By convention the term Money Market refers to the marketplace for short-term condition 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.
The below mentioned instruments are normally termed as money market instruments :
The call money market is an essential 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 :
Primary Dealers can be referred to as mercantile Bankers to Government of India, comprise the first tier of the government securities market. These were created during the year 1994-96 to strengthen the market infrastructure and put in place an improvised and an efficient secondary government securities market trading system and encourage retailing of Government Securities on large scale.
G-Secs are issued by the Reserve Bank of India on behalf of the Government of India. These form a part of the borrowing program accepted by the parliament in the ‘union budget’. G- Secs are normally issued in dematerialized form (SGL) and are also issued in the physical form (in the form of Stock Certificate) and are transferable. When issued in the physical form they are issued in the multiples of Rs. 10,000/-. Normally the dated Government Securities, have a period of 1 year to 20 years. These are sovereign instruments bearing a fixed interest rate (or otherwise) with interests payable semi-annually or otherwise and principal as per schedule, normally on due date on redemption.
G-secs are issued by RBI in either a yield-based (participants bid for the coupon payable) or price-based (participants bid a price for a bond with a fixed coupon) auction basis. The Auction can be either a Multiple price (participants get allotments at their quoted prices/yields) Auction or a Uniform price (all participants get allotments at the same price).
RBI has recently announced a non-competitive bidding facility for retail investors in G-Secs through which non-competitive bids will be allowed up to 5 percent of the notified amount in the specified auctions of dated securities.
State Development Loans (SDLs) are issued by the respective state governments but the RBI coordinates the actual process of selling these securities. Each state is allowed to issue securities up to a certain limit each year. The planning commission in discussion with the respective state governments determines this limit. Generally, the coupon rates on state loans are marginally higher than those of GOI-Secs issued at the same time.
The process for selling of state loans, the auction procedure and allotment procedure is similar to that for GOI-Sec. State Loans also qualify for SLR status Interest payment and other modalities are similar to GOI-Secs. They are also issued in dematerialized form. State Government Securities are also issued in the physical form (in the form of Stock Certificate) and are moveable. No stamp duty is payable on transfer for State Loans as in the case of GOI-Secs. In general, State loans are much less liquid than GOI-Secs.
Treasury bills are actually a class of Central Government Securities. Treasury bills, normally referred to as T-Bills are issued by Government of India against their short term borrowing necessities with maturities ranging between 14 to 364 days. The T-Bill of the following periods are currently issued by Government/Reserve Bank of India in Primary Market: 91-day, 182-day and 364-day T-Bills. All these are issued at a discount-to-face value. For example a Treasury bill of Rs. 100.00 face value issued for Rs. 91.50 gets redeemed at the end of it's tenure at Rs. 100.00.
Auction is a procedure of calling of bids with an objective of arriving at the market price. It is essentially a price discovery mechanism. There are several variant of auction. Auction can be price based or yield based. In securities market we come across below mentioned auction methods.
Multiple Price Auction (French Auction)
In French auction, buyers typically submit bids that specify an amount and a price (or a yield) at which they wish to buy the desired amount. Once submit, these bids are ranked from the highest to the lowest price (or from the lowest to the highest yield) and the amount for sale is awarded to the best bids (i.e. highest prices or lowest yields) upto the cut-off price (partial share being resorted to in case the quantum of securities left over are less than the amount bid at cut-off price). Under the multiple price auctions, each successful bidder will pay the actual price at which he has bid which would thus be a price higher than or equal to the cut-off price arrived at in the auction.
Uniform Price Auction (Dutch auction)
The process is similar to the Multiple Price Auction except that the each successful bidder (who has bid above the cut-off price) pays the lowest price (cut-off price) accepted by the debt manager. All the successful bidders will pay the same price, irrespective of their actual bid price.
After having discovered the coupon through the auction mechanism, if on account of some circumstances the Government / Reserve Bank of India decides to further issue the same security to expand the outstanding quantum, the government usually privately places the security with RBI. The RBI in turn may sell these securities at a later date through their open market window though at a different yield.
Under this scheme of arrangements after the initial primary placement of a security, the issue remains open to yet further subscriptions. The period for which the issue remains open may be sometimes time specific or volume specific.
The price of a bond in the markets is strong-minded by the forces of demand and supply as is the case in any market. The price of a bond in the marketplace also depends on a number of other factors and will fluctuate according to changes in;
The yield on a security is the implied interest offered by a security over its life, given its current market price.
Coupon payments are the cash flows that are offered by a particular security at fixed intervals. The coupon expressed as a percentage of the face value of the security gives the coupon rate.
The difference between coupon rate and yield arises because the market price of a security might be different from the face value of the security. Since coupon payments are calculated on the face value, the coupon rate is different from the implied yield.
This is the yield or return derived by the investor on purchase of the instrument (yield related to purchase price) It is calculated by dividing the coupon rate by the purchase price of the debenture.
For e. g: If an investor buys a 10% Rs 100 debenture of ABC company at Rs 90, his current Yield on the instrument would be computed as:
Current Yield = (10%*100)/90 X 100 , That is 11.11% p.a.
G-Secs are traded on a clean price (Trade price) but settled on the dirty price (Trade price + Accrued Interest). This happens as the coupon payments are not discounted in the price as is the case in the other non-govt. debt instruments.
The Day Count gathering to be followed for the calculation of Accrued Intetest in case of dealings in G-Secs is 30/360. I.e. each month is to be taken as having 30 days and each year is to be taken as having 360 days irrespective of the actual number of days in the month. So months like January, February, March, May, July, August, October and December are to be considered as having 30 days.
