Unit_II_Money_Market_Elaborated_PPT (1).pptx

Money Market

1. UNIT II: MONEY MARKET B.Com Semester-V – Course 14: Financial Markets Prepared with colourful visuals and teaching notes

2. Introduction to Money Market The money market is a crucial component of the financial system where financial instruments with high liquidity and very short maturities are traded. It provides a mechanism for managing short-term funding needs for banks, corporations, and governments. In India, the money market facilitates monetary policy transmission and helps maintain liquidity in the economy.

3. Definition of Money Market A money market is defined as a financial market where short-term borrowing, lending, buying, and selling with original maturities of one year or less take place. It involves a wide array of instruments like Treasury Bills, Commercial Papers, and Certificates of Deposit. The key characteristic is high liquidity and low risk.

4. Structure of Indian Money Market The Indian money market comprises two segments: organized and unorganized. The organized sector includes RBI, commercial banks, cooperative banks, and financial institutions, while the unorganized sector includes indigenous bankers and moneylenders. The RBI regulates the organized sector to maintain liquidity and stability.

5. Features of Money Market Key features of the money market include short-term fund transactions, high liquidity, informal market structure (mostly over-the-counter), and central bank regulation. It plays a pivotal role in short-term resource mobilization and is critical for maintaining liquidity in the banking system.

6. Composition of Money Market The money market is composed of several segments: call money market, notice money, term money, treasury bills, commercial bills, commercial papers, and certificates of deposit. Each serves different participants like banks, companies, and government agencies for short-term funding.

7. Sub-Markets of Money Market Sub-markets within the money market include: 1. Call Money Market 2. Treasury Bill Market 3. Commercial Bill Market 4. Certificate of Deposit Market 5. Repo and Reverse Repo Market. Each market caters to specific liquidity and investment needs.

8. Call Money Market Call money market deals with overnight loans. It allows banks and financial institutions to borrow and lend funds for a short duration (usually one day). It plays a crucial role in maintaining liquidity and meeting statutory reserve requirements.

9. Bill Market The bill market deals in bills of exchange and promissory notes that are drawn by business entities. These bills are used to finance trade transactions and are typically of short maturity. They can be discounted and rediscounted, making them liquid instruments.

10. Treasury Bills Market Treasury bills are short-term debt instruments issued by the central government to meet its short-term liquidity needs. They are issued at a discount and redeemed at face value. Common tenures include 91, 182, and 364 days. They are risk-free and highly liquid.

11. Commercial Paper Market Commercial Papers are unsecured money market instruments issued by large corporations to raise funds for short-term liabilities. These are typically issued for maturities ranging from 7 days to one year and are used as an alternative to bank borrowings.

12. Certificate of Deposit Market Certificates of Deposit are time deposits issued by banks to individuals or institutions. They offer fixed returns for a fixed term and are negotiable in nature. They are used by banks to raise large sums of money in the short term.

13. Finance Bills and Usance Promissory Notes Finance bills are trade bills that are used to finance the movement of goods and services. Usance promissory notes are similar but provide a specified credit period before payment. Both are vital in facilitating short-term trade finance.

14. Instruments of Money Market Major instruments traded in the money market include: - Treasury Bills - Commercial Papers - Call/Notice/Term Money - Certificates of Deposit - Repo Instruments. Each has different characteristics in terms of maturity, issuer, and liquidity.

15. Organised Sector of Money Market The organized sector is regulated by the RBI and includes commercial banks, cooperative banks, public financial institutions, and development financial institutions. These institutions play a central role in money market transactions and policy transmission.

16. Unorganised Sector of Money Market The unorganized sector, comprising indigenous bankers and moneylenders, functions outside RBI regulation. It lacks transparency and contributes to financial dualism in India. Efforts are being made to bring these under formal regulation.

17. Participants in Indian Money Market Participants in the Indian money market include RBI, commercial banks, mutual funds, insurance companies, non-banking financial companies (NBFCs), and corporate houses. Each has a specific role in lending, borrowing, and investing.

18. Role of RBI in Money Market The RBI plays a critical role as a regulator and participant. It manages liquidity through tools like repo, reverse repo, CRR, SLR, and open market operations (OMOs). It ensures stability and effectiveness in money market operations.

19. Functions of Money Market Functions include providing short-term funds, supporting liquidity management, facilitating monetary policy transmission, offering investment opportunities, and determining interest rates based on demand-supply conditions in the financial system.

20. Importance of Money Market The money market is important for ensuring short-term funding, enabling monetary control, enhancing liquidity, reducing cost of borrowing, and improving efficiency of the financial system. It supports both government and corporate funding.

21. Growth of Indian Money Market The Indian money market has grown significantly due to liberalization, regulatory reforms, and introduction of new instruments. Increased transparency, digital platforms, and wider participation have improved efficiency and depth.

22. Money Market Mutual Funds Money Market Mutual Funds invest in short-term debt instruments like T-Bills, CPs, and CDs. They provide investors with safe, liquid, and moderate-yield investment options. These are regulated by SEBI and are ideal for conservative investors.

23. Regulations in Money Market The money market is regulated by RBI (mainly), SEBI (for mutual funds), and the Ministry of Finance. Regulations govern interest rates, participant eligibility, and trading norms to ensure fairness and transparency.

24. Repo and Reverse Repo Market The repo market allows banks to borrow by selling government securities with an agreement to repurchase. Reverse repo is the opposite. These tools are used by RBI for short-term liquidity management and interest rate signaling.

25. Discount and Finance House of India (DFHI) DFHI was set up in 1988 by RBI to develop a secondary market in money market instruments. It enhances liquidity, provides bid-ask quotes, and facilitates smooth functioning of the short-term funds market.

26. Innovations in Money Market Recent innovations include: - Introduction of MIBOR (Mumbai Interbank Offer Rate) - VRRR (Variable Rate Reverse Repo) - Electronic auction of T-Bills These have increased transparency and efficiency.

27. Comparing Capital and Money Market The capital market deals with long-term funds and securities, whereas the money market focuses on short-term debt instruments. They differ in instruments, maturity, participants, and regulation.

28. Advantages of Money Market Advantages include: - Low risk and high liquidity - Cost-effective borrowing for businesses - Efficient monetary policy transmission - Flexible maturity options for investors.

29. Limitations of Indian Money Market Limitations include: - Lack of integration between organized and unorganized sectors - Limited participation - Seasonal liquidity issues - Inadequate penetration in rural areas.

30. Deficiencies of Indian Money Market Deficiencies include a weak bill market, dominance of call money, lack of transparency in unorganized sector, and insufficient regulatory enforcement. These hinder full efficiency.

31. Recent Trends in Money Market Recent trends include the introduction of electronic trading platforms, shift to digital settlement, growth of MMFs, and higher institutional participation. RBI’s modernization efforts continue.

32. Conclusion The money market plays an indispensable role in maintaining liquidity, implementing monetary policy, and providing a safe avenue for short-term investment and funding in the Indian economy.