MONEY MARKET Project - Mcom

INDIAN MONEY MARKET 2019
Chp 1: INTRODUCTION OF INDIAN MONEY MARKET
The financial system of any country is the backbone of the economy of that country. The
financial systems of all economies are broadly subdivided into money market. The money
market, capital market and the gilt edged securities market and foreign exchange market. The
money market, capital market are the gilt securities market provides avenues to the surplus
sector such as household institutions in the economy to deploy their funds to the deficit sector
such as corporate and government sectors to mobilize funds for their requirements. The
operations in the money market are generally short term (up-to 1 year) in nature, in capital
market short term to long term and in gilt securities market generally long term. However, in
an integrated financial system, the occurrence of an event in one market of the financial
system will have an impact on the other market system.
The Indian money market is a market for short term money and financial asset that are close
substitute for money, with the short term in the Indian context being for 1 year. The important
feature of the money market instruments is that is liquid and can be turned quickly at low
cost. The money market is not well defined place where the business is transacted as in the
case of capital markets where all business is transacted at a formal place, i.e. stock exchange.
The money market is basically a telephone market and all the transactions are done through
oral communication and are subsequently confirmed by written communication and exchange
of relative instruments. The money market are consist of many sub market such as the inter-
bank call money, bill discounting, treasury bills, Certificate of deposits, Commercial paper,
Repurchase Options/Ready Forward(REPO or RF), Inter-bank participations certificates
(IBPC’s), Securitised debts, Forward Rate Agreement (FRA’s), etc. which collectively
constitute the money market.
Chp 2: HISTORY OF INDIAN MONEY MARKET
After the fall of Bretton woods system, the government of the Great Britain undertook
various types to prevent the downslide of the pound and instituted new internal controls. One
of the control measures was the creation of the Dollar premium market to discourage the
direct foreign investment. However, this created opportunities for financial ingenuity by the
merchant bankers.
To avoid Dollar premium, Parallel Loans were introduced. Here, the parties were required to
exchange the principal on the value date. During the life of the contract, each party was to
pay the interests on the currency it had received. The next crucial step was the introduction of
the back-to-back Loans, in which the loan was directly arranged between two parent
companies in different countries and structured under one agreement. Parallel Loans were
strictly deigned to satisfy the letter of the law. That is why four entities –the parent and
subsidiary in each of the two different countries had to be involved in structuring each loan.
In back-to back Loans, the intermediary level of the subsidiary was eliminated. Back-to-back
loans tested the legal waters and did not face any problems. In Back-to-back Loans, only one
documentation covered the transaction. These two instruments played an important role in
paving the way for the emergence of the Swaps i.e. Currency Swaps and Interest Rate Swaps.
i) Currency Swaps:
The breakdown of the Bretton Woods System had opened up a whole new area of
the foreign exchange trading. In a deregulated market, banks could offer products
to the clients, collect a fee, and improve their profit margins. Gaining entry into
the Parallel and the Back-to-back Loans was easy for the banks but two problems
began to emerge. One was the old issue of the paperwork, except that increased
volume of the loans gave a new urgency to its resolution. The other problem was
related to accounting. Both of the above mentioned loans were recorded as two
separate transactions. This ignored the contingent nature of the loan, inflated the
balance sheets and distorted the accounting ratios that were used in analysing the
financial health of the banks. The answer, drawing heavily on the experience of
the swap network, came in the form of the Currency Swaps.
In a Currency Swaps, the notional amount of the trade was designated as off-
balance-sheet, and payment of interest by each party was made contingent upon
the other party’s performance. With the principal amount of the currency swap no
longer subject to the counter party default risk, it was possible to classify swaps as
off-balance-sheet instruments. Incorporating the cash flow structure of the Back-
to-back loans into the legal notion of the contingency took the Currency Swap one
step further from being a concept and made it a financial instrument as well.
The early Currency Swap deals were not disclosed to the public because of the
proprietary nature. In 1981, the World Bank and IBM announced a Currency
Swap deal which was well publicised and gave an impetus to the market.
ii) Interest Rate Swaps:

Building on the two important features of the Currency Swaps – contingency of the
payment and the off-balance-sheet nature of the transaction international banks
created and then expanded the idea of the IRS market. Although IRS were created
based on the concept of the Currency Swaps, a different set of circumstances
brought about their explosion. The Euro market, where the Eurodollars are traded,
is the birthplace of the IRS.
iii) Euromarket:
Beginning in the ‘50s, the Socialist governments began to deposit their hard
currency holdings in European banks because they were concerned that, in the
Cold War environment of the ‘50s, the US would freeze their assets. However
these deposits were not enough to create and sustain a large market. It was the
Dollar holdings of the US corporations that created the Euromarket, as it was
against the outflow of the US funds that the Interest Equalisation Tax Act (IETA)
was passed (IETA created a strong incentive for the US investors to keep their
Dollars in Europe). The Euromarket was created because of the higher rates of
return Europe and it was sustained due to the tax differentials that could not be
arbitraged because of the sovereignty. Euromarket was the concept of the laissez-
faire.
Transactions in this market are mostly wholesale in the nature and the interest rates
are heavily influenced by the availability of, and demand for the funds. Loans in
this market are basically variable in nature and if necessary, on a roll over basis
with fixed maturities and non-prepayment clauses.
As the 80s began, interest rates in the US market reached unprecedented high
levels and this trend split into the rate-sensitive Euromarket. So the corporations
sought hedging vehicles against interest rate fluctuations. This was the starting
point of the IRS. Here, the parties agree to the exchange of the interest payments
calculated on the notional amount. However, interest payments in the IRS are
based on the different modes of the same currency.
Thus, we can see that IRS or more precisely the swap market was born as
insurance market directly related to the Euromarket loans. This insurance market
fuelled and sustained the swap market. Swaps became insurance vehicle of the
borrowers because their premiums were borrowed.
Chp 3: INTRODUCTION OF MONEY MARKET
Money market is a market for short term loans or financial assets. It is a market for the
lending and borrowing of short term funds. As the name implies, it does not actually deal in
cash or money. But it actually deals with near substitutes for money or near money like trades
bills, promissory notes and government paper drawn for a short period not exceeding on year.
These short term instruments can be converted into cash readily without any loss and at low
transaction cost. Money market is the centre for dealing mainly in short term money assets. It
meets the short term requirements of borrowers and provides liquidity or cash to lenders. It is
the place where short term surplus funds at the disposal of financial institutions and
individuals are borrowed by individuals, institution and also the government.
The money market does not refer to a particular place where short term funds are dealt with.
It includes all individuals, institutions and intermediaries dealing with short term funds. The
transactions between borrowers, lenders and middlemen take place through telephone,
telegraph, mail and agents. No personal contact or presence of the two parties is essential for
negotiations in a money market. However, a geographical name may be given to a money
market according to its location. For example, the London money market operates from
Lombard Street and the New York money market operates from Wall Street. But, they attract
funds from all over the world to be lent to borrowers from all over the globe. Similarly, the
Mumbai money market is the centre for short term loanable funds of not only Mumbai, but
also the whole of India.
3.1: 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.
3.2: DEFINITION OF MONEY MARKET
According to Crowther, “The money market is the collective name given to the various firms
and institutions that deal in the various grades of near money”
The RBI defines the money market as, ‘a market for short term financial assets that are close
substitutes for money, facilitates the exchange of money for new financial claims in the
primary market as also for financial claims, already issued, in the secondary market.’
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 borrower’s
agents comprising institutions and individuals and also the government itself.
3.3: CHARACTERISTICS/FEATURES OF MONEY MARKET
Prof.S.N.Sen has described certain essential features of a developed money market. They are
as follows:
i. Highly organised banking system:

The commercial banks are the nerve centre of the whole money market. They are
the principal suppliers of short term funds. Their policies regarding loans and
advances have greater impact on the entire money market. The commercial banks
serve as a vital link between the central bank and the various segments of the
money market.
ii. Presence of a Central bank:

The Central Bank Act as a banker’s bank. It keeps their cash reserves and provides
them financial accommodation in difficulties by discounting their eligible
securities. In other words, it enables the commercial banks and other institution to
convert their assets into cash in times of financial crisis. Through its open market
operations, the central bank absorbs surplus cash during off-seasons and provides
additional liquidity in to busy seasons.
iii. Availability of proper credit instruments:

It is necessary for the existence of a developed money market a continuous
availability of readily acceptable negotiable securities such as bills of exchange,
treasury bills, etc., in the market. There should be number of dealers in the money
market to transact in these securities. Availability of negotiable securities and the
presence dealers and brokers in large numbers to transact in these securities are
needed for the existence of developed countries.
iv. Existence of sub-markets:

The number of sub-markets determines the development of a money market. The
larger the number of sub-markets, the broader and more developed will be the
structure of money market. The several sub-markets together make a coherent
money market. In an underdeveloped money market, the various sub-markets,
particularly the bill market are absent.
v. Ample resources:
There must be availability of sufficient funds to finance transactions in the sub
markets. These funds may come from within the country and also from foreign
countries. The London, New York and Paris money attracts funds from all over the
world. The underdeveloped money markets are starved of funds.
vi. Demand and supply of funds:

There should be a large demands and supply of short term funds. It presupposes the
existence of a large domestic and foreign trade. Besides, it should have adequate
amount of liquidity in the form of large amounts maturing within a short period.
vii. Existence of secondary market:

There should be an active secondary market in these instruments.
3.4: FUNCTIONS OF MONEY MARKET
The money market performs a number of functions in the Indian economy.
a) It provides short term funds to public and private institutions needing such
financing for their working capital requirements. It is done by discounting trade
bills through commercial banks discount houses, brokers and acceptance houses.
Thus the money market helps the development of commerce, industry and trade
within and outside country.
b) It provides an opportunity to banks and other institutions to use their surplus funds
profitably for a short period. These institutions include not only commercial banks
and other financial institutions but also large non-financial business corporations,
states and local government.
c) The money market removes the government in borrowing short term funds at low
interest rates on the basis of treasury bills. On the other hand, if the government
were to issue paper money or borrow from the RBI, it would lead to inflationary
pressure in the economy.
d) The money market helps in the successful implementation of the monetary
policies of the central bank. It is through the money market that the RBI is in
position to control the banking system and thereby influence commerce and
industry.
e) By facilitating the transfer of funds from one sector to another, the money market
helps in financial mobility. Mobility in the flow of funds is essential for the
development of commerce and industry in an economy.
f) One of the important functions of money market is that it promotes liquidity and
safety of financial assets.it thus encourages savings and investment.
g) The money market brings equilibrium between the demand and supply of loanable
funds. This it does by allocating savings into investment channels. In this way, it
also helps in rational allocation of resources.
h) As the money market deals in near money assets and not money proper it helps in
economising the use of cash. It thus provides a convenient and safe way of
transferring funds, from one place to another, thereby immensely helping
commerce and industry.
Chp 4: STRUCTURE OF INDIAN MONEY MARKET
INDIAN MONEY MARKET
Unorganised sector Organised sector Cooperative sector
Indigenous bankers Moneylenders Nidhis Chitfunds
RBI Public sector banks Private sector banks Development banks DHFI banks
SBI group Other-Nationalised banks
Scheduled banks Non-Schedule banks
Indian banks Foreign banks
I) Unorganised sector of Indian money market:
Unorganised segment of the Indian money market is composed of unregulated

non-bank financial intermediaries, indigenous bankers and money lenders which
exist even in the small towns and big cities. Their lending activities are mostly
restricted to small towns and villages. The persons who normally borrow from this
unorganised sector include farmers, artisan’s small traders and small scale
producers who do not have any access to modern bank.
 The following are some of the constituents of unorganised money market in

India:
 Indigenous Bankers:
Indigenous bankers include those individuals and private firms which are
engaged in receiving deposits and giving loans and thereby acting like a mini
bank. Their activities are not at all regulated. During the ancient and medieval
periods, these indigenous bankers were very active. But with the growth of
modern banking/ particularly after the advent of British, the business of the
indigenous bankers received a setback. Moreover, with the growth of
commercial banks and co-operative banks the area of operations of indigenous
bankers has again contracted further. Even today, a few thousands of
indigenous bankers are still operating in the western and southern parts of the
country and engaging themselves in the traditional banking business.
 Unregulated Non-bank Financial Intermediaries:

There are different types of unregulated non-bank financial intermediaries in
India. They are mostly constituted by loan or finance companies, chit funds
and Nidhis. A good number of finance companies in India are engaged in
collecting substantial amount of funds in the form of deposits, borrowings and
other receipts. They normally give loans to wholesale traders, retailers, artisans
and different self-employed persons at a high rate of interest ranging between
36 to 48 per cent. There are various types of chit funds in India. They are
doing business in almost all the states but the major portion of their business is
concentrated in Tamil Nadu and Kerala.
 Moneylenders:
Moneylenders are advancing loans to small borrowers like marginal and small
farmers, agricultural labourers, artisans, factory and mine workers, low paid
staffs, small traders etc. at very high rates of interest and also adopt various
malpractices for manipulating loan records of these poor borrowers. The area
of operation of the moneylenders is very much localised and their methods of
operation is also not uniform. The money lending operation of the
moneylenders is totally unregulated and unsupervised which leads to worst
exploitation of the borrowers. Moneylenders have become a necessary evil in

the absence of sufficient institutional sources of credit to the poorer sections
of society. There are broadly three types of moneylenders:
 Professional moneylenders dealing solely with money lending
 Itinerant moneylenders such as Kabulis and Pathans
 Non-professional moneylenders.
 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.
II) Organised Sector of Indian Money Market:

The organised segments of the Indian money market is composed of the Reserve
Bank of India (RBI), the State Bank of India, Commercials banks, co-operative
banks, foreign banks, finance corporations and the Discount or Finance House of
India Limited. The segment of Indian money market is quite integrated and well
organised. Mumbai, Kolkata, Chennai, Delhi, Bangalore and Ahmedabad are the
leading centres of the organised sectors of the Indian money market. The Mumbai
money market is a well organised, having head offices of the RBI and different
commercial banks, two leading well developed stock exchanges, the bullion
exchange and fairly organised market for government securities.
 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.
 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 inter-
corporate deposits and investments.
 Mutual Funds:
Mutual funds also invest their surplus funds in various 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.
Chp 5: ROLE OF MONEY MARKET IN ECONOMY
Money markets play a key role in banks’ liquidity management and the transmission of
monetary policy. In normal times, money markets are among the most liquid in the financial
sector. By providing the appropriate instruments and partners for liquidity trading, the money
market allows the refinancing of short and medium-term positions and facilitates the
mitigation of your business’ liquidity risk. The banking system and the money market
represent the exclusive setting monetary policy operates in. A developed, active and efficient
interbank market enhances the efficiency of central bank’s monetary policy, transmitting its
impulses into the economy best. Thus, the development of the money market smoother the
progress of financial intermediation and boosts lending to economy, hence improving the
country’s economic and social welfare. Therefore, the development of the money market is in
all stakeholders’ interests: the banking system elf, the Central Bank and the economy on the
whole.
1. Producing information and allocating capital:

The information production role of financial systems is explored by Ramakrishna and
Thakur (1984), Bhattacharya and P fleiderer (1985), Boyd and Prescott (1986), and
Allen (1990). They develop models where financial intermediaries arise to produce
information and sell this information to savers. Financial intermediaries can improve
the ex-ante assessment of investment opportunities with positive ramifications on
resource allocation by economizing on information acquisition costs. As Schumpeter
(1912) argued, financial systems can enhance growth by spurring technological
innovation by identifying and funding entrepreneurs with the best chance of
successfully implementing innovative procedures. For sustained growth at the frontier
of technology, acquiring information and strengthening incentives for obtaining
information to improve resource allocation become key issues.
2. Risk sharing:
One of the most important functions of a financial system is to achieve an optimal
allocation of risk. There are many studies directly analysing the interaction of the risk
sharing role of financial systems and economic growth. These theoretical analyses
clarify the conditions under which financial development that facilitates risk sharing
promotes economic growth and welfare. Quite often in these studies, however,
authors focus on either markets or intermediaries, or a comparison of the two extreme
cases where every financing is conducted by either markets or intermediaries. The
intermediate case in which markets and institutions co-exist is rarely analysed in the
context of growth models because the addition of markets can destroy the risk-sharing
opportunities provided by intermediaries. In addition, studies focus on the role of
financial systems that face diversifiable risks. The implications for financial
development and financial structure on economic growth are potentially quite
different when markets cannot diversify away all of the risks inherent in the economic
environment. One importance of risk sharing on economic growth comes from the
fact that wile avers generally do not like risk, high-return projects tend to be riskier
than low return projects.
3. Liquidity:
Money market funds provide valuable liquidity by investing in commercial paper,
municipal securities and repurchase agreements: Money market funds are significant
participants in the commercial paper, municipal securities and repurchase agreement
(or repo) markets. Money market funds hold almost 40% of all outstanding
commercial paper, which is now the primary source for short-term funding for
corporations, who issue commercial paper as a lower-cost alternative to short-term
bank loans. The repo market is an important means by which the Federal Reserve
conducts monetary policy and provides daily liquidity to global financial institutions.
Quantum of liquidity in the banking system is of paramount importance, as it is an
important determinant of the inflation rate as well as the creation of credit by the
banks in the economy. Market forces generally indicate the need for borrowing or
liquidity and the money market adjusts itself to such calls. RBI facilitates such
adjustments with monetary policy tools available with it.
4. Diversification:
For both individual and institutional investors, money market mutual funds provide a
commercially attractive alternative to bank deposits. Money market funds offer
greater investment diversification, are less susceptible to collapse than banks and offer
investors greater disclosure on the nature of their investments and the underlying
assets than traditional bank deposits. For the financial system generally, money
market mutual funds reduce pressure on the FDIC, reduce systemic risk and provide
essential liquidity to capital markets because of the funds’ investments in commercial
paper, municipal securities and repurchase agreements.
5. Encouragements to saving and investment:

Money market has encouraged investors to save which results in encouragement to
investment in the economy. The savings and investment equilibrium of demand and
supply of loanable funds helps in the allocation of resources.
6. Controls the price line in economy:

Inflation is one of the severe economic problems that all the developing economies
have to face every now and then. Cyclical fluctuations do influence the price level
differently depending upon the demand and supply situation at the given point of
time. Money market rates play a main role in controlling the price line. Higher rates in
the money markets decrease the liquidity in the economy and have the effect of
reducing the economic activity in the system. Reduced rates on the other hand
increase the liquidity in the market and bring down the cost of capital considerably,
thereby raising the investment. This function also assists the RBI to control the
general money supply in the economy.
7. Helps in correcting the imbalances in economy:

Financial policy on the other hand, has longer term perspective and aims at correcting
the imbalances in the economy. Credit policy and the financial policy both balance
each other to achieve the long term goals strong-minded by the government. It not
only maintains total control over the credit creation by the banks, but also keeps a
close watch over it. The instruments of financial policy counting the repo rate cash
reserve ratio and bank rate are used by the Central Bank of the country to give the
necessary direction to the monetary policy.
8. Regulates the flow of credit and credit rates:

Money markets are one of the most significant mechanisms of any developing
financial system. In its place of just ensure that the money market in India regulate the
flow of credit and credit rates, this instrument has emerge as one of the significant
policy tools with the government and the RBI to control the financial policy, money
supply, credit creation and control, inflation rate and overall economic policy of the
State. Therefore the first and the leading function of the money market mechanism are
regulatory in nature. While determining the total volume of credit plan for the six
monthly periods, the credit policy also aims at directing the flow of credit as per the
priorities fixed by the government according to the requirements of the economy.
9. Transmission of monetary policy:

The money market forms the first and foremost link in the transmission of monetary
policy impulses to the real economy. Policy interventions by the central bank along
with its market operations influence the decisions of households and firms through the
monetary policy transmission mechanism. The key to this mechanism is the total
claim of the economy on the central bank, commonly known as the monetary base or
high-powered money in the economy. Among the constituents of the monetary base,
the most important constituent is bank reserves, i.e., the claims that banks hold in the
form of deposits with the central bank. The banks’ need for these reserves depends on
the overall level of economic activity. This is governed by several factors:
(i) Banks hold such reserves in proportion to the volume of deposits in many
countries, known as reserve requirements, which influence their ability to
extend credit and create deposits, thereby limiting the volume of transactions
to be handled by the bank.
(ii) Bank’s ability to make loans (asset of the bank) depends on its ability to
mobilize deposits (liability of the bank) as total assets and liabilities of the
bank need to match and expand/contract together; and
(iii) Banks’ need to hold balances at the central bank for settlement of claims
within the banking system as these transactions are settled through the
accounts of banks maintained with the central bank. Therefore, the daily
functioning of a modern economy and its financial system creates a demand
for central bank reserves which increases along with an expansion in overall
economic activity (Friedman, 2000b).
Chp 6: MONEY MARKET INSTRUMENTS
As the name suggests, Money market instruments are simply the instruments or tools which
can help one operate in the money market. These instruments serve a dual purpose of not
only allowing borrowers meet their short-term requirements but also provide easy liquidity to
lenders. Some of the common money market instruments include Banker’s Acceptance,
Treasury Bills, Repurchase Agreements, Certificate of Deposits and Commercial Papers.
Money market instruments allow governments, financial organizations and businesses to
finance their short-term cash requirements. There are various types of money market
instruments:
i) Treasury bills (T- Bills):

Issued by the Central Government, Treasury Bills are known to be one of the
safest money market instruments available. However, treasury bills carry zero risk
i.e. are zero risk instruments. Therefore, the returns one gets on them are not
attractive. Treasury bills come with different maturity periods like 3-month, 6-
month and 1 year and are circulated by primary and secondary markets. Treasury
bills are issued by the Central government at a lesser price than their face value.
The interest earned by the buyer will be the difference of the maturity value of the
instrument and the buying price of the bill, which is decided with the help of
bidding done via auctions. Currently, there are 3 types of treasury bills issued by
the Government of India via auctions, which are 91-day, 182-day and 364-day
treasury bills.
ii) Certificates of Deposits:

A Certificate of Deposit or CD, functions as a deposit receipt for money which is
deposited with a financial organization or bank. However, a Certificate of Deposit
is different from a Fixed Deposit Receipt in two aspects. The first aspect of
difference is that a CD is only issued for a larger sum of money. Secondly, a
Certificate of Deposit is freely negotiable. First announced in 1989 by RBI,
Certificate of Deposits have become a preferred investment choice for
organizations in terms of short-term surplus investment as they carry low risk
while providing interest rates which are higher than those provided by Treasury
bills and term deposits. Certificate of Deposits are also relatively liquid, which is
an added advantage, especially for issuing banks. Like treasury bills, CDs are also
issued at a discounted price and their tenor ranges between a span of 7 days up to
1 year. However, banks issue Certificates of Deposits for durations ranging from 3
months, 6 months and 12 months. They can be issued to individuals (except
minors), trusts, companies, corporations, associations, funds, non-resident Indians,
etc.
.
iii) Commercial Papers (CPs):
Commercial Papers are can be compared to an unsecured short-term promissory
note which is issued by highly rated companies with the purpose of raising capital
to meet requirements directly from the market. CPs usually feature a fixed
maturity period which can range anywhere from 1 day up to 270 days. Highly
popular in countries like Japan, UK, USA, Australia and many others,
Commercial Papers promise higher returns as compared to treasury bills and are
automatically not as secure in comparison. Commercial papers are actively traded
in secondary market.
iv) Repurchase agreement:

Repurchase Agreements, also known as Reverse Repo or simply as Repo, loans of
a short duration which are agreed upon by buyers and sellers for the purpose of
selling and repurchasing. These transactions can only be carried out between RBI
approved parties Repo / Reverse Repo transactions can be done only between the
parties approved by RBI. Transactions are only permitted between securities
approved by the RBI like treasury bills, central or state government securities,
corporate bonds and PSU bonds.
v) Banker's Acceptance (BA):

Banker's Acceptance or BA is basically a document promising future payment
which is guaranteed by a commercial bank. Similar to a treasury bill, Banker’s
Acceptance is often used in money market funds and specifies the details of the
repayment like the amount to be repaid, date of repayment and the details of the
individual to which the repayment is due. Bankers Acceptance features maturity
periods ranging between 30 days up to 180 days.
vi) Inter-bank Participation Certificates:

Inter-bank Participation Certificates or simply Participation certificates (PC) are
short-term papers are issued by scheduled commercial banks to raise funds from
other banks against big loan portfolios. When banks are short of liquidity to carry
on their immediate operations and need short-term funds, they may approach other
banks to share/participate in their lending portfolios. In other words, part of the
specified loans and advances of the borrowing bank will be passed on to the
lender-bank against cash.
vii) 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.
CHP 7: PARTICIPANTS IN THE MONEY MARKET
Theoretically, anyone can participate in the market. Yet market practices and regulatory
pronouncements have placed certain restrictions on participation for each of the sub-markets
in the money market. For example, call money market is open to only banks. Financial
Institutions, Insurance companies and Mutual funds can only lend in the market.
It would therefore be useful to know the participants in each of the sub-markets of money
market. Given below is the list and profile of the participants which participate both in the
Money Market as well as the debt portion of the Capital Market. While all resident entities
are participants in these markets, this section covers the larger and major participants.
1. Central Government:
The Central Government is an issuer of Government of India Securities (G-Sec) and
Treasury Bills (T-bills). These instruments are issued to finance the government as
well as for managing the Government’s cash flow. G-Sec are dated (dated securities
are those which have specific maturity and coupon payment dates embedded into the
terms of issue) debt obligations of the Central Government. These bonds are issued by
the RBI, on behalf of the Government; so as to finance the latter’s budget
requirements, deficits and public sector development programmes. These bonds are
issued throughout the financial year. The calendar of issuance of G-Sec is decided at
the beginning of every half of the financial year. T-bills are short-term debt
obligations of the Central Government. These are discounted instruments. These may
form part of the budgetary borrowing or be issued for managing the Government’s
cash flow. T-bills allow the government to manage its cash position since revenue
collections are bunched whereas revenue expenditures are dispersed.
2. State Government:
The State Governments issue securities termed as State Development Loans (SDLs),
which are medium to long term maturity bonds floated to enable State Governments
to fund their budget deficits.
3. Public Sector Undertakings:

Public Sector Undertakings (PSUs) issue bonds which are medium to long-term
coupon bearing debt securities. PSU Bonds can be of two types: taxable and tax-free
bonds. These bonds are issued to finance the working capital requirements and long-
term projects of public sector undertakings. PSUs can also issue Commercial Paper to
finance their working capital requirements.
Like any other business organization, PSUs generate large cash surpluses. Such PSUs
are active investors in instruments like Fixed Deposits, Certificates of Deposits and
Treasury Bills. Some of the PSUs with long-term cash surpluses are also active
investors in G-Sec and bonds.
4. Scheduled Commercial Banks (SCBs):

Banks issue Certificate of Deposit (CDs) which are unsecured, negotiable instru-
ments. These are usually issued at a discount to face value. They are issued in periods
when bank deposits volumes are low and banks perceive that they can get funds at
low interest rates. Their period of issue ranges from 7 days to 1 year. SCBs also
participate in the overnight (call) and term markets. They can participate both as
lenders and borrowers in the call and term markets. These banks use these funds in
their day-to-day and short-term liquidity management. Call money is an important
tool to manage CRR commitments. Banks invest in Government securities to maintain
their Statutory Liquidity Ratio (SLR), as well as to invest their surplus funds.
Therefore, banks have both mandated and surplus investments in G-Sec instruments.
Currently banks have been mandated to hold 25% of their Net Demand and Time
Liabilities (NDTL) as SLR. A bulk of the SLR is met by investments in Government
and other approved securities. Banks participate in PSU bond market as investors of
surplus funds. Banks also take a trading position in the G-Sec and PSU Bond market
to take advantage of rate volatility.
5. Private Sector Companies:

Private Sector Companies issue commercial papers (CPs) and corporate debentures.
CPs are short-term, negotiable, discounted debt instruments. They are issued in the
form of unsecured promissory notes. They are issued when corporations want to raise
their short-term capital directly from the market instead of borrowing from banks.
Corporate debentures are coupon bearing, medium to long term instruments which are
issued by corporations when they want to access loans to finance projects and
working capital requirements. Corporate debentures can be issued as fully or partly
convertible into shares of the issuing corporation. Bonds which do not have
convertibility clause are known as non-convertible bonds. These bonds can be issued
with fixed or floating interest rates. Depending on the stipulated availability of
security these bonds could be classified as secured or unsecured.
6. Provident Funds:
Provident funds have short term and long term surplus funds. They invest their funds
in debt instruments according to their internal guidelines as to how much they can
invest in each instrument category. The instruments that provident funds can invest in
are:
 G-Secs,
 State Developments Loans,
 Bonds guaranteed by the Central or State Governments,
 Bonds or obligations of PSUs, SCBs and Financial Institutions and
 Bonds issued by Private Sector Companies carrying an acceptable level of
rating by at least two rating agencies.
7. General Insurance Companies:

General insurance companies (GICs) have to maintain certain funds which have to be
invested in approved investments. They participate in the G-Sec, Bond and short term
money market as lenders. It is seen that generally they do not access funds from these
markets.
8. Life Insurance Companies:

Life Insurance Companies (LICs) invest their funds in G-Sec, Bond or short term
money markets. They have certain pre-determined thresholds as to how much they
can invest in each category of instruments.
9. Non-banking Finance Companies:

Non-banking Finance Companies (NBFCs) invest their funds in debt instruments to
fulfill certain regulatory mandates as well as to park their surplus funds. NBFCs are
required to invest 15% of their net worth in bonds which fulfill the SLR requirement.
10. Mutual Funds:

Mutual funds invest their funds in money market and debt instruments. The
proportion of the funds which they can invest in any one instrument varies according
to the approved investment pattern declared in each scheme.
11. Primary Dealers:

The organization of Primary Dealers was conceived and permitted by the Reserve
Bank of India (RBI) in 1995. These are institutional entities registered with the RBI.
The roles of a PD are:
 To commit participation as Principals in Government of India issues through
bidding in auctions.
 To provide underwriting services and ensure development of underwriting and
market- making capabilities for government securities outside the RBI.
 To offer firm buy – sell/bid ask quotes for T-Bills & dated securities and to
improve secondary market trading system, which would contribute to price
discovery, enhance liquidity and turnover and encourage voluntary holding of
government securities amongst a wider investor base.
 To strengthen the infrastructure in the government securities market in order
to make it vibrant, liquid and broad based.
 To make PDs an effective conduit for conducting open market operations.
CHP 8: DEFECTS AND MEASURES FOR DEVELOPMENT OF

INDIAN MONEY MARKET
8.1 DEFECTS OF MONEY MARKET

1. Unorganized Money Market:
The presence of indigenous bankers, village money lenders, etc. in villages and
semi-urban areas make the Indian money market highly unorganized. They follow
their own rules and practices of finance and banking and are not subject to the
regulation and control of the Reserve Bank of India. There are not in place
adequate and proper rules and regulations in order to allow for the orderly growth
of the money market in India.
2. Absence Of Integration:
This is the serious lacuna afflicting the Indian money market. Several sectors are
very loosely connected with each other. Often, there used to be hostility among
the different sections of the money market. There is hardly any cohesive working
relationship between the organized banking system and the unorganized
indigenous bankers.
3. Inadequate National Market:

There has been a late entry of national level players such as the DFHI, STCI, etc
in the Indian financial system. This to great extent retarded the early growth of the
money. The so-called advancements in computerization and telecommunications
are also very limited and confined mostly to urban and semi-urban areas.
Coordination between various money markets and their constituents is lacking. It
is imperative that a well-co-ordinated and operationally uniform money market
has to emerge in the country.
4. Interest Rate Disparity:

A major defect of the Indian money market has been that the interest rate varies
from place to place, from time to time and from segment to segment. Wide
disparity in money rates exists. This condition makes it difficult for any
worthwhile regulatory mechanisms to be put in place.
5. Deficient Bill Market:

Lack of popularity of bill culture among the traders both at national and
international arena, has given rise to a sick and a deficient bill market. This has
greatly affected the development of the money market. The transactions relating to
bill discounting and purchasing are limited. Besides, they also constitute only a
small part of total money market operations in the country. It is a sad commentary
that the different sub markets in the bill market have not shown much
development too. For instance, the market for government and semi-government
securities is narrow. This has greatly affected the efficient use of the monetary
control measures of the RBI so as to curb the inflationary pressure or to keep the
slump away from the economy.
6. Limited Funds:
There has been noticed a perceptible shortage in the supply of loan able funds.
The far exceeding demand has created a wide chasm in the Indian money market.
This situation can be attributed to such factors as lower savings rate on account of
poverty, inadequate banking facilities, poor banking habits among the people,
inadequate facilities for investment of small saving and the existence of a parallel
economy with vast amount of black money defying all regulations.
7. Seasonal Variations:
An essential characteristic of the Indian money market is the existence of
seasonality of the demand for money and short-term funds. This seasonal variation
follows the pattern of the seasonal variations in agricultural activities.
Accordingly during the busy season from October to April, the demand for money
is more, as more funds are needed for financing the post-harvest movement for the
marketing of agricultural products, for the financing of seasonal industries such as
sugar, etc. and also for financing the higher tempo economic activities in general,
after the dull rainy season. This is one of the problems faced by the Indian money
market. The frequent seasonal variations in demand and the supply of funds, rates
of interest, etc. could be attributed to the seasonal nature of the Indian agriculture.
Similarly, the cyclical fluctuations in the industrial sector also debilitate the
working of the Indian money market.
8. Unstable Conditions:
The variations in the rates of interest, demand and supply of funds, etc. create
unstable conditions in the money market. This affects the ability of the central
bank of the country to monitor the functioning of the various segments.
9. Lack Of Well-Organized Banking System:

Developed money market presupposes the existence of a well-organized
commercial banking system. But, unfortunately, the development in the realm of
commercial banking sector has been uneven, although it has been expanding
rapidly. Moreover, the banking facilities are inadequate, highly urban-centric and
organized inefficiently. Banks are still lacking computerization, technological up
gradation and well developed branch network.
10. Inadequate Foreign Funds:

An important perquisite for the successful conduct of operations in all the
segments of the money market is the movement of foreign funds on a higher scale.
Although there has been an enhanced inflow of funds from abroad with the
commencement of the process of liberalization under various routes such as the
FDI, it is not in keeping with the actual requirements of the market. This has also
affected the development of the Indian money Market.
11. Inadequate Instruments:

A significant deficiency of the Indian money market has been the non-availability
of adequate number of quality credit instruments especially for a short period.
Supply of short-term instruments such as commercials bills, treasury bills, etc is
highly inadequate. This to a very large extent retards the development in the
Indian money market.
12. Constricted Secondary Market:

The true development of a financial market depends on the extent of secondary
market facilities are available in the country. As far as the Indian money market
concern, the secondary market for the money market instrument is mainly
restricted to rediscounting of commercial bills and treasury bills. Absence of
sufficient number of credit instrument also adds to the woes. Further, there has
been reluctance on the part of the some of the big borrowers to avail finances
against discount of commercial bills.
13. Limited Participants:

The highly regulated kind of regimen prevailing in the Indian capital market
deters the free entry and exit of large numbers of players. For instance, institutions
such as DFHI, STCI, banks, specified all-India financial institutions and a few big
companies chiefly dominate the market. There is also a lopsided growth in the
number of participants spared across the different domains of money markets
causing considerable disharmony.
8.2 MEASURES FOR DEVELOPMENT OF MONEY MARKET

Keeping in mind the need for a developed money market for a fast growing economy like
India, and based on series of recommendations put forth by the committees such
Chakraborty Committee on Monetary System and The Vaghul Working Money Market.
The following measures were initiated by RBI towards developing the Indian money
market:
1. Infrastructure:
RBI undertook several measures for setting institutions, to help hasten the Growth
and development in the Indian money market. Accordingly, the discount and
Finance House of India Ltd. (DHFI) was established to broaden and deepen the
money market operations. It acts as a market maker. Similarly, the Securities and
Exchanges Board of India (SEBI) was set up to function as an apex regulatory
body relating to all aspects of security market activities. Credit Rating agencies
such as CRLSIL, ICRA, etc. were promoted for making possible easy raising of
funds from the money market.
2. Developing Bill Culture:

The RBI, to develop the bill culture by promoting and encouraging credit
transactions, made all-out efforts by introducing rediscounting of bills, besides
giving stamp duty exemptions for rediscounting of derivatives usance promissory
notes arising out of genuine trade bill transaction.
3. Innovative Submarkets:
Very recently, several innovative markets such as certificate of deposit, call
money market, collateral loan market, commercial paper market, MMMFs, etc.
came to be introduced to strength to the money market.
4. Credit Control Measures:

Credit control measures such as CRR and SLR are efficiently manipulated to tone
up and buoy the money market operations especially in the commercial banking
sector.
5. Repo Operations:
The reintroduction of repos (ready forward) in November 1996, was aim at
mopping up excess liquidity thus reducing volatility in call money market and the
foreign money markets. Beginning October 21, 1997, repo facility was further
extended to corporate debt and PSU Bonds. Under these arrangements, RBI made
reverse repo facility available to primary dealers in government security market, at
the bank rate, on a discretionary basis and subject to certain regulations from time
to time.
6. MMMFS:
The introduction of Money Market Mutual Funds (MMMFs) for investment in
money market instrument marked an important development in the realm of
Indian Money Market. MMMF are required to invest in call/notice money,
certificates of deposits (CDs), commercial papers (CPs), commercial bill arising
out of genuine trade/commercial transactions, treasury bills and dated government
securities having an unexpired maturity up to 1 year. Pioneer Money Market

Account was launched on February 24, 1997 as India’s first MMMF. The UTI –
Money Market Mutual Fund launched on April 23, 1997 followed this.
7. Derivative Products:
The latest and the most innovative of all the financial instruments came to be
introduced in the Indian Money Market. Instrument such as options, futures,
swaps, forwards; forward rate agreements, etc. are now available for trading by
investors. Derivatives have biggest advantage in them, in that they facilitate
hedging and thereby help minimize the credit risks.
8.3 SUGGESTIONS TO IMPROVE THE INDIAN MONEY MARKET
The following suggestions are made to further improve the Indian money markets:
1. Control over Indigenous Bankers:

Nationalisation of banks in 1969, banking facilities have considerably expanded in
rural India under the branch expansion scheme of commercial banks, lead bank
scheme, regional rural banks, cooperative banks, etc. But the hold of the indigenous
bankers still continues over the majority of villagers. As recommended by the
Banking Commission, 1972, the activities of the indigenous bankers should be
controlled through the commercial banks and they should encourage the former to
transform themselves into corporate bodies. The RBI should lay down guidelines for
commercial banks in dealing with indigenous bankers.
2. Control over Chit Funds:

To control the activities of chit funds which exploit and cheat their members of their
hard earned savings, the Banking Commission suggested that there should be a
uniform legislation for chit funds throughout the country and that only public limited
companies with a minimum paid-up capital should be allowed to run chit funds.
3. Standard Forms of Hundis:

In the unorganised sector of the money market, large transactions are performed by
discounting hundis by indigenous bankers. But these hundis are not accepted by
commercial banks. In order to bring these hundis within the purview of the organised
money market, the Banking Commission recommended that standard forms of
Darshni (sight) and Muddati (usance) hundis should be prescribed and the Negotiable
Instruments Act be made applicable to these hundis.
4. Development of Bill Market:
In the organised sector of the money market, a properly developed bill market is
essential for the growth of money market in India. For this purpose, the Government
should direct departmental undertakings and public sector organisations that payments
for all credit purchases should be in the form of bills which should be strictly
honoured on due dates. A similar procedure should be adopted in respect of CAS
parties. The procedure for rediscounting of bills should be simplified. Further,
rediscounting by the institutions should be freely permitted. The need is to develop
bill culture in the country.
5. Growth of Money Market in Other Centres:

The money market is restricted to four major cities in India. To expand the money
market in other cities, banking and clearing house facilities should be provided on a
larger scale. Discount houses and acceptance houses should be established. Cheap
remittance facilities should be extended throughout the country to increase the
mobility of funds. These measures will go a long way in the growth of the money
market in other cities.
6. Creation of Secondary Market:

For the smooth functioning and growth of the money market, an active secondary
market should be created by establishing new sets of institutions which should impart
sufficient liquidity in the Indian money market.
Chp 9: RECOMMENDATION OF VARIOUS COMMITTEES

The Indian money market has undergone metamorphosis during the last few years owing to a
series of measure which increased the number of participants, introduced newer instruments
and deregulated interest rate. The Reserve Bank of India set up a committee to review the
functioning of monetary system, viz., SUKHMOY CHAKRAVARTY COMMITTEE in
1982, a working group to review the functioning of money market, viz., VAGHUL
WORKING GROUP in 1986 and the NARASIHMHAM COMMITTEE to review the
functioning of financial system in India. While the Chakravarthy committee recommended
measures for improvement in the monetary system, the Vaghul Working Group
recommended measures to activate and vitalize the money market and the Narasihmham
Committee recommended measures to streamline the functioning of the financial system. RBI
appointed a working group on money market under the Chairmanship of N Vaghul, which
suggested a number measures to deepen the money market. As a follow up the RBI took the
following initiatives:
a. Formation of DFHI, an institution established in March 1988, to provide
liquidity to money market instruments.
b. Increasing the range of money market instruments; CP, CD and Inter-bank
participation Certificates are some of the instruments introduced in 1988-89.
c. Freeing of call money rates in stages from interest rate regulation to price
discovery based on market forces.
d. Today the bank rate has emerged as a reference rate and the call money rates
generally operate in a corridor with the Repo rate acting as a floor and the bank
rate as a ceiling.
e. At present the overnight money market is the only floating rate benchmark. The
methodology used for calculating the overnight index is transparent.
f. Reuters MIBOR is the weighted average of call money transactions of 22 banks
and other players.
g. NSE-MIBOR (Mumbai Inter-bank Offer Rate) is the rates polled from a
representative panel of 32 banks/institutions/P26-09-2019s.
h. The other benchmark instruments are 14, 91, 182 & 364 day treasury bills. Also
we have the SBI-PLR rate.
9.1 RECOMMENDATION OF NARASIMHAM COMMITTEE

(APRIL - 1998)
The various recommendations in respect of the money market in the subject report are as
under:
1. The banks should put in place proper Asset-Liability Management policies, which
should prescribe tolerance levels for mismatches in various time bands.
2. The inter-bank call and money market and inter-bank term money market should be
strictly restricted to banks.
3. The only exception should be primary dealer (PDs), who in a sense, perform a key
function of equilibrating the call money market and are formally treated as banks for
the purpose of their inter-bank transactions.
4. All the other present non-bank participants in the inter-bank call money market
should not be provided access to the inter-bank call money market.
5. These institution could be provide access to the money market through different
other segments of the money market.
6. Structural changes would result in the development of a strong and stable money
market with liquidity and depth.
7. The foreign institutional investor should be given access to the Treasury bill market.
Broadening the market by increasing the participant would provide depth to the
market.
8. With the progressive expansion of the forward exchange market there should be
endeavour to integrate the forward exchange market with the spot market by
allowing the participant in the spot forex market to participate in the forward market
by the exposure.
9. Furthermore, the forex market, the money market and the securities market should
be allowed to integrate and their forward premium should reflect the interest rate
differential.
10. As instruments move in tandem in these markets the derivatives of a seamless and a
vibrant financial market would hopefully emerge.
Chp 10: MAJOR REFORMS IN THE ORGANISED MONEY MARKET
A money market is a market for borrowings and lending of short term funds. It deals in funds
and financial instruments having a maturity period of one day to one year. It is a mechanism
through which short term funds are loaned or borrowed and through which a large part of
financial transactions of a particular country or of the world are cleared. It is different from
stock market. It is not a single market but a collection of markets for several instruments like
call money market, Commercial bill market etc. The Reserve Bank of India is the most
important constituent of Indian money market. Thus RBI describes money market as “the
centre for dealings, mainly of a short term character, in monetary assets, it meets the short
term requirements of borrowers and provides liquidity or cash to lenders”.
In money market, transactions of large amount and high volume take place. It is dominated
by small number of large players. In money market the players are: Government, RBI, DFHI
(Discount and Finance House of India) banks, Mutual Funds, Corporate Investors, Provident
Funds, PSUs (Public Sector Undertakings), NBFCs (Non-Banking Finance Companies) etc.
The role and level of participation by each type of player differs from that of others.
 Reforms in the organised Money Market: On the recommendations of S. Chakravarthy

Committee and Narasihmham Committee, the RBI has initiated a number of reforms:
1. Deregulations of interest rate:
RBI has deregulated interest rate. Banks have been advised to ensure that the
interest rates changed remained within reasonable limits. From May 1989, the
ceiling on interest rates on call money, inter-bank short term deposits, bills
rediscounting and inter-bank participation was removed and rates were permitted
to be determined by market forces.
2. Reforms in Call and Term Money Market:

To provide more liquidity RBI liberalized entry into call money market. At
present banks and primary dealers operate as both lenders and borrowers.
Lenders other than UTI and LIC are also allowed to participate in call money
market operations. RBI has taken several steps in recent years to remove
constraints in term money market. In October 1998, RBI announced that there
should be no participation of non-banking institutions in call/term money market
operations and it should be purely an interbank market.
3. Introducing New Money Market Instruments:

In order to widen and diversify the Indian Money Market, RBI has introduced
many new money market instruments like 182 days Treasury bills, 364 days
Treasury bills, CD3 and CPs. Through these instruments the government,
commercials banks, financial institutions and corporates can raise funds through
money market. They also provide investors additional instruments for
investments.
4. Repo:
Repos were introduced in 1992 to do away. With short term fluctuations in
liquidity of Money market. In 1996 reverse repos were introduced. RBI has been
using Repo and Reverse repo operations to influence the volume of liquidity and
to stabilise short term rate of interest or call rate. Repo rate was 6.75% in March
2011 and reverse repo rate was 5.75%.
5. Refinance by RBI:
The RBI uses refinance facilitates to various sectors to meet liquidity shortages
and control the credit conditions. At present two schemes of refinancing are in
operations: Export credit refinance and general refinance. RBI has kept the
refinance rate linked to bank rate.
6. MMMFs:
Money Market Mutual Funds were introduced in 1992. The objective of the
scheme was to provide an additional short term avenue to the individual
investors. In 1995, RBI modified the scheme to allow private sector
organisations to set up MMMFs. So far, three MMMFs have been set up one
each by IDBI, UTI and one in private sector.
7. DFHI:
The Discount and Finance House of India was set up on 25th April 1988. It buys
bills and other short term paper from banks and financial institutions. Banks can
sell their short term securities to DFHI and obtain funds in case they need them,
without disturbing their investments.
8. Clearing Corporations of India Limited (CCIL):

