CHAPTER 10 -FINANCIAL MARKETS-BUSINESS STUDIES -PART 2(CLASS 12)CBSE

The Indian money market

The average turnover of the money market in India is over Rs. 1,00,000 crore daily. This is more than 3 per cent let out to the system. This implies that 2 per cent of the annual GDP of India gets traded in the money market in just one day. Even though the money market is many times larger than the capital market, it is not even a fraction of the daily trading in developed markets.

Role of the Reserve Bank of India in the Money Market

The Reserve Bank of India is the most important constituent of the money market. The market comes within the direct purview of the Reserve Bank regulations.

The aims of the Reserve Bank’s operations in the money market are:

• to ensure that liquidity and short-term interest rates are maintained at levels consistent with the

monetary policy objectives of maintaining price stability;

• to ensure an adequate flow of credit to the productive sectors of the economy; and

• to bring about order in the foreign exchange market.

The Reserve Bank influences liquidity and interest rates through a number of operating instruments—

cash reserve requirement (CRR) of banks, conduct of open market operations (OMOs), repos, change in bank rates, and, at times, foreign exchange swap operations

Money Market Centres

There are money market centres in India at Mumbai, Delhi, and Kolkata. Mumbai is the only active money market centre in India with money fl owing in from all parts of the country getting transacted there.

MONEY MARKET INSTRUMENTS

The instruments traded in the Indian money market are

1. Treasury bills (T-bills);

2. Call/notice money market—Call (overnight) and short notice (up to 14 days);

3. Commercial Papers (CPs)

4. Certificates of Deposits (CDs)

5. Commercial Bills (CBs)

6. Collateralised Borrowing and Lending Obligation (CBLO)

TREASURY BILLS

Treasury bills are short-term instruments issued by the Reserve Bank on behalf of the government to tide over short-term liquidity shortfalls. This instrument is used by the government to raise short-term funds to bridge seasonal or temporary gaps between its receipts (revenue and capital) and expenditure. They form the most important segment of the money market not only in India but all over the world as well.

T-bills are repaid at par on maturity. The difference between the amount paid by the tenderer at the time of purchase (which is less than the face value) and the amount received on maturity represents the interest amount on T-bills and is known as the discount. Tax deducted at source (TDS) is not applicable on T-bills.

Features of T-Bills

They are negotiable securities.

They are highly liquid as they are of shorter tenure and there is a possibility of inter-bank repos in them. There is an absence of default risk.

They have an assured yield, low transaction cost, and are eligible for inclusion in the securities for SLR purposes. They are not issued in scrip form. The purchases and sales are effected through the Subsidiary General Ledger (SGL) account.

At present, there are 91-day, 182-day, and 364-day T-bills in vogue. The 91-day T-bills are auctioned by the RBI every Friday and the 364-day T-bills every alternate Wednesday, i.e., the Wednesday preceding the reporting Friday. Treasury bills are available for a minimum amount of Rs. 25,000 and in multiples thereof.

The call money market is a market for very short-term funds repayable on demand and with a maturity period varying between one day to a fortnight. When money is borrowed or lent for a day, it is known as call (overnight) money. Intervening holidays and/or Sundays are excluded for this purpose. When money is borrowed or lent for more than a day and up to 14 days, it is known as notice money. No collateral security is required to cover these transactions. The call money market is a highly liquid market, with the liquidity being exceeded only by cash. It is highly risky as well as extremely volatile.

A commercial paper is an unsecured short-term promissory note issued at a discount by creditworthy corporates, primary dealers and all-India financial institutions.

A commercial paper is an unsecured short-term promissory note, negotiable and transferable by endorsement and delivery with a fixed maturity period. It is generally issued at a discount by the leading creditworthy and highly rated corporates to meet their working capital requirements. Depending upon the issuing company, a commercial paper is also known as a finance paper, industrial paper, or corporate paper.

CERTIFICATES OF DEPOSIT

Certificates of deposit (CDs) are unsecured, negotiable, short-term instruments in bearer form, issued by commercial banks and development financial institutions.

Certificates of deposit were introduced in June 1989. Only scheduled commercial banks excluding Regional Rural Banks and Local Area Banks were allowed to issue them initially. Financial institutions were permitted to issue certificates of deposit within the umbrella limit fixed by the Reserve Bank in 1992.

Certificates of deposit are time deposits of specific maturity similar to fixed deposits (FDs). The biggest difference between the two is that CDs, being in bearer form, are transferable and tradable while FDs are not. Like other time deposits, CDs are subject to SLR and CRR requirements. There is no ceiling on the amount to be raised by banks. The deposits attract stamp duty as applicable to negotiable instruments.

They can be issued to individuals, corporations, companies, trusts, funds, associates, and others.

A commercial bill is one which arises out of a genuine trade transaction, i.e. credit transaction. As soon as goods are sold on credit, the seller draws a bill on the buyer for the amount due. The buyer accepts it immediately agreeing to pay amount mentioned therein after a certain specified date. Thus, a bill of exchange contains a written order from the creditor to the debtor, to pay a certain sum, to a certain person, after a creation period. A bill of exchange is a ‘self-liquidating’ paper and negotiable/; it is drawn always for a short period ranging between 3 months and 6 months.

COLLATERALISED BORROWING AND LENDING OBLIGATION (CBLO)

The Clearing Corporation of India Limited (CCIL) launched a new product–Collateralised Borrowing and Lending Obligation (CBLO)—on January 20, 2003 to provide liquidity to non-bank entities hit by restrictions on access to the call money market. CBLO is a discounted instrument available in electronic book entry form for the maturity period ranging from 1 day to 19 days. The maturity period can range up to one year as per the RBI guidelines. The CBLO is an obligation by the borrower to return the borrowed money, at a specified future date, and an authority to the lender to receive money lent, at a specified future

date with an option/privilege to transfer the authority to another person for value received. The eligible securities are central government securities including treasury bills with a residual maturity period of more than six months. There are no restrictions on the minimum denomination as well as lock-in period for its secondary market transactions.