Call Money Market

Money Market

1. Money Market

2. Contents Introduction. History. Characterstics. Objectives. Importance. Functions. Segments . Reference.

3. Introduction Money Market is a market where short term instruments that mature in a year or earlier are traded. Money market is a market for short-term financial assets which are near substitutes for money.

4. History Till 1935,When RBI was set up the indian money market remained highly disintegrated, unorganised ,narrow,shallow and there fore very backward. The planned economic development that commenced in the year 1951 marked an important beginning in the annals of the market. The nationalisation of banks in 1969, the setting up of various committiees such as Sukhmoy Chakraborty Committee (1982), the Vaghul Working Group (1986) , the setting up of discount and finance house of india ltd.(1988), The Securities Trading Corporation of India (1994) and The Commencement of Liberalisation and GLOBALISATION process in 1991 gave aurther fillip for the integrated and efficient development of indian money market.

5. Characterstics Short term funds are borrowed and lent. No fixed place for conduct of operations. Dealings may be conducting with or without the help of brokers. The short term financial assets that are dealt in are close substitutes of money. Funds are traded for a maximum period of one year. Presence of a large number of sub markets such as inter-bank call money, bills rediscounting, treasury bills etc.

6. Objectives Providing an equilibrium mechanism for ironing out short term surplus and deficit. Providing a focal point for central bank intervention for influencing liquidity in the economy. Providing access to users of short term money to meet their requirements at a reasonable price.

7. Importance Source Of capital Ideal investment Effective Monetary management Economic Development Efficient Banking System Facilitating Trade

8. Functions Investment Function Financing Function Facilitating Function

9. Institutions Operating In Money Market Commercial banks NBFC Acceptence Houses Central Bank

10. Organized V/S Unorganized Money Market Feature Organized Sector Unorganized Sector Interest Rates Reasonable real interest rate Exorbitant rate of interest. institutions Comprises RBI, SBI together with its associates,20 public sector commercial banks,private sector commercial banks including foreign banks,regional rural banks, non scheduled commercial banks and other non banking financial intermidiaries comprising LIC,GIC and UTI Comprises of indigenious bankers,money lenders and other non banking financial intermediaries like chit funds etc. instruments Includes Tbs,CDs,CPs,call funds etc. Includes hundi-indigenous bills of exchange.

11. Segments /Sub-Markets Call Money Market Collateral Loan Market Bill Market Acceptance Market Certificate Of Deposit

12. CALL MONEY MARKET A market where call funds are borrowed and lent is called call money market. Call funds include very short period funds such as money-at –call and short notice etc.

13. Features of call money market Call and notice money- call money market deals invery short period funds. The period ranges from overnight to a fortnight. Whereas call money is repayable on the immediate next working day, notice money is repayable within a fortnight. These transactions are not covered by any collateral security. Sensitive segment- any change in demand and supply of short term funds in the financial system Is quickly reflected in call money rates

14. BENEFITS of CALL MONEY MARKET Quick Funds Best Investments Profitability

15. HISTORY OF INDIAN CALL MONEY MARKET Although call money market became operational worldwide after the First World War , there were only few participants like few rich individuals and foreign exchange banks. Call Money Market in India was operationalized with the inauguration of the RBI in the year 1935 with the banks taking part in it.

16. CONT’D… From early 1970, LIC and UTI were permitted to operate in call market,but only as supplier of call loans. State Bank Of India and its subsidiaries entered the call money market in October 1970 and at that point of time institutional investors were prohibited from operating in this market .

17. COMMITTEES SUKHMOY CHAKRABORTY COMMITTEE(1982)-deregulation of interest rate on call loans THE VAGHUL WORKING GROUP(1986)-Wanted the total freeing of call money rate and recommended the setting up of discount house DFHI(1988)-Rates were made totally free and market determined with effect from May1,1989,operate as lender and borrower. SPECIAL INSTITUTIONS-GIC,IDBI and NABARD were allowed entry from may2,1989 as lenders STCI(1994)-Permission to operate in market both as a lender and borrower PRIVATE MUTUAL FUND (1995)-Allowed to operate as lender

18. MODE OF OPERATION THOSE INVOLVING BANKS-Transaction conducted over the telephone .Lender issues a RBI cheque in favour of borrowing bank which is acknowledged by call money borrowing receipt. On the reversal day, the borrowing bank repays the amount with interest by issuing the RBI cheque and the lender returns the duly discharged receipt. THOSE INVOLVING DFHI-borrower and lender approach the DFHI by spelling out their terms such as quantum and availability of funds ,interest rates etc. the transaction when confirmed results in exchange of DSA.DFHI issues a call deposit receipt to the lender and in turn receives a RBI cheque for the money borrowed. In case of lending,DFHI gives a RBI cheque for the amount lent in exchange for call deposit receipt. On the reversal day ,lender surrenders the duly discharged call deposit receipt and the borrower in turn issues a RBI cheque for the amount borrowed with interest.

19. CALL MONEY RATE The rate of interest on call loans is called call money rate. The rate of call money is strikingly varying and volatile. The factors responsible are CRR requirements, fluctuating corporate demand ,volume of bank deposits, vagaries noticed in GSM, cyclical fluctuation etc.

