Overview of Indian money market

Overview of Indian money market



Introduction-

The money market is a mechanism that deals with the lending and borrowing of short term funds. The India Money Market has come of age in the past two decades. In order to study the money market of India in detail, we at first need to understand the parameters around which the money market in India revolves.

The performance of the Indian Money Market is heavily dependent on real interest rate that is the interest rate that is inflation adjusted. Though the money market is free from interest rate ceilings, structural barriers and other institutional factors can be held responsible for creating distortions in India Money Market. Apart from the call market rates, the other interest rates in the Indian Money Market usually do not change in the short run.

It is due to this disparity between the opposite forces that is prevalent in the money market in India that a well defined income path cannot be traced.

Owing to the deregulation of the interest rate in the early nineties following the economic reforms laid down by the then finance minister Dr. Manmohan Singh, studies concerning the behavior of interest rate were restricted. However the liquidity of the market makes its good subject for empirical research.

The Indian Money Market involves a wide range of instruments. Here, maturities range from one day to a year, issued by banks and corporate of various sizes. The money market is also closely linked with the Foreign Exchange Market through the process of covered interest arbitrage in which the forward premium acts as a bridge between domestic and foreign interest rates.





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 up to one year and the term near substitutes to money, denotes any financial asset which can be quickly converted into money with minimum transaction cost.




Money Market elements-




-          Money Market Refers to the market for short-term requirement and deployment of funds.
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-          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.





Indian money market current position-



India market news is the topic of discussion for every investor nationwide. The global economic downturn since the last quarter of 2008 has been gaining grounds until the Satyam scam. The fourth-biggest software firm - Satyam Computers, ever since its drastic crash and financial wrongdoing revelations, has been in India news and global news headlines affecting the India money market. India has many foreign investors and the economy not being very highly affected despite the global recession; more foreign investors are looking towards India as a safe and secured investment destination. But as India market news make plain, the Satyam scandal may prove to be a huge loss to India, prompting foreign investors to leave India.

Strengthening of the Indian rupee and loss of dollar over the last week of December 08 and first week of January brought in a ray of hope amongst investors, thus raising the importance of India money market. Data released by the India news recorded buying of local shares by overseas funds. India market news further brought to light that with the Satyam scam, stock market indices witnessed a 7.1 percent slump. Despite the two weeks' rise of the rupee, it again slumped down due to the Satyam effect.
India money market is flooded with news like 'NSE removing Satyam from Nifty, replacing the position with Rel Capital', 'Satyam losing Rs 10, 000 crore in market cap', etc. The India market news on 7th evening shook domestic as well as global investor confidence affecting many other top companies. Overall, the situation is expected to improve and India money market is again going to witness a rise. Thanks to the corrective measures taken by the RBI as well as the government. With the lending rate cut by 350 basis points by the the RBI as well as the 200 billion rupee ($4 billion) stimulus package announced by the government will help materialize the 7% growth target. Duties cut on manufactured products further add to the boost. What the India news reveals currently is not expected to be the same.



Short Term Money Market instruments 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 opportunity for balancing the short-term surplus funds of lenders and the requirements of borrowers. By convention, the term "Money Market" refers to the market for short-term requirement and deployment of funds. Money market instruments are those instruments, which have a maturity period of less than one year. The most active part of the money market is the market for overnight call and term money between banks and institutions and repo transactions. Call Money / Repo are very short-term Money Market products. There is a wide range of participants (banks, primary dealers, financial institutions, mutual funds,trusts,provident funds etc.) dealing in money market instruments. Money Market Instruments and the participants of money market are regulated by RBI and SEBI.As a primary dealer SBI DFHI is an active player in this market and widely deals in Short Term Money Market Insrtruments.The below mentioned instruments are normally termed as money market instruments:

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- Call/ Notice/ Term Money
- Repo/ Reverse Repo
- Inter Corporate Deposits
- Commercial Paper
- Certificate of Deposit

- T-Bill







Expectations from Indian money market-



Those looking to increase their returns on the moneys in their savings bank account can invest in this fund.

Investors should consider the following factors before buying units in the fund: The fund is suitable for investors with a diversified portfolio of fixed-income investments.

Such investments include long-term government bonds, medium-term corporate bonds and fixed-deposits. Investing in TIMMA enhances diversification because the fund takes exposures in money market instruments. The NAV for a fund having exposure to such instruments is not based on the market price; the NAV is simply the interest accrued on these instruments on a daily basis. This means that the NAV will not fall below the initial investment value, unlike in the case of bond funds that are marked-to-market.

Now, the call money market is about 4.75 per cent, and other money market instruments such as commercial papers and T-bills are marginally higher. This means that retail investors can earn at least 3 percentage points more than the interest on the savings bank account. Besides, the risk is not significantly different from the savings account. TIMMA and the savings bank account are exposed to reinvestment risk. If interest rates were to decline further, TIMMA's portfolio manager will have to reinvest the money at lower rates. Similarly, monies in the savings bank account will earn lower interest rate when rates decline.



Conclusion-

Investors need to be, however, wary of the expense ratio. The fund's expense ratio of one per cent is somewhat high. This essentially means that if the fund earns 5 per cent on its portfolio, the unit-holders will receive only 4 per cent, because the fund will deduct one per cent for managing the portfolio. Of course, given that the interest rate on savings bank account is very low, the fund provides good returns even after adjusting for the expense ratio.

The return differential will narrow only if the RBI cuts the repo rate and continues to administer the savings bank rate at the current level; a cut in repo rate will lead to lower rates on call money and other money market instruments. On balance, retail investors who want to enhance returns on their savings bank account can buy units in this fund.

Chinmoy ghosh.

Lecturer accounting and finance.