Terms Relating To Money Markets Finance Essay

It is a Centre in which fiscal establishments join together for the intent of covering in fiscal or pecuniary assets, which may be of short term adulthood or long term adulthood. The short term agencies, by and large a period upto one twelvemonth and the term near replacements to money, denotes any fiscal plus which can be rapidly converted into money with minimal dealing cost.A

Footings associating to Money Market

Money Market Refers to the market for short-run demand and deployment of funds.A

Name Money Money Lent for one dayA

Notice Money Money Lent for a period transcending one dayA

Term Money Money lend for 15 yearss or more in Inter-bank marketA

Held till adulthood Securities which are non meant for sale and shall be kept till maturityA

Held for merchandising Securities acquired by the Bankss with the purpose to merchandise by taking advantage of the short-run price/ involvement rate motions will be classified under held for trading.A

Available for sale The securities which do non fall within the above two classs i.e. HTM or HFT will be classified under available for sale.A

Output to adulthood Expected rate of return on an bing security purchased from the marketA

Coupon Rate Specified involvement rate on a fixed adulthood security fixed at the clip of issue.A

Treasury operations Trading in authorities securities in the market. An investor Bank can buy these securities in the primary market. Trading takes topographic point in the secondary market.A

Gilt Edged security Government security that is a claim on the authorities and is a unafraid fiscal instrument which guarantees certainty of both capital and involvement. These securities are free of default hazard or recognition hazard, which leads to low market hazard and high liquidity.A

CALL/NOTICE MONEY MARKET OPERATIONS IN INDIAA

The money market is a market for short-run fiscal assets that are close replacements of money. The most of import characteristic of a money market instrument is that it is liquid and can be turned over rapidly at low cost and provides an avenue for equilibrating the short-run excess financess of loaners and the demands of borrowers. The call/notice money market forms an of import section of the Indian money market. Under call money market, financess are transacted on nightlong footing and under notice money market, financess are transacted for the period between 2 yearss and 14 days.A

Banks borrow in this money market for the undermentioned propose.A

aˆ? To make full the spreads or impermanent mismatches in fundsA

aˆ? To run into the CRR & A ; SLR Mandatory demands as stipulated by the Central bankA

aˆ? To run into sudden demand for financess originating out of big outflowsA

Therefore name money normally serves the function of equilibrating the short-run liquidness place of banksA

ParticipantsA

Participants in call/notice money market presently include Bankss, Primary Dealers ( PDs ) , development finance establishments, insurance companies and choice common financess. Of these, Bankss and PDs can run both as borrowers and loaners in the market. But non-bank establishments ( such as all-India FIs, choice Insurance Companies or Common Fundss ) , which have been given specific permission to run in call/notice money market can, nevertheless, operate as loaners merely. No new non-bank establishments are permitted to run ( i.e. , lend ) in the call/notice money market with consequence from May 5, 2001. In instance any eligible establishment has echt trouble in deploying its extra liquidness, RBI may see supplying impermanent permission to impart a higher sum in call/notice money market for a specific period on a individual basis.A

Effective from Aug 06, 2005 non-bank participants except Primary Traders are to stop take part, to do the call money market pure inter-bank market.A

Prudential norms of RBIA

Lending of scheduled commercial Bankss, on a biweekly mean footing, should non transcend 25 per cent of their capital fund. However, Bankss are allowed to impart a upper limit of 50 % on any twenty-four hours, during a fortnight.A

Borrowings by scheduled commercial Bankss should non transcend 100 per cent of their capital fund or 2 per cent of sum sedimentations, whichever is higher. However, Bankss are allowed to borrow a upper limit of 125 per cent of their capital fund on any twenty-four hours, during a fortnight.A

Interest RateA

Eligible participants are free to make up one’s mind on involvement rates in call/notice money market.

What is call money market?

1 The call money is the money Lent for one twenty-four hours

2 Deals with nightlong adoption and loaning

3A The financess locatedA through the money market can be utilised

A 4 To supply funding for theA purchase of securities thatA can beadded to the portfolio of the investing house

5 As a resource that will cover the border histories of thefirm ‘s clients.

Why?

1 Helps Bank to pull off short-run shortage or excess ofA money

2 Provides financess that can be used to carry on transactionsbetween Bankss, or with other money market traders

A 3 The call money loan basically works in the samemanner as a twenty-four hours to twenty-four hours loan

4 Crosses international lines, with fundingopportunities located around the universe

Market size

1 Market for veryA short term financess, known as money on call

A 2 The rate at which financess are borrowed in this market is called`Call Money rate ‘

A 3 The size of the market for these financess in India is between Rs60,000 million to Rs 70,000 million

4 Of which publicA sector Bankss account for 80 % of adoptions

5 Foreign banks/private sector Bankss account for the balance20 % .

Penetration

1 The money market is a market for short-run fiscal assetsthat are close replacements of money.

2 It is liquid and can be turned over rapidly at low cost.

3 Provides an avenue for equilibrating the short-run surplusfunds of lendersA and the demands of borrowers.

A 4 The call money market forms an of import segmentA of theIndian money market.

