ppt

1. MONETARY ECONOMICS:
Financial System
Dr.Sunitha.S
Assistant Professor
School of Management Studies,
National Institute of Technology (NIT) Calicut

2.  Financial system:
 Formal financial sector:presence of an
orgnaised,instituional and regulated system
 Informal financial sector Is an
unorganised,non instituional and noin
regulated system
 Resulting in “ financial dualism”
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3.  Formal sector comes
under the purview of
the misnitsry of
finance(MoF),RBI and
Securities and
Exchange Board of
India(SEBI) &
Insurance Regulatory
and Development
Authority(IRDA).
 Infrmal scetor
:consists of
moneylenders,pawn
brokers,funds or
associations doing
finance business,chit
fund companies,local
brokers etc
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4. 4
Monetary Economics studies about……
 Banks
 Money market
 Capital Market
 Non Bank Financial Intermediaries
 Unregulated Credit Markets

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And aspects of stock market like……….
 Stock Exchanges
 BSE
 NSE
 NIFTY
 SENSEX
 Bulls &Bears

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Some basic stuff
 Credit
 Liquidity
 Inflation
 Monetary Policy
 Fiscal Policy

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“Inflation is too much money chasing too
few goods”
 Demand pull or cost push inflation

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Banking
 Central Bank
 Commercial Banks
 Development Banks
 Cooperative banks

9. 1. Accepting of deposits
 Current deposit Account - withdraw money at any time – no interest
 Fixed deposit - money deposited in the account is for very short
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period. – high rate of interest – term deposit – matures at a definite
period.
 Savings deposit Account – some restrictions. – minimum amount of
money – interest rate is low.
2. Granting of loans and advances
 Loans
- Overdraft – draft in excess of credit balance – for the reliable
customer.

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Reserve Bank of India
 Currency Authority
 Banker to Govt
 Bankers’ Bank
 Controller of money supply & credit
 Exchange Management & control

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Non Bank Financial Intermediaries (NBFIs)
Regulated Unregulated
 Mutual Funds (UTI)
 Insurance companies
(LIC & GIC)
 Provident/Pension
Funds
 Post Offices Savings
 Other NBFIs
 Money Lenders
 Chit funds
 Hire Purchase/Leasing
companies

12. Financial System

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Financial System
 Financial institutions
 Commercial banks, RBI, NBFIs, companies
 Financial Assets
 Currency, deposits, cheques, bills, bonds, shares,
 Equities, debentures, T-bills, certificates of deposits,
commercial papers
 Financial markets
 Money market (short term funds)
 Capital market (medium & long term funds)
 Primary Market (New Issue Market)
 Secondary Market (Stock Market)

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Money Market

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Money Market
 Market in which short
term funds are
borrowed and lent
( maturity below one
year) are called as
money market.
Submarkets
 Call Money Market
 Commercial Bill Market
 Treasury Bill Market
 Certificate of Deposit
 Commercial Paper

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Call Money Market
 Deals with one day loans (called as call loans
or call money) as well as loans up to 15 days
 Who are the Participants?
 usually banks, Mutual funds, large corporations
and insurance companies are able to participate
in this market.
borrowers are banks who are temporarily
short of funds
Suppliers are banks with temporary excess of
cash

17.  The rate at which the call loan is lent is called
as call rate.
 The rate of interest is always higher than
savings account rate.
 The loans in the call money market are very
short, usually lasting no longer than a week
and are often used to help banks meet
reserve requirements.
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18. Money lent for a day is called as call money
and for a period more than a day is called as
notice money and money lent for 15 days or
more days is called term money.
Helps in maintaining liquidity, controlling
inflation, fill the gaps or temporary
mismatches in funds and also determining
the interest rates in the economy
Need based market where in demand and
supply of money shape in the market
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Commercial Bill market
 Bill of Exchange (BOE) is like a promissory
note ,which has a maturity period of 3
months.
 “I owe you so and so amount of money after
3 months from the present date.”
 Either the BOE holder could wait till it gets
matured or get it discounted or get encashed
through the process of discounting

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Treasury Bill market
 T Bills are short term debt instruments issued
by the Govt to get funds.
 Who are the participants?
 Borrowers: mostly commercial banks
 Lender: Govt departments
 Sold by RBI through auction
 Maturity: 91days,182 days,365 days
 Zero default risk and hence more safer

21. Treasury Bills
 Treasury bills, commonly referred to as T-Bills are issued
by Government of India against their short term
borrowing requirements with maturities ranging between
14 to 364 days.
 All these are issued at a discount-to-face value. For
example a Treasury bill of Rs. 100.00 face value issued
for Rs. 91.50 gets redeemed at the end of it's tenure at
Rs. 100.00.
 Who can invest in T-Bill
 Banks, Primary Dealers, State Governments, Provident
Funds, Financial Institutions, Insurance Companies,
NBFCs, FIIs (as per prescribed norms), NRIs can invest
in T-Bills.

22. • 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.
• Eligible to be included for SLR purpose
• Amount
• 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.

23.  Gilt Edged security Government security
that is a claim on the government and is a
secured financial instrument which
guarantees certainty of both capital and
interest. These securities are free of default
risk or credit risk, which leads to low market
risk and high liquidity.
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Certificate of Deposit (CD)
 CDs are short-term borrowings issued by
banks and are freely transferable by
endorsement and delivery.
 Borrowed mainly by banks
• Minimum period 7 days
• Maximum period 1 year

25.  CD s are issued generally when banks face
tight liquidity,and are issued at relatively high
interest rates.
 CDs are issued when the deposit growth is
sluggish but credit demand is high.
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Commercial Paper(CP)
 Direct short term finance issued by large
creditworthy companies
 Borrowed by banks, companies
 Maturity : 7 days to 3 months to one year
 Also known as Industrial paper,corporate
paper and industrial paper.

