Banking General Awareness Money Market and Capital Market Money Supply

MONEY AND ITS TYPES

Money: Money is anything that is widely accepted in exchange for goods and services.

 

Types of Money

• Commodity Money - Commodity money is the type of Money that is in the form of a commodity with intrinsic value which means it has value outside of its use as money. The commodity itself represents money, and the money is the commodity. Example: Gold silver, copper, salt, peppercorns, rice, large stones, etc.
• Representative Money - It actually represents Money. It is exchangeable for a commodity. Examples: Token coins, or any other physical tokens like certificates.
• Fiat Money - It is whose value is not derived from any intrinsic value or any guarantee that it can be converted into valuable commodity (like gold). It has value as money because a government decreed that it has value for that purpose.

 

Money Market

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

• currency with the public demand deposits+ other deposits held with the RBI.
• savings deposits with post office savings banks
• time deposits
• total deposits with the post office savings organization.

 

MONEY MARKET INSTRUMENTS

1. Treasury Bills
2. Commercial Papers
3. Certificate of Deposit
4. Banker's Acceptance
5. Repurchase Agreement

 

Treasury Bills:

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.

 

Minimum Price:

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.

 

Commercial Paper

• Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note. CP, as a privately placed instrument, was introduced in India in 1990 with a view to enable highly rated corporate borrowers to diversify their sources of short- term borrowings and to provide an additional instrument to investors.
• Individuals, banking companies, other corporate bodies (registered or incorporated in India) and

 

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

1. The tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs.4 crore.
2. The company has been sanctioned working capital limit by banks or FIs; and
3. The borrowal account of the company is classified as a Standard Asset by the financing bank/institution.
4. The minimum credit rating shall be 'A3' as per rating symbol and definition prescribed by SEBI

 

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.

 

Denomination:

CP can be issued in denominations of Rs.5 lakh or multiples thereof.

 

Other Conditions:

• Only a scheduled bank can act as an IPA for issuance of CP.
• CP can be issued either in the form of a promissory note or in a dematerialized form through any of the depositories approved by and registered with SEBI. Banks, FIS and PDS can hold CP only in dematerialized form.

 

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.

• "Call Money" means deals in overnight funds.
• "Notice Money" means deals in funds for 2 -14 days.
• "Term Money" means deals in funds for 15 days -1 year.

 

Participants

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

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.

• This capital market encircles the system through which the public takes up long-term securities, either directly or through intermediaries. It also to be noted that Risk is much greater in capital market unlike Money Market which has small risk.
• This instrument consists of a series of channels through which the savings of the community are mobilised and made available to the entrepreneurs for undertaking investment activities.
• Regulator: Stock Exchange Board of India set up guidelines, and supervise and regulate the working of capital market. SEBI in consultation with the Government has taken a number of steps to introduce improved practices and greater transparency in the capital markets in the interest of the investing public and the healthy development of the capital markets.

 

Government Securities

• Government securities, also called the gilt edged securities or G-secs, are not only free from default risk but also provide reasonable returns and, therefore, offer the most suitable investment opportunity to provident funds.
• The Government securities comprise dated securities issued by the Government of India and state governments as also, treasury bills issued by the Government of India.
• Reserve Bank of India manages and services these securities through its public debt offices located in various places as an agent of the Government.

 

Mutual Fund

A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities.

• The first introduction of a mutual fund in India occurred in 1963, when the Government of India launched Unit Trust of India.
• The regulator of mutual funds in India - SEBI.
• The first private sector fund to operate in India was Kothari Pioneer, which later merged with Franklin Templeton.

 

Capital Market Instruments

1. Shares
2. Debentures
3. Bonds

 

OTHER IMPORTANT POINTS ON MONEY SUPPLY

• High powered money' as used by RBI means money produced by RBI and Government of India and held by public and banks. Ingredients of high powered money include post office deposits + public sector bank deposits + deposit held by RBI including cash reserves of banks partly held in the form of currency as 'cash in hand' and partly as deposit with RBI and other deposits of RBI.
• Difference between   high-powered money and ordinary money supply is that ordinary money supply includes demand deposits with banks plus currency with public plus other deposits with RBI whereas high powered money includes currency with public besides cash reserves of banks and other deposits of RBI.
• Narrow Money concept used by RBI means those assets which represent immediate purchasing power and act as a 'medium of exchange' function of money.
• Blocked Currency means when one money currency of a country is not permitted to be exchanged with another country's money currency, it is called blocked currency.

 

MASALA BONDS

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.

 

 

Amount	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
Maturity	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;

 

Key Facts:

• Masala bonds are a step to help internationalize the Indian rupee and also deepen the Indian financial system.
• IFC issued a '1,000 crore bond to fund infrastructure projects in India. These bonds were listed on the London Stock Exchange (LSE).
• IFC then named them Masala bonds to give a local flavour by calling to mind Indian culture and cuisine.
• These are the first rupee bonds listed on the London Stock Exchange.
• They can be issued for three or five or seven-year maturities.
• The first Masala bonds were issued on 10 November 2014 under IFC's $2 billion offshore rupee program.
• They are different from External Commercial .Borrowings (ECB) in a way that in ECB the currency risk lies with the Indian issuer while in case of masala bonds, the currency risk lies with the overseas Investor.

