Money Markets Introduction to Money Markets

Agenda In this session, you will learn about: Features of the Money Market Functions of the Money Market Advantages of the Money Market Disadvantages of the Money Market Structure of the Indian Money Market Key Terms used in the Money Market

Introduction Financial Market Capital MarketMoney Market Raising of long term capital Transfer of liquidity

What is a Money Market? Money = Liquidity The market where financial instruments with high liquidity and very short maturities are traded.

What is a Money Market? A market for short term financial assets that are close substitutes for money, and facilitates the exchange of money in the primary and secondary market. “ ”

Features of Money Markets Institutions Individuals Government Bodies Not a Place; It is a System Telephone or Fax Short term: 1 day -1 year Over the Counter and Wholesale Money Markets Duration of Funds Location Mode of Transaction Type of Trade Major Players

Role of the Money Market Financial Mobility Demand and Supply Promotes Liquidity and Safety Economy in Use of Cash

Instruments of the Money Market TREASURY BILLS 1 COMMERCIAL PAPERS 2 CALL/NOTICE 3 REPURCHASE AGREEMENTS 4 CERTIFICATES OF DEPOSITS 5 The Money Market doesn’t deal with cash but with substitutes of cash

Major Players in the Money Market ISSUERSLENDERS Government Banks Financial Institutions Corporates Mutual Funds Foreign Institutional Investors Banks INTERMEDIARIES Central Bank Dealers

Money Market Accounts A money market account is a government-insured bank account that pays relatively high interest rates and provides cash withdrawal privileges. Are offered by banks and credit unions and have several significant advantages and disadvantages. Offers both savings and checking tools at higher yields than regular savings and checking accounts Are also known as money market deposit accounts. Did you know that retail customers can also access the money market?

Text Advantages of the Money Market Higher Rate of Interest Easy Access to funds Low Risk

Advantages of the Money Market Text Safe Investments DiversificationEase of Access

Disadvantages of the Money Market High Balance Requirement Interest Rate Fluctuation and Other Fees Limited Number of Transactions

Disadvantages of the Money Market Tax & Inflation Minimum Balance and Fees Not for Long Term Savers

Structure of the Indian Money Market Indian Money Market Sub Markets Call Money Market 364-day Bill Market CDs CPs Commercial Bills Treasury Bills Unorganized Money Market Organized Money Market Reserve Bank of India Scheduled Commercial Banks Lenders Development Banks Investment Institutions Regional Rural Banks Foreign Banks State Finance Corporations DFHI Indigenous Bankers Domestic Money Nidhis & Chit Funds Traders & Friends Brokers & Dealers

Capital Markets vs Money Markets CAPITAL MARKETSMONEY MARKETS 1.Long term trading More than 1 Year 2.Risk is more and varied. 3.Instruments include shares, bonds, etc. 4.High returns 1.Short term trading Less than 1 year 2.They are less risky. 3.Instruments include T Bills, Certificate of deposit, etc. 4.Slow and steady returns V/S

Key Terminologies Repo Rate Reverse Repo Rate Statutory Liquidity Ratio Net Demand Liabilities Time Demand Liabilities Cash Reserve Ratio Open Market Operations Excess Reserves Marginal Standing Facility Bank Rate Call Rate

Bank Rate Bank Rate is the rate at which the Central Bank of the country provides finance to commercial banks. A tool which central bank uses for short-term purposes Bank Rates Deposit Rates

Repo Rate Repo rate is the rate at which the RBI lends money to the banks for a short term. Funds Loaned Principal Interest + Expensive to Borrow Repo Rate Cheaper to Borrow Repo Rate Repo rate is depended on RBI to make it either expensive or cheaper for commercial banks

Reverse Repo Rate is the rate at which the RBI borrows money from commercial banks. Reverse Repo Rate Funds Loaned + Principal Interest Reverse Repo Rate Reverse Repo rate signifies the rate at which the RBI absorbs liquidity from the banks Liquidity

Bank accounts from which you can withdraw your money Net Demand Liabilities Bank accounts from which you cannot withdraw your money Time Demand Liabilities Net Demand and Time Demand Liabilities

Statutory Liquidity Ratio The ratio of liquid assets to demand and time liabilities is known as Statutory Liquidity Ratio (SLR). Liquid Assets/Demand Liabilities x Time Liabilities FORMULA

Cash Reserve Ratio Cash reserve Ratio is the minimum amount of funds that the banks have to keep with the RBI. Funds based on CRR Funds Credit Reserve Ratio Funds with Banks Liquidity

Cash Reserve Ratio CRR is similar to the discount rate in the US Rs. 90 crores Rs. 1,000 crores Rs. 910 crores USES: Investments Lending Credit Purpose Credit Reserve RatioLiquidity Credit Reserve Ratio Liquidity

MSF and Call Rate A special window for banks to borrow from RBI in an emergency situation like an acute cash shortage. Marginal Standing Facility (MSF) Interest Rate paid by the banks for lending and borrowing funds with maturity period ranging from 1 day to 14 days. Call Rate

Excess Reserves Excess reserves in the U.S., Excess reserves are the capital reserves held by a bank or financial institution in excess of what is required by regulators, creditors or internal controls. Measured against standard reserve requirement amounts set by central banking authorities These required reserve ratios set the minimum liquid deposits

Money Bonds Money Bonds Sale of BondsPurchase of Bonds The buying and selling of government securities in the open market in order to expand or contract the amount of money in the banking system. Withdraw Money from the Banking System Inject Money into the Banking System Open Market Operations

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