Money Market Instruments & Savings Account, with Securities in India

Money Market means market where money or its equivalent can be traded. Money is synonym of liquidity. Money Market consists of financial institutions and dealers in money or credit who wish to generate liquidity. It is better known as a place where large institutions and governments manage their short term cash needs. For generation of liquidity, short term borrowing and lending is done by these financial institutions and dealers. Money Market is part of financial market where instruments with high liquidity and very short term maturities are traded. Due to highly liquid nature of securities and their short term maturities, money market is treated as a safe place. Hence, money market is a market where short term obligations such as treasury bills, commercial papers and banker's acceptances are bought and sold.

Benefits and functions of Money Market

Money Markets exist to facilitate efficient transfer of short-term funds between holders and borrowers of cash assets. For the lender/investor, it provides a good return on their funds. For the borrower, it enables rapid and relatively inexpensive acquisition of cash to cover short-term liabilities. One of the primary functions of Money Market is to provide focal point for RBI's intervention for influencing liquidity and general levels of interest rates in the economy. RBI being the main constituent in the Money Market aims at ensuring that liquidity and short term interest rates are consistent with the monetary policy objectives.

Money Market & Capital Market:

Money Market is a place for short term lending and borrowing, typically within a year. It deals in short term debt financing and investments. On the other hand, Capital Market refers to stock market, which refers to trading in shares and bonds of companies on recognized stock exchanges. Individual players cannot invest in money market as the value of investments is large, on the other hand, in capital market, anybody can make investments through a broker. Stock Market is associated with high risk and high return as against Money Market which is more secure. In case of money market, deals are transacted on phone or through electronic systems as against capital market where trading is through recognized stock exchanges.

Treasury Bills:-

Treasury Bills are Money Market instruments to finance the short term requirements of the Government of India. These are discounted securities and thus are issued at a discount to face value. The return to the investor is the difference between the maturity value and issue price

Treasury Bills or T-Bills as they are known are issued by the Government of India to meet their short-term requirement. T-Bills are issued for 91-day, 182-day and 364-day maturities. T-Bills are issued at a discount to their face value and redeemed at par.

364-day T-Bills forms part of the government borrowing programme.There are three types of Treasury Bills.

91-day T-bill - maturity is in 91 days. Its auction is weekly on every Wednesday.

182-day T-bill - maturity is in 182 days. Its auction is on every alternate Wednesday other than a reporting week.

364-Day T-bill - maturity is in 364 days. Its auction is on every alternate Wednesday in a reporting week.

Features of T-Bills auction

All T-Bills auctions are Price-based.
All T-Bills are auctioned on Multiple-Price basis.

The RBI auctions 91-day T-Bills every Wednesday, 182-day T-Bills on every alternate wednesday and 364-day T-Bills on the Wednesday of the reporting Friday week.

Commercial Paper is a low-cost alternative to bank loans. It is a short term unsecured promissory note issued by corporates and financial institutions at a discounted value on face value. They are usually issued with fixed maturity between one to 270 days and for financing of accounts receivables, inventories and meeting short term liabilities. Say, for example, a company has receivables of Rs 1 lacs with credit period of 6 months. It will not be able to liquidate its receivables before 6 months. The company is in need of funds. It can issue commercial papers in form of unsecured promissory notes at discount of 10% on face value of Rs 1 lacs to be matured after 6 months. The company has strong credit rating and finds buyers easily. The company is able to liquidate its receivables immediately and the buyer is able to earn interest of Rs 10K over a period of 6 months. They yield higher returns as compared to T-Bills as they are less secure in comparison to these bills. Chances of default are almost negligible but are not zero risk instruments. Commercial Paper being an instrument not backed by any collateral, only firms with high quality credit ratings will find buyers easily without offering any substantial discounts. They are issued by corporates to impart flexibility in raising working capital resources at market determined rates. Commercial Papers are actively traded in the secondary market since they are issued in the form of promissory notes and are freely transferable in demat form.