20. CERTIFICATE OF DEPOSITS Certificates of Deposit (CDs) were introduced in India in 1989. Certificate of Deposit is like a promissory note issued by a bank in form of a certificate entitling the bearer to receive interest.  It is similar to bank term deposit account. The certificate bears the maturity date, fixed rate of interest and the value.

21. CONT’D…  Minimum amount of a CD should be Rs.5 lakh, i.e., the minimum deposit that could be accepted from a single subscriber should not be less than Rs.5 lakh and in the multiples of Rs. 1 lakh there after. INVESTORS CDs can be issued to individuals, corporations, companies, trusts, funds, associations, etc.   The maturity period of CDs issued by banks ranges from 3 Days to 12 Months that issued by specified financial institutions can have a maturity period upto 3 years.

22. With the announcement of Credit Policy On April-27-2000 the maturity period was reduced from 3 Months to 15 Days.

23. COMMERCIAL PAPER MARKET Commercial Paper is the short term unsecured promissory note issued by corporate and financial institutions at a discounted value on face value.  It was introduced in India in 1990 with a view to enabling highly rated corporate borrowers/ to diversify their sources of short-term borrowings and to provide an additional instrument to investors. They come with fixed maturity period ranging from 15 days to one year.  These are issued for the purpose of financing of accounts receivables, inventories and meeting short term liabilities.

24. The return on commercial papers is higher as compared to T-Bills so as the risk as they are less secure in comparison to these bills.  It is easy to find buyers for the firms with high credit ratings. These securities are actively traded in secondary market.

25. Capital market

26. Introduction to capital market Capital market is a market for financial assets which have a long or indefinate maturity. it considers of financial institutions like icici, uti, lic etc which play the role of lenders in the market. Whereas borrowers are Bussiness units and corporate. Capital market is a market where buyers and sellers engage in trade of financial securities like bonds, stocks etc.

27. Regulator of capital market Securities and exchange board of india is the regulatory authority established under sebi act 1992 and is principal regulator for stock exchange in india. It protects investors, intrest, and promotes the indian security market. Rbi is responsible for implementing monetary and credit policies. Nse- it sets out and implements rules and regulations to govern the security market.

28. Functions of capital market To mobilise the financial resources on nation wide scale. It is source of mobilizing idle saving from the economy To ensure most effective allocation of mobilised financial resources by directing the same either to such projects providing highest yield or underdeveloped priority areas. Provision of investment avenue- diverse investment avenue for public in bonds, equity, mutual funds Etc. so they can spread risk

29. Significance of capital market Continuous availability of funds Speed up economy and growth. Capital formation- through mobilisation of ideal resources it generates savings, which is made available to various segments. This helps in increasing capital formation

30. Structure of capital market Gilt edged market- it refers the market for government and semi government securities which carries fixed rate of interest. It is totally secured. its types are bearer bonds, promisory notes Industrial securities market- it deals with new issue market(public issue, right issue, bonus issue)and old issue market(stock exchange) Development financial institutions- they provide long and medium term finance to industry trade and agriculture. Like idbi, sidbi, lic etc

31. CAPITAL MARKET INSTRUMENTS 1.Industrial securities-these are most popular securities in the market. Classified into ownership securities that is equity shares and preference shares and creditorship securities(debentures) 2.Gilt edged securities- these are government and semi government securities. These are Promisory notes- negotiable instruments issued by central or state govt. it promise for payment of principal and interest.

32. Bearer bonds- vests the ownership with the person who is having mere possesion of it. The tranfer of such securities can be made by mere delivery. If its lost ownre losses all his rights. Public sector undertaken bonds-these are debt instuments issued by various public sector unitssuch as indian railways, coal india ltd etc. they have 7 yrs maturity are are normally secured

33. Classification of capital market Capital market can be broken down into primary market and capital market. Primary market where new stocks and bonds are issued to investors through underwriters , banks etc in form of initial public offering. and secondary market where existing stocks and bonds are traded through stock exchange. Markets such asnew york stock exchange, london stock exchange.

34. Difference between primary market and secondary market Basis for comparison Primary market Secondary market meaning The place where fresh issue of shares is made. The place where pre issued securities are dealt with. Another name New issue market Old issue market Type of purchasing direct Indirect How many times a securities can be sold Only once Multiple times price fixed Fluctuates, depends on demand and supply force

35. Methods of floatation of new issues Public issue-raising directly from public through prospectus Right issue- they are proposed to existing shareholders at a price much lower than the market price. Bonus share-in this no additional amount is paid by shareholders as these are dividend paid in form of shares. Offer to employees-it enables the employess to become the shareholders and thereby share the profit of company

36. Difference between money market and capital market Basis for comparison Money market Capital market meaning Financial market for lending and borrowing for short period Financial market where long term securities are issued and traded Financial instruments Treasury bills, commercial bills, trade credit etc Shares, debentures, bonds etc Risk factor Low Comparatively high time Within a year More than a year Return on investment less Comparatively high