Banking Topics of interest


MONEY MARKET

It is a centre in which financial institutions join together for the purpose of dealing in financial or monetary assets, which may be of short term maturity or long term maturity. The short term means, generally a period upto one year and the term near substitutes to money, denotes any financial asset which can be quickly converted into money with minimum transaction cost.
Terms relating to Money Market


Money Market
Refers to the market for short-term requirement and deployment of funds.
Call Money
Money lent for one day
Notice Money
Money lent for a period exceeding one day
Term Money
Money lend for 15 days or more in Inter-bank market
Held till maturity
Securities which are not meant for sale and shall be kept till maturity
Held for trading
Securities acquired by the banks with the intention to trade by taking advantage of the short-term price/ interest rate movements will be classified under held for trading.
Available for sale
The securities which do not fall within the above two categories i.e. HTM or HFT will be classified under available for sale.
Yield to maturity
Expected rate of return on an existing security purchased from the market
Coupon Rate
Specified interest rate on a fixed maturity security fixed at the time of issue.
Treasury operations
Trading in government securities in the market. An investor Bank can purchase these securities in the primary market. Trading takes place in the secondary market.
Gilt Edged security
Government security that is a claim on the government and is a secure financial instrument which guarantees certainty of both capital and interest. These securities are free of default risk or credit risk, which leads to low market risk and high liquidity.

CALL/NOTICE MONEY MARKET OPERATIONS IN INDIA


The money market is a market for short-term financial assets that are close substitutes of money. The most important feature of a money market instrument is that it is liquid and can be turned over quickly at low cost and provides an avenue for equilibrating the short-term surplus funds of lenders and the requirements of borrowers. The call/notice money market forms an important segment of the Indian money market. Under call money market, funds are transacted on overnight basis and under notice money market, funds are transacted for the period between 2 days and 14 days.
Banks borrow in this money market for the following propose.
To fill the gaps or temporary mismatches in funds
To meet the CRR & SLR Mandatory requirements as stipulated by the Central bank
To meet sudden demand for funds arising out of large outflows
Thus call money usually serves the role of equilibrating the short-term liquidity position of banks

Participants

Participants in call/notice money market currently include banks, Primary Dealers (PDs), development finance institutions, insurance companies and select mutual funds. Of these, banks and PDs can operate both as borrowers and lenders in the market. But non-bank institutions (such as all-India FIs, select Insurance Companies or Mutual Funds), which have been given specific permission to operate in call/notice money market can, however, operate as lenders only. No new non-bank institutions are permitted to operate (i.e., lend) in the call/notice money market with effect from May 5, 2001. In case any eligible institution has genuine difficulty in deploying its excess liquidity, RBI may consider providing temporary permission to lend a higher amount in call/notice money market for a specific period on a case-by-case basis.
Effective from Aug 06, 2005 non-bank participants except Primary Dealers are to discontinue participate, to make the call money market pure inter-bank market.
Prudential norms of RBI

Lending of scheduled commercial banks, on a fortnightly average basis, should not exceed 25 per cent of their capital fund. However, banks are allowed to lend a maximum of 50% on any day, during a fortnight.
Borrowings by scheduled commercial banks should not exceed 100 per cent of their capital fund or 2 per cent of aggregate deposits, whichever is higher. However, banks are allowed to borrow a maximum of 125 per cent of their capital fund on any day, during a fortnight.
Interest Rate

Eligible participants are free to decide on interest rates in call/notice money market.

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