In the recent past the forex market and the call money market have become quite closely inter-linked; the changes in the former affect the latter significantly. The interest rate paid on call money loans, known as the call rate, is highly volatile. Short essay on Indian Money MarketIn India the money market plays a vital role in the progress of economy. For, banks are prohibited from paying interest on deposits made for less than 15 days. The major call money markets arein Mumbai, Kolkata, Delhi, Chennai, Ahmedabad. Ad-hoc bills were abolished in April 1997.
These are issued at a discount. Instruments of Money Market : The common instruments of money market are: 1. They are unsecured and negotiable. On the other hand, Capital Market refers to stock market, which refers to trading in shares and bonds of companies on recognized stock exchanges. It is also considered to be the biggest regulator in the markets. And, the bank guarantees that the buyer will pay the seller at a future date. Since it is unsecured, it is issued by the large and creditworthy companies to meet their short term fund requirements.
It is negotiable and transferable by endorsement. Rest 20% of the short term funds come from the banks. When the loan is repaid with interest, the lender returns the lender the duly discharges receipt. There are also a few money markets which are international in character e. But, it is not welldeveloped when compared to American and London money markets. Therefore, it is also called inter-bank call money market. They are highly liquid and no risk of default of payment is there.
All others have to keep their funds in term deposits of minimum 15 days with banks in order to earn interest. Main Features of Money Market: 1. The auction format of 91-day treasury bill has changed from uniform price to multiple price to encourage more responsible bidding from the market players. The credit operations of certain banks tend to be much in excess of their own resources. The ceilings on the call rate and inter-bank term money rate were dropped, with effect from May 1, 1989. The maturity periods of call money are extremely short and its liquidity is just next to cash. Generally money market is the source of finance for working capital.
They come with the maturities of 3-month, 6-month and 1-year. There should be competition within each sub-market as well as between different sub-markets. The funds raised through Commercial Paper can be used for fulfilling seasonal and working capital need. What a participation certificate for banksis an inter-corporate deposits between corporate. It is the most sensitive section of themoney market and the changes in the demand for and supply of call loans are promptlyreflected in call rates.
Repayment requires a formal notice or demand from the lender. The nature of the money market transactions is such that they are large in amount and high in volume. Call money market is meant for inter bank borrowing and lending for short term. It is cheap in the sense brokers have been prohibited form operating in the call market. Many of these institutions deal on telephone and fax only.
Moreover, commercial banks can quickly borrow from the call market to meet their statutory liquidity requirements. These loans are given to brokers and dealers in stock exchange. These loans are repayable on demand at the option of either the lender or the borrower. It is more of an institutional platform for lending and borrowing in money market. Based on the strategy, the Group made a number of recommendations which include: a Limited freeing of interest rates in the money market, b Activation of existing instruments like commercial bill and introduction of new instruments viz. In India, the establishment of Discount and Finance House of India Ltd.
The market experiences some regular seasonal changes. They are zero-risk instruments, and hence returns are not that attractive. The price is thus lower than its face value by the amount of interest due on the bill. It is a highly volatile rate that varies from day to day and sometimes even from hour to hour. The call money market is a highly competitive and sensitive market. Firm with strong credit rating can draw such bill. Hence, banks need not pay brokers on call money transitions.