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Banking related general awareness- Major instruments of Indian Money Market

What are major instruments in the Indian money market?
The money market is a market for short term financial assets that are close substitutes for money.
Short term means a period of one year or less. Close substitute for money is any financial asset which is not money but which can be quickly converted into money with minimum transaction cost and without a loss of value.
An effective money market requires the development of appropriate institutions, instruments and operating procedures that facilitate the widening and deepening of the market. Availability of multiple instruments is essential for improving the depth of the market. It helps the participants to deploy their surplus in suitable assets.
In India major participants in the money market are commercial banks, LIC, GIC, IFCI, ICICI, RBI and Government of India. By varying the liquidity in the market through various monetary measures,
RBI influences the availability and cost of funds. A well developed money market can contribute a lot in the efficient implementation of monetary policy. The important money market instruments are as given below:
(a) Call money and notice money
Core of the Indian money market structure is the inter banks call money market which is centralized in Mumbai with sub markets in Delhi, Kolkatta and Chennai. Call money is confined to inter bank business. This instrument meets the short term liquidity requirement of banks and other financial institutions. Interest rate on call money is market determined and sensitive to forces of supply and demand.
Call money lending is for 1 – 2 days and such transaction can be for a maximum period of 14 days. Discount and finance house of India (DFHI) was set up to facilitate call money operations and reduce volatility in the call rate.
(b) Repos – Inter Bank
This is a very useful fund/liquidity management instrument. The securities are sold by borrower to lender with the condition that the same will be repurchased by the borrower at a predetermined rate on a predetermined date. This instrument is very convenient to those banks which have surplus SLR but CRR deficit. Presently repo transactions are permitted against all GOI dated securities, treasury bills, PSU bonds, units of UTI, etc.
(c) Repos – RBI
RBI also uses repos in its open market operations for evening out surplus liquidity in the market and reducing the volatility in the call rates. This also enables the surplus banks to plan their short term liquidity management.
(d) Treasury Bills
Treasury bills are short term Promissory notes issued by Government of India to raise short term funds to meet temporary mismatches in cash flows. This also helps the monetary authority to mop up excess liquidity from the systems. Features of T-bills are high liquidity, absence of risk of default, ready availability assured yield, low transaction cost, eligibility for inclusion in SLR and negligible capital depreciation.
(e) Certificate Deposit
The certificate of deposit (CD) is a money market instrument which can be issued by banks and financial institutions. This is an instrument of discretionary liability and is of the nature of issuance promissory note. The instrument is transferable by endorsement and delivery. CDs can be issued to individuals, corporations, companies, trusts, funds, associations and NRIs.
(f) Commercial Paper
Commercial Papers (CPs) are unsecured negotiable promissory notes issued by well rated corporates to raise short term funds for meeting working capital requirements directly from the market instead of borrowing from banks. CP is issued at discount to face value and is freely transferable by endorsement and delivery from the day of issue itself.
(g) Inter bank Participation Certificates (IBPC)
These are short term instruments to even out liquidity within the banking system. The objective is to provide some degree of flexibility in the credit portfolio of banks and smoothen consortium arrangements. This is purely an inter bank instrument. The RBI has authorised the banks to fund their short term needs from within the system through issuance of IBPC.
There are also bill rediscounting and refinance drawal facilities to enable bank to tide over their liquidity shortages.

SOURCE: www.iibf.org.in
Banking related general awareness- Major instruments of Indian Money Market Reviewed by sambasivan srinivasan on 3:44:00 AM Rating: 5

3 comments:

chinmay choudhury said...

Thank you, Sir.

Sambasivan.S said...

chinmay choudhury: I posted just today and you have read it. great.keep it up. note down the points in a note book and revise periodically.

Sambasivan.S said...

chinmay choudhury--I wish you register your email id for getting updates under follow by mail.

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