27. Commercial Paper
 Commercial Paper (CP) is an unsecured money market instrument
issued in the form of a promissory note.

Who can issue Commercial Paper (CP)
Highly rated corporate borrowers
To whom issued
 CP is issued to and held by individuals, banking companies, other
corporate bodies registered or incorporated in India and
unincorporated bodies, Non-Resident Indians (NRIs) and Foreign
Institutional Investors (FIIs).
 Denomination: min. of 5 lakhs and multiple thereof.

28. Some important Ratios
 Bank rate
 CRR
 SLR
 Repo Rate
 Reverse Repo Rate

29. What is Bank rate?
 Bank Rate is the rate at which central bank of
the country (in India it is RBI) allows finance
to commercial banks.
 If the bank rate goes up, long-term interest
rates also tend to move up, and vice-versa.
Thus, it can be said that in case bank rate is
hiked, banks will hike their own lending rates
to ensure and they continue to make a profit.

30. What is CRR?
 CRR means Cash Reserve Ratio.
 Banks in India are required to hold a certain
proportion of their deposits in the form of
cash. However, actually Banks don’t hold
these as cash with themselves, but deposit
such case with Reserve Bank of India (RBI) /
currency chests, which is considered as
equivalent to holding cash with themselves..

31. CRR
 This minimum ratio (that is the part of the total deposits
to be held as cash) is stipulated by the RBI and is known
as the CRR or Cash Reserve Ratio.
 Thus, When a bank’s deposits increase by Rs100, and if
the cash reserve ratio is 9%, the banks will have to hold
additional Rs 9 with RBI and Bank will be able to use
only Rs 91 for investments and lending / credit purpose.
Therefore, higher the ratio (i.e. CRR), the lower is the
amount that banks will be able to use for lending and
investment. This power of RBI to reduce the lendable
amount by increasing the CRR, makes it an instrument
in the hands of a central bank through which it can
control the amount that banks lend. Thus, it is a tool
used by RBI to control liquidity in the banking system

32. What is SLR?
 SLR stands for Statutory Liquidity Ratio.
 indicates the minimum percentage of
deposits that the bank has to maintain in form
of gold, cash or other approved securities.
 Controls the credit growth in the economy

33. REPO RATE
 Repo (Repurchase) rate is the rate at which
the RBI lends short-term money to the banks.
When the repo rate increases borrowing from
RBI becomes more expensive. Therefore,
we can say that in case, RBI wants to make
it more expensive for the banks to borrow
money, it increases the repo rate; similarly, if
it wants to make it cheaper for banks to
borrow money, it reduces the repo rate

34. Definition of 'Repurchase Agreement
- Repo'
 A form of short-term borrowing for dealers in
government securities. The dealer sells the
government securities to investors, usually on
an overnight basis, and buys them back the
following day.
For the party selling the security (and
agreeing to repurchase it in the future) it is a
repo; for the party on the other end of the
transaction, (buying the security and agreeing
to sell in the future) it is a reverse repurchase
agreement. 34

35. REVERSE REPO RATE
 Reverse Repo rate is the rate at which banks
park their short-term excess liquidity with the
RBI. The RBI uses this tool when it feels
there is too much money floating in the
banking system. An increase in the reverse
repo rate means that the RBI will borrow
money from the banks at a higher rate of
interest. As a result, banks would prefer to
keep their money with the RBI

36. REPO RATE Vs REVERSE REPO RATE
 Thus, we can conclude that Repo Rate
signifies the rate at which liquidity is injected
in the banking system by RBI, whereas
Reverse repo rate signifies the rate at which
the central bank absorbs liquidity from the
banks.

37.  Repo rate, also called repurchase rate, is the
rate of interest that banks pay when they
borrow money from the Reserve Bank of
India to meet their short-term fund
requirements. This is called repurchase rate
because when they borrow money from the
RBI, they keep government securities with
the central bank as collateral. When they pay
the money back to RBI, they take the
collateral back.
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38.  Reverse repo rate is the rate of interest that
banks get when they keep their surplus
money with the RBI. Repo rate is always
higher than the reverse repo rate. At present,
the repo rate is 7.75% per annum and the
reverse repo rate is 6.75%.
 By controlling these rates, the RBI controls
the rate of interest in the economy.
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39. Marginal standing facility(MSF)
 MSF rate is the rate at which banks borrow
funds overnight from the Reserve Bank of India
(RBI) against approved government securities.
This came into effect in may 2011. Under the
Marginal Standing Facility (MSF), currently
banks avail funds from the RBI on overnight
basis against their excess statutory liquidity ratio
(SLR) holdings. Additionally, they can also avail
funds on overnight basis below the stipulated
SLR up to 2.5% of their respective Net Demand
and Time Liabilities (NDTL) outstanding at the
end of second preceding fortnight.
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40. Recent Rates Issued by RBI
(as of 31 October,2012 & 3 April 2013 &
11 November 2013)
 Bank rate 9% 8.5% 8.75
 Repo rate 8% 7.5% 7.75
 Reverse repo rate 7% 6.5% 6.75
 CRR 4.5% 4.0 4.0
 SLR 23% 23% 23
 Marginal Standing 9% 8.75
Facility (MSF)

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Thank You