Certificate of Deposit:

It is a short term borrowing more like a bank term deposit account. It is a promissory note issued by a bank in form of a certificate entitling the bearer to receive interest. The certificate bears the maturity date, the fixed rate of interest and the value. It can be issued in any denomination. They are stamped and transferred by endorsement. Its term generally ranges from three months to five years and restricts the holders to withdraw funds on demand. However, on payment of certain penalty the money can be withdrawn on demand. The returns on Certificate of Deposits are higher than T-Bills because it assumes higher level of risk. While buying Certificate of Deposit, return method should be seen. Returns can be based on Annual Percentage Yield (APY) or Annual Percentage Rate (APR). In APY, interest earned is based on compounded interest calculation. However, in APR method, simple interest calculation is done to generate the return. Accordingly, if the interest is paid annually, equal return is generated by both APY and APR methods.

However, if interest is paid more than once in a year, it is beneficial to opt APY over APR.

Advantages of Certificate of Deposit as a money market instrument

Repo / Reverse Repo:

A repo agreement is the sale of a security with a commitment to repurchase the same security as a specified price and on specified date while a reverse repo is purchase of security with a commitment to sell at predetermined price and date. A repo transaction for party would mean reverse repo for the second party. In lieu of the loan, the borrower pays a contracted rate to the lender, which is called the repo rate. As against the call money market where the lending is totally unsecured, the lending in the repo is backed by a simultaneous transfer of securities. The main players in this market are all institutional players like Banks,Primary Dealers, financial institutions, mutual funds, insurance companies etc. allowed to operate a SGL with the Reserve Bank of India.

RBI also operates daily repo/ reverse repo auctions to provide benchmark rates in the markets as well as managing in the liquidity in the system. RBI sucks or injects liquidity in the banking system by daily repo/ reverse operations. Repurchase transactions, called Repo or Reverse Repo are transactions or short term loans in which two parties agree to sell and repurchase the same security. They are usually used for overnight borrowing. Repo/Reverse Repo transactions can be done only between the parties approved by RBI and in RBI approved securities viz. GOI and State Govt Securities, T-Bills, PSU Bonds, FI Bonds, Corporate Bonds etc. Under repurchase agreement the seller sells specified securities with an agreement to repurchase the same at a mutually decided future date and price. Similarly, the buyer purchases the securities with an agreement to resell the same to the seller on an agreed date at a predetermined price. Such a transaction is called a Repo when viewed from the perspective of the seller of the securities and Reverse Repo when viewed from the perspective of the buyer of the securities. Thus, whether a given agreement is termed as a Repo or Reverse Repo depends on which party initiated the transaction. The lender or buyer in a Repo is entitled to receive compensation for use of funds provided to the counterparty. Effectively the seller of the security borrows money for a period of time (Repo period) at a particular rate of interest mutually agreed with the buyer of the security who has lent the funds to the seller. The rate of interest agreed upon is called the Repo rate. The Repo rate is negotiated by the counterparties independently of the coupon rate or rates of the underlying securities and is influenced by overall money market conditions.

Inter Corporate Deposits:

Inter Corporate Deposits are unsecured loans extended by corporate with excess funds to other corporate bodies. The rates in this market are higher as compared to that of other markets.

An ICD is an unsecured loan extended by one corporate to another. This market allows corporates with surplus funds to lend to other corporates. Also the better-rated corporates can borrow from the banking system and lend in this market. As the cost of funds for a corporate is much higher than that for a bank, the rates in this market are higher than those in the other markets. Also, as ICDs are unsecured, the risk inherent is high and the risk premium is also built into the rates.

RBI permits Primary Dealers to accept Inter- Corporate Deposits upto fifty percent of their Net Worth and for a period of not less than 7 days. Primary Dealers cannot lend in the ICD market. Apart from CPs, corporate also have access to another market called the inter corporate deposits (ICD) market.

Collateralized Borrowing and Lending Obligation (CBLO):

“Collateralized Borrowing and Lending Obligation (CBLO)", a money market instrument as approved by RBI, is a product developed by CCIL for the benefit of the entities who have either been phased out from Inter Bank Call Money Market or have been given restricted participation in terms of ceiling on call borrowing and lending transactions and who do not have access to the call money market. CBLO is a discounted instrument available in electronic book entry form for the maturity period ranging from one day to ninety days (can be made available up to one year as per RBI guidelines). In order to enable the market participants to borrow and lend funds, CBLO is an obligation by the borrower to return the money borrowed, at a specified future date; 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; An underlying charge on securities held in custody for the amount borrowed/lent.

