Financial System of India
Financial market – whole market foundation is based on two things demand
and supply. Demand can be short term and long term. So according to
this need Indian financial market is divided into two parts.
●Short term market or money market and long term market or capital market.
Now let’s study short term market. It has 8 parts or instruments. Here main purpose is to understand the concept and the need of a particular instrument.
●Treasury Bills – these are used by central government to full fill its short term needs of time up to 364 days.
●Certificate of Deposit (CD)- these are used by the banks for less than one year. RBI has allowed IFCI, IDBI, ICICI AND EXIM to issue CD for 1-3 years. They cannot issue less than one year.
●Commercial Paper (CP)- only listed companies can issue these papers. Why they do so ?, because they don’t want to go to bank for short term funds so they issue these papers and take fund from money market.
●Commercial Bill (CB)- Organised in 1990, the CBs are issued by the All India Financial Institutions (AIFIs), Non-Banking Finance Companies (NBFCs), Scheduled Commercial Banks, Merchant Banks, Co-operative banks and the Mutual Funds.
●Call Money Market (CMM)- This is inter-bank money market. Bank to bank no public dealing. It can be 1-14 days and not more than that. No collateral is needed.
●Mutual Fund (MF)- these are for individuals like us. People can invest for short term in SEBI takes care of it besides of RBI.
●Repo and Reverse Repo – In India Repos introduced in 1992 and reverse Repos in 1996. Repos means re-purchase……..re-purchase of what——–government securities. When banks need money for short term, they sale these securities to RBI. Thus they can full fill their short term needs. RBI decides that Repo rate in India.
●Reverse Repo rate – What if RBI wants money for short term needs. RBI sales the government securities and collect funds from money market. As government securities are always a secure way for banks so they prefer to invest money in it.
■RBI also uses these rate as liquidity controller in the market. When there is a lack of money in the market it decrease the repo rate, money becomes cheaper. When inflation is high and flow of money is high in other words market is flooded with the money, to absorb this additional money from market it uses Reverse Repo Rate.
■Cash Management Bill (CMB) – The Government of India, in consultation with the RBI, had decided to issue a new short-term instrument, known as Cash Management Bills, to meet the temporary cash flow mismatches of the Government. CMBs in India are non-standard, discounted instruments issued for maturities less than 91 days. These are kind of Ways and Means but not exactly.
●If we see these are for different parties, like banks, individuals, companies and RBI anf GOV for their short term needs.
■Now what are monetary tools – means if anything happens in above list how it gets done in the market. Market kaam kaise karti hai.
🔽Call Money Market – In this market only overnight borrowings take place. Scheduled commercial banks can participate in it,,,RRB, co-operative banks are not allowed.
Open Market Operations (OMOs)- When RBI wants change the liquidity of money in the economy, it sales/purchases government securities. That we studied in the Repo/RR rates.
🔽Liquidity Adjustment Facility (LAF)- RBI introduced it in 2000. On daily basis, the RBI stands ready to lend to or borrow money from the banking
system, as per the latter’s requirement, at fixed interest rates. The primary aim of such an operation is to assist banks to adjust to their day-to-day mismatches in liquidity, via Repo and Reverse Repo operations.
●Short term market or money market and long term market or capital market.
Now let’s study short term market. It has 8 parts or instruments. Here main purpose is to understand the concept and the need of a particular instrument.
●Treasury Bills – these are used by central government to full fill its short term needs of time up to 364 days.
●Certificate of Deposit (CD)- these are used by the banks for less than one year. RBI has allowed IFCI, IDBI, ICICI AND EXIM to issue CD for 1-3 years. They cannot issue less than one year.
●Commercial Paper (CP)- only listed companies can issue these papers. Why they do so ?, because they don’t want to go to bank for short term funds so they issue these papers and take fund from money market.
●Commercial Bill (CB)- Organised in 1990, the CBs are issued by the All India Financial Institutions (AIFIs), Non-Banking Finance Companies (NBFCs), Scheduled Commercial Banks, Merchant Banks, Co-operative banks and the Mutual Funds.
●Call Money Market (CMM)- This is inter-bank money market. Bank to bank no public dealing. It can be 1-14 days and not more than that. No collateral is needed.
●Mutual Fund (MF)- these are for individuals like us. People can invest for short term in SEBI takes care of it besides of RBI.
●Repo and Reverse Repo – In India Repos introduced in 1992 and reverse Repos in 1996. Repos means re-purchase……..re-purchase of what——–government securities. When banks need money for short term, they sale these securities to RBI. Thus they can full fill their short term needs. RBI decides that Repo rate in India.
●Reverse Repo rate – What if RBI wants money for short term needs. RBI sales the government securities and collect funds from money market. As government securities are always a secure way for banks so they prefer to invest money in it.
■RBI also uses these rate as liquidity controller in the market. When there is a lack of money in the market it decrease the repo rate, money becomes cheaper. When inflation is high and flow of money is high in other words market is flooded with the money, to absorb this additional money from market it uses Reverse Repo Rate.
■Cash Management Bill (CMB) – The Government of India, in consultation with the RBI, had decided to issue a new short-term instrument, known as Cash Management Bills, to meet the temporary cash flow mismatches of the Government. CMBs in India are non-standard, discounted instruments issued for maturities less than 91 days. These are kind of Ways and Means but not exactly.
●If we see these are for different parties, like banks, individuals, companies and RBI anf GOV for their short term needs.
■Now what are monetary tools – means if anything happens in above list how it gets done in the market. Market kaam kaise karti hai.
🔽Call Money Market – In this market only overnight borrowings take place. Scheduled commercial banks can participate in it,,,RRB, co-operative banks are not allowed.
Open Market Operations (OMOs)- When RBI wants change the liquidity of money in the economy, it sales/purchases government securities. That we studied in the Repo/RR rates.
🔽Liquidity Adjustment Facility (LAF)- RBI introduced it in 2000. On daily basis, the RBI stands ready to lend to or borrow money from the banking
system, as per the latter’s requirement, at fixed interest rates. The primary aim of such an operation is to assist banks to adjust to their day-to-day mismatches in liquidity, via Repo and Reverse Repo operations.
0 comments:
Post a Comment