Money Market is a place for short term lending and borrowing, typically within a year. It deals in short term debt financing and investments. On the other hand, Capital Market refers to stock market, which refers to trading in shares and bonds of companies on recognized stock exchanges. Individual players cannot invest in money market as the value of investments is large; on the other hand, in capital market, anybody can make investments through a broker.Stock Market is associated with high risk and high return while the Money Market is safe and secure. In money market, deals are transacted on phone or through electronic systems; in the capital market trading is done through recognized stock exchanges.
4.32 Government Securities:
The market for government securities is the oldest and most dominant in terms of market capitalization.
It not only provides resources to the government for meeting its short term and long term needs, but also sets benchmark for pricing corporate paper of varying maturities and is used by the RBI as an instrument of monetary policy. The instruments in this segment are fixed coupon bonds, commonly referred to as dated securities, treasury bills, floating rate bonds, zero coupon bonds. Both Central and State government securities comprise this segment of the debt market.
While the RBI regulates the issuance of government securities, corporate debt securities fall under the regulatory purview of the SEBI. NSE and BSE provide a trading platform for most debt instruments issued in India.
4.33 Treasury Bills:
Treasury bills are instruments of short-term borrowing by the Government of India, issued as promissory notes under discount. The interest received on them is the discount which is the difference between the price at which they are issued and their redemption value. They promise assured yield and negligible risk of default.
4.34 Fixed Income Securities:
Fixed-income securities are investments where the cash flows are according to a predetermined amount of interest, paid on a fixed schedule. The different types of fixed income securities include government securities, corporate bonds, debentures, etc.
Government Securities: G-Secs are issued by the Reserve Bank of India on behalf of the Government of India.G-Secs provide risk-free return to investors.
CorporateBonds: Corporate Bonds are issued by public sector undertakings and private corporations for a wide range of tenors. Compared with government bonds, corporate bonds generally have a higher risk of default and hence the higher rate of return on these instruments.
Debentures: Debentures are instruments for raising loan by a Company.
Inter-bank Participation Certificate:Inter-Bank Participation Certificates are instruments issuedby scheduled commercial banks only to raise funds or to deploy short term surplus.
4.35 Repurchase Agreements: (REPOS / Reverse Repo):
Repo or repurchase agreement is a means of short-term borrowing. In a repo transaction. RBI repurchases government securities from banks – primarily depending on the level of money supply itdecides to maintain in the country’s monetary system.
Repo rate is the discount rate at which banks borrow from RBI.
Reduction in repo rate will help banks to get money at a cheaper rate, while increase in repo rate will make bank borrowings from RBI more expensive.
Reverse repo is the exact opposite of repo. In a reverse repo transaction, banks purchase government securities from RBI and lend money to the banking regulator, thus earning interest. Reverse repo rate is the rate at which RBI borrows money from banks. Since the banks are lending to RBI, their investment is in safe hands with virtually zero risk of default.
Thus, repo rate is always higher than the reverse repo rate.
4.36 LAF:
On the basis of the recommendations of the second Narsimham Committee, 1998, an interim LAF was introduced in 1999 to provide a ceiling and fixed rate repos were continued to provide a floor for money market rates. Liquidity Adjustment Facility was introduced for the first time from June 2000 onward, and revised in 2001 and 2004.
4.37 Commercial Paper (CP):
Commercial paper is an unsecured promissory note with a fixed maturity ranging from sevendays to one year. Commercial Paper is a money market security issued (sold) by highly rated corporate borrowers, primary dealers and large financial institutions to raise funds to meet their short term debt obligations, and is backed by the issuers’ promise to pay the face amount on the maturity date specified on the note.
Since it is not backed by collateral, only firms with excellent credit ratings from a recognized rating agency are able to sell their commercial paper at a reasonable price.
4.38 Certificate of Deposit (CD):
With a view to further widening the range of money market instruments and giving investors greater flexibility in the deployment of their short term surplus funds, Certificate of Deposits(CDs) were introduced in India in 1989. They are essentially securitized short term time deposits issued by banks and all-India Financial Institutions during the period of tight liquidity at relatively higher discount rates as compared to term deposits.
CDs are short-term borrowings by banks. CDs differ from term deposit (Fixed Deposits) because they involve the creation of paper, and hence have the facility for transfer and multiple owner ships before maturity.
CD rates are usually slightly higher than Fixed Deposit rates
4.39 Bill discounting:
Discounting a bill – means the bank is buying it (i.e., a Bill of Exchange or Promissory Note) before it is due and credits its value after a discount charge to the customer’s account. The transaction is an advance against the bill and the discount represents the intereston the advance from the date of purchase of the bill until it is due for payment – that is how the bank makes money on it.