Indian Money Market - A Detailed Overview PDF

INSTITUTE: USB DEPARTMENT: BBA Bachelor of Business Administration Business Environment BBO-305 Mr. Kapil Sharma UNIT 1 : Chapter 2.2 Indian Financ...

INSTITUTE: USB DEPARTMENT: BBA Bachelor of Business Administration Business Environment BBO-305 Mr. Kapil Sharma UNIT 1 : Chapter 2.2 Indian Financial System DISCOVER. LEARN. EMPOWER  Indian Space for visual (size 24) Financial System Course Outcome CO No Statement Level Will be covered in To understand the basic components CO1 of business environment for growth Remember this lecture and survival of businesses. To apply environmental analysis CO2 techniques for smooth functioning Understand of businesses. To analyze the impact of continuously changing government CO3 Apply regulations on business and its profitability. To assess the legal, social, financial and global environmental factors CO4 Analyse impacting businesses and their growth 2 To create an entrepreneurial venture CO5 Apply Indian Financi al System  Financial System of any country consists of financial markets, financial intermediation and financial instruments or financial products Flow of funds (savings) Seekers of funds Suppliers of funds (Mainly business firms (Mainly households) and government) Flow of financial services Incomes , and financial claims Definition of Financial System According to Dr.Prasanna Chandra, “The financial system consists of a variety of financial intermediaries, markets and instruments that are related to each other. It provides the principal means by which savings are transformed into investments.”  Financial assets/instruments Enable channelizing funds from surplus units to deficit units There are instruments for savers such as deposits, equities, mutual fund units, etc. There are instruments for borrowers such as loans, overdrafts, etc. Like businesses, governments too raise funds through issuing of bonds, Treasury bills, etc. Instruments like PPF, etc. are available to savers who wish to lend money to the government  Financial Institutions Includes institutions and mechanisms which Mobilization of savings Effective distribution of savings Institutions are banks, insurance companies, mutual funds- promote/mobilise savings Individual investors, industrial and trading companies- borrowers  Financial Markets Money Market- for short-term funds (less than a year ) Organised (Banks) Unorganised (money lenders, chit funds, etc.) Capital Market- for long-term funds Primary Issues Market Stock Market  Indian Financial System Organized Un-Organized Regulators Money lenders Financial Institutions Local bankers Financial Markets Traders Financial services Landlords Financial Instruments MONEY MARKET  Money Market Money market is a place for trading in money and short term financial assets that are close substitutes of money. Provides an opportunity for balancing the short term surplus funds of investors with short term requirements of borrowers.  Market for short term loans i.e. less than one year. Do not deal in money but near money assets. Money market is not a place but an activity. The transactions are carried out by telephone, mail etc. among people who may have never met one other. Example: Bombay money market, New York money market The centre for dealings, mainly short term character, in monetary assets; it meets the short term requirements of borrowers and provide liquidity and cash to the lenders. Characteristics of Money Market RBI occupies an important position in the money market. Provides short term funds to various borrowers. Efficient mechanism for cost control, credit control. Enables businessmen to invest their temporary surplus Characteristics of a developed money Market Players in Indian Money Market RBI Commercial banks Financial institutions Brokers Discount and finance house of India Foreign Banks Co-operative Banks Significance Of Money Market 1. Economic development of the country: Provide short term funds Ensures regular supply of funds through its sub- markets and instruments Helps in economic development by providing financial assistance to trade, commerce and industry. 2. Profitable investment: oHelps commercial banks to use their excess reserves in profitable investments. Maximize profits by investing their excess reserves. oExcess reserves are invested in near money assets which are highly liquid and can be easily converted into cash. 3. Help to government: Borrows short term funds at very low interest rates. 4. Help to commercial Bank: the banks with deficit of funds can raise funds from money market at a low rate of interest. 