Money Market

May 29, 2016 | Author: Jåçøb Blâçk | Category: Types, Research
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RAJHASTHANI SAMMELAN’S Ghanshyamdas Saraf College Affiliated to University of Mumbai ACCREDITED BY NAAC BY ‗A‘ GRADE & Durgadevi Saraf Junior College (ARTS & COMMERCE) S.V Road, Malad (W) Mumbai: 400 064 Year: 2012-2013

RAJHASTHANI SAMMELAN’S Ghanshyamdas Saraf College Affiliated to University of Mumbai ACCREDITED BY NAAC BY ‗A‘ GRADE & Durgadevi Saraf Junior College (ARTS & COMMERCE) S.V Road, Malad (W) Mumbai: 400 064 Year: 2012-2013

CERTIFICATE I Prof. Prasanna Choudhari here by certify that Ms. Priyanka Shantiswaroop Rajput a student of Ghanshyamdas Saraf College of T.Y.B.F.M (Semester V) has completed Project on ―STUDY OF MONEY MARKET‖ in the Academic Year 2012-2013. This information submitted is true and original to the best of my knowledge

External examiner:



Project Co-ordinator: Date:

College Seal:

ACKNOWLEDGEMENT I take this opportunity to thank the UNIVERSITY OF MUMBAI for giving me a chance to do this project. I express my sincere gratitude to the Principal, course Coordinator Mrs. Deepti Soni Madam, Guide Prof. Prasanna Choudhari and our librarian and other teachers for their constant support and helping for completing the project. I am also grateful to my friends for giving support in my project. Lastly, I would like to thank each and every person who helped me in completing the project especially MY PARENTS

DECLARATION I Miss Priyanka Shantiswaroop Rajput a student of Ghanshyamdas Saraf College of Arts and Commerce, Malad (W) T.Y.B.F.M (Semester V) hereby declare that I have completed the project on “STUDY OF MONEY MARKET” in the academic year 2012-2013. This information submitted is true and original to best of my knowledge.


Signature of the student

EXECUTIVE SUMMARY The seventh largest and second most populous country in the world, India has long been considered a country of unrealized potential. A new spirit of economic freedom is now stirring in the country, bringing sweeping changes in its wake. A series of ambitious economic reforms aimed at deregulating the country and stimulating foreign investment has moved India firmly into the front ranks of the rapidly growing Asia Pacific region and unleashed the latent strengths of a complex and rapidly changing nation. India's process of economic reform is firmly rooted in a political consensus that spans her diverse political parties. India's democracy is a known and stable factor, which has taken deep roots over nearly half a century. Importantly, India has no fundamental conflict between its political and economic systems. Its political institutions have fostered an open society with strong collective and individual rights and an environment supportive of free economic enterprise. India's time tested institutions offer foreign investors a transparent environment that guarantees the security of their long term investments. These include a free and vibrant press, a judiciary which can and does overrule the government, a sophisticated legal and accounting system and a user friendly intellectual infrastructure. India's dynamic and highly competitive private sector has long been the backbone of its economic activity. It accounts for over 75% of its Gross Domestic Product and offers considerable scope for joint ventures and collaborations. Today, India is one of the most exciting emerging money markets in the world. Skilled managerial and technical manpower that match the best available in the world and a middle class whose size exceeds the population of the USA or the European Union, provide India with a distinct cutting edge in global competition. The average turnover of the money market in India is over Rs. 40,000 crores daily. This is more than 3 percents of the total money supply in

the Indian economy and 6 percent of the total funds that commercial banks have let out to the system. This implies that 2 percent of the annual GDP of India gets traded in the money market in just one day. Even though the money market is many times larger than the capital market, it is not even fraction of the daily trading in developed markets.


 To study about Money market  To study about the structure of money market and its components  To study about the money market instruments brief.  To study about the role of Reserve bank of India in Indian Money market  To study the defects of money market



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Meaning of Money Market



Objectives of Money Market



Characteristic Of Money Market



Structure of Money Market



Component of Money Market



The Role of Reserve Bank of India in Indian Money Market



Defects of Money Market












Case Study





Introduction The money market is a key component of the financial system as it is the fulcrum of monetar y operations conducted by the central bank in its pursuit of monetary policy objectives. The money market is a subsection of the fixed income market. We generally think of the term fixed income as being synonymous to bonds. In reality, a bond is just one type of fixed income security. The difference between the money market and the bond market is that the money market specializes in very short-term debt securities (debt that matures in less than one year). Money market investments are also called cash investments because of their short maturities.

Money market securities are essentially IOUs issued by governments, financial institutions and large corporations. These instruments are very liquid and considered extraordinarily safe. Because they are extremely conservative, money market securities offer significantly lower returns than most other securities.

One of the main differences between the money market and the stock market is that most money market securities trade in very high denominations. This limits access for the individual investor. Furthermore, the money market is a dealer market, which means that firms buy and sell securities in their own accounts, at their own risk. Compare this to the stock market where a broker receives commission to acts as an agent, while the investor takes the risk of holding the stock. Another characteristic of a dealer market is the lack of a central trading floor or exchange. Deals are transacted over the phone or through electronic systems. The easiest way for us to gain access to the money market is with a money market mutual funds, or sometimes through a money market bank account.

These accounts and funds pool together the assets of thousands of investors in order to buy the money market securities on their behalf. However, some money market instruments, like Treasury bills, may be purchased directly. Failing that, they can be acquired through other large financial institutions with direct access to these markets. There are several different instruments in the money market, offering different returns and different risks.

History Till 1935, when the RBI was set up the Indian money market remained highly disintegrated, unorganized, narrow, shallow and therefore, very backward. The planned economic development that commenced in the year 1951 market an important beginning in the annals of the Indian money market. The nationalization of banks in 1969, setting up of various committees such as the Sukhmoy Chakraborty Committee (1982), the Vaghul working group (1986), the setting up of discount and finance house of India ltd. (1988), the securities trading corporation of India (1994) and the commencement of liberalization and globalization process in 1991 gave a further fillip for the integrated and efficient development of India money market. India has witnessed in the past two decades substantial changes in the money and capital markets. The money market scenario, which has emerged since 1980s, has witnessed new instruments and new directions have been chalked out. It is to be noted here that, strictly speaking, the money market deals with short term flow of funds whereas the capital market, embracing the stock market, deals with medium and long-term capital flows. But these two markets can not be placed in water tight compartments and there is often a spillover from one market to the other.

1) Meaning of Money Market Money market refers to the market where money and highly liquid marketable securities are bought and sold having a maturity period of one or less than one year. It is not a place like the stock market but an activity conducted by telephone. The money market constitutes a very important segment of the Indian financial system. The highly liquid marketable securities are also called as ‗ money market instruments‘ like treasury bills, government securities, commercial paper, certificates of deposit, call money, repurchase agreements etc. The major player in the money market are Reserve Bank of India (RBI), Discount and Finance House of India (DFHI), banks, financial institutions, mutual funds, government, big corporate houses. The basic aim of dealing in money market instruments is to fill the gap of short-term liquidity problems or to deploy the short-term surplus to gain income on that.

2) Definition of Money Market: According to the McGraw Hill Dictionary of Modern Economics, ―money market is the term designed to include the financial institutions which handle the purchase, sale, and transfers of short term credit instruments. The money market includes the entire machinery for the channelizing of short-term funds. Concerned primarily with small business needs for working capital, individual‘s borrowings, and government short term obligations, it differs from the long term or capital market which devotes its attention to dealings in bonds, corporate





According to the Reserve Bank of India, ―money market is the centre for dealing, mainly of short term character, in money assets; it meets the short term requirements of borrowings and provides liquidity or cash to the lenders. It is the place where short term surplus investible funds at the disposal of financial and other institutions and individuals are bid by borrowers‘ agents comprising









According to the Geoffrey, ―money market is the collective name given to the various firms and institutions that deal in the various grades of the near money.‖

Objectives of Money Market

The following are the important objectives of a money market: 

To provide a parking place to employ short-term surplus funds.

To provide room for overcoming short-term deficits.

To enable the Central Bank to influence and regulate liquidity in the economy through its intervention in this market.

To provide a reasonable access to users of Short-term funds to meet their requirements quickly, adequately and at reasonable costs.

Characteristic of Money Market

 It is a market dealing with short term funds or financial assets.

 These financial assests have a maturity period of upto one year.

 Financial assets can be easily converted into cash.

 It consists of various sub markets like call money market, bill market etc.

 Central Bank, Commercial Bank, Financial institution are main constituents of money market.

Significance of Money Market If the money market is well developed and broad based in a country, it greatly helps in the economic development of a country. The central bank can use its monetary policy effectively and can bring desired changes in the economy for the industrial and commercial progress in the country. The importance of money market is given, in brief, as under:

(i) Financing Industry A well developed money market helps the industries to secure short term loans for meeting their working capital requirements. It thus saves a number of industrial units from becoming sick.

(ii) Financing trade An outward and a well knit money market system play an important role in financing the domestic as well as international trade. The traders can get short term finance from banks by discounting bills of exchange. The acceptance houses and discount market help in financing foreign trade.

(iii) Profitable investment The money market helps the commercial banks to earn profit by investing their surplus funds in the purchase of. Treasury bills and bills of exchange, these short term credit instruments are not only safe but also highly liquid. The banks can easily convert them into cash at a short notice.