It is a money market instrument that enables entities, which have restricted participation in the call money market, to borrow and lend

It is a discounted instrument which can be traded on CBLO Screen
It is on electronic trading platform with the matching of the bids and yields take place on Best Yield-Time Priority basis

The maturity ranges generally from 1 day to 90 days and can also be made available up to 1 year

Central Government Securities including T-Bills are eligible securities that can be used as collateral for CBLO

Call Money / Notice Money /Term Money:
The call money market is an integral part of the Indian Money Market, where the day-to-day surplus funds (mostly of banks) are traded. The loans are of short-term duration varying from 1 to 14 days. The money that is lent for one day in this market is known as "Call Money", and if it exceeds one day (but less than 15 days) it is referred to as "Notice Money". Term Money refers to Money lent for 15 days or more in the Interbank Market.

Banks borrow in this money market for the following purpose:

To fill the gaps or temporary mismatches in funds
To meet the CRR & SLR mandatory requirements as stipulated by the RBI.
To meet sudden demand for funds arising out of large outflows.
Thus call money usually serves the role of equilibrating the short-term liquidity position of banks

Those who can both borrow as well as lend in the market - RBI (through LAF) Banks, PDs

Notice Money - funds borrowed / lent for more than one day but upto a maximum of 14 days,

Term Money - funds borrowed / lent for 15 days and more upto a maximum period of 1 year,

Interest Rate: Eligible participants are free to decide on interest rates

Reporting Requirement:

Participants needs to report on NDS - Call system from September 18, 2007 & Deals should be reported with in 15 mins on NDS. In normal conditions when the liquidity is high, the Call rates hovers between LAF Repo and Reverse Repo rates

Is an integral part of the Indian money market where day-to-day surplus funds (mostly of banks) are traded.
The loans are of short-term duration (1 to 14 days). Money lent for one day is called 'call money'; if it exceeds 1 day but is
less than 15 days it is called 'notice money'. Money lent for more than 15 days is 'term money'
The borrowing is exclusively limited to banks & PDs, who are temporarily short of funds.
Call loans are generally made on a clean basis- i.e. no collateral is required
The main function of the call money market is to redistribute the pool of day-to-day surplus funds of banks among other
banks in temporary deficit of funds
The call market helps banks economise their cash and yet improve their liquidity
It is a highly competitive and sensitive market

Those who can both borrow and lend in the market - RBI (through LAF), banks and primary dealers
Once upon a time, select financial institutions viz., IDBI, UTI, Mutual Funds were allowed in the call money market only on the lender's side
These were phased out and call money market is now a pure inter-bank market (since August 2005)

Banker's Acceptance:

It is a short-term credit investment. It is guaranteed by a bank to make payments. The Banker's Acceptance is traded in the Secondary Market. The banker's acceptance is mostly used to finance exports, imports and other transactions in goods. The banker's acceptance need not be held till the maturity date but the holder has the option to sell it off in the secondary market whenever he finds it suitable.

Although BA's, as they are known, have their origin in trade bills issued by merchants, today they are an important money market instrument. A banker's acceptance is simply a bill of exchange drawn by a person and accepted by a bank. The person drawing the bill must have a good credit rating otherwise the BA will not be tradable. The drawer promises to make payment of the face value upon a given future date. The most common term for these instruments is 90 days. They can very from 30 days to180 days. The BA has the advantage of locking the borrower in to a fixed rate over the term of the bill. This can be important if a rise in short-term rates is expected.

The money market is a market for short-term financial assets that are close substitutes of money. The most important feature of a money market instrument is that it is liquid and can be turned over quickly at low cost and provides an opportunity for balancing the short-term surplus funds of lenders and the requirements of borrowers. By convention, the term "Money Market" refers to the market for short-term requirement and deployment of funds. Money market instruments are those instruments, which have a maturity period of less than one year. The most active part of the money market is the market for overnight call and term money between banks and institutions and repo transactions. Call Money / Repo are very short-term Money Market products. There is a wide range of participants(banks, primary dealers, financial institutions, mutual funds,trusts,provident funds etc.) dealing in money market instruments. Money Market Instruments and the participants of money market are regulated by RBI and SEBI.As a primary dealer SBI DFHI is an active player in this market and widely deals in Short Term Money Market Insrtruments.The below mentioned instruments are normally termed as money market instruments: