Money Market

Money Market

  • Short-Term Funds: Deals with funds ranging from overnight to 1 year.
  • Transactions: Can be either secured or unsecured.
  • Trading Platform: Always conducted Over the Counter (OTC), meaning transactions occur directly between parties without exchange supervision.
  • Features of Money Market Instruments:
  1. High Liquidity: Easily convertible into cash with minimal value loss.
  2. Minimal Transaction Cost: Low cost involved in trading.
  3. Fiscal Mobility: Facilitates quick movement of funds.
  • Participants: Includes commercial banks, RRBs (Regional Rural Banks), and bill markets.

1. Call Money / Notice Money

  • Duration:
  • Notice Money: 1-14 days.
  • Call Money: Overnight or up to 1 day.
  • Collateral: No collateral required, only promissory notes.
  • Participants:
  1. Scheduled Commercial Banks (SCB), excluding RRBs.
  2. Cooperative Banks (excluding Land Development Banks).
  3. Primary Dealers (acting both as borrowers and lenders).
  • Interest Rates: Participants are free to decide the interest rate.
  • Non-Banking Financial Institutions (NBFI) cannot participate in this market.

2. Bill Market / Discount Market

  • Purpose: Deals with short-term funds. I. Commercial Bills (aka Trade Bills):
  • Definition: Negotiable instruments drawn by sellers of goods and services (G&S) on buyers, for the value of goods delivered.
  • Process: Once these trade bills are accepted by commercial banks for discounting, they become commercial bills. II. Treasury Bills:
  • Short-term investment options for banks and financial institutions (FIs), primarily used for managing short-term liquidity.
  • Types:
    • 91 days.
    • 182 days.
    • 364 days.
  • Issuer: Issued solely by the Central Government (not states) and managed by the RBI.
  • Discounted Issue: Issued at a discount and redeemed at par value, hence no explicit interest rate.
  • Auction: Held on the Negotiated Dealing System (NDS) platform.

1. Ways and Means Advances (WMAs)

  • Replaced the ad-hoc treasury bill system in 1997 for 91 days.
  • RBI-CENTRE:
  • No collateral required, interest rate at Repo rate.
  • Amount limited and set at the beginning of the financial year by consultation between the RBI and the Centre.
  • Overdraft: Charged an additional 2% interest.
  • RBI-STATE:
  1. Normal WMA: Unsecured, charged at Bank rate.
  2. Special WMA: Secured by Government securities (G-Sec), exhausted first before the normal WMA.
  • Benefit: Dropped the automaticity (RBI printing money) to finance government cash imbalances.

2. Cash Management Bills (CMB)

  • Similar to Treasury Bills, but with a maturity of less than 91 days.
  • Used to manage temporary cash flow mismatches of the government.

3. Government Securities

  • Tradable instruments issued by both Centre and States through the RBI.
  • Acknowledge the government’s debt obligations.
  • Short-term: Treasury Bills (T-Bills), Cash Management Bills (CMB).
  • Long-term: Bonds, Dated Securities.
  • Risk-free: No risk of default, hence called “Risk-free gilt-edged instruments.”
  • Centre: Issues both T-Bills and Bonds (Dated Securities).
  • States: Issue Bonds (Dated Securities), known as State Development Loans (SDL). Dated Securities:
  • Long-term (up to 30 years).
  • Fixed or floating interest rate paid on the face value.
  • Qualifies for SLR (Statutory Liquidity Ratio) and LAF (Liquidity Adjustment Facility). Types of Bonds:
  1. Floating Rate Bonds: Variable interest rate with a cap and floor.
  2. Capital Indexed Bonds: Interest rate is fixed as a percentage over the inflation rate.
  • Who can invest?
  • Any person, firm, company, institution, state government, PF, trusts, NRI, NRI corporates, and FII registered with SEBI and approved by RBI.
  • RBI sets limits on FPI (Foreign Portfolio Investment) in government securities.

4. Certificates of Deposits (CD)

  • Issued only by Scheduled Commercial Banks (excluding RRBs and local area banks) and All India Financial Institutions (AIFI).
  • Negotiable promissory notes, secure, and short-term (up to 1 year).
  • Issued at a discount to face value, with the discount negotiated between the issuer and investor.
  • Maturity Period:
  • Banks: 7 days to 1 year.
  • FIs: 1 year to 3 years (e.g., IFCI, IDBI, IRBI, EXIM).

5. Commercial Papers (CP)

  • Unsecured promissory notes issued by top-rated companies, NBFCs, primary dealers, satellite dealers, and AIFIs.
  • Duration: 7 days to 1 year.
  • Features:
  1. Corporates with tangible worth of >₹4 crore.
  2. All CPs require a credit rating.
  3. Issued at discount to face value.
  • Note: AIFIs can issue both CDs and CPs.

6. Discount and Finance House of India (DFHI)

  • Established in 1988 by RBI to facilitate smooth short-term liquidity imbalances and develop the active money market.
  • Tasks: Develop the secondary market for existing money market instruments such as T-bills, G-Secs, CPs, CDs, call money, notice money, and term deposits.

7. Collective Investment Schemes (CIS)

  • A scheme that pools funds from investors, where the corpus exceeds ₹100 crore.
  • Excludes mutual funds, insurers, PFS, registered chit funds, cooperatives, and nidhis.
  • Regulated by SEBI.

8. Alternative Investment Fund (AIF)

  • Pooling capital from both Indian and foreign investors to invest as per a predefined policy.
  • Includes sectors like commodities, venture capital, infrastructure equity, SME funds, real estate, private equity, and hedge funds.
  • Excludes mutual funds, CIS, family trusts, and employee stock options.
  • Regulated by SEBI.
  • Budget 2016: No categorization as FDI or FII for foreign investment to encourage foreign investment.
  • Categories under AIF by SEBI:
  1. Category 1: Venture capital funds, SME funds, social venture funds.
  2. Category 2: Real estate funds, private equity funds, funds for distressed assets, NIIF.
  3. Category 3: Hedge funds, PIPE funds.

9. Real Estate Investment Trust (REIT)

  • Pools money from investors to invest in commercial properties that are completed and generating income.

10. Mutual Funds

  • Created when a large number of investors pool in their money, managed by a group of qualified professionals known as Asset Management Companies (AMC).
  • Registered with SEBI.

11. Hedge Fund

  • Targeted at high-net-worth individuals (HNIs) using diverse and complex strategies to generate returns.
  • Varies in strategies like long-short, derivatives, leverage.
  • Goal: Maximize return with minimal risk.

12. Vulture Funds

  • Invest in distressed debt, typically in bonds considered to be weak or in default.
  • Buys high-yield bonds of companies near bankruptcy (e.g., NPA or sovereign debt) and takes legal action to recover the contracted payouts.

13. Venture Capital Fund (VCF)

  • Long-term investment fund that manages money from investors seeking equity stakes in startups and SMEs.
  • Registered with SEBI.
  • Angel investors are a subcategory of VCFs.

14. Angel Investors

  • Affluent individuals who provide capital for business startups, usually in exchange for convertible debt or ownership equity.
  • Invests their own money, not pooled money.
  • Definition of a startup:
  1. Private limited company, LLP, or partnership firm.
  2. Turnover: Not exceeding ₹100 crore in any of the previous financial years.
  3. Up to 10 years from incorporation.
  • Startups must be registered with DIPP.

Difference Between VCF and Angel Investors:

  1. VCF: Does not use its own money but pooled funds.
  2. VCF: Invests in already established businesses; Angel Investors invest in new businesses.
  3. VCF: May request a seat on the Board; Angel Investors typically act as mentors.
  4. Both seek equity in the business.

Chit Fund

  • A group of people contribute money in a defined manner at periodic intervals into a pool.
  • Governed by the Chit Funds Act, 1982.
  • Registered and regulated by the State Government.
  • As per the Securities Laws, 2014, SEBI has the power to deal with Ponzi schemes.

Qualified Institutional Placement (QIP)

  • The sale of any security that is convertible into or exchangeable with equity shares at a later date.

External Commercial Borrowing (ECB)

  • Access to foreign funds for Indian corporates and PSUs.
  • Cannot be used for investment in the stock market or speculation in real estate. Two Routes:
  1. Automatic route: For corporates under the Companies Act, 1956, except financial intermediaries like banks, FIs, and NBFCs.
  2. Approval route.
  • Foreign Currency Convertible Bonds (FCCB):
  • A part of external debt.
  • Issued by companies for long-term loans.
  • Convertible into shares at a predetermined rate.

Credit Default Swap (CDS)

  • A form of insurance against debt default.
  • Redistributes the risk of credit by transferring the risk of default to a third party.

Take Out Financing

  • A method of financing long-term projects by banks through medium-term loans.
  • Process:
  • Initially, a bank sanctions a medium-term loan to finance a project.
  • After a fixed period or when certain milestones of the project are achieved, a financial institution engaged in long-term financing takes out the loan from the bank’s books.
  • The bank sells the loan to the institution, thus removing it from its books.

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