5. Encouragement to Savings and investment: it encourages saving and investment by transferring funds from one sector to another sector. Structure of Money Market  1. Call Money Market It is the market for very short term funds, also called money at call and short notice. These loans are given for a very short period not exceeding 7 days. More often from day to day or for overnight only i.e. 24 hours. Highly liquid market Loans are unsecured It is affected by seasonal variations.  2. Collateral loan market Backed by the securities, stocks and bonds. Collateral securities may be in the form of some valuable say govt. bonds which are easily marketable and do not fluctuate much in prices. The collateral is returned to the borrower when the loan is repaid Once the borrower is unable to repay the loan, the collateral becomes the property of the lender. These loans are given for few months.  3. Acceptance Market Bankers’ acceptance is a draft drawn by an individual or a firm upon a bank and accepted by the bank whereby it is ordered to pay to the order of a designated party or to bearer a certain sum of money at a specified time in future. The market where the bankers’ acceptance are easily sold and discounted is known as acceptance market. A banker’s acceptance can be easily discounted in the money market because they carry signature of the bankers. 4. Bill Market It is a market in which short term papers or bills are bought and sold.  A bill of exchange is a written unconditional order which is signed by the drawer requiring the drawee to pay on demand or at fixed future time, a definite sum of money. Treasury bills are government papers securities for a short period usually of 91 days duration. Treasury bills are promissory notes of the government to pay a specified sum after a specified period.  MONEY MARKET INSTITUTIONS  1. Commercial Banks These are the backbone of the money market. These banks use their short term deposits for financing trade and commerce for short period. They invest their surplus funds in discounting bills of exchange. Commercial banks put their excess reserves in different forms or channels of investments which satisfy their liquidity and profitability needs.  2. Central bank Plays a vital role Monetary authority Acts as an apex institution Lender of last resort Controller and guardian of money market Raises or reduces the money supply and credit to ensure economic stability in the economy. 3. Acceptance Houses Functions as intermediaries between importers and exporters and between lenders and borrowers in the short period. Specialize in acceptance of commercial bills/trade bills. 4. Non-banking financial intermediaries Resort to lending and borrowing of short term funds in the money market. e.g. Insurance companies, investment houses, provident funds etc.  Money market instruments 1. Commercial bills Written instrument containing an unconditional order Signed by the drawer Directing a certain person to pay a certain sum of money only to, or order of a certain person, or to bearer of an instrument at a fixed time in future or on demand Bill drawn when goods are sold on credit Buyer accepts the bill and return to seller The seller may either retain the bill or get it discounted 2. Treasury Bills It is a short term government security Usually of 91 days, 180 days or 365 days duration Sold by central bank on behalf of government No fixed rate of interest payable Sold on basis of competitive bidding  3. Call and short notice money Call money refers to money given for very short period Taken for a day or overnight but not exceeding seven days in any circumstances. Notice money refers to a money given for up to 14 days If the loan is given for 1 day – Money at call If loan cannot be called back on demand and will require notice of at least 3 days – Money at short notice  4. Certificate of deposit These are marketable receipts in bearer or registered form of funds deposited in a bank for a specified period at specified rate of interest Freely transferable Liquid and riskless in terms of default of payment of interest and principal. 5. Commercial Papers These are short term usance promissory notes Issued by reputed companies with good credit rating and having sufficient tangible assets Negotiable by endorsement and delivery Normally issued by banks, public utilities, insurance and finance companies. 6. REPO Under REPO, holder of securities sells them to an investor with an agreement to repurchase at predetermined date and rate. Also called ready forward transaction as it involves selling a security on spot basis and repurchasing the same on forward basis. Defects in Indian money market  REFERENCES Reference Books- K. Aswathappa, Essentials of Business environment. Francis Cherrunilam, International Trade and Export Management, Himalaya Publications. References of websites- google.com https://www.toppr.com/guides/business-studies/business-environment/indian-industrial-policies/, https://study.com/academy/lesson/what-is-business-environment-definition-factors-quiz.html 42 THANK YOU