Knowledge Centre

Money Market

THE MONEY MARKET Primarily facilitates lending and borrowing of funds between banks and entities like Primary Dealers (PDs). Banks and PDs borrow and lend overnight or for the short period to meet their short term mismatches in fund positions. This borrowing and lending is on secured and unsecured basis.

• Standing deposit facility(SDF)

The rate at which the Reserve Bank accepts uncollateralised deposits, on an overnight basis, from all LAF participants. The SDF is also a financial stability tool in addition to its role in liquidity management. With introduction of SDF in April 2022, the SDF rate replaced the fixed reverse repo rate as the floor of the LAF corridor.

• REPO RATE

The interest rate at which the Reserve Bank provides liquidity under the liquidity adjustment facility (LAF) to all LAF participants against the collateral of government and other approved securities

• Call Money

It is the borrowing or lending of funds for 1day.

• Notice Money

Where money is borrowed or lend for period between 2 days and 14 days it is known as Notice Money.

• Term Money

Refers to borrowing/lending of funds for period exceeding 14 days.

• TREASURY BILLS

TREASURY BILLS are basically instruments for short term (maturities less than one year) borrowing by the Central Government. These are of three types:

  • 91 Days Treasury Bills
  • 182 Days Treasury Bills
  • 364 Days Treasury Bills.

As a part of the overall development of the Government Securities    market, Treasury Bills are issued by the RBI on an auction basis.

Basic Terminologies of Bond

A. YIELD TO MATURITY

The rate of return that an investor would earn if an investor buys the bond at its current market price & held it until maturity, Represents the discount rate which equates the discounted value of a bond’s future cash flows to its current market price. This is the most scientific tool used while valuing the bond securities

B. YIELD TO CALL

The rate of return an investor would earn if an investor buys a callable bond at its current market price & hold it until the call date

C. YIELD TO PUT

The rate of return an investor would earn if an investor buy a pu􀁊able bond at its current market price & hold it until the put date




D. CURRENT YIELD

It is calculated as annual Coupon divided by the market Price of the Bond.

Nowadays current yield is no longer used as a standard yield measure, because it fails to capture the future cash flows, re-investment income and capital gains/losses on investment return.

F. DIRTY PRICE

If the bond is traded between two coupon dates, the buyer of the bond will have to compensate the seller for that part of the period between coupons for which the seller owned the bond. The price arrived at after adjusting this factor (Accrued Interest) is called the Dirty Price.

G. CLEAN PRICE

The price arrived at without adjusting the accrued interest component is called Clean Price.

 

Monetary Policy Terminologies

STATUTORY LIQUIDITY RATIO (SLR)

  • SLR is an obligatory reserve that commercial banks must maintain themselves.
  • It is a percentage of commercial banks’ net demand and time liabilities, maintained as approved securities.
  • SLR keep banks solvent

CASH RESERVE RATIO (CRR)

  • CRR is a reserve maintained by banks with the RBI.
  • It is a percentage of the banks’ deposits maintained in cash form.
  • CRR maintains cash flow in the economy

REPO RATES

  • Repo Rate: It is the interest rate at which the central bank of a country lends money to commercial banks. The central bank in India i.e. the Reserve Bank of India (RBI) uses repo rate to regulate liquidity in the economy.

REVERSE REPO RATES

  • Reverse repo rate is also a monetary policy used by the central bank (which is RBI in India) to regulate the flow of money in the market. When in need, the central bank of a country borrows money from commercial banks and pays them interest as per the reverse repo rate applicable.

Standing deposit facility (SDF)

  • The SDF is a liquidity window through which the RBI will give banks an option to park excess liquidity with it. It is different from the reverse repo facility in that it does not require banks to provide collateral while parking funds. 
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