(iv) Self sufficiency of banks The money market is useful for the commercial banks themselves. If the commercial banks are at any time in need of funds, they can meet their requirements by recalling their old short term loans from the money market.

(v) Effective implementation of monetary policy The well developed money market helps the central bank in shaping and controlling the flow of money in the country. The central bank mops up excess short term liquidity through the sale of treasury bills and injects liquidity by purchase of treasury bills.

(vi) Encourages economic growth If the money market is well organized, it safeguards the liquidity and safety of financial asset This encourages the twin functions of economic growth, savings and investments.

(vii) Help to government The organized money market helps the government of a country to borrow funds through the sale of Treasury bills at low rate of interest The government thus would not go for deficit financing through the printing of notes and issuing of more money which generally leads to rise in an increase in general prices.

(viii) Proper allocation of resources In the money market, the demand for and supply of loan able funds are brought at equilibrium The savings of the community are converted into investment which leads to pro allocation of resources in the country.


The Indian money market is divided into two parts namely organized and unorganized. The organized sector consist of The Reserve Bank of India, Foreign Banks, Commercial Banks, Co-operative banks, Discount and Finance House of India, Mutual funds and finance Companies.








Certificate of

Call & short


notice Market

SUB-MARKET (Instruments)



The Unorganized sector consists of indigenous bankers, money lenders, nonbanking financial intermediaries like chit funds, nidhis etc. this sector is a hetrogenous sector. The organized sector of money market is well advanced. Its principal centres are Mumbai, Kolkata, Delhi, Chennai, Ahmedabad, and Bangalore. Of these centres the Mumbai centre is most active one

Organized Money Market The RBI is the apex institution which controls and monitors all the organizations in the organised sector. The commercial banks can operate as lenders and operators. The FIs like IDBI, ICICI, and others operate as lenders. The organised sector of Indian money market is fairly developed and organised, but it is not comparable to the money markets of developed countries like USA, UK and Japan.

Main constituents of Organised Money Market  Reserve Bank of India Reserve Bank of India is the regulator over the money market in India. As the Central bank, it injects liquidity in the banking system, when it is deficient and contracts the same in opposite situation.

 Commercial Banks Commercial Banks and the CO-operative banks are the major participants in the Indian money market. They mobilize the savings of the people through acceptance of deposits and lend it to business houses for their short term working capital requirements. While a portion of these deposits is invested in medium and long-term Government securities and corporate shares and bonds, they provide short-term funds to the Government by investing in the Treasury Bills. They employ the short-term surpluses in various money market instruments.

 Discount and Finance House of India Ltd. (DFHI) DFHI deals both ways in the money market instruments. Hence, it has helped in the growth of secondary market, as well as those of the money market instruments.

 Financial and Investment Institutions These institutions (eg. LIC, UTI, GIC, Development Banks, etc.) have been allowed to participate in the call money market as lenders only.

 Corporates Companies create demand for funds from the banking system. They raise short-term funds directly from the money market by issuing commercial paper. Moreover, they accept public deposits and also indulge in intercorporate deposits and investments.

 Mutual Funds Mutual funds also invest their surplus funds in variou~ money market instruments for short periods. They are also permitted to participate in the Call Money Market. Money Market Mutual Funds have been set up specifically for the purpose of mobilisation of short-term funds for investment in money market instruments.

UNORGANISED MONEY MARKET The unorganized money market mostly finances short term financial needs of farmers and small businessmen. The main constituents of unorganized Money market are:

 Indigenous Bankers (IBs) The IBs are individuals or private firms who receive deposits and give loans and thereby they operate as banks. Unlike moneylenders who only lend money, IBs accept deposits as well as lend money. They operate mostly in urban areas, especially in western and southern regions of the country. Over the years, IBs faced stiff competition from cooperative banks and commercial banks. Borrowers are small manufacturers and traders, who may not be able to obtain funds from the organised banking sector, may be due to lack of security or some other reason.

 Money Lenders (MLs) MLs are important participants in unorganised money markets in India. There are professional as well as non professional MLs. They lend money in rural areas as well as urban areas. They normally charge an invariably high rate of interest ranging between 15% p.a. to 50% p.a. and even more. The borrowers are mostly poor farmers, artisans, petty traders, manual workers and others who require short term funds and do not get the same from organised sector.

 Chit Funds and Nidhis They collect funds from the members for the purpose of lending to members (who are in need of funds) for personal or other purposes. The chit funds lend money to its members by draw of chits or lots, whereas Nidhis lend money to its members and others.

 Finance Brokers They act as middlemen between lenders and borrowers. They charge commission for their services. They are found mostly in urban markets, especially in cloth markets and commodity markets. 

Finance Companies They operate throughout the country. They borrow or accept deposits and lend them to others. They provide funds to small traders and others. They operate like indigenous bankers.

Sub Market (Instruments): INSTRUMENTS Traditionally when a borrower takes a loan from a lender, he enters into an agreement with the lender specifying when he would repay the loan and what return (interest) he would provide the lender for providing the loan. This entire structure can be converted into a form wherein the loan can be made tradable by converting it into smaller units with pro rata allocation of interest and principal. This tradable form of the loan is termed as a debt instrument. Therefore, debt instruments are basically obligations undertaken by the issuer of the instrument as regards certain future cash flows representing interest and principal, which the issuer would pay to the legal owner of the instrument. Debt instruments are of various types. The key terms that distinguish one debt instrument from another are as follows:

Issuer of the instrument

Face value of the instrument

Interest rate

Repayment terms (and therefore maturity period/tenor)

Security or collateral provided by the issuer


By convention, the term "money market" refers to the market for short-term requirement and deployment of funds. Money market instruments are those instruments, which have a maturity period of less than one year. The most active part of the money market is the market for overnight and term money between banks and institutions (called call money) and the market for repo transactions. The former is in the form of loans and the latter are sale and bu back agreements










instruments are commercial papers (CPs), certificates of deposit (CDs) and treasury bills (T-Bills). All of these are discounted instruments ie they are issued at a discount to their maturity value and the difference between the issuing price and the maturity/face value is the implicit interest. These are also completely unsecured instruments. One of the important features of money market instruments is their high liquidity and tradability. A key reason for this is that these instruments are transferred by endorsement and delivery and there is no stamp duty or any other transfer fee levied when the instrument changes hands. Another important feature is that there is no tax deducted at source from the interest component. A brief description of these instruments is as follows:

Certificate of Deposit

Commercial Papers,

Treasury Bills,

Ready Forward Contracts (Repos)

Call and Short Notice Market

Money Market Mutual Fund’s (MMFS)

CERTIFICATE OF DEPOSIT The certificates of deposit are basically time deposits that are issued by the commercial banks with maturity periods ranging from 3 months to five years. The return on the certificate of deposit is higher than the Treasury Bills because it assumes Certificates of deposits process the following distinguishing characteristics:

Negotiable instruments CDs are negotiable term-deposit certificates Issued by commercial bank/financial institutions at discount to face institutions. value at market rates. The Negotiable Instruments Act governs CDs.

Maturity The maturity period of CDs ranges from 15 days to one year.

Nature CDs are in the form of usance promissory notes and hence easily negotiable by endorsement and delivery.

Ideal source CDs constitute a judicious source of investments as these certificates are the liabilities of commercial

PROFILE A distinguishing profile of Certificate of Deposit as operating in India is presented below:

THE TAMBE WORKING GROUP The Tambe working Group set up in 1982 in India, reported that banks and financial institutions were not willing to support the launch of money market instruments such as CDs, and therefore advised against the introduction of these instruments. The Group cited many reasons for the non-popularity of these instruments including the absence of secondary market, administered interest rate structure on bank deposits and the danger of CDs giving rise to a large number of fictitious transactions.

THE VAGHUL WORKING GROUP The Vaghul Working Group set up in 1987, again reviewed the issue and expressed itself against the launch of the instrument by the RBI. The Group reported that the introduction of CDs as a money market instrument would be meaningful only where the short-term deposit rates were aligned with other rates in the financial system.The Group instead recommended, as a prelude, the setting up of a discount house and the alignment of short-term deposit rates. Based on the recommendations of the Group, the RBI constituted the Discount and Finance House of India Ltd. (DFHI) in the year 1988. In the same manner, RBI rationalized the interest rate structure in March 1989 by abolishing fixed deposits of shortest terms with maturity of 15 to 45 days.

THE LAUNCH The RBI launched the scheme of CDs with effect from March 27, 1989. Following guidelines were laid down in this regard.

ELIGIBLE ISSUERS The institutions that are eligible to issue CDs are scheduled commercial banks (excluding RRBs) and specified all-India financial institutions, namely, IDBI, IFCI, ICICI, SIDBI, IRBI, and EXIM bank.

ELIGIBLE SUBSCRIBERS The parties who are eligible to buy CDs are individuals, associations, companies, corporations, trust funds, etc. NRI an also subscribe to the CDs. How ere, this is possible only on a non-repatriation basis. It is not possible for an NRI to endorse CDs to another NRI in the secondary market.

NEGOTIATION CDs are freely transferable by endorsement and delivery after the initial lock in period of 15 days. The instrument can be purchased by any of the above subscribers and DFHI in the secondary market.

MATURITY The maturity period of CDs issued by banks ranges from 3 days to 12 months and that issued by specified financial institutions can have a maturity period up to 3 years. With the announcement of credit policy on April27, 2000 the maturity period was reduced from 3 month to 15 days.

DISCOUNT CDs are to be issued at a discount to face value, with the maturity period not having any grace period.

LIMITS OF ISSUE The maximum amount of issue by a bank, which was originally fixed at 1 percent of its fortnightly aggregate average deposits, was raised to 10 percent in

1992. This was subsequently abolished totally. The minimum size of issue to a single investor, which was originally fixed at Rs.10 lakhs, was reduced to Rs. 5lakhs with effect from October 21, 1997. Issue of CDs above Rs.5 lakhs can now be made in multiples of Rs.1 lakhs. CDs can now be CRR on issue price of CDs for which there is no ceiling.

STAMP DUTY Stamp duty is payable on CDs as applicable to any other negotiable instrument.

SECURITY PAPER CDs are transferable by endorsement and delivery, and shall therefore be issued on a good quality security paper.

OTHER REQUIREMENTS 1. No loans can be granted by banks against CDs. 2. Banks cannot have any buyback arrangement of their own CDs before maturity. 3. Banks are to submit fortnightly report on their CDs to the RBI under section 42 of the RBI Act, 1935. 4. Banks are to show CDs under the head ‗liabilities‘ in the balance sheet.

YIELD CDs are offered at interest rates higher than the time deposits of banks. However, the rate of interest is dependent upon many factors such as urgency of requirement for funds, alterative opportunities for investment of funds mobilized, etc. The rate of discount being deregulated is now determined by the demand and supply of CDs. CDs are issued at a discount to their face value and redeemed at par. CDs are issued at a front-end discount and in such a case; the effective rate of interest is higher than the quoted discount rate. Effective rate of interest may be calculated as follows. ERRR= [(1+QDR/100*N/M) N/M-1]*100 Where, ERR = Effective rate of interest QDR = Quoted discount rate N

= Total period in a year. Say 12 months or 365 days etc


= Maturity period in months or days as the case may be

ROLE OF DFHI The Discount and Finance House of India Ltd. Functions as a market maker in CDs market. It offers bid rate, the rate of discount at which it is prepared to buy CDs, and offer rate at which it would be willing to sell the CDs. The DFHI acts as an ideal conduit for disinvestments of CD holdings, which is done through their banker in Mumbai. DFHI also engages in buying CDs from the bank at its bid discount rate. Settlements are effected through RBI cheque.

ROLE OF BANKS Scheduled commercial banks are the active players in the realm of CDs market segment. CDs are used as an important money market instrument. CDs provide an ideal avenue of investment money market instrument. CDs provide ideal avenue of investment for bankers. CDs are considered safe, liquid, and

attractive in returns for both scheduled commercial bank and investors. It is not necessary for banks to encash CDs before maturity under the RBI Act. Banks are under obligation to maintain usual reserve requirements (SLR and CRR) on issue price of CDs. CDs offer the opportunity for banks for the bulk mobilization of resources as part of effective fund management. Besides, offering an attractive yield help bankers utilize them eligible assets for determination of Net Demand and Time Liabilities (NDTL). According to the RBI guidelines, it will not be possible for banks to enter into buyback arrangement with the subscriber of CDs. Similarly, they cannot grant loans against CDs issued by them. It is possible for investors to sell CDs in secondary market before their maturity. This offers investors the advantage of liquidity through ready marketability. However, the tendency on the part of holders of CDs to hold the instruments till maturity date has not made possible for the creation of an effective secondary market for them, although the primary market for CDs has shown a considerable improvement.


Debt instrument that are issued by corporate houses for raising short-term financial resources from the money market are called Commercial Papers (CPs).

FEATURES Following are the features of commercial papers:

NATURE These are unsecured debts of corporate. They are issued in the form of promissory notes. These are redeemable at par to the holder at maturity. The issuing company should have a minimum tangible net worth to the extent of Rs.4 crores. Moreover, the working capital (fund-based) limit of the company should not be less than Rs. 4 crores and this allows corporate to issue CPs up to 100 per cent of their fund based working capital limits. CPs are issued at a discount to face value in multiples of Rs.5 Lakhs. CPs attracts stamp duty. No prior approval of RBI is needed to issue CPs and no underwriting is mandatory. The issuing company has to bear all expense (Such as dealers‘ fees, rating agency fee and charges for provision of standby facilities) relating to the issue of CP. The issue of CPs serves the purpose of releasing the pressure on bank funds for small and medium sized borrowers, besides allowing highly rated companies to borrow directly from the market.-

MARKET The market for the Cps comprises of issues made by public sector and private sector enterprises CPs issued by top rated corporate are considered as sound investments. Conditions attached to the issue are less stringent than those applicable for raising CPs. Beginning from September 1996, Primary Dealers(PDs) were also permitted by RBI to issue CPs for augmenting their resources. This is one of the steps initiated by the RBI to make the CPs market popular.

RATING As per the guidelines of the RBI, CPs are required to be graded by the organization issuing them. Accordingly, a rated CP is considered to be a quality and sound instrument. With the liberalization of interest rate structure, the rate of interest is market-determined. This causes wide variation in the prevailing rates of interest.

INTEREST RATES The rate of interest applicable to CPs varies greatly. This variation is influenced by a large number of factors such as credit rating of the instrument, economic phase, the prevailing rate of interest in CPs market, call rates, the position in foreign exchange market, etc. It is however to be noted that there is no benchmark for the interest rate.

MARKETABILITY The marketability of the CPs is influenced by the rates prevailing in the call money market and the foreign exchange market. Accordingly where attractive interest rates prevail in these markets, the demand for Cps will be affected. This is because; investors will divert their investment into these markets.

CPS IN LIEU OF WC The nature of credit policy announced by the RBI to allows highly rated corporate to have the advantage of banks offering an automatic restoration of working capital limits on the repayment of CP. Accordingly, short-term working capital loans were substituted with cheaper CPs. This was done by the RBI to hasten the growth of the CP market.

SATELLITE DEALERS (SDs) Dealers who are enlisted with the RBI to deal in the Government securities market, are called ‗Satellite Dealers‘. With effect from June 17, 1998, they are allowed to issue CPs, with prior approval from RBI. The purpose was to enable them to have access to short-term borrowings through CP route. Following are the conditions to be satisfied in this regard:

RATING In order that the satellite dealers are permitted to trade in CPs, it is essential that the issuing corporate obtain the minimum specified credit rating from a credit rating agency. Such a rating must have been approved by the months.

MATURITY The CPs shall be issued for a maturity period ranging from 15 days to one year from the dated is issue.

TARGET MARKET The issue of CPs may be targeted to such persons as individuals, banks, companies, other corporate bodies registered or incorporated in India and unincorporated bodies and non-resident Indian (NRI) on non-repatriation basis subject to the condition that it shall be transferable.

LIMITS OF ISSUE Each issue of CPs (including renewal) shall be treated as a fresh issue. The CPs issue may take place in multiples of Rs. 5 Lakhs. The investment by any single investor shall be for a minimum amount of Rs. 25 Lakhs (face Value) and the secondary market transactions may be dealt in for amounts of Rs. 5Lakhs or multiples thereof. The RBI shall fix the total amount of issue. The issue amount shall be raised within a period of 2 week from weeks from the date of approval by the Reserve Bank or ma be issued on a single day or in parts on different days as the case may be.

NATURE The CPs shall be in the form of usance promissory note. It shall be negotiable by endorsement and delivery. It is issued at discount to face value, discount being determined by the SD issuing the CPs. The SDs shall bear the expenses of the issue, including dealer‘s fee, rating agency fee, etc.


TREASURY BILLS (TBs) A kind of finance bills, which are in the nature of promissory notes, issued by the government under discount for a fixed period, not exceeding one year, containing a promise to pay the amount stated therein to the bearer of the instrument, are know as ‗treasury bills‘.

GENERAL FEATURES Treasury bills incorporate the following general features:

Issuer TBs are issued by the government for raising short-term funds from institutions or the public for bridging temporary gaps between receipts (both revenue and capital) and expenditure.

Finance bills TBs are in the nature of finance bills because they do not arise due any genuine commercial transaction in goods.

Liquidity TBs are not self-liquidating like genuine trade bills, although they enjoy higher degree of liquidity.

Vital source Treasury bills are an important source of raising short- term funds by the government.

Monetary management

TBs serve as an important tool of monetary used by the central bank of the county to infuse liquidity in to the economy.

FEATURES OF INDIAN TBs HISTORY It was in the year 1877 that Treasury Bills (TBs) came to be issued for the first time in the world. Later, it acquired wide popularity around the world both in developing and developed countries. TBs were first issued in India in October1971. The issue aimed at raising resources for financing the First World War efforts of the government and for mopping liquidity in the economy due to heavy war expenditure.TBs that were initially sold by the government had a maturity period of 3 months, 6 months, 9 months and 12 months. Later on, with the setting up of the RBI in 1935, the issue profile of TBs underwent a lot of changes. Accordingly, RBI came to issue two type of TBs such as Tap Bills that were issued at all times and Intermediate Bill that were sold between auctions, to nongoverment investors. However, in the year 1965, a sale of TBs to public through auction was suspended and issue took place on top basis at a discount. Thus commercial banks began to invest in them.

ISSUE TBs, which were first up to 1935 by the Government of India directly, came to be issued by the RBI since its inception in 1935. Thereafter, TBs are issued at a discount by the RBI on behalf of the Government of India.

TYPES There are two types of treasury bills. They are ordinary treasury bills and ad hoc treasury bills. The freely marketable treasury bills that are issued by the Government of India to the public, banks and other institution for raising resources to meet the short-term finance needs takes the form of ordinary TBs.


A lot of changes taken place in the realm of the periodicity of treasury bills, changes having being brought about by the policy announcements made by RBI from time to time. A brief account of the changes in the period of maturity of TBs is outlined below: 1. Maturity period of TBs at the close of the First World War was of 3, 6, 9, and 12 month‘s duration. 2. Maturity periods of tap bills and Intermediate Bills introduces by RBI immediately after its inception was 91 days which was continued up to November 1986. 3. Maturity period of 182 days recommended by Chakraborty Committee was issued up to April 1992. 4. Maturity period of 365 days beginning from April 1992. 5. Maturity period of 14 days introduced in May 1997 and of 28 days introduced on October21, 1997. 6. Maturity period of 182 days reintroduced with effect from May26, 1999.

PARTICIPANTS The participants in the TBs market include the Reserve Bank of India, the State Bank Of India, Commercial Banks, State Governments and othe approved bodies, Discounts and Finance House of India as a market maker in TBs, the Securities Trading Corporation of India (STCI), other financial institutions such as, LIC, UTI, GIC, NABRAD, IDBI, IFCI, ICICI, etc corporate entities and general public and Foreign Institutional Investors. Of the above-mentioned participants, RBI and commercial banks are the most popular players. This essentially arises from the nature of relationship between them. TBs are least popular among the corporate entities and the general public.

THE ISSUE PROCEDURE The procedure followed by the RBI for successful issue of treasury bills is briefly outlined below.

NOTIFICATION The RBI issues notifications for the sale of 91day TBs on tap basis throughout the week and the 14-days, 28- days, 91-days, and 364-days, TBs through fortnightly auction. The notification mentions the date of auction and the last date for submission of tenders.

TENDERING Immediately after the issue of notification by theRBI, investors are permitted to submit bids through separate tenders. The result of the auction mentioning the price up to which the bids have been accepted is displayed. The successful bidders are expected to collect letter of acceptance from the RBI and deposit the same together with a cheque on RBI.

SGL SGL is maintained by the RBI for facilitating the purchases and sales of TBs by the investors like Commercial Banks, DFHI, STCI and other financial institutions.

DFHI Where the SGL facility is not available to certain investors, purchase and sale takes DFHI. TBs sold to such investors are held by DFHI on their behalf, which pays the proceeds of the TBs held, to the investor on the date of maturity. DFHI takes an active part in the primary auctions of TBs, besides operating in the secondary market by quoting tow-way rates. In addition, the DFHI also gives buyback and sell-back commitments for periods up to 14 days at negotiated interest rates, to commercial banks, financial institutions and public sector undertakings.

AUCTIONING METHOD’s. UNIFORM PRICE AUCTION The system of uniform price auction system in respect of 97-days, TBs was introduced as to broaden market participation. (‗Winners‘ curse is a phenomenon whereby those bidding at lower than the cut-off, end up paying a premium.) The introduction of uniform price auction is expected to reduce uncertainty associated with the bidding process. This is peculiar to the underdeveloped nature of Indian money market, which is afflicted by the lack of reliable information, causing wide differences in the yiel expectations before the auctions. The amounts of issue are notified in respect of 97-days TBs auctions and the dated securities auctions.

TREASURY BILLS AUCTION Auction in TBs takes place both on ‗Competitive‘ as well as on ‗noncompetitive‘ basis. The State Governments, Provident Funds and the Nepal Rastra Bank are the ‗noncompetitive‘ bidders. Commercial banks and other financial institutions comprise ‗competitive bidders‘. It is to be noted that the merits of enhanced market efficiency and price discovery take place through the competitive bids.

POLICY MEASURES With a view to improving the depth and liquidity in the government securities market, RBI announced the following policy measures relating to Treasury Bills with effect from October1999: 1. Price based auction of government – dated securities. 2. Auction of 182-day Treasury Bills. 3. A calendar of Treasury Bills Issuance

TB RATE The discount rate at which the RBI sells TBs known as Treasury Bills rate. The effective yield on TBs depends on such factors as the rate of discount,

difference between the issue price and the redemption value, and time period of their maturity. The treasury bills rate is computed as follows: Y= {[(FV-IP)/IP]*[364/MP]}*100. Where, FV = Face Value TBs IP = Issue Price of TBs MP = Maturity Period of TBs in days D = Discount.

BENEFITS TBs being an important money market instruments provide the following benefits:

LIQUIDITY Treasury bills command high liquidity. A number of institutions such as RBI, the DFHI, STCI, commercial banks, etc take part in the TB market. In addition, the Central bank is always prepared to purchased or discount TBs.

NO DEFAULT RISK Since there is a guarantee by the central government, TBs are absolutely free from the risk of default of payment by the issuer. Moreover, the government itself issues the TBs.

AVAILABILITY RBI has the policy of making available on a steady basis, the TBs especially through the ‗Tap‘ route since July 12, 1965. This greatly helps banks and other institutions to park their funds temporarily in TBs.

LOW COST Trading in TBs involves less transaction costs. This is because two-way quotes with a fine margin are offered by the DFHI on a daily basis.

SAFE RETURN The biggest advantage of TBs is that they offer a steady and sage return to investors. There are not many fluctuations in the discount rate. It is also possible for the investors to earn attractive return by keeping investment in

nonearning cash to the minimum and supplementing it with TBs.

NO CAPITAL DEPRECIATION Since TBs command high order of liquidity, safely and yield, there is very little scope for capital depreciation in them.

SLR ELIGBILITY TBs are of great attraction to commercial banks as it helps them park their funds (Net Demand and Time Liabilities) as per the norms or SLR announced b the RBI from time to time. This reason makes commercial banks dominate dealers in TBs.

FUNDS MOBILIZATION TBs are used as an ideal tool by the government for raising short-term funds required for meeting temporary budget deficit.

MONETARY MANAGEMENT It is also possible for the government to mop up excess liquidity in the economy through the issue of TBs. Since TBs are subscribed by the investors other than the RBI, the issue would neither lead to inflationary pressure nor result in monetization.

BETTER SPREAD TBs facilitate proper spread of asset mix different maturity as they are available on tap basis as well as in fortnightly auctions.

PERFECT HEDGE TBs can be used as a hedge against volatility of call loan market and interest rate fluctuations.

FUND MANAGEMENT TBs serve as effective tools of fund management because of the following reasons: 1. Ready market availability, both for sale and purchase at market driven prices, thus imparting flexibility. 2. Facility of rediscounting TBs on ‗tap basis‘. 3. Facility of refinancing from the RBI. 4. Plethora of options available to fund managers to invest in TBs and for raising funds against

TBs especially through and with the help of DFHI

5. Ideally suited for investment of temporary surplus 6. Possibility of building up portfolio of TBs with dates of maturities matching the dates of payment of liabilities, such as certificates of deposits and deposits of short-term maturities. 7. Possibility of meeting the temporary difficulties of funds by entering into buyback transactions for surplus TBs and reversing the transactions when the financial need is over 8. Possibility of making enhanced profit by indulging in quick raising of money against TBs for investing in call money market when call rates are high and doing the reverse when call rates dip.


The term Repo is used as an abbreviation for Repurchase Agreement or Ready Forward. A Repo involves a simultaneous ―sales and repurchase‖agreements. A Repo works as follow as follows. Party A needs short-term funds and PartyB wants to make a short-term investment. Party A sells securities to Party B at a certain price and simultaneously agrees to repurchase the same after a specified time at a slightly higher price. The difference between the sale price and repurchase price represent the interest cost to Party A (the party doing the repo) and conversely the interest income for Party B (the party doing the Reverse Repo). Reverse Repos are a safe and convenient form of short-term investment.

BENEFITS & FEATURES Interest Rate Being collateralized loans, repos help reduce counter party risk & therefore, fetch a low interest rate.

Contract The Repo contract provides the seller – bank to get money by partying with its security and the buyer – bank in turn to get the security by parting with its money. It becomes a Reserve Repo deal for the purchaser of the security. Securities are sold first to a buyer bank and simultaneously another contract is entered in to with buyer to repurchase them at a predetermine date and price in future. The price of the sale and repurchase of securities is determined before entering into deal.

Safety Repo is an almost risk free instrument used to even out liquidity changes in the system. Repos offer short-term outlet for temporary excess cash at close to the market interest rate.

Hedge tool As purchaser of the repo requires title to the securities for the term of agreement and as the repurchase price is locked in at a time of sale itself. It is possible to use repos as an effective hedge-tool to arrange the others repos or to sell them outright or to deliver them to another party to fulfill the delivery commitment in respect of a forward or future contract or a short sale or a maturing reveres repo.

Period The minimum period for Ready Forward Transaction Bill willbe 3 day. However, RBI withdraws this restriction for the minimum period with the effect from October 30, 1998.

Liquidity Control The RBI uses Repo as a tool of liquidity control for absorbing surplus liquidity from the banking system in a flexible way and thereby preventing interest rate arbitraging. All Repo transaction are to be effected at Mumbai only and the deals are to be necessary put through the subsidiary General Ledger (SGL) account with the Reserve Bank of India.

Cash Management Tool The Repo arrangement essential serves as a short – term cash management tool as the bank receive cash from the buyer of the securities in return for the securities. This helps the bankermeet temporary cash requirement. This also makes the repo a pure money lending operation. On the maturity of the ‗repos‘ the security is purchased back by the seller bank from the buyer-bank by returningthe money to the buyer.


