Structure Of Money Market In India
Let us educate ourselves about the Structure of money market in India. In the Indian economy, there are various forms of market available. The Financial Market is one of them, Financial market deals with financial assets are created and exchanged.
This financial market is further divided into two major classifications; capital market and money market.
The structure of the Money Market in India category in 3 major studies:
Components Of Money Market
Institutions Of Money Market
Instruments Of Money Market
Components Of Money Market
For sake of clarification some of the important components of Money Market are:
1.Call Money Market
2.Collateral Loan Market
3.Bankers Acceptance Market
4.Treasury Bill Market
5.Commercial Bill Market
Call Money Market
Call Money market refers to the short period money market. In this market, borrowing money is called from the Commercial Bank. Those loans are given for a period not exceeding 7 days or for one day. It is more usual for banks. There are no Collateral securities for Call Money Market.
Collateral Loan Market
In this market the credit is avoidable only when collateral securities are given. This security can be any form or pledge, mortgage, securities and stock and bonds etc. The market for loans by collateral securities called the collateral Loan Market.
Bankers Acceptance Market
By acceptance market we mean the market for bankers acceptance which arise arise out of trade transaction both domestic and foreign. This market occupies an important place in European countries. Specialise firm in foreign countries who accepted this bills, any bill accepted by firms can easily be sold or discounted in the market.
Treasury Bill Market
Treasury bill market is that market which deals in treasury bills. It is issued by the central Government for short period loans for 91 days, these bills are sold by a reserve bank on the behalf of the Government.
These bills are purchased by commercial banks, reserve banks, NBFI, LIC & GIC. Treasury bills are bought and sold with a discount. The interest rate on the treasury bills is very low.
Commercial Bill Market
The commercial bill market is the market where bills are issued by businessmen, reputed small firms and industry in exchange of the goods purchased and sold. The buyers using promissory note to pay the seller a specified amount at a particular date.
Commercial bills are paid by seller to the buyer on a specified amount of a particular day for the goods received. Generally these bills maturity period is 3 months (90 days).
Institution Of Money Market
The institution of Money Market means the market which deals in lending and borrowing of short-term funds. The main institution of money market are discussed below.
The acceptance houses and the bill bankers are another constituent of the money market. The function as an intermediary between lenders and borrowers, exporters and importers in the short-term. They accept the bills of buyers whose position is unknown to the seller but the transaction between them is possible.
Bill Bankers are intermediary between the lender and the borrower and also discount the bill of exchange at a small commision.
Besides the commercial bank this NBFI also performs the function of lending and borrowing of short-term funds in the money market. It includes investment in business houses, insurance companies, chit fund, provident Fund, building and societies etc.
Commercial banks are the backbone of the money market. This bank collects money from the public in the form of savings and lends money in terms of loan against the promissory notes etc. The commercial banks invest their funds in discounting bills of exchange to motive the trade and commerce by mobilising the flow of money. Commercial banks, cooperative banks, financial banks etc are also forms of money market.
The Central Bank is the apex institution and monetary authority. It plays a vital role in the money market. The Money Market does not exist without a central bank. The central banking functions are regulatory in nature. It is the lender of lost resources. During an emergency the central bank lends money to the commercial banks. It raises or reduces the money supply and credit to stable the economy
Instruments Of Money Market
There are 8 instruments present for the Money Market. These instruments provide a vital role for the money market. They are:
The money is borrowed, lent and demanded for a short period of time which is generally for one day ( Sunday & holidays are excluded). Most banks use call money when one bank faces a temporary shortage of cash to meet the shortage for one or two days. Call money is also known as an interbank call money market such as insurance companies, mutual fund companies also use this market.
Commercial Paper Money
Commercial Paper Money market was firstly introduced in india 1990. It is an unsecured promissory note issued by public or private sector companies with a fixed maturity period which varies from 3 to 12 months. Commercial banks are unsecured so this can be issued by the reputed companies.
It is issued when an industry or business organisation requires urgent money for business expansion & development for short term borrowing money from the market.
Commercial banks and mutual funds are the main investors of commercial paper. Commercial paper is also known as bridge financing when a firm faces the cost issue of the reputed firm with a discount and current market rate of interest and the maturity period is no longer than 9 months.
Commercial Bill is a negotiable instrument and can be easily transferred from one party to another party easily. The drawee of the bill honours the bill on the due date. A trade bill is nothing but written acknowledgement of debt where the drames instruct / direct the payee / drawee to make payment within a fixed period of time.
The drawee accepts the bill and becomes liable to make payment on the due date or maturity period. Commercial bill otherwise known as Trade Bill & Accommodation Bill. Commercial bills are drawn by one business firm to another business firm or organisation. It is the common instrument used in credit purchase and sale in the industry and business.
In the commercial bill Industry and companies are involved.Commercial Bills issued for a short term maturity period, generally 90 days and can be discounted with banks even before the maturity period.
Certificate Of Deposit (CD)
It is a time or deposit which can be sold in the secondary market. It can be only issued by commercial banks and some other financial institutions. It is a bearer certificate which is issued by banks against the deposits kept by companies and institutions.
Regional Rural Bank & Local Area Bank are not able to issue CDs. The maturity period of a CD varies from 91 days to 1 year.It is a banking term and only used when money is deposited in a bank in CD form and not included commercial industries.
What information appears on the Certificate Of Deposits?
The amount of the deposits
Maturity date & period of time
The method under which the interest is calculated.
Treasury Bills are issued by the reserve bank of India on behalf of the Government. This bills enables Govt. to get short-term borrowings. These bills are sold to banks and public at discount rate. It is more than safe because the Govt is involved in it. Treasury bills are also known as TB & zero coupon bonds. Its maturity period varies from 14 to 364 days.
Repurchase agreement (Repos)
The development money market has experienced change in the use of purchase (Repos). It is a very important instrument of the money market. It is a money market instrument which enables collateral short-term borrowings and lends through sale or purchase operation in debt instruments by providing collateral securities.
Under repurchase agreement a holder of security sells them to an investor with an agreement to repurchase at a predetermined date and rate.
Money market funds are invest in short-term to pulled the investment to meet the certain goods. These are two basic types of money market funds one is taxable and another is tax free.
Inter Bank Participation Certificate (IBPC)
The IBPCs are the interbank money market instruments used by commercial banks to park their surplus funds. This IBPCs are of two type:
With Risk Sharing
Without Risk IBPCs
With Risk Sharing: These certificates are issued for 91 days to 180 days and the interest is determined on these participation certificates between the issuing and participating bank freely.
Without Risk IBPCs:This instrument exceeds 90 days. The interest is determined by two contracting banks.