Description
difference between money market and capital market, various money market instruments, characteristic of call money market
INDIAN MONEY MARKET
Money Market
? Market for Financial Assets which are Close
substitutes for “money” – liquidity
? An
? Objectives
equilibrating mechanism for evening out short-term surpluses / deficits point for central bank intervention
? Focal
? Reasonable
access for users to meet their requirements at realistic prices
Characteristics of Money Market
? Transactions
Term ?Instruments with very low risk used ?Very low transaction costs ?No transactions hassles ?Very high volumes ? Market efficiency depends on ?Low cost ?Information availability ?Large number of participants
?Short
Financial Markets
Capital Market
? Market for Long Term ? Supply
? ? ? ?
Money Market
? Market for Short Term Funds ? Assets-
Individual savers Investments by Banks FI?s Mutual Funds Companies FI?s Mutual Funds
close substitutes of money
? Supply
?
Temporary surpluses of Companies, FI?s , Banks Temporary deficits of Banks, FI & Companies
? Demand
? ? ?
? Demand
?
? Guiding Principle:
? Guiding Principle
Risk-Return trade off
Parking in Riskless Assets ? Yield not so important
Money Market Instruments
? Call Money ? Short Notice Monet and Term Money ? Treasury Bills ? Dated Government Securities
? Certificates of Deposit
? Commercial Papers ? Inter-Corporate Deposits
? Repos / Reverse Repos
? RBI Repos & Reverse Repos (LAF)
Call Money Market
? Overnight funds / deposits ? Participants
• Banks • Primary Dealers ? Demand And Supply :
Temporary surpluses / deficits of banks and PD?s
? RBI restrictions:
?Borrowing
?Lending
Characteristics of Call Money Market
? Clean Lending, in the form of a deposit ? Interest rates
Deregulated ie., rates determined by the market forces
? Volatile : wide fluctuations even during the day
? Intervention of RBI through LAF, OMO ? Contracted over the telephone
? High Value transactions
? Brokers not allowed
Treasury Bills
? Short Term Debt of Government of India ? Maturity less than a year
? Issued
? through
RBI ? at a discount to face-value and redeemed at F V ? for 91 and 364 days ? by auction
? Anybody can invest ? Minimum investment Rs 25,000? Good secondary market ? Good instrument for cash management
Government Debt
? Very Large requirements of GOI every year ? RBI?s role :
advise, issue management and registrar ? Forms :
GP Notes, Stock Certficates, SGL & C-SGL Balances
? Coupons:
semi-annual, zero, floating
? Indexed Bonds, floaters
? Issue thro auctions : normal or price auctions ? State Development Bonds (perceived Default
Characteristics of Government Securities
? Good investments ? Good cash management instruments
? Very large volumes floating in the market
? Good liquidity ? Asset base for repos / reverse repos ? Trading thro NDS platform – quick and hassle free ? Investors :
Banks , FI?s, PD?s , PF Trusts, Companies, Networth individuals High-
Repos and Reverse Repos
? Repurchase agreement / RP?s Buy-Backs/ Ready Forward ? Combination of a Ready Transaction and a Forward Deal ? Simultaneous sale of an asset (today)
And an agreement (contract) To repurchase the same asset on a future date at a price fixed today ? Two legs
Sale ? Give the asset and receive rupees ? Title passes on „day one? ? Re-purchase ? Give rupees and receive back the asset ? Title restored on the date of maturity
?
? Repo a form of borrowing ?
RBI and the Money Market
? RBI intervention and signaling through the money
market ? RBI Reverse Repo?
sells GOI bonds from own holding and buys back ? Implications • Borrows from the market • Sucks up liquidity • Influences interest rate s- “ floor”
? RBI Repo
Buys GOI bonds into own holding and sells them back ? Implications • Lends to banks / PD?s • Injects liquidity • Influences interest rates – “ceiling”
?
RBI - LAF and OMO
? LAF
?every
day ?Both REPO and Reverse Repo window ?No pre-announced interest rates but auction ?Very effective fine tuning of money supply / liquidity / interest rates
? OMO sale or purchase of RBI on “own
account”
?Influences
the money supply / liquidity ?Longer-term effect that LAF
Strips
? Separate Trading of Registered Interest and
Principal Securities ? Separating a standard coupon-bearing bonds into its individual coupon and principal components ? A five year coupon Bond will result in 5+1=6 zero coupon bonds ? The newly created zero coupon bonds remain the direct obligations of the Government and are registered in the books of the agent meant for this purpose
Strips (2)
? Stripping only facilitates transferring the right to
ownership of individual cash flows ? Advantages
availability of zero coupon bonds ? more accurate matching of liabilities without reinvestment risk ? precise management of cash flows ? Solves the need of Govt to have coupon borrowings and markets desire for Zeroes
?
C B L O’s
? Collateralized Borrowing and Lending Obligation ? mechanism to borrow and lend funds against
securities ? platform for the lenders and borrowers to come together ? not only for banks but also for primary dealers, financial institutions, mutual funds, non-banking finance companies and corporates.
C L BO’s
? open a Constituent Subsidiary General Ledger
(CSGL) account with CCIL and pledge securities as collateral ? market participants will borrow and lend by exchanging the CBLOs ? The securities of the borrowers will be held in their CSGL account opened with CCIL and will not be transferred to the lenders ? For liquidity requirements and not for Statutory Liquidity Requirements of banks
C L BO’s
? type of derivative debt instrument ? instrument has short maturities, up to 90 days
? overcome the drawbacks plaguing the present Repos
market - obligations can be squared up only on the due date – cannot “pre-pay or “call-back” ? holder of CBLO can sell, or, an investor can buy it, at anytime during its tenure ? denominations of Rs 50 lakh
C L BO’s
? `offers' and `bids„
? Specifying the discount rate and maturity period
? The bids/offers will be through an auction screen
called `auction market'. These orders are matched on the basis of the best quotations, allowing, of course, for negotiations
C L BO’s
? net liabilities and receivables for each participant are
settled at the end of the day ? CCIL fixes borrowing limits for each participant on the basis of a valuation of the securities after a `haircut'
? Liquidity
Determinants of Interest Rate
?Forex Inflows ?Government Borrowings ?Credit Off-take ? Rate of inflation ? Growth rate of GDP ? Global Interest Rates ? Policy – Monetary Tools
doc_691194631.pptx
difference between money market and capital market, various money market instruments, characteristic of call money market
INDIAN MONEY MARKET
Money Market
? Market for Financial Assets which are Close
substitutes for “money” – liquidity
? An
? Objectives
equilibrating mechanism for evening out short-term surpluses / deficits point for central bank intervention
? Focal
? Reasonable
access for users to meet their requirements at realistic prices
Characteristics of Money Market
? Transactions
Term ?Instruments with very low risk used ?Very low transaction costs ?No transactions hassles ?Very high volumes ? Market efficiency depends on ?Low cost ?Information availability ?Large number of participants
?Short
Financial Markets
Capital Market
? Market for Long Term ? Supply
? ? ? ?
Money Market
? Market for Short Term Funds ? Assets-
Individual savers Investments by Banks FI?s Mutual Funds Companies FI?s Mutual Funds
close substitutes of money
? Supply
?
Temporary surpluses of Companies, FI?s , Banks Temporary deficits of Banks, FI & Companies
? Demand
? ? ?
? Demand
?
? Guiding Principle:
? Guiding Principle
Risk-Return trade off
Parking in Riskless Assets ? Yield not so important
Money Market Instruments
? Call Money ? Short Notice Monet and Term Money ? Treasury Bills ? Dated Government Securities
? Certificates of Deposit
? Commercial Papers ? Inter-Corporate Deposits
? Repos / Reverse Repos
? RBI Repos & Reverse Repos (LAF)
Call Money Market
? Overnight funds / deposits ? Participants
• Banks • Primary Dealers ? Demand And Supply :
Temporary surpluses / deficits of banks and PD?s
? RBI restrictions:
?Borrowing
?Lending
Characteristics of Call Money Market
? Clean Lending, in the form of a deposit ? Interest rates
Deregulated ie., rates determined by the market forces
? Volatile : wide fluctuations even during the day
? Intervention of RBI through LAF, OMO ? Contracted over the telephone
? High Value transactions
? Brokers not allowed
Treasury Bills
? Short Term Debt of Government of India ? Maturity less than a year
? Issued
? through
RBI ? at a discount to face-value and redeemed at F V ? for 91 and 364 days ? by auction
? Anybody can invest ? Minimum investment Rs 25,000? Good secondary market ? Good instrument for cash management
Government Debt
? Very Large requirements of GOI every year ? RBI?s role :
advise, issue management and registrar ? Forms :
GP Notes, Stock Certficates, SGL & C-SGL Balances
? Coupons:
semi-annual, zero, floating
? Indexed Bonds, floaters
? Issue thro auctions : normal or price auctions ? State Development Bonds (perceived Default
Characteristics of Government Securities
? Good investments ? Good cash management instruments
? Very large volumes floating in the market
? Good liquidity ? Asset base for repos / reverse repos ? Trading thro NDS platform – quick and hassle free ? Investors :
Banks , FI?s, PD?s , PF Trusts, Companies, Networth individuals High-
Repos and Reverse Repos
? Repurchase agreement / RP?s Buy-Backs/ Ready Forward ? Combination of a Ready Transaction and a Forward Deal ? Simultaneous sale of an asset (today)
And an agreement (contract) To repurchase the same asset on a future date at a price fixed today ? Two legs
Sale ? Give the asset and receive rupees ? Title passes on „day one? ? Re-purchase ? Give rupees and receive back the asset ? Title restored on the date of maturity
?
? Repo a form of borrowing ?
RBI and the Money Market
? RBI intervention and signaling through the money
market ? RBI Reverse Repo?
sells GOI bonds from own holding and buys back ? Implications • Borrows from the market • Sucks up liquidity • Influences interest rate s- “ floor”
? RBI Repo
Buys GOI bonds into own holding and sells them back ? Implications • Lends to banks / PD?s • Injects liquidity • Influences interest rates – “ceiling”
?
RBI - LAF and OMO
? LAF
?every
day ?Both REPO and Reverse Repo window ?No pre-announced interest rates but auction ?Very effective fine tuning of money supply / liquidity / interest rates
? OMO sale or purchase of RBI on “own
account”
?Influences
the money supply / liquidity ?Longer-term effect that LAF
Strips
? Separate Trading of Registered Interest and
Principal Securities ? Separating a standard coupon-bearing bonds into its individual coupon and principal components ? A five year coupon Bond will result in 5+1=6 zero coupon bonds ? The newly created zero coupon bonds remain the direct obligations of the Government and are registered in the books of the agent meant for this purpose
Strips (2)
? Stripping only facilitates transferring the right to
ownership of individual cash flows ? Advantages
availability of zero coupon bonds ? more accurate matching of liabilities without reinvestment risk ? precise management of cash flows ? Solves the need of Govt to have coupon borrowings and markets desire for Zeroes
?
C B L O’s
? Collateralized Borrowing and Lending Obligation ? mechanism to borrow and lend funds against
securities ? platform for the lenders and borrowers to come together ? not only for banks but also for primary dealers, financial institutions, mutual funds, non-banking finance companies and corporates.
C L BO’s
? open a Constituent Subsidiary General Ledger
(CSGL) account with CCIL and pledge securities as collateral ? market participants will borrow and lend by exchanging the CBLOs ? The securities of the borrowers will be held in their CSGL account opened with CCIL and will not be transferred to the lenders ? For liquidity requirements and not for Statutory Liquidity Requirements of banks
C L BO’s
? type of derivative debt instrument ? instrument has short maturities, up to 90 days
? overcome the drawbacks plaguing the present Repos
market - obligations can be squared up only on the due date – cannot “pre-pay or “call-back” ? holder of CBLO can sell, or, an investor can buy it, at anytime during its tenure ? denominations of Rs 50 lakh
C L BO’s
? `offers' and `bids„
? Specifying the discount rate and maturity period
? The bids/offers will be through an auction screen
called `auction market'. These orders are matched on the basis of the best quotations, allowing, of course, for negotiations
C L BO’s
? net liabilities and receivables for each participant are
settled at the end of the day ? CCIL fixes borrowing limits for each participant on the basis of a valuation of the securities after a `haircut'
? Liquidity
Determinants of Interest Rate
?Forex Inflows ?Government Borrowings ?Credit Off-take ? Rate of inflation ? Growth rate of GDP ? Global Interest Rates ? Policy – Monetary Tools
doc_691194631.pptx