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Banking and insurance: The money market

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indian project
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  1. Introduction
  2. Functions of the money market
    1. Benefits of an efficient money market
  3. The Indian money market
    1. Steps to develop the money market in India
    2. Money market instruments and centers
  4. An overview of a treasury bill
    1. Participants in the T-bills market
    2. Sale of T-bills
  5. Commercial papers (CP)
    1. Summary of guidelines for issuance of CP
  6. An overview of commercial papers
  7. An overview of certificates of deposits
  8. Various terms of money market
  9. Money market vs mutual funds
  10. A study of money market securities
  11. Conclusion

The money market is a market for financial assets that are close substitutes for money. It is a market for overnight to short-term funds and instruments having a maturity period of one or less than one year. It is not a place (like the Stock Market), but an activity conducted by telephone. The money market constitutes a very important segment of the Indian financial system. The main players are: Reserve Bank of India (RBI), Discount and Finance House of India (DFHI), mutual funds, banks, corporate investors, non-banking finance companies (NBFCs), state governments, provident funds, primary dealers, Securities Trading Corporation of India (STCI), public sector undertaking (PSUs), non-residents Indians and overseas corporate bodies. A well-functioning money market facilitates the development of a market for longer-term securities. The interest rates for extremely short-term use of money serve as a benchmark for longer-term financial instrument. An efficient money market benefits a number of players. It is provides a stable source of funds to banks in addition to deposits, allowing alternative financing structures and competition. It allows banks to manage risks arising from interest rate fluctuations and to manage the maturity structure of their assets and liabilities.

[...] The call money market is a market for very short-term funds repayable on demand and with a maturity period varying between one day to a fortnight. When money is borrowed or lent for a day, it is known as call (overnight) money. Intervening holidays and/or Sundays are excluded for this purpose. When money is borrowed or lend for more than a day and upto 14 days, it is known as notice money. No collateral security is required to cover these transactions. [...]

[...] Money Market Instruments The instruments traded in the Indian money market are Treasury Bills (T-bills) ii) Call/notice money market- Call (overnight) and short notice (up to 14 days) iii) Commercial papers iv) Certificates of deposit Commercial Bills Call/notice money market and treasury bills form the most important segments of the Indian money market. Treasury bills, call money market, and certificates of deposit provide liquidity for government and banks while commercial paper and commercial bills provide liquidity for the commercial sector and intermediaries. [...]

[...] The paper is usually priced between the lending rate of scheduled commercial banks and a representative money market rate. Corporate are allowed to issue CPs up to 100 percent of their fund- based working capital limits. The paper attracts stamp duty. No prior approval of the Reserve Bank is needed to issue a CP and underwriting the issue is not mandatory. Most CPs have been issued by manufacturing companies for a maturity period of approximately three months or less. During 2001-02, manufacturing and related companies issued 67.4 per cent of total CPs, whereas 21.5 per cent of the total was issued by leasing and finance companies and the balance of 11.1 per cent by financial institutions. [...]

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