Category : Banking
MONEY AND ITS TYPES
Money: Money is anything that is widely accepted in exchange for goods and services.
Types of Money
Money Market is a short-term credit market. The Money Market is regulated by the Reserve Bank of India. It is the centre in which short- term funds are borrowed and lent. It consists of borrowers and lenders of short-term funds.
The lenders are commercial banks, insurance companies, finance companies and the central bank. The money market brings together the lenders and the borrowers.
RBI approach of money supply
The RBI controls the money supply in the economy by various means.
Various measures of money supply are: Reserve Money (MO): Notes and coins + reserves of banks with central bank
MONEY MARKET INSTRUMENTS
Treasury bills (T-bills) offer short-term investment opportunities, generally up to one year. They are thus useful in managing short- term liquidity. At present, the Government of India issues three types of treasury bills through auctions, namely, 91-day, 182-day and 364-day. There are no treasury bills issued by State Governments.
Treasury bills are available for a minimum amount of Rs. 25,000 and in multiples of Rs. 25,000. Treasury bills are issued at a discount and are redeemed at par. Treasury bills are also issued under the Market Stabilization Scheme (MSS).
Commercial Paper and Certificates of Deposits
Certificate of Deposit
Commercial Paper (CP)
Certificate of Deposit (CD) is a negotiable money market instrument and issued in demat form or as a Usance Promissory Note against funds deposited at a bank or other eligible financial institution for a specified time period.
Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note. It was introduced in India in 1990 with a view to enabling highly rated corporate borrowers.
CDs can be issued by (i) scheduled commercial banks (excluding Regional Rural Banks and Local Area Banks); and (ii) select All-India Financial Institutions (FIs) that have been permitted by RBI.
Corporates, primary dealers (PDs) and the All-India Financial Institutions (FIs) are eligible to issue CP. (the tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs.4 crore)
Minimum amount of a CD should be Rs.1 lakh, i.e./ the minimum deposit that could be accepted from a single subscriber should not be less than Rs.1 lakh, and in multiples of Rs.1 lakh thereafter.
CP can be issued in denominations of Rs. 5 lakh or multiples thereof.
The maturity period of CDs issued by banks should not be less than 7 days and not more than one year, from the date of issue. The FIs can issue CDs for a period not less than 1 year and not exceeding 3 year from the date of issue.
CP can be issued for maturities between a minimum of 7 days and a maximum of a up to one year from the date of issue. However, the maturity date of the CP should not go beyond the date up to which the credit rating of the issuer is valid.
CDs can be issued to individuals, corporations, companies (including banks and PDs), trusts, funds, associations, etc. Non-Resident Indians (NRIs) may also subscribe to CDs, but only on non-repatriable basis, which should be clearly stated on the Certificate. Such CDs cannot be endorsed to another NRI in the secondary market.
Individuals, banking companies, other corporate bodies (registered or incorporated in India) and unincorporated bodies, NRIs and Foreign Institutional Investors (FIIs) etc. can invest in CPs. However, investment by FIIs would be within the limits set for them by Securities and Exchange Board of India (SEBI) from time-to-time.
Unincorporated bodies, Non-Resident Indians (NRIs) and Foreign Institutional Investors (Ells) Money Supply etc. can invest in CPs. However, investment by Flls would be within the limits set for them by SEBI from time-to-time.
Who is permitted to issue CP
Subsequently, primary dealers (PDs) and all-India financial institutions (FIs) were also permitted to issue CP to enable them to meet their short-term funding requirements.
However, the corporate issuing CP should meet the following conditions
Minimum and Maximum period of maturity:
CF can be issued for maturities between a minimum of 7 days and a maximum of up to one year from the date of Issue.
CP can be issued in denominations of Rs.5 lakh or multiples thereof.
Call and Notice Money Market
The money market is a market for short- term financial assets that are close substitutes of money. The most important feature of a money market instrument is that it is liquid and can be turned into money quickly at low cost and provides an avenue for equilibrating the short-term surplus funds of lenders and the requirements of borrowers.
Scheduled commercial banks (excluding RRBs), co-operative banks (other than Land Development Banks) and Primary Dealers (PDs), are permitted to participate in call/notice money market both as borrowers and lenders.
Capital Market is an institutional arrangement for facilitating the borrowing and lending of long-term funds. Usually, focus is on the markets for long-term debt and equity claims, government securities, bonds, mortgages, and other instruments of long-term debts.
A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities.
Capital Market Instruments
OTHER IMPORTANT POINTS ON MONEY SUPPLY
Masala bonds are the rupee-denominated bonds which can be issued by the Indian entities to raise money from overseas markets. By rupee-denominated bonds, it means that the money borrowed will be in Indian rupees and not any foreign currency.
Under the automatic route the amount will be equivalent to INR 50 billion (Rs.5,000 crore) per annum through Automatic Approval, beyond Rs.5,000 crore in a financial year will require prior approval of the Reserve Bank
Minimum maturity period of 3 years. However they can be issued for three or five or seven-year maturities.
Who Can Issue
Any corporate or body corporate as well as Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) can issue such off-shore rupee denominated bonds.
Indian banks can issue these bonds in the forms of (i) Perpetual Debt Instruments (PDI) qualifying for inclusion as Additional Tier 1 capital and debt capital instruments qualifying for inclusion as Tier 2 capital, and (ii) Long term Rupee Denominated Bonds overseas for financing infrastructure and affordable housing.
Where can these bonds be issued?
