Indian Money Market

The money market is a mechanism that deals with the lending and borrowing of short term funds. The India Money Market has come of age in the past two decades. In order to study the money market of India in detail, we at first need to understand the parameters around which the money market in India revolves.

The performance of the Indian Money Market is heavily dependent on real interest rate that is the interest rate that is inflation adjusted. Though the money market is free from interest rate ceilings,structural barriers and other institutional factors can be held responsible for creating distortions in India Money Market. Apart from the call market rates, the other interest rates in the Indian Money Market usually do not change in the short run. It is due to this disparity between the opposite forces that is prevalent in the money market in India that a well defined income path cannot be traced.

Owing to the deregulation of the interest rate in the early nineties following the economic reforms laid down by the then finance minister Dr. Manmohan Singh, studies concerning the behavior of interest rate was restricted. However the liquidity of the market makes its a good subject for empirical research.

The Indian Money Market involves a wide range of instruments. Here, maturities range from one day to a year, issued by banks and corporates of various sizes. The money market is also closely linked with the Foreign Exchange Market through the process of covered interest arbitrage in which the forward premium acts as a bridge between domestic and foreign interest rates.

To analyze the interest rates that characterize the Indian Money Market, the following elements need to be covered:

• The term structure of interest rate.
• The difference between domestic and international interest rates
• The market structure differences between the auction markets that clear continuously and the. customer markets.
• The credit speed between instruments involving similar maturity but diverse risk factor.

Such is the distortion in the Indian Money Market.

Latest Oil Update

Global oil demand is now expected to contract in 2008for the first time since 1983, shrinking by 0.2 mb/d, with the total this year revised down by 350 kb/d to 85.8 mb/d. 2009 demand will grow again to a downward‐adjusted 86.3 mb/d. This forecast is based on the IMF assumption that the global economy will gradually recover from 2H09.

World oil supply growth slowed to 165 kb/d in November, averaging 86.5 mb/d, with OPEC crude supply curbed by 760 kb/d to 31.3 mb/d on weakening demand. December supplies will likely be reduced further and OPEC Ministers meet on 17 December to mull further target cuts. The ‘call on OPEC crude and stock change’ for 2009 averages 30.7 mb/d, around 0.8 mb/d below 2008.

Non‐OPEC output now averages 49.6 mb/d for 2008and 50.1 mb/d for 2009, representing annualised changes of ‐85 kb/d and +480 kb/d respectively. But lower estimates are incorporated for 2009 Europe and the FSU (‐0.2 mb/d), while the OPEC NGL forecast is also trimmed by 0.3 mb/d.

Crude oil prices dropped to nearly $40/bbl in early December, amid continued signs of economic slowdown and OECD demand decline. Weak refining margins are causing economic run cuts and in turn a crude overhang, as seen in growing stocks and a widening contango.

Global 4Q08 refinery crude throughput should average 72.6 mb/d, 0.8 mb/d lower than in last month’s report, due to weaker demand and the poor margin outlook, particularly on the US Gulf Coast. Global 1Q09 crude runs are forecast to average 73.5 mb/d, a dip of 0.4 mb/d against 1Q08, driven by a 0.7 mb/d year‐on‐year decline in the OECD.

OECD industry stocks rose by 45.6 mb to 2,697 mb in October, on weak demand and post‐hurricane recovery in the US. Downward revisions to OECD demand increased end‐October forward demand cover to 56.8 days, well above the five‐year average. Preliminary November data point to another OECD stock build of 10.3 mb.