The Reserve Bank of India introduced the Money Market Mutual Funds (MMMFs) scheme in April 1972. The schemes aim at providing additional short-term avenues to individual investor in order to bring Money Market Instrument within their reach. MMMFs are expected to be more attractive to banks and financial institutions, ho would find them providing greater liquidity and depth to the money market.

FEATURES The Silent features of the MMMFs are as follows.

Eligibility The MMMFs can be set up by schedule commercial banks and publicfinancial institution as define under section 4A of the companies Act, 1956, either directly or through their existing Mutual Funds / Subsidiaries who are engaged in fund management. In addition, private sector Mutual Funds may also set up MMMFs with the prior approval of RBI, subject to fulfillment of certain terms and conditions. SEBI‘s clearance is required in the event of MMMFs being set up in the private sector.

Structure MMMFs can be set up either as Money Market Deposit Accounts (MMDAs) or Money Market Mutual Funds (MMMFs)

Size There is no ceiling prescribed for the MMMFs for raising resources.

Investors The MMMFs are primary indented to serve as a vehicle for individual investor to participate in the Money Market, the units / shares of MMMFs can

be issued only to individuals. In addition, individual Non Resident Indian (NRIs) may also subscribe to the share / units of MMMFs. The dividend / income on such subscription will be allowed to be repatriated, through the principle amount of subscription will be allowed to be repatriated, though the principal amount of subscription will not.

Minimum Size of Investment MMMFs would be free to determine the minimum size of the investment by single investor. The investor cannot be guaranteed of a minimum rate of return, the minimum lock-in period for the investment would be 46 days.

Investment by MMMFs The resources mobilized by MMMFs should be invested exclusively in the various money market instruments as listed below. 1. Treasury Bills and dated Government Securities having an unexpired maturity up to 1 year with no minimum limit 2. call / notice money with no maximum limit 3. Commercial Paper with no maximum limit, the exposure to the commercial paper issue by the individual company being limited to 3% of the resources of the MMMFs as the prudential requirement 4. Commercial bills arising out of genuine trade / commercial transactions and accepted / co-accepted by banks with no – maximum limits.

Reserve Requirements In the MMMFs set up by banks, the resources mobilized by them would not to be consider part of their net demand, and time liabilities, and as such would be free of any reserve requirement.

Stamp duty The share / units issued by MMMFs would be subject to Stamp duty.

Regulatory Authority RBI is the regulatory that gives the approval for the setting of MMMFs. Beside

this, banks their subsidiaries and public financial institution would also be required to comply with the guidelines and directives that may be issued by RBI from time to time for the setting and operation of MMMFs. Similarly, the Private Sector MMMFs would need to clearance of SEBI, as also approval of RBI.

Call Money Market Call and notice money market refers to the market for short -term funds ranging from overnight funds to funds for a maximum tenor of 14 days. Under Call money market, funds are transacted on overnight basis and under notice money market, funds are transacted for the period of 2 days to 14 days. The call/notice money market is an important segment of the Indian Money Market. This is because, any change in demand and supply of short-term funds in the financial system is quickly reflected in call money rates. The RBI makes use of this market for conducting the open market operations effectively. Participants in call/notice money market currently include banks (excluding RRBs) and Primary dealers both as borrowers and lenders. Non Bank institutions are not permitted in the call/notice money market with effect from August 6, 2005. The regulator has prescribed limits on the banks and primary dealers operation in the call/notice money market. Call money market is for very short term funds, known as money on call. The rate at which funds are borrowed in this market is called `Call Money rate'. The size of the market for these funds in India is between Rs 60,000 million to Rs 70,000 million, of which public sector banks account for 80% of borrowings and foreign banks/private sector banks account for the balance 20%. Non-bank financial institutions like IDBI, LIC, and GIC etc participate only as lenders in this market. 80% of the requirement of call money funds is met by the nonbank participants and 20% from the banking system. In pursuance of the announcement made in the Annual Policy Statement of April 2006, an electronic screen-based negotiated quote-driven system for all dealings in call/notice and term money market was operationalised with effect from September 18, 2006. This system has been developed by Clearing Corporation of India Ltd. on behalf of the Reserve Bank of India. The NDS CALL system provides an electronic dealing platform with features like Direct

one to one negotiation, real time quote and trade information, preferred counterparty setup, online exposure limit monitoring, online regulatory limit monitoring, dealing in call, notice and term money, dealing facilitated for T+0 settlement type for Call Money and dealing facilitated for T+0 and T+1 settlement type for Notice and Term Money. Information on previous dealt rates, ongoing bids/offers on re al time basis imparts greater transparency and facilitates better rate discovery in the call money market. The system has also helped to improve the ease of transactions, increased operational efficiency and resolve problems associated with asymmetry of information. However, participation on this platform is optional and currently both the electronic platform and the telephonic market are co-existing. After the introduction of NDS-CALL, market participants have increasingly started using this new system more so during times of high volatility in call rates.

Volumes in the Call Money Market Call markets represent the most active segment of the money markets. Though the demand for funds in the call market is mainly governed by the banks' need for resources to meet their statutory reserve requirements, it also offers to some participants a regular funding source for building up short -term assets. However, the demand for funds for reserve requirements dominates any other demand in the market.. Figure 4.1 displays the average daily volumes in the call markets.

Figure 4.2: Average Daily Volumes in the Call Market (Rs. cr.) Committee Recommendation on Call Money Market: There are various committee suggested recommendation on Call Money Market are as follow:

The Sukhumoy Chakravarty Committee The call money market for India was first recommended by the Sukhumoy Chakravarty Committee, which was set up in 1982 to review the working of the monetary system. They felt that allowing additional non-bank participants into the call market would not dilute the strength of monetary regulation by the RBI, as resources from non-bank participants do not represent any additional resource for the system as a whole, and their participation in call money market would only imply a redistribution of existing resources from one participant to another. In view of this, the Chakravarty Committee recommended that additional non-bank participants may be allowed to participate in call money market.

The Vaghul Committee Report The Vaghul Committee (1990), while recommending the introduction of a number of money market instruments to broaden and deepen the money market, recommended that the call markets should be restricted to banks. The other participants could choose from the new money market instruments, for their short -term requirements. One of the reasons the committee ascribed to keeping the call markets as pure inter-bank markets was the distortions that would arise in an environment where deposit rates were regulated, while call rates were market determined.

The Narasimham Committee II Report The Narasimham Committee II (1998) also recommended that call money market in India, like in most other developed markets, should be strictly restricted to banks and primary dealers. Since non- bank participants are not subject to reserve requirements, the Committee felt that such participants should use the other money market instruments, and move out of the call markets. Following the recommendations of the Reserve Banks Internal Working Group (1997) and the Narasimhan Committee (1998), steps were taken to reform the call money market by transforming it into a pure inter bank market in a phased manner. The non-banks exit was implemented in four stages beginning May 2001 whereby limits on lending by non-banks were progressively reduced along with the operationalisation of negotiated dealing system (NDS) and CCIL until their complete withdrawal in August 2005. In order to create avenues for deployment of funds by non-banks following their phased exit from the call money market, several new instruments were created such as market repos and CBLO. Various reform measures have imparted stability to the call money market. With the transformation of the call money market into a pure inter-bank

market, the turnover in the call/notice money market has declined significantly. The activity has migrated to other overnight collateralized market segments such as market repo and CBLO

Participants in the Call Money Market Participants in call money market include the following:  As lenders and borrowers: Banks and institutions such as commercial banks, both Indian and foreign, State Bank of India, Cooperative Banks, Discount and Finance House of India ltd. (DFHL) and Securities Trading Corporation of India (STCI).  As lenders: Life Insurance Corporation of India (LIC), Unit Trust of India (UTI), General Insurance Corporation (GIC), Industrial Development Bank of India (IDBI), National Bank for Agriculture and Rural Development (NABARD), specified institutions already operating in bills rediscounting market, and entities/corporates/mutual funds. The participants in the call markets increased in the 1990s, with a gradual opening up of the call markets to non-bank entities. Initially DFHI was the only PD eligible to participate in the call market, with other PDs having to route their transactions through DFHI, and subsequently STCI. In 1996, PDs apart from DFHI and STCI were allowed to lend and borrow directly in the call markets.

Presently there are 18 primary dealers

participating in the call markets. Then from 1991 onwards, corporates were allowed to lend in the call markets, initially through the DFHI, and later through any of the PDs. In order to be able to lend, corporates had to provide proof of bulk lendable resources to the RBI and were not suppose to have any outstanding borrowings with the banking system. The minimum amount corporates had to lend was reduced from Rs. 20 crore, in a phased manner to Rs. 3 crore in 1998. There were 50 corporates eligible to lend in the call markets, through the primary dealers. The corporates which were allowed to route their transactions through PDs, were phased out by end June 2001.

Table 4.2: Number of Participants in Call/Notice Money Market

Category I. Borrower II. Lender







F I 2 0










Source: Report of the Technical Group on Phasing Out of Non-banks from Call/Notice Money Market, March 2001.

Banks and PDs technically can operate on both sides of the call market, though in reality, only the P Ds borrow and lend in the call markets. The bank participants are divided into two categories: banks which are predominantly lenders (mostly the public sector banks) and banks which are predominantly borrowers (foreign and private sector banks). Currently, the participants in the call/notice money market currently include banks (excluding RRBs) and Primary Dealers (PDs) both as borrowers and lenders.