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.

 

MONETARY POLICY

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:

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.

 

Repo rate:

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.

• This tool used for absorbing liquidity and injecting the same with banks through agreement with the Cap of 0.25% of NDTL as on April 2014.

 

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.

• As per the provisions of the RBI Act, out of the six Members of Monetary Policy Committee/ three Members will be from the RBI and the other three Members of MPC will be appointed by the Central Government.

1. The Governor of the Bank-Chairperson, ex officio;
2. Deputy Governor of the Bank/ in charge of Monetary Policy - Member/ ex officio;
3. One officer of the Bank to be nominated by the Central Board - Member, ex officio;
4. Shri Chetan Ghate, Professor, Indian Statistical Institute (ISI) - Member
5. Professor Pami Dua, Director, Delhi School of Economics (DSE) - Member
6. Dr. Ravindra H. Dholakia, Professor,Indian Institute of Management (IIM),Ahmedabad

• The Members of the Monetary Policy Committee appointed by the Central Government shall hold office for a period of four years, with immediate effect or until further orders, whichever is earlier.

 

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

• Demand pull inflation: This type of inflation occurs when total demand for goods and services in an economy exceeds the supply of the same.
• Cost-push Inflation: If there is increase in the cost of production of goods and services, due to increase of wages and raw materials cost, there is likely to be a consequent increase in the prices of finished goods and services.
• Stagflation: It is a situation in which the inflation rate is high and the economic growth rate is low.
• Reflation: It is the act of stimulating the economy by increasing the money supply or by reducing taxes. It is an act of pumping money in the market to increase the circulation so that economy can be stipulated again.
• Disinflation: It is a decrease in the rate of inflation - a slowdown in the rate of increase of the general price level of goods and services in a nation's gross domestic product over time.
• Deflation: It is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% (a negative inflation rate).
• Hyperinflation: It is the extremely rapid escalation of prices (typically more than 50% per month) for goods and services.
• Headline Inflation: Headline inflation refers to inflation figure which is not adjusted for seasonality or for the often volatile elements of food & energy prices, which are removed in the Core CPI. Headline inflation will usually be quoted on an annualized basis, meaning that a monthly headline figure of 4% inflation equates to a monthly rate that, if repeated for 12 months, would create 4% inflation for the year. Comparisons of headline inflation are typically made on a year- over-year basis. Also known as "top-line inflation".
• Imported Inflation: A depreciation in the exchange rate will make imports more expensive. Therefore, the prices will increase solely due to this exchange rate effect. A depreciation will also make exports more competitive so will increase demand.

 

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.

 

INDIAN CURRENCY

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.

• The Reserve Bank can also issue notes in the denominations of one thousand rupees, five thousand rupees and ten thousand rupees, or any other denomination that the Central Government may specify.
• There cannot, though, be notes in denominations higher than ten thousand rupees in terms of the current provisions of the Reserve Bank of India Act, 1934. Coins can be issued up to the denomination of Rs.1000.

 

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.

• A double numbered note cut into two pieces but on which both the numbers are intact is now being treated as soiled note. Soiled notes can be tendered at all bank branches for and exchange obtained.
• Soiled or mutilated notes are fully payable. Payment of exchange value of mutilated notes is governed by the RBI under refund Rules, 1975.
• In order to increase the life of currency notes. Reserve Bank of India (RBI) issued Clean Note Policy in 2001.

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.

 

Coin Minting

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.

1. Mumbai,
2. Alipore (Kolkata),
3. Saifabad (Hyderabad), Cherlapally (Hyderabad)
4. Noida (UP)

 

Currency Notes

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.

1. Currency notes are printed at the Currency Note Press in Nashik
2. Bank Note Press in Dewas
3. Bharatiya Reserve Bank Note Mudran (P) Ltd at Salboni and Mysore and at,
4. The Watermark Paper Manufacturing Mill in Hoshangabad.

 

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.

• The notes introduced in 1954 were Rs. 500, Rs. 1000, Rs. 5000 and Rs. 10000.
• These notes were withdrawn in 1946 by the RBI under the British Indian Government to curb the black money menace in India.
• These notes were exchanged for Rs. 100 or lower denomination          :
• The notes were re-introduced in 1954 by the RBI, which was subsequently demonetized, in 1978 by the Morarji Desai-led Janta Parivar government (first non-congress government in Independent India) just after the downfall of the Indira Gandhi government in 1977 due to Emergency crisis the country faced.
• 3 times demonetisation occurred in India since 1935 (1946,1978, and 2016)