Structure of Indian money market and It's instruments

MONEY MARKET INSTRUMENTS (Constituents) or Structure of Indian money Market

The entire money market can be divided into two parts. They are

a)      Organised money market

b)      Unorganized money market.

Organised money markets are also known as authorised money market and unorganized money markets are known as unauthorized money market. Both of these components comprises off several components which are illustrated below with the help of a chart:

After studying above organizational chart of the Indian money market it is necessary to understand various components or sub markets within it. They are explained below:

1.       Call Money:  Call/Notice money is an amount borrowed or lent on demand for a very short period. If the period is more than one day and up to 14 days it is called 'Notice money' otherwise the amount is known as Call money'. Intervening holidays and/or Sundays are excluded for this purpose. No collateral security is required to cover these transactions:

Features of Call Money:

i.         The call market enables the banks and institutions to even out their day-to-day deficits and surpluses of money.

ii.        Commercial banks, Co-operative Banks and primary dealers are allowed to borrow and lend in this market for adjusting their cash reserve requirements.

iii.      Specified All-India Financial Institutions, Mutual Funds and certain specified entities are allowed to access Call/Notice money only as lenders.

iv.      It is a completely inter-bank market hence non-bank entities are not allowed access to this market.

v.        Interest rates in the call and notice money market are market determined.

2.       TREASURY BILLS MARKET: In the short term, the lowest risk category instruments are the treasury bills. RBI issues these at a prefixed day and a fixed amount. These are four types of treasury bills.

i.         14-day Tbill- maturity is in 14 days. Its auction is on every Friday of every week. The notified amount for this auction is Rs. 100 crores.

ii.        91-day Tbill- maturity is in 91 days. Its auction is on every Friday of every week. The notified amount for this auction is Rs. 100 crores.

iii.      182-day Tbill- maturity is in 182 days. Its auction is on every alternate Wednesday (which is not a reporting week). The notified amount for this auction is Rs. 100 crores.

iv.      364-Day Tbill- maturity is in 364 days. Its auction is on every alternate Wednesday (which is a reporting week). The notified amount for this auction is Rs. 500 crores.

A considerable part of the government's borrowings happen through Tbills of various maturities. Based on the bids received at the auctions, RBI decides the cut off yield and accepts all bids below this yield.

3. INTER-BANK TERM MONEY: Interbank market for deposits of maturity beyond 14 days and up to three months is referred to as the term money market. The specified entities are not allowed to lend beyond 14 days. The development of the term money market is inevitable due to the following reasons

i.         Declining spread in lending operations

ii.        Volatility in the call money market

iii.      Growing desire for fixed interest rates borrowing by Corporates

iv.      Move towards fuller integration between forex and money market

v.        Stringent guidelines by regulators/management of the institutions

4. CERTIFICATE OF DEPOSITS: After treasury bills, the next lowest risk category investment option is the certificate of deposit (CD) issued by banks and FIs.  CDs are issued by banks and FIs mainly to augment funds by attracting deposits from Corporates, high net worth individuals, trusts, etc. the issue of CDs reached a high in the last two years as banks faced with reducing deposit base secured funds by these means. The foreign and private banks, especially, which do not have large branch networks and hence lower deposit base use this instrument to raise funds.

The rates on these deposits are determined by various factors. Low call rates would mean higher liquidity in the market. Also the interest rate on one-year bank deposits acts as a lower barrier for the rates in the market. 

5. INTER-CORPORATES DEPOSITS MARKET: Apart from CPs, Corporates also have access to another market called the inter- Corporates deposits (ICD) market. An ICD is an unsecured loan extended by one Corporates to another. Existing mainly as a refuge for low rated Corporates, this market allows funds surplus Corporates 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 Corporates in much higher than a bank, the rates in this market are higher than those in the other markets. ICDs are unsecured, and hence the risk inherent in high. The ICD market is not well organised with very little information available publicly about transaction details.

6. COMMERCIAL PAPER MARKET (CP): CPs is negotiable short-term unsecured promissory notes with fixed maturities, issued by well rated companies generally sold on discount basis. Companies can issue CPs either directly to the investors or through banks / merchant banks (called dealers). These are basically instruments evidencing the liability of the issuer to pay the holder in due course a fixed amount (face value of the instrument) on the specified due date. These are issued for a fixed period of time at a discount to the face value and mature at par.

7. READY FORWARD CONTRACT: It is a transaction in which two parties agree to sell and repurchase the same security. Under such an agreement the seller sells specified securities with an agreement to repurchase the same at a mutually decided future date and a price. Similarly, the buyer purchases the securities with an agreement to resell the same to the seller on an agreed date in future at a predetermined price. Such a transaction is called a Repo when viewed from the prospective of the seller of securities (the party acquiring fund) and Reverse Repo when described from the point of view of the supplier of funds.