RBI : The Reserve Bank of India is the main controller for the Money Market. Reserve Bank of India also controls and regulates the G-Secs Market. Apart from its role as a regulator, it has to concurrently fulfill several other important objectives viz. running the borrowing program of the Government of India, controlling inflation, ensuring adequate credit at reasonable costs to various sectors of the economy, managing the foreign exchange reserves of the country and ensure a stable currency environment. SEBI: Regulator for the Indian Corporate Debt Market is the Securities and Exchange Board of India (SEBI). SEBI controls bond market and corporate debt market in cases where entities raise money from public during public issues. It regulates the method in which such moneys are raised and tries to guarantee a fair play for the retail investor. It forces the issuer to make the retail investor aware of the risks inherent in the investment by way and its disclosure norms. SEBI is also a regulator for the Mutual Funds.
FIMMDA stands for The Fixed Income Money Market and Derivatives Association of India (FIMMDA). It is an Association of Commercial Banks, Financial Institutions and Primary Dealers. FIMMDA is a voluntary market body for the bond, Money And Derivatives Markets.
FIMMDA has member representing all major institutional segments of the market. The membership include Nationalized Banks such as State Bank of India, its associate banks, Bank of India, Bank of Baroda; Private sector Banks such as ICICI Bank, HDFC Bank, IDBI Bank; Foreign Banks such as Bank of America, ABN Amro, Citibank, Financial institutions such as ICICI, IDBI, UTI, EXIM Bank; and Primary Dealers.
Maturity indicates the life of the security i.e. the time over which interest flows will occur.
Any private/public sector co. wishing to raise money through the CP market has to meet the following requirements :
CDs are short-term borrowings in the form of Usance Promissory Notes having a maturity of not less than 15 days up to a most of one year. CD is subject to payment of Stamp Duty below Indian Stamp Act, 1899 (Central Act). They are like bank term deposits accounts. Unlike traditional time deposits these are freely negotiable instruments and are often referred to as Negotiable Certificate of Deposits.
There is no single location or exchange where debt market participants interact for common business. Participants talk to each other over telephone conclude deals and send confirmations by Fax, Mail etc. with back office doing the settlement of trades. In the sense the wholesale debt market is a virtual market. The daily transaction volume of all the debt instruments traded would be about Rs.4000 - 5000 crores per day. In India, NSE has its separate segment which allows online trades in the listed debt securities through its member brokers. Recently BSE as well as OTCI have introduced Debt Market Segment. Reserve Bank of India has proposed Negotiated Dealing System (NDS) for trades in the G-Secs and Repos. NDS is likely to be operational by October 2001.
A tradable form of loan is usually termed as a Debt tool. They are usually obligations of issuer of such instrument as regards certain future cash flow representing Interest & Principal, which the issuer would pay to the legal owner of the Instrument. Debt Instruments are of various types. The distinguishing factors of the Debt Instruments are as follows:
Institutional investors operating in the Indian Debt Market are :
When we talk of interest rates there are different types of interest rates - rates that banks offer to their depositors, rates that they lend to their borrowers, the rate at which the Government borrows in the bond/G-Sec, market rates offered to small investors in small savings schemes like NSC rates at which companies issue fixed deposits etc.
The factors which govern the interest rates are mostly economy related and are commonly referred to as macroeconomic. Some of these factors are:
This is the yield or return derived by the investor on purchase of the instrument (yield related to purchase price) It is calculated by dividing the coupon rate by the purchase price of the debenture. For e. g: If an investor buys a 10% Rs 100 debenture of ABC company at Rs 90, his current Yield on the instrument would be computed as:
Current Yield = (10%*100)/90 X 100, that is 11.11% p.a.
The yield or the return on the instrument is held till its maturity is known as the Yield-to-maturity (YTM). It basically measures the total income earned by the investor over the entire life of the Security.
A Repo deal is one where eligible parties enter into a agreement with another to borrow money against at a prearranged rate against the collateral of qualified security for a specified period of time. The legal title of the security does change. The motive of the deal is to fund a position. Though the mechanics fundamentally remain the same and the contract almost remains the same in case of a reverse Repo deal the underlying motive of the deal is to meet the security / instrument specific needs or to lend the money. Indian Repo Market is governed by Reserve Bank of India. At present Repo is permitted between permitted 64 players against Central & State Government Securities (including T-Bills) only at Mumbai.
The Zero Coupon Yield Curve (also called the Spot Curve) is a association between maturity and interest rates. It differs from a normal yield curve by the fact that it is not the YTM of coupon bearing securities, which gets plotted. Represented against time are the yields on zero coupon instruments across maturities. The benefit of having zero coupon yields (or spot yields) is that the deficiency of the YTM approach (See Yield to Maturity) is removed. However zero coupon bonds are generally not available across the entire spectrum of time and hence statistical opinion processes are used. The zero coupon yield curve is useful in valuation of even coupon bearing securities and can be extended to other risk classes as well after adjusting for the spreads. It is also an important input for robust measures of Value at Risk (VaR).
In some cases, a fund will close to new investors and distribute its assets to investors, in accordance with the distribution terms in its prospectus. A fund might do this to provide equitable treatment to all investors in the face of significant redemption pressure that might lead to a forced sale of the fund's assets.
Assets of money market mutual funds have doubled since 2004, rising to a level of $3.9 trillion by January 2009. This increase primarily reflected very significant inflows to institutional money market funds, and to a lesser extent, inflows to retail money market funds in 2007 and 2008.
Retail funds are offered primarily to individuals with moderate-sized accounts. As of January 2009, retail money market funds hold around 35 percent of all money market fund assets.
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