Call Money Rates: The rate of interest on call funds is called money rate. Call money rates are characteristics in that they are found to be having seasonal and daily variations requiring intervention by RBI and other institutions. The concentration in the borrowing and lending side of the call markets impacts liquidity in the call markets.

The presence or absence of

important players is a significant influence on quantity as well as price. This leads to a lack of depth and high levels of volatility in call rates, when the participant structure on the lending or borrowing side alters.

Short-term liquidity conditions impact the call rates the most. On the supply side the call rates are influenced by factors such as: deposit mobilization of banks, capital flows, and banks reserve requirements; and on the demand side, call rates are influenced by tax outflows, government borrowing programme, seasonal fluctuations in credit off take. The external situation and the behaviour of exchange rates also have an influence on call rates, as most players in this market run integrated treasuries that hold short term positions in both rupee and forex markets, deploying and borrowing funds through call markets. Table 4.3: Call Money Rates Year


Minimum Year Average


(% p.a.)

(% p.a.)

(End March)

(% p.a.)


(% p.a.)

1996 - 97





1997 - 98





1998 - 99





1999 - 00





2000 - 01





2001 - 02





2002 - 03





2003 -04





2004 - 05





Source: Handbook of Statistics on Indian Economy, 2006-07, RBI During normal times, call rates hover in a range between the repo rate and the reverse repo rate. The repo rate represents an avenue for parking short -term funds, and during periods of easy liquidity, call rates are only slightly

above the repo rates.

During periods of tight liquidity, call rates move

towards the reverse repo rate. Table 4.3 provides data on the behaviour of call rates. Figure 4.3displays the trend of average monthly call rates. The behaviour of call rates has historically been influenced by liquidity conditions in the market. Call rates touched a peak of about 35% in May 1992, reflecting tight liquidity on account of high levels of statutory pre-emptions and withdrawal of all refinance facilities, barring export credit refinance. Call rates again came under pressure in November 1995 when the rates were 35% par.


The Reserve Bank of India introduced the Money Market Mutual Funds (MMMFs) scheme in April 1972. The schemes aim at providing additional short-term avenues to individual investor in order to bring Money Market Instrument within their reach. MMMFs are expected to be more attractive to banks and financial institutions, ho would find them providing greater liquidity and depth to the money market.

FEATURES The Silent features of the MMMFs are as follows.

Eligibility The MMMFs can be set up by schedule commercial banks and publicfinancial institution as define under section 4A of the companies Act, 1956, either directly or through their existing Mutual Funds / Subsidiaries who are engaged in fund management. In addition, private sector Mutual Funds may also set up MMMFs with the prior approval of RBI, subject to fulfillment of certain terms and conditions. SEBI‘s clearance is required in the event of MMMFs being set up in the private sector.

Structure MMMFs can be set up either as Money Market Deposit Accounts (MMDAs) or Money Market Mutual Funds (MMMFs)

Size There is no ceiling prescribed for the MMMFs for raising resources.

Investors The MMMFs are primary indented to serve as a vehicle for individual investor to participate in the Money Market, the units / shares of MMMFs can be issued only to individuals. In addition, individual Non Resident Indian (NRIs) may also subscribe to the share / units of MMMFs. The dividend / income on such subscription will be allowed to be repatriated, through the principle amount of subscription will be allowed to be repatriated, though the principal amount of subscription will not.

Minimum Size of Investment MMMFs would be free to determine the minimum size of the investment by single investor. The investor cannot be guaranteed of a minimum rate of return, the minimum lock-in period for the investment would be 46 days.

Investment by MMMFsThe resources mobilized by MMMFs should be invested exclusively in the various money market instruments as listed below. 1. Treasury Bills and dated Government Securities having an unexpired maturity up to 1 year with no minimum limit 2. call / notice money with no maximum limit 3. Commercial Paper with no maximum limit, the exposure to the commercial paper issue by the individual company being limited to 3% of the resources of the MMMFs as the prudential requirement 4. Commercial bills arising out of genuine trade / commercial transactions and accepted / co-accepted by banks with no – maximum limits.

Reserve Requirements In the MMMFs set up by banks, the resources mobilized by them would not to be consider part of their net demand, and time liabilities, and as such would be free of any reserve requirement.

Stamp duty The share / units issued by MMMFs would be subject to Stamp duty.

Regulatory Authority RBI is the regulatory that gives the approval for the setting of MMMFs. Beside this, banks their subsidiaries and public financial institution would also be required to comply with the guidelines and directives that may be issued by RBI from time to time for the setting and operation of MMMFs. Similarly, the Private Sector MMMFs would need to clearance of SEBI, as also approval of RBI.

The Role of the Reserve Bank of India in the Money Market

The Reserve Bank of India is the most important constituent of the money market. The market comes within the direct preview of the Reserve Bank of India regulations. The aims of the Reserve Bank‘s operations in the money market are:  To ensure that liquidity and short term interest rates are maintained at levels consistent with the monetary policy objectives of maintaining price stability.  To ensure an adequate flow of credit to the productive sector of the economy and  To bring about order in the foreign exchange market. The Reserve Bank of India influence liquidity and interest rates through a number of operating instruments - cash reserve requirement (CRR) of banks, conduct of open market operations (OMOs), repos, change in bank rates and at times, foreign exchange swap operations.

Defects of Money Market

A well-developed money market is a necessary pre-condition for the effective implementation of monetary policy. The central bank controls and regulates the money supply in the country through the money market. However, unfortunately, the Indian money market is inadequately developed, loosely organised and suffers from many weaknesses. Major defects are discussed below: D E F E C T S

Dichotomy between organized and unorganized sector Predominance of unorganized sector Wasteful Competition Absence of All-India Market Inadequate banking facilities


Seasonal shortage of funds


Diversity of Interest rates Absence of Bill market


o Dichotomy between Organised and Unorganised Sectors The most important defect of the Indian money market is its division into two sectors: (a) the organised sector and (b) the unorganised sector. There is little contact, coordination and cooperation between the two sectors. In such conditions it is difficult for the Reserve Bank to ensure uniform and effective implementations of monetary policy in both the sectors.

o Predominance of Unorganised Sector Another important defect of the Indian money market is its predominance of unorganised sector. The indigenous bankers occupy a significant position in the money-lending business in the rural areas. In this unorganised sector, no clearcut distinction is made between short-term and long-term and between the purposes of loans. These indigenous bankers, which constitute a large portion of the money market, remain outside the organised sector. Therefore, they seriously restrict the Reserve Bank's control over the money market,

o Wasteful Competition Wasteful competition exists not only between the organised and unorganised sectors, but also among the members of the two sectors. The relation between various segments of the money market are not cordial; they are loosely connected with each other and generally follow separatist tendencies. For example, even today, the State Bank of Indian and other commercial banks look down upon each other as rivals. Similarly, competition exists between the Indian commercial banks and foreign banks.

o Absence of All-India Money Market Indian money market has not been organised into a single integrated allIndian market. It is divided into small segments mostly catering to the local financial needs. For example, there is little contact between the money markets

in the bigger cities, like, Bombay, Madras, and Calcutta and those in smaller towns.

o Inadequate Banking Facilities Indian money market is inadequate to meet the financial need of the economy. Although there has been rapid expansion of bank branches in recent years particularly after the nationalisation of banks, yet vast rural areas still exist without banking facilities. As compared to the size and population of the country, the banking institutions are not enough. Shortage of Capital: Indian money market generally suffers from the shortage of capital funds. The availability of capital in the money market is insufficient to meet the needs of industry and trade in the country. The main reasons for the shortage of capital are: (a) low saving capacity of the people; (b)inadequate banking facilities, particularly in the rural areas; and (c) undeveloped banking habits among the people.

o Seasonal Shortage of Funds A Major drawback of the Indian money market is the seasonal stringency of credit and higher interest rates during a part of the year. Such a shortage invariably appears during the busy months from November to June when there is excess demand for credit for carrying on the harvesting and marketing operations in agriculture. As a result, the interest rates rise in this period. On the contrary, during the slack season, from July to October, the demand for credit and the rate of interest decline sharply.

o Diversity of Interest Rates Another defect of Indian money market is the multiplicity and disparity of interest rates. In 1931, the Central Banking Enquiry Committee wrote: "The fact that a call rate of 3/4 per cent, a hundi rate of 3 per cent, a bank rate of 4 per cent, a bazar rate of small traders of 6.25 per cent and a Calcutta bazar rate

for bills of small trader of 10 per cent can exist simultaneously indicates an extraordinary sluggishness of the movement of credit between various markets." The interest rates also differ in various centres like Bombay, Calcutta, etc. Variations in the interest rate structure is largely due to the credit immobility because of inadequate, costly and time-consuming means of transferring money. Disparities in the interest rates adversely affect the smooth and effective functioning of the money market.

o Absence of Bill Market The existence of a well-organised bill market is essential for the proper and efficient working of money market. Unfortunately, in spite of the serious efforts made by the Reserve Bank of India, the bill market in India has not yet been fully developed. The short-term bills form a much smaller proportion of the bank finance in India as compared to that in the advanced countries.