The Rupee denominated bonds can only be issued in a country and can only be subscribed by a resident of a country:
1. That is a member of Financial Action Task Force (FATF) or a member of a FATF-Style Regional body; and
2. Whose securities market regulator is a signatory to the International Organization of Securtieis Commission's (IOSCO's) Multilateral Memorandum of Understanding (Appendix A Signatories) or a signatory to bilateral Memorandum of Understanding with the SEBI for information sharing arrangements;
The first Masala bond was issued by the International Finance Corporation (IFC), the investment arm of the World Bank dubbed as Uridashi Masala Bonds in November 2014. The Housing Development Finance Corporation (HDFC) was the first Indian company to issue rupee-denominated bonds "masala bonds" on London Stock Exchange (LSE) in July 2016. International Financial Corporation was first time issued green masala bonds in August 2015 to raise private sector investments that address climate change in India. Canada's British Columbia province was the first foreign government to issue of masala bonds.
RBI regulates liquidity in a manner that balances inflation and helps in GDP growth and development. The tools that RBI uses to manage monetary policy are -
Bank rate is the interest rate at which central bank lends money to domestic banks. Such loans are given out either by direct lending or by rediscounting (buying back) the bills of commercial banks and treasury bills. Thus/ bank rate is also known as discount rate. In bank rate, there is no need for collateral security.
When banks sell security/ banks promise to buy back the same security from RBI at a predetermined date with an interest at the rate of REPO. It is actually a repurchase agreement. When RBI reduces the Repo Rate, the banks can borrow more at a lower cost.
Reverse repo rate:
RBI borrowing money from banks and the interest paid by RBI to banks on such borrowing is known as Reverse Repo Rate. It is opposite of Repo rate. An increase in this rate can cause the banks to transfer more funds to RBI due to their attractive interest rates. Hence RBI uses this way to drawn out excess money from the banks.
Cash reserve ratio:
All the commercial banks have to keep certain minimum amount of cash reserves with RBI. It uses CRR as a tool to increase or decrease the reserve requirement depending on whether RBI wants to increase or decrease in the money supply. RBI can vary Cash Reserve Ratio (CRR) rate between 3% and 15%.
Statutory Liquidity Ratio:
Amount of liquid assets such as Gold or other approved securities that a financial institution must maintain as reserves other than the cash.
Marginal Standing Facility:
Marginal standing facility (MSF) created by Reserve Bank of India in its credit policy Money supply of May 2011 which is a frame for banks to borrow from the RBI in an emergency situation when inter-bank liquidity dries up completely.
Liquidity Adjustment Facility:
Liquidity adjustment facility (LAF) is a monetary policy tool was introduced by RBI during June/ 2000 which allows banks to borrow money through repurchase agreements. LAF is used to aid banks in adjusting the day to day mismatches in liquidity.
MCLR (Marginal Cost of Lending Rate)
MCLR got effective after April 1, 2016. How RBI decided to implement MCLR system? Before 2010, there was Benchmark Prime Lending Rate (BPLR) system. Under this, banks were allowed to lend loans to their most trustworthy customers at a low rate. But this system was not transparent. After this, banks were advised by RBI to apply the system of base rate i.e. below this rate, banks will not be able to lend credits, except in the cases allowed by RBI.
Different parameters are used. These parameters include average cost of funds, marginal cost of funds or any other methodology which seemed reasonable. But then banks used to change their methodology as and when they wanted. Whenever the RBI cuts the repo rate, the same has to be done by banks also in their base rates, but they lower the base rate in small because most banks currently follow average cost of funds based calculation for arriving at respective base rates. This is the main reason for changing the policy to Marginal Cost of Funds based Lending Rates (MCLR).
MONETARY POLICY COMMITTEE
The Reserve Bank of India Act, 1934 (RBI Act) has been amended by the Finance Act, 2016, to provide for a statutory and institutionalized framework for a Monetary Policy Committee/ for maintaining price stability, while keeping in mind the objective of growth.
INFLATION AND ITS TYPES
Inflation is a rise in the general level of prices of goods and services in an economy over a period of time.
Types of Inflation
How to Measure Inflation
CPI (Consumer Price Index): A consumer price index (CPI) measures changes in the price level of consumer goods and services purchased by households or consumers.
Wholesale price index: The Wholesale Price Index or WPI is the price of a representative basket of wholesale goods.
The Indian currency is called the Indian Rupee (INR) and the coins are called paise. One Rupee consists of 100 paise. The Reserve Bank manages currency in India. The Government, on the advice of the Reserve Bank, decides on the various denominations.
Soiled and Mutilated Notes
Soiled notes are notes, which have become dirty and limp due to excessive use. Mutilated notes are notes, which are torn, disfigured, burnt, washed, eaten by white ants, etc.
These Rules have been framed under Section 28 of the Reserve Bank of India Act, 1934. The public can get value for these notes as laid down in the Rules, after adjudication. Currently, provisions exist for paying either full, half or no value as far as notes in the denomination for Rs. 10 and above are concerned; as regards Rs. 1, Rs. 2 & Rs. 5, a tenderer can get either full or no value depending upon the condition of the note.
The Union Government has the sole right to mint the coins and one rupee note. The responsibility for coinage comes under the Coinage Act, 1906 which is amended from time to time. The designing and minting of coins in various denominations is also the responsibility of the Government of India. The coins are issued for circulation only through the Reserve Bank in terms of the RBI Act.
Coins are minted at the following four Government Mints.
The design of bank notes is approved by the central government, or the recommendation of the central board of the Reserve Bank of India. The current series of bank notes (which began in 1996) is known as the Mahatma Gandhi series. Bank notes are issued in the denominations of Rs. 5, Rs. 10, Rs. 20, Rs. 50, Rs. 100, Rs. 500 and Rs. 2000.
DEMONETISATION IN INDIA
The largest note ever printed by the Reserve Bank of India was Rs. 10000 which was introduced in 1938 by the British India government and subsequently again by Independent India in 1954.
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