Composition of Indian Money Market, Indian Economy Video Lecture | Indian Economy - B Com

hello we would be talking about the
basics of money markets today let's look
at the agenda for this section we would
be introducing to you what are really
money markets talk about the various
segments and the participants in the
money markets let's also talk about some
of the instruments and how is really
interest calculated for these
instruments let's start with defining
what are money markets money markets are
a part of the global financial markets
where money is lent or borrowed for a
very short period so essentially it's a
short-term lending and borrowing money
market participants are governments
financial institutions banks and large
corporate houses households do not
really participate directly in money
markets the period of funding is
short-term which means that money is
lent or borrowed for a short period and
this could be less than one year money
is lent or borrowed for as less as one
single day going up to one year let's
look at the various segments within the
money market space money markets can be
segmented in four different ways the
first one the interbank market let's try
and first understand how the banking
business works the banks on one side
accept deposits from people who have the
money and on the other side loan it to
people who want the money
also banks are required to maintain
certain reserves with them now in this
entire process of money being deposited
by depositors and on the other side
being loaned to people on the other side
banks are in a deficit or a surplus
position
when they are in a deficit position they
are required to borrow money which means
that banks who need money will go to
banks who have the money and borrow for
as less as one single day this is
broadly the interbank pocket primary
market is the first time issuance of the
money market instruments corporate
houses government's financial
institutions issue securities to raise
money the secondary market is the
day-to-day buying and selling of these
money market instruments some of the
money market instruments which are for a
period of say one day may not have an
active secondary market the derivatives
market is basically the financial
contracts based on the money market
instruments let's look at how is
interest calculated for this short term
lending and borrowing that takes place
in a money market instrument the lender
is lending money to the borrower and the
borrower at the end of the decided
period will return the money along with
some interest now when we say that this
lending and borrowing is for less than
one year
how does interest really get calculated
the period would be less than one year
so the actual number of days for which
the loan has been given will have to be
taken into consideration this is called
as the day count convention which means
that actual number of days divided by
either 360 or 365 is taken into
consideration some markets take 360 days
whereas some markets take 365 days let's
take a numerical example to understand
this better let's say we have a loan of
euro 10 million the period is from
15th of July until 15th of October and
the interest is 5.75% if you look at the
period from 15th of July to 15th of
October that comes to 92 days when we
calculate the interest for 92 days
taking into consideration 360 days it
comes to euro one hundred and forty six
thousand nine hundred and forty five
this is how interest is calculated for
that particular period
let's also introduce to you another way
of issuing the money market instruments
in the first example we have seen that
party a loans thousand dollars let's say
to a party B party B at the end of the
period will return back these thousand
dollars and also let's say pay five
percent interest that would be fifty
dollars so what is given away is
thousand dollars and what gets returned
is thousand fifty in other way of
looking at it let's look at it the other
way
what if party a deduct the interest
upfront at the start of the period
itself deduct these fifty dollars and
loans nine hundred and fifty dollars the
borrower party B will have to pay back
thousand dollars so here there is no
separate element of interest being paid
but interest is deducted upfront at the
start of the period this is called as
zero coupon security we will be talking
about the zero coupon securities later
in this section now let's try and
understand what are the various
instruments available in the money
markets they are the call money the
Treasury bills commercial papers and the
certificate of deposits let's examine
each of these in detail
call money or the notice money is
broadly the interbank market as we spoke
about earlier banks lend and borrow for
as less as one single day if the money
is lent or borrowed for a period up to
14 days that would be called as notice
money certificate of deposits
certificates of deposits are basically
negotiable instruments issued by the
banks let's talk about the interbank
lending the call money or overnight
money could be lent or borrowed for a
period of one single day the same thing
if it's done over the weekend would
translate into weekend money we talked
about it earlier that if the money is
lent for about 14 days that would be
notice money but anything beyond that
would be termed as term money and
intraday as the word suggests is lending
and borrowing during the day so money is
lent at the start of the business
but before the end is repaid back let's
look at other instruments like Treasury
bills and bills of exchange Treasury
bills are issued by the government but
governments do not directly issue these
securities they would do it through the
central banks central banks issue
Treasury bills by way of zero coupon
securities let's say for example the US
government issues $1,000 Treasury bill
but if the interest is let's say 5% then
they would deduct this interest and they
will have to issue this at let's say
nine hundred and sixty or nine hundred
and seventy depending on the interest
rate in the economy Bills of exchange
are nothing but instruments where one
party promises to pay the other party an
amount after a fix period commercial
papers commercial papers
as the word suggests are issued by
companies or corporates corporates have
short-term working capital requirements
they need money for their day-to-day
functioning they might want to borrow
money for a period of three months six
months nine months or twelve months on
the other hand repo and reverse repo are
not really lending and borrowing but
really selling in buying of securities
in a repurchase agreement party a sells
a security with the promise to buy it
back later so for the party who is
selling it first and buying it later it
would be a repo but for the other party
who is buying the securities with the
promise to sell it later it would be a
reverse repo so we have seen some of the
instruments under the money market space
let's summarize the learnings in this
section today we have talked about what
are really money markets what are the
various segments within the money market
space the participants in the money
markets and also examine some of the
instruments under this section thank you