Many factors are responsible for the underdeveloped bill market in India (i) Most of the commercial transactions are made in terms of cash. (ii) Cash credit is the main form of borrowing from the banks. Cash credit is given by the banks against the security of commodities. No bills are involved in this type of credit. (iii)The practice of advancing loans by the sellers also limits the use of bills. (iv) There is lack of uniformity in drawing bills (bundles) in different parts of the country. (v) Heavy stamp duty discourages the use of exchange bills. (vi) Absence of acceptance houses is another factor responsible for the underdevelopment of bill market in India.

(vii) In their desire to ensure greater liquidity and public confidence, the Indian banks prefer to invest their funds in first class government securities than in exchange bills. (viii) The Reserve Bank of India also prefers to extend rediscounting facility to the commercial banks against approved securities


Questionnaire For Indian Money Market Name: Age:


Contact No.


1) What is your annual income? □ below 1 lakhs □ between 1 lakhs- 3 lakhs □ between 3 lakhs- 5 lakhs □ above 5 lakhs

2) How do you invest your savings? □ Deposits in Banks □ Invest in Real Estate □ Invest in Capital Market □ Invest in Money Market Mutual Funds

3) Do you have any knowledge about Money Market Instruments? □ Yes □ No □ Heard but not know

4) How long would you like to hold your Money Market Instruments? □ Long term period □ Short term period 5) How much risk would you be willing to take? □ Low □ Average □ Medium □ High

6) In your opinion, what is expected rate of return in a year? □ below 10 % □ between 10 % - 20% □ between 20% - 30% □ above 30%.

7) How would rate your experience with Indian Money Market? □ Poor □ Average □ Good □ Excellent

8) Is recession had affected your investment decision? □ Yes □ No Sampling objective: to find out individual investors for the age group of 18 -55 years. Sampling area: Mumbai




investors Deposits in


Banks Investment in


Real Estate Investment in


Capital Market Investment in Money Market


Investment of Savings Investment in Money Market 23%

Investment in Capital Market 27%

Deposits in Banks 32%

Investment in Real Estate 18%

Deposits in Banks

Investment in Real Estate

Investment in Capital Market

Investment in Money Market

The above pie diagram show how the pattern of investment of saving by individual investors in various field of investment














Risk Involvement

Low 8%

Average 13%

High 42%

Medium 37%






In a view of the various defects in the Indian money market, the following suggestions have been made for its proper development:

 The activities of the indigenous banks should be brought under the effective control of the Reserve Bank of India.  Hundies used in the money market should be standardised and written in the uniform manner in order to develop an all-India money market.  Banking facilities should be expanded especially in the unbanked and neglected areas.  Discounting and rediscounting facilities should be expanded in a big way to develop the bill market in the country.  For raising the efficiency of the money market, the number of the clearing houses in the country should be increased and their working improved.  Adequate and less costly remittance facilities should be provided to the businessmen to increase the mobility of capital.  Variations in the interest rates should be reduced.


money market specializes in debt securities that mature in less than one year.

liquid, and are considered very safe. As a result, they offer a lower return than other securities.

through a money market mutual fund.

T-bills are short-term government securities that mature in one year or less from their issue date. T-bills are considered to be one of the safest investments - they don't provide a great return.

certificate of deposit (CD) is a time deposit with a bank.

Annual percentage yield (APY) takes into account compound interest, annual percentage rate (APR) does not.

length of the CD.

Commercial paper is an unsecured, short-term loan issued by a corporation. Returns are higher than T-bills because of the higher default risk.

Banker's acceptances (BA)are negotiable time draft for financing transactions in goods.

available to individuals through money market funds.

Eurodollars are U.S. dollar-denominated deposit at banks outside of the United States.

to invest in this market is indirectly through a money market fund.

Repurchase agreements (repos) are a form of overnight borrowing backed by government securities

Articles on Money market 1. SEC Can't Agree on a Fix For Money-Market Funds Updated August 23, 2012, 10:51 a.m. ET

Nothing the government can do will prevent every future financial crisis; they have been with us since the advent of money and financial markets. But the government is even having trouble fixing things that made the last crisis so devastating.

Financial crises can't be prevented, but can the government make changes to make their impact less devastating? David Wessel reports on The News Hub. Photo: Bloomberg. Outnumbered 3-2, Securities and Exchange Commission Chairman Mary Schapiro on Wednesday abandoned her effort to propose rule changes for money-market mutual funds, the $1-a-share funds that currently hold $2.6 trillion from individuals and institutions.Backed by the Treasury secretary and Federal Reserve chairman, Ms. Schapiro had argued changes were needed to prevent a repeat of the destabilizing September 2008 run on the funds. The industry is resisting strenuously, arguing the changes would render the funds less desirable, if not unusable.

But Ms. Schapiro had only one other vote. The swing voter was Luis Aguilar, a former general counsel of Invesco, which has a money-market fund. He said Wednesday he would oppose the Schapiro proposal; she called off a vote that had been tentatively set for next week. Money-market funds pool investors' money and put it in short-term government and corporate debt. They generally offer investors (here's the rub) $1 back for every $1 they invest, a feature unique among mutual funds. Customers often view them like banks and can write checks on their accounts—but, unlike banks, the funds aren't backed by government deposit insurance and don't have cushions to cover any losses on their holdings. In September 2008, the original money fund, Reserve Primary Fund, had so much of its money—1.2% of its $63 billion—in Lehman Brothers that when Lehman went down it "broke the buck." Reserve ended up with 97 cents for every $1 its remaining customers had invested. That contributed to a run on prime money-market funds, the ones that invest in securities other than U.S. Treasurys. In one week, $310 billion, or 15%, fled. That endangered the big companies hooked on borrowing from the funds, and led the Treasury to extend an extraordinary taxpayer guarantee to those with money in the funds.

No one wants to go through that again. So in 2010, the SEC, with industry backing, required funds to have more ready cash (essentially, securities that are about to mature or are issued by the government) in case a lot of investors suddenly want to pull money out. The industry says that solved the problem, a view that Mr. Aguilar says the SEC hasn't thoroughly studied. Ms. Schapiro says it solved only one— liquidity—but didn't solve another: the risk the funds take that some company to which they have lent money defaults (excluding, of course, funds that limit holdings to U.S. Treasurys). As Eric Rosengren, president of the Federal Reserve Bank of Boston, puts it: Prime money-market funds are trying to do three things—to promise to return $1 for every $1 invested, to invest in securities with some credit risk and to hold no capital cushion to absorb losses. The three are incompatible. The industry notes that only two funds have ever broken the buck—and argues this is much ado about nothing.Yet that doesn't mean other funds didn't come close. A Boston Fed study—unchallenged by the industry—found "frequent and significant" cases in which companies that sponsor money funds had to bail them out. At least $4.4 billion was provided between 2007 and 2011 to at least 78 funds.That's good for shareholders, but will sponsors always be there? "If sponsor support were explicitly required and planned for, and all sponsors had the consistent ability to provide support, such a business model might not be viewed as problematic," the Fed economists said. "But the current model…reinforces investor confidence in the stability of the product without the ability of all sponsors to consistently deliver." The industry also argues the 2010 rule changes were sufficient.

Agence France-Presse/Getty Images SEC Chairman Mary Schapiro during testimony before a House committee hearing in June. Yet the Treasury's Office of Financial Research found that in April 2012—after those SEC changes had been implemented—there were 105 money-market funds with combined assets of more than $1 trillion that were at risk of breaking the buck if any of the top 20 outfits in which they invested defaulted. Of those, 14 were at risk of breaking the buck if any of the top 30 outfits in which they invested did so. In ordinary times, that may be OK. In a crisis, it spells trouble, particularly since the funds tend to invest in the same securities. Ms. Schapiro offered two options. One, forbid money-market funds from fixing share prices at $1 and, instead, let them fluctuate with the market value of their holdings. The industry hates this, and so do many of those who put money in the funds. Or, two, require the funds to set aside some capital to absorb losses. The industry doesn't much like this either because it's expensive. Mr. Aguilar said either would have sent big bucks into unregulated money funds, and that would have made the system riskier.The next move is up to the Financial Stability Oversight Council, created after the crisis to look over the shoulders of the SEC and other regulators. Ms. Schapiro late Wednesday called for FSOC's help. "The issue is too important to investors, to our economy and to taxpayers to put our head in the sand and wish it away," she said.

2. Scrutiny of money market funds continues The failure of SEC chair's plan to tighten rules underscores an ongoing investor risk. By Andrew Tangel, Los Angeles Times August 24, 2012

An unsuccessful effort to tighten rules for money-market mutual funds raises an unpleasant issue for the millions of investors who rely on the funds. Should investors keep billions of dollars in a low-yielding investment that could be far riskier than it seems? The head of the Securities and Exchange Commission was forced to scrap a plan to revamp the structure and inner workings of money-market mutual funds after failing to garner enough support for the plan. SEC Chairwoman Mary L. Schapiro had argued that money-market funds are vulnerable to losses during financial panics, which could cause investors to lose money. The risk is that funds could "break the buck," or push their value below a dollar a share, as happened with one high-profile fund during the financial crisis in late 2008. Unexpected losses in money-market funds would be a blow to the millions of Americans who have long relied on the funds as the virtual equivalent of bank savings accounts. Investors may not be worried about the funds' safety, but they have noticed their extremely low yields. Investors have shifted $1.3 trillion into bank savings accounts since the crisis, leaving $2.6 trillion in money-market funds, according to Peter Crane, president of Crane Data, a research firm in Westboro, Mass. "They're much more concerned about the low yields than they are the remote risk of at some point losing a penny on the dollar," Crane said.