5 Under call money market, financess are transacted on overnightbasis

Banks borrow in this money market for the followingpropose.

A 1 To make full the spreads or impermanent mismatches in financess

A 2 To run into the CRR & A ; SLR Mandatory demands asstipulated by the Central bank

A 3 To run into sudden demand for financess originating out of largeoutflows

A 4 Thus name money normally serves the function ofA equilibrating the short-run liquidness place of Bankss

Features

1 Affected by liquidness in theA market

2 One of the sections of the money market

3 No physicalA reference

4 Interest rates undergo a alteration on a twenty-four hours to twenty-four hours footing

5 RBI has prescribed prudential bounds for Bankss

A 6 Minutess non secured by any collateral

Operationss in call market

Borrowers and loaners contact each other overA telephone.A

The borrowers and lendersA arrive at a dealspecifying the sum of loan and the rate ofA involvement.

After the trade is over, the loaner issuesA FBL check in favour ofA the borrower.A

The borrower in bend issuesA call moneyA borrowing reception.

When the loan isA repaid with involvement, the loaner returns thedulydischarged reception.

The trade canA be straight negotiatedA by routing itA through the Discountand Finance House of India ( DFHI ) .

The borrowers and loaners inform the DFHI about their fundrequirement and handiness at a specified rate of involvement.

Once the trade is confirmed, the Deal Settlement Advice is exchanged. InA caseA theA DFHIA borrows, A itA issuesA aA callA depositA receiptA toA theA lenderand receivesA RBI chequeA for theA money borrowed.The reverseA takesplace in the instance of loanings by the DFHI.

The duly discharged call sedimentation reception is surrendered at the clip ofA colony.

Call loans can be renewed upto a maximal period of 14 yearss merely andsuch reclamations are recorded on the dorsum of the sedimentation reception by the borrower.

Entry barriers

The entry into this field is restricted by RBI.

Commercial Banks, A Co-operative Banks andA Primary Dealersare allowed to borrow and impart in this market.

Specified All-India Financial Institutions, Mutual Funds, andcertain specified entities are allowed to entree to Call/Noticemoney market merely as loaners.

Reserve Bank of India has late taken stairss to do thecall/notice money market wholly inter-bank market.

Therefore the non-bank entities will non beA allowed entree tothis market beyond December 31, 2000

Stairss taken by run batted in

Both the borrowers and theA loaners are required to hold currentaccounts with the Reserve Bank of India.

A This will ease speedy and timely debit and recognition operations.

A The call market enables the Bankss and establishments to even out theirday to dayA shortages andA excesss ofA money.

Banks particularly entree the call market to borrow/lend money foradjusting their hard currency modesty demands ( CRR ) .

A The loaners holding steady influx of financess ( e.g. LIC, UTI ) look at thecall market as an mercantile establishment for deploying financess on short term footing.

Advantages

High Liquid

High Profitableness

Care of SLR

Safe and inexpensive

Aid to cardinal bankA operations

Disadvantages

Uneven Development

Lack of Integration

Volatility in Call Money rates

Advantages of call money

In India, commercial Bankss play a dominant function in the call loan market. They used to borrow and impart among themselves and such loans are called inter-bank loans. They are really popular in India. So many advantages are available to commercial Bankss. They are as follows:

High Liquid: Money Lent in a call market can be called back at any clip when needed. So, it is extremely liquid. It enables commercial Bankss to run into big sudden payments and remittals by doing a call on the market.

High Profitableness: Banks can gain high profiles by imparting their excess financess to the call market when call rates are high volatile. It offers a profitable parking topographic point for using the excess financess of Bankss temporarily.

Care Of SLR: Call market enables commercial bank to minimum their statutory modesty demands. By and large Bankss borrow on a big graduated table every coverage Friday to run into their SLR demands. In absence of call market, Bankss have to keep idle hard currency to meet5 their modesty demands. It will state upon their profitableness.

Safe And Cheap: Though call loans are non secured, they are safe since the participants have a strong fiscal standing. It is inexpensive in the sense agents have been prohibited signifier operating in the call market. Hence, Bankss need non pay agents on call money passages.

Aid To Central Bank Operations: Name money market is the most sensitive portion of any fiscal system. Changes in demand and supply of financess are rapidly reflected in call money rates and give an indicant to the cardinal bank to follow an appropriate pecuniary policy. Furthermore, the being of an efficient call market helps the cardinal bank to transport out its unfastened market operations efficaciously and successfully.

Drawbacks of call money

The call market in India suffers from the following drawbacks:

Uneven Development: The call market in India is confined to merely large industrial and commercial centres like Mumbai, Kolkata, Chennai, Delhi, Bangalore and Ahmadabad. Generally call markets are associated with stock exchanges. Hence the market is non equally development.

Lack Of Integration: The call markets in different centres are non to the full integrated. Besides, a big figure of local call markets exist without any integrating.

Volatility In Call Money Ratess: Another drawback is the volatile nature of the call money rates. Name rates really to greater extant indifferent centres apathetic seasons on different yearss within a two weeks. The rates really between 12 % and 85 % . One can non believe 85 % being charged on call loans.