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.
 INDEX

Sr. No. Contents Page No

1. Introduction 2

2. History 4

3. Meaning of Money Market 5

4. Objectives of Money Market 7

5. Characteristic Of Money Market 8

6. Structure of Money Market 9

7. Component of Money Market 11

8. The Role of Reserve Bank of India in 51

Indian Money Market

9. Defects of Money Market 52

10. Questionnaire 57

11. Suggestion 62

12. Conclusion 63

13. Case Study

14. Articles

15. Bibliography
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 substantialchanges 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, individuals borrowings, and government short

term obligations, it differs from the long term or capital market which

devotes its attention to dealings in bonds, corporate stock and mortgage

credit.

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 institutions and individuals and also the

government itself.

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.

STRUCTURE OF MONEY MARKET

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.
 STRUCTURE OF
MONEY MARKET

ORGANIZED UNORGANIZED SUB-MARKET

SECTOR SECTOR (Instruments)
Commercial T-bills Repos
paper

Certificate of Call & short MMMF s

deposit notice Market

The Unorganized sector consists of indigenous bankers, money lenders,

non-banking 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

MONEY MARKET INSTRUMENTS

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 - both are obviously not traded. The main traded 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 Funds (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

M = 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.

COMMERCIAL PAPER

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 stand-

by 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 dealers fee, rating agency fee, etc.
TREASURY BILL

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.
MATURITY PERIOD

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 months 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 METHODs.

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.

REPOS

The term Repo is used as an abbreviation for Repurchase Agreement or

Ready Forward. A Repo involves a simultaneous sales and

repurchaseagreements. 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.

MONEY MARKET MUTUAL FUNDS (MMMFS)

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. SEBIs 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 non-bank 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

F
Category Bank PD MF Corporate Total
I
I.
154 19 - - - 173
Borrower
2
II. Lender 154 19 35 50 277
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 pre- dominantly lenders (mostly the public sector

banks) and banks which are pre- dominantly 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 Maximum Minimum Average Bank rate

Year (% p.a.) (% p.a.) (% p.a.) (End March)

(% p.a.)

1996 - 97 14.6 1.05 7.8 12.0

1997 - 98 52.2 0.2 8.7 10.5
1998 - 99 20.2 3.6 7.8 8.0
1999 - 00 35.0 0.1 8.9 8.0
2000 - 01 35.0 0.2 9.2 7.0
2001 - 02 22.0 3.6 7.2 6.5
2002 - 03 20.00 0.50 5.89 6.25
2003 -04 12.00 1.00 4.62 6.00
2004 - 05 10.95 0.6 4.65 6.00
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.

 MONEY MARKET MUTUAL FUNDS (MMMFS)

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. SEBIs 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 Banks 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

D
regulates the money supply in the country through the money market.
E
However, unfortunately, the Indian money market is inadequately
F
developed,
E Dichotomy
loosely organised between
and suffers fromorganized and
many weaknesses. Major
C are discussed below:unorganized sector
defects
T Predominance of unorganized sector
S Wasteful Competition
Absence of All-India Market
O
Inadequate banking facilities
F
Seasonal shortage of funds
Diversity of Interest rates
M
Absence of Bill market
M
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 clear-cut 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

all-Indian 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

Suggestion

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.

Conclusion

The money market specializes in debt securities that mature in less than

one year.
 Money market securities are very liquid, and are considered very safe.

As a result, they offer a lower return than other securities.

The easiest way for individuals to gain access to the money market is

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.

A 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.

CDs are safe, but the returns aren't great, and your money is tied up for

the 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.
 BAs are used frequently in international trade and are generally only

available to individuals through money market funds.

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

United States.

The average eurodollar deposit is very large. The only way for

individuals 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

BIBLIOGRAGHY

BOOKS REFERENCE:

o DYNAMICS OF INDIAN FINANCIAL SYSTEM BY - PREETY SINGH

o INDIAN FINANCIAL SYSTEM BY BHARATI V. PATHAK

o FINANCIAL SERVICE AND MARKET-BY DR.S.GURUSWAMY

o NSE DEBT MARKET (BASIC MODULE) WORK BOOK

WEBSITES:

o www.rbi.org.in/weekly statistical supplement/various issues.co.in

o www.investopedia.com.

o www.bseindia.com

o www.nseindia.com

o www.economics.indiatimes.com/