Money-market funds historically have paid investors 1% to 2% more than bank savings rates. But since the financial crisis, interest rates have been at historic lows, bringing the fund yields closer in line with — if not slightly below — savings accounts rates, which are insured by the Federal Deposit Insurance Corp. The average money-market fund yields 0.06%, whereas the average bank savings rate is about 0.1%, analysts said. Schapiro on Wednesday canceled a vote on her proposed money-market fund rules after being unable to get three needed votes from the commission. Schapiro and other federal regulators say the funds remain a weak link in the financial system four years after the collapse of Lehman Bros. sent financial markets — and the economy — into a free fall. Prior to the trouble of the Primary Reserve Fund in 2008, only one other money-market fund had broken the buck from 1983 to 2008, according to the SEC. It was a small fund and had no widespread impact. The Primary Reserve Fund and other funds faced widespread investor panic, forcing the U.S. Treasury to guarantee accounts. As with other types of mutual funds, Schapiro wanted money-market funds to have floating values. Instead of $1 a share, a fund could drop to, say, 98 cents if its underlying investments had lost money. Schapiro also wanted the companies managing money funds to post more capital to cover investor losses. The proposal also would have prevented investors from withdrawing their entire accounts at once to prevent runs. "The issue is too important to investors, to our economy and to taxpayers to put our head in the sand and wish it away," Schapiro said in a statement. "Money market funds' susceptibility to runs needs to be addressed."

The U.S. Treasury said Thursday that it would press further to revamp regulations. "Treasury is in the process of consulting with the Federal Reserve Board, the Securities and Exchange Commission and other regulatory agencies to consider the appropriate next steps to reduce risks to financial stability from money market funds," spokeswoman Suzanne Elio said in a statement. Money-market funds play an important role in finance. They invest in shortterm assets, including U.S. government bonds and commercial paper that companies use to finance immediate cash needs. Some analysts said the SEC's regulations could have unintended consequences that could potentially harm investors and companies' sources of short-term capital. "It would diminish the appeal to individual investors greatly," said Greg McBride, senior financial analyst at "And it would also make it a lot more difficult for money market fund providers to make a profit."

3. Are Money Market Funds a Safe Investment ? Posted in Money Market by DailyDeals on Monday, December 20th, 2010 at 10:39 pm

Although historical stock market gains hover around 8 %, steep declining beark markets, such as the one we are experiencing in 2008, can result in extreme negative earnings for equities. Due to the recent credit crisis, stock market indices have experienced declines of up to 40 % year-over-year. Fortunately, during these tough economic times, there are financial instruments that actually yield a positive gain - the intruments that provide such gain are known as money market instruments. These instruments act as a capital preservation vehicle during bear markets, and also provide a great source of liquidity, since these instruments permit redemption in a couple of business days.

Money markets are debt securities of the shor-term variety (one year maturity or less), and are very liquid instruments, which can be cashed out of at any time. Their reputation is one of safety, and they typically issued by government, large corporations, or financial banking institutions. These funds are usually procured through bank accounts or through mutual funds. Over the years, the rates of money market funds have moved up and down consistent with the interest rates of the times. Of late, interest rates for these funds have been at historical lows, since interest rates have been quite low the last couple of years. The value of a money market fund is always maintained at $ 1/share by default, with appropriate interest earned on it, based on the prevailing rate. Although historically most government-based and corporate-based money market funds have not been guaranteed, bank-issued money market rates are almost always FDIC-insured. However, since the great credit crisis of 2008 has been bestowed up on us, the government has decided to pony up and insure all money market funds for at least a year, with a dedicated emergency pool of money that has been made available. Recently, a well-established multual fund, the Reserve Primary Fund, "broke-the-buck", when they couldn't meet the redemption requirements of the fund, after a mass exodus of investors took place. This breaking-of-the buck resulted from the fund holding debt that was exposed to Lehman Brothers, an institutional brokerage that went belly-up. Hence, the government decided to step in quell the storm, by insuring all money market funds, for a period of at least a year. Since all money market funds are effectively insured now, it is a prudent time to park excess cash (or cash that you wish to preserve during the market downturn) in these funds. Moreover, it is your best bet to invest in bank-issued money market funds, which are FDIC-insured up to $ 500,000 (for joint accounts). These are rock-solid investments that will cater to capital preservation, and provide a very liquid stream of assets.

4. Money Market Reforms Seen Harming an Alternative to Banks

Big businesses' miss givings about large banks show through when the conversation turns to regulation. Two trade groups for corporate treasurers have sounded the alarm about proposed reforms of money market funds, warning that proposed regulations could reduce large companies' financing options — and add to their dependence on megabanks. "We are mindful of the need for a healthy banking system, but we're also mindful of needs for healthy alternatives to the banking system," says Thomas C. Deas, Jr., the treasurer of chemical company FMC Corp. (FMC) and the chairman of the National Association of Corporate Treasurers. The Securities and Exchange Commission has proposed rules that would revamp the $2.6 trillion U.S. money market fund industry, arguing it remains a risk to the financial system. Last month, Deas testified before a House subcommittee that the reforms — such as floating the funds' net asset value or imposing new capital requirements — would "have a significant negative impact on the ongoing viability of these funds, and also adversely affect the corporate commercial paper market." "The cumulative effect of the proposed changes will drive money market fund investors to bank deposits, concentrating risk in a sector where over the past 40 years there have been 2,800 failures, costing taxpayers $188 billion," he said in testimony before the House Financial Services' subcommittee on capital markets. Jeff A. Glenzer, who oversees public policy for the Association for Financial Professionals, raised similar concerns. Though the AFP doesn't "have a position" on whether big banks should be broken up, "for people who are

worried about 'too big to fail,' that [money-market fund reform] would exacerbate it," he says. More than 50% of corporate cash is already held in bank deposits, according to the association. Deas also points out how little visibility corporate treasurers sometimes have into the health of their bank partners. "A money market fund's public financial statements, giving what their investments are and duration and credit quality, are very straightforward to read," Deas said in an interview. Banks' financials can be hard to read, he says, invoking the massive trading losses that dragged JPMorgan Chase into public scrutiny this spring and helped re-ignite public discussion about separating banks' commercial and investment functions. "Obviously even [JPMorgan Chief Executive] Jamie Dimon, with all of his access not only to public financial statements but to internal reports and daily value-at-risk analyses that he receives, was unable to perceive the trouble in their London trading operation," Deas says. "That's why it's important to us to have money market funds as an alternative, both for investments and for their ability in some respects to disintermediate the banks."

5. Money market fund reform stalls By Chris Isidore @CNNMoneyInvest August 23, 2012: 11:01 AM ET

The SEC has dropped plans for new regulations on money market accounts after a majority of commission members announced they would vote against the proposal. NEW YORK (CNNMoney) -- In a setback for advocates of Wall Street reform, a proposal to regulate money-market mutual funds has been tabled by the Securities and Exchange Commission because there weren't enough votes to approve it. SEC chairman Mary Schapiro expressed regret for the proposal's withdrawal. In a statement Wednesday night, she said the 2008 financial crisis highlighted the need for the reform proposal, which was two years in the making. "I consider the structural reform of money markets one of the pieces of unfinished business from the financial crisis," she said. She urged other policymakers to take up the effort. Money-market mutual funds, which invest in Treasuries and other debt securities, played a big role in the 2008 crisis. Shortly after Lehman Bros. filed for bankruptcy in September of that year, one key fund announced its clients could get back only 97 cents of every dollar they had put in the fund -- a move known as "breaking the buck." That triggered a $300 billion run on other money market funds that led to a virtual freeze in financial markets. The SEC staff had proposed alternatives to try to reduce the threat of runs on the funds and the need for more federal intervention in the future. One would have required money funds to disclose their share prices like other mutual funds, making it clearer that the funds were investment accounts, not banking accounts with an implied guarantee.

The other proposal would have required the firms to hold more capital to protect against losses. And customers who wanted to close out their accounts would have had to wait 30 days to get a portion of their cash back, which was seen as reducing the risk of a run on the accounts. Investment firms that offer money-market accounts fought the proposals. The Investment Company Institute, an industry trade group, said it was pleased the SEC would no longer try to implement the rules, saying they would have had "adverse consequences...for investors, [debt] issuers and the economy." Jaret Seiberg, a financial services analyst with Guggenheim Washington Research Group, said there is about $1.6 trillion in the money market accounts most directly affected by the proposed rules. He said while the accounts are popular with individual investors, they're not likely to respond one way or the other to rule changes. The debate is what would happen to hundreds of billions of corporate cash that is also in the funds. "The industry believes this would have been devastating, that money would have flowed out of money market funds and gone to unregulated investments overseas," Seiberg said. But he said such moves would pose their own risks for investors, so it's not clear the funds would have been hurt by the rules. Seiberg said the push to regulate the funds is not over. He said Schapiro could start the process again, or it could move to the Financial Stability Oversight Council, which was created by the Dodd-Frank financial reform act. "We're in round three. There's a lot more of this fight to go," Seiberg said. Schapiro's statement did not identify which three members of the five-member commission opposed the reforms. Besides the two Republican members long seen as opponents, Luis Aguilar, a Democratic member, was quoted by The Wall Street Journal and The New York Times as believing the SEC staff had not adequately studied the issue. Before being appointed by President George W. Bush in 2008 and reappointed by President Obama, Aguilar served as general counsel, executive vice president and corporate secretary of the investment firmInvesco (IVZ). Among

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