a financially strong company.
Benefits of commercial paper
- These are easy to publish.
- The issuer can issue a CP with a maturity according to the cash flow.
- Improves the image of the issuer in the capital markets. This makes it easier to raise long-term funding
- Investors get higher returns
- These facilitate loan securitization. This will create a secondary market for CP.
Disadvantages of commercial paper
- It cannot be repaid before maturity.
- It can only be issued by a large and financially strong company.
6. Repurchase agreement (REPO)
The REPO is basically two parties (the parties include the RBI, the bank, or the NBFC. In this agreement, the holder of the government securities sells the securities to the lender and is agreed on an agreed future date. I agree to buy back at the same price). At the end of the period, the borrower buys back the securities at a given price. The difference between the purchase price and the original price is the borrower's cost. The cost of this borrowing is called repo rate.
A transaction is called a repo from the perspective of the seller of the security and vice versa from the perspective of the supplier of the funds. Therefore, whether a particular contract is called a repo or a reverse repo depends largely on which party initiates the transaction.
Therefore, a repo is a transaction in which a participant (borrower) obtains immediate funds by selling securities and at the same time agrees to buy back the same or similar securities at a specified price after a specified period of time. Also called a forward contract.
7. Money Market Mutual Fund (MMMF)
Money market mutual funds mobilize money from the general public. The money collected will be invested in money market products. Investors get higher returns. They are more fluid compared to other investment options.
MMMF was launched in the United States in 1972. In India, the first MMMF was founded in 1997 by Kothari Pioneer. But this was unsuccessful.
Benefits of MMMF
- These allow small investors to participate in the money market.
- Investors get higher returns.
- These are very liquid.
- These promote the development of the money market.
Disadvantages of MMMF
- Heavy stamp duty.
- Higher levitation cost.
- Lack of investor education.
8. American Depositary Receipts and Global Depository Receipts
ADR is a product with the nature of depositary receipts and certificates. These products are negotiable and represent listed local currency-denominated shares issued by companies outside the United States. For example, NRI can invest in the stock of an Indian company without worrying about dollar conversion or other exchange procedures.
If the facility is expanding globally, these devices are called GDRs. ADRs are listed on the American Stock Exchange, and GDRs are listed on non-US Stock Exchanges such as Landon, Luxemburg, and Tokyo.
Structure of Indian money market
RBI plays an important role in India's money markets. It is the center of our monetary system. A leader in the Indian money market. India's money markets are very collapsed and unorganized. India's money markets can be divided into two sectors: unorganized and organized. Between these two lies the co-operative sector. It can be included in organized sectors.
The organized sector consists of RBI, SBI Banking Group, public sector banks, private sector banks, development banks and other financial institutions. The unorganized sector consists of indigenous bankers, lenders, chit funds and more. These are outside the control of RBI. This is why India's money markets remain underdeveloped.
Features or Defects of Indian Money Market
The characteristics or deficiencies of India's money market are:
1. Existence of unorganized segments: The most important flaw in India's money markets is the existence of unorganized segments. The unorganized segment consists of indigenous bankers, money lenders, and so on. This unorganized sector does not comply with RBI rules and regulations. Moreover, higher interest rates dominate in unorganized markets.
2. Lack of integration: Another important drawback of India's money market is that it is divided into various sections. Unfortunately, these sections are loosely connected to every other. There is no coordination between organized and unorganized sectors. The situation has improved with the establishment of the RBI and the passage of banking regulations.
3. Interest rate inequality: Interest rates in different money markets and in different segments of the money market are still different. Too many interest rates are widespread in the market. For example, the government borrowing rate. Interest rates on commercial banks, interest rates on cooperative banks, interest rates on financial institutions. This interest rate inequality is due to the lack of liquidity of funds from one segment to another.
4. Seasonal diversity of cash markets: The demand for money within the Indian market is seasonal in nature. During the busy season from November to June, you need money to market seasonal industries such as agricultural products, sugar and jaguar. From July to October, the demand for funds is low. As a result, the monetary rate fluctuates from period to period.
5. Lack of bill market: India's bill market is not well developed. Our country is very short of sound commercial bills of exchange. As a matter of custom, Indian traders rely on Hundi rather than properly drawn bills of exchange.
6. Limited merchandise: The supply of short-term merchandise such as commercial buildings and treasury buildings is very limited and inadequate.
7. Limited number of participants: The number of participants in the Indian money market is limited. Entry into the cash market is strictly regulated.
8. Restricted secondary market: The secondary market for money market products is primarily restricted to re-discounting commercial and treasury bills.
9. No contact with foreign money markets: India's money markets have few contracts with money markets in other countries.
Overall, we can conclude that India's money market is relatively developing.
Indian money market player or participant
Below are the players in the Indian money market.
- Government.
- RBI
- Commercial bank
- Financial institutions such as IFCI, IDBI, ICICI, SIDBI, UTI, LIC.
- Discount and Finance House in India.
- Broker
- Investment trust
- Public sector business
- Corporate unit
Key takeaways:
- Money markets are organized exchanges where participants lend and borrow large amounts of money within a year.
- Investors are attracted to money market products because of their superior security and liquidity.
- Money market mutual funds are the foremost accessible to individuals.
- Treasury short-term securities are issued regularly by the US Treasury to refinance the issues of the early T bill that has reached maturity and to help the federal government raise its deficit.
- Financial instruments with a short maturity of up to one year, used as a tool for issuers to raise funds, are known as money market products.
- These are debt securities that offer fixed interest rates and are generally unsecured.
- There is no collateral to support the collateral, and theoretically there is a high risk of non-repayment.
- However, money market products have a high credit rating, so issuers do not default. This makes it a reliable tool for investors looking for options to deposit funds and earn fixed returns in the short term.
- Individuals, corporations (registered or incorporated in India), banking companies, unincorporated organizations, non-resident Indians (NRI) and foreign institutional investors (FII) can invest in CP. SEBI sets FII investment limits from time to time.
References:
- Kohn, Meir: Financial Institutions and Markets, Tata McGraw Hill.
- Bhole L.M: Financial Institutions and Markets, Tata McGraw Hill.
- Desai, Vasantha: The Indian Financial System, Himalaya Publishing House.
- Machiraju.R.H: Indian Financial System, Vikas Publishing House.
- Khan M.Y: Indian Financial System, Tata McGraw Hill.
- Varshney, P.N., & D K Mittal, D.K.: Indian Financial System, Sulthan Chand & Sons
