MONEY MARKET INSTRUMENTS—SOME THOUGHTS
Money market is the market for short term debt finances. It comprises of the call and notice money market, repo market and the market for debt instruments such as treasury bills that have an original maturity of less than one year.
The money market does not exist in a specific physical location or follow a single set of rules or post a single set of prices. Rather, it represents a web of borrowers and lenders, liked by telephones and computers dealing with short term debt funds, Banks financial institutions, companies and government are the key participants in the money market. At the center of this web is the central bank whose policies have an important bearing on the interest rates in the money markets.
The money market provides an equilibrium mechanism for levelling out the demand and supply of short term funds and serves as a focal point for the intervention by the central bank (RBI in India) for influencing the liquidity and interest rates in the financial systems.
Repo market:
In a repo transaction, a holder of securities sells them with an agreement to repurchase the same after a certain period at a predetermined price which is higher than the sale price. In essence it means that the parties exchange securities and cash with a simultaneous agreement to reverse the transactions after a given period. Thus a repo represents a collateralized short term lending transaction. The party which lends securities (or borrows cash) is said to be doing the repo and the party which lends cash (or borrows securities) is said to be doing the reverse repo.
The salient features if repo transaction is as follows:
1. Repos are generally for a period not exceeding 14 days though there is no restriction on the maximum period for which a repo can be done
2. G-secs treasury bills and select PSU and institutional bonds are the instruments used as collateral security for repo transactions
3. While banks and primary dealers can do repos as well as reverse repos, other participants such as institutions and corporates can only lend funds in the repo market? Recently policy changes seek to do away with this restriction and promote a phased expansion of the repo market. Such an expansion however, would call for creating an enabling infrastructure such as the Clearing Corporation and electronic settlements of transactions.
4. Repos are settled on DVP basis on the same day. So, the participants in repo transactions must hold SGL, account and current account with the RBI
5. Repos are reported in the negotiated trade segment of the WDM segment of the NSE.
Treasury Bills:
Treasury bills are short term debt instruments of the central government. Presently 91-day and 364 day treasury are issued. Treasury bills are sold through an auction process according to a fixed auction calendar announced by RBI. Banks and primary dealers are the major bidders in the competitive auction process. Provident funds and other investors can make non-competitive bids. RBI makes allocation to non-competitive bidders at a weighted average yield arrived at on the bass of the yields quoted by accepted competitive bids.
Treasury bills are issued at a discount and redeemed at par. Hence the implicit yield on a treasury bill is a function of the size of the discount and the period of maturity.
Treasury bills are largely held by banks. Provident funds trusts, and mutual funds gave also in recent years become important inverts in treasury bills. Most buyers of treasury bills hold them till maturity and hence the secondary activity is quite limited.
Commercial Paper:
Commercial paper (CP) is an instrument of short term in secured borrowing issued by non-banking companies. CPOs are issued at a discount and redeemed at par. CPs are meant primarily to finance working capital needs of corporates and hence form part of the working capital limits set by banks.
CP issues are regulated by RBI guidelines issued from time to time. According to October 2001 guidelines:
1. Corporates, all India financial institutions (FIs), Primary Dealers and Satellite Dealers can issue CPs. A corporate is eligible if its tangible net worth is at least Rs 4 crore, if it has a sanctioned working capital limit from a bank or financial institution ad if its borrowed account is a standard asset.
2. The minimum credit rating shall be P-2 of CRISIL or an equivalent thereof.
3. The maturity period is 15 days to 1 year
4. The denomination is Rs 5 lakh or a multiple, thereof.
5. Only a scheduled banks can act as an IPA (Issuing and paying Agent)
6. CP can be issued as a promissory note or in a demat form.
The RBI has mandated that all further issues of CPs should be in a demat form and that banks, financial institutions, primary dealers and secondary dealers convert their CP holdings into demat form from March 31, 2002 onwards. This reduces stamp duty in CP transactions.
The above discussions were pertaining to money market instruments with relative advantages.
Dr.R.SRINIVASAN is a Post graduate in commerce and Management. He received his doctoral degree from Alagappa University in 1997. He is now Working as an ASSOCIATE PROFESSORin Post graduate and Research Department of Corporate Secretaryship at Bharathidasan Government College for Women (Autonomous), Pondicherry University, Puducherry.He currently teaches Accounting ,financial management and Research Methodology Subjects. Before Joining BGCW, he was teaching in SNR College, Coimbatore, Sindhi college, Chennai& T.S.Narayanasamy College, Chennai for eight years. He was with the industry for a short term at Salzar Electronics Pvt. Ltd, Coimbatore. He has about 20 years of teaching experience and having research experience of 15 years. His interests are in Accounting and finance, Capital Market, Quantitative Methods. He underwent the Faculty Development Programme at Indian Institute of Management Ahmedabad during 2000-01. He has presented 20 papers in national and international conferences and has published twenty papers in the areas of Finance and Human resource Management in National Journals. Co-authored a book titled, ‘Investors Protection, published by Raj Publications, New Delhi He has delivered lectures in contemporary finance topics at Pondicherry University. He is involved in consultancy projects for Godrej Saralee, Chennai in the areas of Statistical Applications. He has supervised a number of research projects in the area of corporate finance and Human Resource Management. He is the Board of examiner in corporate Secretaryship and Management for the past two decades. Article Source:http://www.articlesbase.com/banking-articles/money-market-instrumentssome-thoughts-1532233.html
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