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Which of the following provides liquidity to money market instruments by creating a secondary market where they can be traded?

Which of the following provides liquidity to money market instruments by creating a secondary market where they can be traded? Correct Answer DFHI

Money market: It is a financial market where short-term financial assets having liquidity of one year or less are traded on stock exchanges.

Money market instruments: 

1. Call/notice money

  • It is a segment of the market where scheduled commercial banks lend or borrow on short notice (say a period of 14 days). In order to manage day-to-day cash flows.

2. Treasury bills

  • T-bills are one of the safest money market instruments. The Central Government issues this financial instrument and it carries an attractive interest rate. Also, these come with different maturity periods of 3, 6 months, and 1 year.

3. Inter-Bank Term Market

  • This market was initially only for commercial and co-operative banks but are now available to various financial institutions as well. The interest rates are market-driven. Also, the market is predominantly a 90-day market.

4. Certificate of Deposit

  • Certificates of Deposit, CD are term-deposits accepted by the commercial banks at market rates.
  • Also, all scheduled banks (except RRB’s and Cooperative banks) are allowed to issue CP. It can be issued for a period of 3 months to 1 year.

Vaghul Committee's recommendations's:

  • The Vaghul Committee in its Report (1987) strongly recommended the establishment of a Finance House of India as an autonomous public limited company – to deal in short-term money market instruments with the object of improving the liquidity of these instruments.
  •  Consequently, Shri. R.N. Malhotra, the then Governor of the RBI, announced on March 31, 1987 the establishment of the Discount and Finance House of India Ltd.

DISCOUNT AND FINANCE HOUSE OF INDIA LTD. (DFHI):  

  • DFHI was incorporated in March 1988 and it commenced operation in April 1988
  • Main objective of this money market institution is to facilitate smoothening of the short-term liquidity imbalances by developing an active secondary market for the money market instruments 

Therefore, based on the Vaghul Committee's recommendations's the Reserve Bank of India had jointly set up with the public sector banks and other all India financial institutions, the Discount and Finance House of India (DFHI) to deal in money market instruments in order to provide liquidity in the money market. 

  1. National Securities Depository Limited (NSDL) is an Indian central securities depository based in Mumbai. It was established in August 1996 as the first electronic securities depository in India with national coverage.
  2. State Bank of India (SBI) is an Indian multinational, public sector banking and financial services statutory body headquartered in Mumbai, Maharashtra. SBI is ranked 236th in the Fortune Global 500 list of the world's biggest corporations of 2019.
  3. The OTC Exchange Of India (OTCEI), also known as the Over-the-Counter Exchange of India, is based in Mumbai, Maharashtra. It is India's first exchange for small companies, as well as the first screen-based nationwide stock exchange in India.

Related Questions

In the Money market which of the following statement's is/are incorrect?
1. The call money market deals in short-term finance repayable on demand, with a maturity period varying from one day to 14 days.
2. Treasury bills are instruments of short-term borrowing by the Government of India, issued as promissory notes under discount.
3. A reduction in the repo rate helps banks to get money at a cheaper rate.
4. Money market mutual funds invest money in specifically, high-quality and very short maturity based money market instruments.
Consider the following statements.
Assertion (A): A well-developed money market is the basis for an effective monetary policy. It is in the money market that the Central Bank comes into contact with the financial sectors of the economy as a whole and it is through the liquidity in the market that influences the cost and availability of credit.
Reasoning (R): A well-organized money market is an essential condition for the successful operation of the Central Banking policies, and for holding the conditions of liquidity within the bounds of what the monetary authorities consider desirable.
Consider the following statements for deflection and null type instruments: 1. Deflection type of instruments are more accurate than null type of instruments. 2. Deflection type of instruments can be highly sensitive as compared with the null type of instruments. 3. Null type of instruments are more suitable for measurements under dynamic conditions than deflection type of instruments. Which of the above statements are not correct?
Consider the following statements in connection with deflection-type and null-type instruments: 1. Null-type instruments are more accurate than the deflection-type ones. 2. Null-type of instrument can be highly sensitive compared to a deflection-type instrument. 3. Under dynamic conditions, null-type instruments are less preferred to deflection-type instruments. 4. Response is faster in null-type instruments as compared to deflection-type instruments. Which of the above statements are correct?
Which of the following are the instruments or money market?
1. Call money market
2. Commercial bill market
3. Industrial securities market
4. Short-term loans market
5. Treasury bill market
Financial instruments traded in money markets are then traded in
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Liquidity Adjustment facility by RBI allows a. RBI to manage market liquidity on a daily basis. b. Transmit interest rate signals to the market. Which of the statements given above is/are correct?