Ppt on-money-market-1

MONEY MARKET
1) Meaning of Money Market:
Money market refers to the market where money and highly
liquid marketable securities are bought and sold having a maturity
period of one or less than one year. It is not a place like the stock
market but an activity conducted by telephone. The money market
constitutes a very important segment of the Indian financial
system.
The highly liquid marketable securities are also called as ‘
money market instruments’ like treasury bills, government
securities, commercial paper, certificates of deposit, call money,
repurchase agreements etc.
According to the Geoffrey, “money market is the
collective name given to the various firms and institutions
that deal in the various grades of the near money.”

CONTENTS

 What is Money Market?
 Features of Money Market?
 Objective of Money Market?
 Importance of Money Market?
 Composition of Money Market?
 Instrument of Money Market?
 Structure of Indian Money Market?
 Disadvantage of Money Market?

Continued…….
 Characteristic features of a developed
money Market?
 Recent development in Money Market?
 Summary

1! What is Money Market?
As per RBI definitions “ A market for short terms
financial assets that are close substitute for
money, facilitates the exchange of money in
primary and secondary market”.

 The money market is a mechanism that deals with
the lending and borrowing of short term funds
(less than one year).

 A segment of the financial market in which
financial instruments with high liquidity and very
short maturities are traded.

Continued…….
 It doesn’t actually deal in cash or money
but deals with substitute of cash like trade
bills, promissory notes & govt papers
which can converted into cash without any
loss at low transaction cost.

 It includes all individual, institution and
intermediaries.

2 ! Features of Money Market?

 It is a market purely for short-terms funds or
financial assets called near money.

 It deals with financial assets having a maturity
period less than one year only.

 In Money Market transaction can not take place
formal like stock exchange, only through oral
communication, relevant document and written
communication transaction can be done.

Continued……..
 Transaction have to be conducted without the
help of brokers.

 It is not a single homogeneous market, it
comprises of several submarket like call money
market, acceptance & bill market.

 The component of Money Market are the
commercial banks, acceptance houses & NBFC
(Non-banking financial companies).

3 ! Objective of Money Market?
 To provide a parking place to employ short term
surplus funds.

 To provide room for overcoming short term
deficits.

 To enable the central bank to influence and
regulate liquidity in the economy through its
intervention in this market.

 To provide a reasonable access to users of short-
term funds to meet their requirement quickly,
adequately at reasonable cost.

4 ! Importance of Money Market?

o Development of trade & industry.
o Development of capital market.
o Smooth functioning of commercial banks.
o Effective central bank control.
o Formulation of suitable monetary policy.
o source of finance to government.

5 ! Composition of Money Market?

Money Market consists of a number of sub-
markets which collectively constitute the
money market. They are,
 Call Money Market

 Commercial bills market or discount

market
 Acceptance market

 Treasury bill market

6 ! Instrument of Money Market?
A variety of instrument are available in a developed
money market. In India till 1986, only a few
instrument were available.

They were
• Treasury bills

• Money at call and short notice in the call loan

market.
• Commercial bills, promissory notes in the bill

market.

New instrument

Now, in addition to the above the following new
instrument are available:

 Commercial papers.
 Certificate of deposit.
 Inter-bank participation certificates.
 Repo instrument
 Banker's Acceptance
 Repurchase agreement
 Money Market mutual fund

Treasury Bills (T-Bills)

 (T-bills) are the most marketable money market
security.
 They are issued with three-month, six-month
and one-year maturities.
 T-bills are purchased for a price that is less than
their par (face) value; when they mature, the
government pays the holder the full par value.
 T-Bills are so popular among money market
instruments because of affordability to the
individual investors.

Certificate of deposit (CD)

 A CD is a time deposit with a bank.
 Like most time deposit, funds can not
withdrawn before maturity without paying
a penalty.
 CD’s have specific maturity date, interest
rate and it can be issued in any
denomination.
 The main advantage of CD is their safety.
 Anyone can earn more than a saving
account interest.

Commercial paper (CP)

 CP is a short term unsecured loan issued by a
corporation typically financing day to day
operation.

 CP is very safe investment because the financial
situation of a company can easily be predicted
over a few months.

 Only company with high credit rating issues
CP’s.

Repurchase agreement (Repos)

 Repo is a form of overnight borrowing and is
used by those who deal in government
securities.
 They are usually very short term repurchases
agreement, from overnight to 30 days of more.
 The short term maturity and government backing
usually mean that Repos provide lenders with
extreamly low risk.
 Repos are safe collateral for loans.

Banker's Acceptance
 A banker’s acceptance (BA) is a short-term
credit investment created by a non-financial firm.
 BA’s are guaranteed by a bank to make
payment.
 Acceptances are traded at discounts from face
value in the secondary market.
 BA acts as a negotiable time draft for financing
imports, exports or other transactions in goods.
 This is especially useful when the credit
worthiness of a foreign trade partner is unknown.

7 ! Structure of Indian Money
Market?
I :- ORGANISED STRUCTURE
1. Reserve bank of India.
2. DFHI (discount and finance house of India).
3. Commercial banks
i. Public sector banks
SBI with 7 subsidiaries
Cooperative banks
20 nationalised banks
ii. Private banks
Indian Banks
Foreign banks
4. Development bank
IDBI, IFCI, ICICI, NABARD, LIC, GIC, UTI etc.

Continued…..
II. UNORGANISED SECTOR
1. Indigenous banks
2 Money lenders
3. Chits
4. Nidhis

III. CO-OPERATIVE SECTOR
1. State cooperative
i. central cooperative banks
Primary Agri credit societies
Primary urban banks
2. State Land development banks
central land development banks
Primary land development banks

8 ! Disadvantage of Money Market

 Purchasing power of your money goes
down, in case of up in inflation.
 Absence of integration.
 Absence of Bill market.
 No contact with foreign Money markets.
 Limited instruments.
 Limited secondary market.
 Limited participants.

9 ! Characteristic features of a
developed money Market?
 Highly organaised banking system
 Presence of central bank

 Availability of proper credit instrument

 Existence of sub-market

 Ample resources

 Existence of secondary market

 Demand and supply of fund

10 ! Recent development in
Money Market
 Integration of unorganised sector with the
organised sector
 Widening of call Money market
 Introduction of innovative instrument
 Offering of Market rates of interest
 Promotion of bill culture
 Entry of Money market mutual funds
 Setting up of credit rating agencies
 Adoption of suitable monetary policy
 Establishment of DFHI
 Setting up of security trading corporation of India
ltd. (STCI)

11 ! Summary
 The money market specializes in debt
securities that mature in less than one year.
 Money market securities are very liquid, and
are considered very safe. As a result, they offer
a lower return than other securities.
 The easiest way for individuals to gain access
to the money market is through a money market
mutual fund.
 T-bills are short-term government securities that
mature in one year or less from their issue date.
 T-bills are considered to be one of the safest
investments.

Continued…….
 A certificate of deposit (CD) is a time deposit with a
bank.
 Annual percentage yield (APY) takes into account
compound interest, annual percentage rate (APR)
does not.
 CDs are safe, but the returns aren't great, and your
money is tied up for the length of the CD.
 Commercial paper is an unsecured, short-term loan
issued by a corporation. Returns are higher than T-
bills because of the higher default risk.
 Banker’s acceptance (BA) are negotiable time draft
for financing transactions in goods.
 Repurchase agreement (repos) are a form of
overnight borrowing backed by government
securities.

Ppt on-money-market-1

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