CCIL was registered in 2001 under the Companies Act, 1956 with the State
Bank of India as Chief Promoter. CCIL clears all transactions in government
securities and repos reported on NDS (Negotiated Dealing System) of RBI and
also Rupee/ US $ foreign exchange spot and forward deals.
9. Regulations of NBFCs:
In 1997, RBI Act was amended and it provided a comprehensive regulation for
non-bank financial companies (NBFCs) sector. According to amendment, no
NBFC can carry or any business of a financial institution including acceptance of
public deposit, without obtaining a Certificate of Registration from RBI. They
are required to submit periodic returns to RBI.
10. Recovery of Debts:

In 1993 for speedy recovery of debts, RBI has set up special Recovery Tribunals.
The Special Recovery Tribunals provides legal assistance to banks to recover
dues.
10.1 MONEY MARKET REFORMS INTRODUCED BY THE RBI

SINCE 1991
RBI and the Government have taken various steps to bring reforms in the Indian money
market, which may be enumerated as follows:
1. Over the past ten years new money market instruments have been introduced. These
include 182 days, 364 days Treasury Bills, Certificate of Deposits (CDs) and
Commercial Papers (CPs).
2. Deregulation of money market interest rates from May, 1989 by RBI to activate
money market.
3. In August 1959, the Government waived stamp duty on trade bills which was
considered a major administrative constraint in the use of bills.
4. Discount and Finance House of India (DFHI) was set up on April 25, 1998.
5. Introduction of Repo in government security market in December, 1992. It can now
also be affected between banks and financial institutions and banks inter se. in April
1999, the RBI introduced regulatory safeguards.
6. Money Market Mutual Funds were in 1992.
7. Re-finance facility by the RBI in the area of (a) Export credit refinance (b) General
refinance initiated.
8. Credit Rating agencies such as CRISIL, IICRA, and CARE provide rating facilities
for raising funds through Bonds, Fixed Deposits, CPs and other instruments. In
addition, these agencies provide financial analysis.
9. Successive reduction in Cash Reserve Ratio (CRR) has helped releasing more
resources for money market operations by commercials banks. Gradual and
successive reduction in CRR has resulted from 15% in November 1995 to 4.5%
w.e.f. 14-6-2003.
10. With introduction of Primary Dealers (PDs) who operate both as borrowers and
lenders, call money market provides more liquidity.
11. Minimum size of CDs to a single investor was reduced to Rs.5 lakh in October 1997.
12. All Foreign Institutional Investors (FIIs) registered with the SEBI and approved by
the RBI, have been allowed to invest in Government securities from October 1997.
13. A derivative is the latest addition to the list of money market instruments.
14. From October 1999, the RBI has decided to release on daily basis data on volume
and rates in call money market and other relevant data.
15. Inter-bank participation certificates on a risk sharing basis and without risk sharing
basis were introduced in 1989.
16. Corporates entities with bank lendable funds of at least Rs.20 crore have been
allowed to participate in Call Money and Bill Re-discounting Market.
17. Introduction of uniform price auction for all treasury bills from October 1997.
18. Setting up of a Clearing Corporations which will be counter party to transactions in
money and forex market.
19. In December 2002, the RBI proposed retail trading in Government securities through
the SEBI registered brokers.
20. Introduction of trading in ‘Options’ on specified individual scrips from July 2001.
21. Commencement of trading in Stock Index Futures at the BSE from June 2000 based
on Sensex and SP CNX Nifty at the NSE.
Chp 11: MONEY MARKET MUTUAL FUND
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, how would find them providing
greater liquidity and depth to the money market. A Money Market Mutual fund is a kind of
mutual fund that invests in safe and low risk securities. These are good short term investment
options available to retail investors in India. Money Market Mutual Funds are used to manage
the short term cash needs. It is an open-ended scheme in the debt fund category that deals
only with cash or cash equivalents. As these securities have an average maturity of one year,
they are termed as market instruments. Money Market Mutual Funds invest in Treasury Bills,
Certificate of Deposits, Commercial Papers and Repurchase Agreement.
11.1 PURPOSE OF MONEY MARKET MUTUAL FUNDS

 The money market mutual funds help in industrial financing by providing short
term funding.
 Short term funding from money markets can help industries finance day to day
operations and meet working capital requirements.
 The money market mutual funds are a profitable and safe investment option for
investors who want to invest in low risk mutual funds.
 These instruments help commercial banks and corporations borrow money from
the market and give investors options to invest and generate income.
11.2 ADVANTAGES OF MONEY MARKET MUTUAL FUND

When it comes to investments, mutual funds are the best investment options in Indian
market today. The investors are attracted towards mutual funds as these are good
investment options that provide the investor higher returns. With money market
mutual funds, the investor can invest in safe and stable instruments of investment that
have a sovereign guarantee. Listed below are the advantages of money market mutual
funds:
 Money market instruments are short term investment options, that have a
maturity of less than a year. These are safe and effective investment options for
investors.
 The best money market funds offer around 8% - 805% returns nearly double that
of a savings account.
 Money market funds are issued by the central and state governments, banks,
PSUs and other corporates.
 You can choose the desired fund as per its maturity period and associated risk
 Money market mutual funds are rated by independent agencies, making it easy
for you to pick the right fund.
 All the mutual funds are registered with SEBI. They function within the
provisions of strict regulations created to protect the interest of the investor.
11.3 SPECIAL FEATURES OF MONEY MARKET MUTUAL FUNDS

1. Eligibility:
The MMMFs can be set up by schedule commercial banks and public financial
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 fulfilment of certain terms and
conditions. SEBI‘s clearance is required in the event of MMMFs being set up in
the private sector.
2. Structure:
MMMFs can be set up either as Money Market Deposit Accounts (MMDAs) or
Money Market Mutual Funds (MMMFs).
3. Size:
There is no ceiling prescribed for the MMMFs for raising resources.
4. 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.
5. Investment by MMMFs:
The resources mobilized by MMMFs should be invested exclusively in the
various money market instruments as listed below. Treasury Bills and dated
Government Securities having an unexpired maturity up to 1 year with no
minimum limit. Call / notice money with no maximum limit. 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. Commercial bills arising out of genuine trade commercial
transactions and accepted / co-accepted by banks with no – maximum limits.
6. Reserve Requirements:
In the MMMFs set up by banks, the resources mobilized by them would not to be
considering part of their net demand, and time liabilities, and as such would be
free of any reserve requirement.
7. Stamp duty:
The share / units issued by MMMFs would be subject to Stamp duty.
8. 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.
11.4 TYPES OF MONEY MARKET MUTUAL FUNDS

There are two types of Money Market Mutual Funds:
a. Institutional money market mutual funds:
These funds are held by governments, institutional investors and businesses etc.
huge sum of money is parked in institutional money funds.
b. Retail money market mutual funds:

Retail money market mutual funds are used for parking money temporarily. The
investment portfolio of money market funds comprises of treasury bills, short
term debts, tax free bonds etc.
Chp 12: CREDIT RATINGS OF MONEY MARKET INSTRUMENTS
Credit rating is the process of assigning standard scores which summarize the probability of
the issuer being able to meet its repayment obligations for a particular debt instrument in a
timely manner. Credit rating is integral to debt markets as it helps market participants to
arrive at quick estimates and opinions about various instruments. In this manner it facilitates
trading in debt and money market instruments especially in instruments other than
Government of India Securities.
Rating is usually assigned to a specific instrument rather than the company as a whole. In the
Indian context, the rating is done at the instance of the issuer, which pays rating fees for this
service. If it is unsatisfied with the rating assigned to its proposed instrument, it is at liberty
not to disclose the rating given to it. There are 4 rating agencies in India. These are as
follows:
1. CRISIL: The oldest rating agency was originally promoted by ICICI. Standard &
Poor, the global leader in ratings, has recently taken a small 10% stake in CRISIL.
2. ICRA: Promoted by IFCI. Moody’s, the other global rating major, has recently taken
a small 11% stake in ICRA.
3. CARE: Promoted by IDBI.
4. Duff and Phelps: Co-promoted by Duff and Phelps, the world’s 4th largest rating
agency.
CRISIL is believed to have about 42% market share followed by ICRA with about 36%,
CARE with 18% and Duff and Phelps with 4%.
12.1 GRADING SYSTEM OF CREDIT RATING AGENCIES
Each of the rating agencies has different codes for expressing rating for different
instruments; however, the number of grades and sub-grades is similar e.g. for long term
debentures/bonds and fixed deposits, CRISIL has 4 main grades and a host of sub grades. In
decreasing order of quality, these are AAA, AA+, AA, AA-, A+, A, A-, BBB-, BBB,
BBB+, BB+, BB, BB-, B+, B, B-, C and D. ICRA, CARE and Duff and Phelps have similar
grading systems. The following table contains a key to the codes used by CRISIL and
ICRA.
Credit rating is a dynamic concept and all the rating companies are constantly reviewing the
companies rated by them with a view to changing (either upgrading or downgrading) the
rating. They also have a system whereby they keep ratings for particular companies on
"rating watch" in case of major events, which may lead to change in rating in the near
future. Ratings are made public through periodic newsletters issued by rating companies,
which also elucidate briefly the rationale for particular ratings. In addition, they issue press
releases to all major newspapers and wire services about rating events on a regular basis.
12.2 FACTORS INVOLVED IN CREDIT RATING
Credit rating depends on several factors, some of which are tangible/numerical and some of
which are judgmental and intangible. Some of these factors are listed below:
1. Overall fundamentals and earnings capacity of the company and volatility of the
same.
2. Overall macro-economic and business/industry environment.
3. Liquidity position of the company (as distinguished from profits).
4. Requirement of funds to meet irrevocable commitments.
5. Financial flexibility of the company to raise funds from outside sources to meet
temporary financial needs.
6. Guarantee/support from financially strong external bodies.
7. Level of existing leverage (borrowings) and financial risk.
Chp 13: DATA ANALYSIS AND INTERPRETATION
Q1. What is your Annual Income?
Income
6% Below 1 lakhs
11%
33% Between 1 lakhs - 3
lakhs
Between 3 lakhs - 5
lakhs
50% Above 5 lakhs
Interpretation:
Out of 20 respondents, 33% of respondent has the annual income below 1 lakhs.
Out of 20 respondents, 50% of respondent has the annual income between 1 to 3lakhs.
Out of 20 respondents, 11% of respondent has the annual income between 3 lakhs to 5 lakhs.
Out of 20 respondents, 6% of respondent has the annual income of above 5 lakhs.
Q2. How do you invest your savings?
Savings
11% Deposits n banks

5%
Invest in real estate
17%
Invest in capital
market
67%
Invest in MMMF
Interpretation:
Out of 20 respondents, 67% of respondent deposits their money in banks.
Out of 20 respondents, 17% of respondent invest in real estate.
Out of 20 respondents, 5% of respondent invest in capital market.
Out of 20 respondent 11% of respondent invest in money market mutual fund.
Q3. Do you have any knowledge about money market instruments?
Knowledge
28%
Yes
44%
No
Heard but not know
28%
Interpretation:
Out of 20 respondents, 44% of respondent has the knowledge about money market
instruments.
Out of 20 respondents, 28% of respondent don’t have the knowledge of money market
instruments.
Out of 20 respondents, 28% of respondent has heard but not know about money market
instruments.
Q4. How long would you like to hold your money market instruments?
Period
Short-term
44% period
56% Long term

period
Interpretation:
Out of 20 respondents, 44% of respondent hold their money market instruments for short
term period.
Out of 20 respondents, 56% of respondent hold their money market instruments for long term
period.
Q5. How much risk would you be willing to take?
Risk
11%
28% Low
11%
Average
Medium
High
50%
Interpretation:
Out of 20 respondents, 28% of respondent willing to take low risk.
Out of 20 respondents, 50% of respondent willing to take average risk.
Out of 20 respondents, 11% of respondent willing to take medium risk.
Out of 20 respondents, 11% of respondent willing to take high risk.
Q6. In your opinion, what is expected rate of return?
ROR
11%
17% Below 10%
Between 10% -
20%
17%
Between 20% -
30%
55% Above 30%
Interpretation:
Out of 20 respondents, 11% of respondent expect rate of return below 10%.
Out of 20 respondents, 55% of respondent expect rate of return between 10% - 20%.
Out of 20 respondents, 17% of respondent expect rate of return between 20% - 30%.
Out of 20 respondents, 17% of respondent expect rate of return above 30%.
Q7. How would you rate your experience with Indian Money Market?
Experience
6%
17%
Poor
33% Average
Good
Excellent
44%
Interpretation:
Out of 20 respondents, 17% of respondent rated poor experience with Indian Money Market.
Out of 20 respondents, 44% of respondent rated average experience with Indian Money
Market.
Out of 20 respondents, 33% of respondent rated high experience with Indian Money Market.
Out of 20 respondents, 6% of respondent rated excellent experience with Indian Money
Market.
Q8. Is recession had affected your investment decision?
Investment
17%
Yes
No
83%
Interpretation:
Out of 20 respondents, 83% of respondent responded positive due to recession their
investment decision had affected.
Out of 20 respondents, 17% of respondent responded negative due to recession their
investment decision does not get affected.
Chp 14: CONCLUSION

The Indian Money Market was controlled by tight controls and administered interest rate
structure up to late 1980s. However, following the policy measures during the early 1990s the
money market has become broad based with the enlargement of participants and instrument,
and change in liquidated conditions in quickly transmitted. The reform measures have greatly
contributed to the development of inter-linkages, increasing liquidity across various segments
of the money market. An enabling environment has thus been created whereby the monetary
authority can gradually switch away from the direct instruments of control to indirect
methods like open market operations, including repos. The market determined interest rate is
gradually emerging as an important intermediate target with the ultimate objective of
achieving price stability and economic growth.
Radical measures are taken to transform the Indian money market from a closed, inward and
narrow domestic space to open, outward-looking and international, can have competitive and
efficient operation for optimal gain. Interest rates have been fixed at certain level of bank
deposits and lending, foreign financial institutions have been allowed to invest in domestic
market. Securities market gas been reorganised with the setting up of new instruments (like
CP, CD) and new organisation (like NSE).
Liberalisation and globalisations of money market has brought many distortions without
necessarily increasing the efficiency of institutions and allocation of resources. Credit does
not reach the productive sector, whether agriculture or industry, whereas banks and financial
institutions are flush with funds. In our dualistic economy where the rural sector dominates,
money market reforms should start from reorganising rural financial structure so that funds
can sufficiently flow to the wider activities. In doing this government has important role of
regulation and redirection of financial institutions under liberalisation.
REFERENCE
 BIBLIOGRAPHY
 E. Gordon, Dr. K. Natarajan (Tenth Edition), Himalayan Publishing

House - Financial Markets and Services
 S. Parveen (New Edition) 2019, School of Management Studies – Financial

Markets
 Dr. S. Guruswamy (Second Edition) – Financial Services
 WEBLIOGRAPHY
 http://www.economicsdiscussion.net/essays/essay-on-the-indian-money-
market/18073
 https://www.wikipedia.org
 https://www.scribd.com/doc/132193047/Money-Market

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INDIAN MONEY MARKET 2019

Chp 1: INTRODUCTION OF INDIAN MONEY MARKET

Chp 2: HISTORY OF INDIAN MONEY MARKET

ii) Interest Rate Swaps:

Chp 3: INTRODUCTION OF MONEY MARKET

3.1: MEANING OF MONEY MARKET

3.2: DEFINITION OF MONEY MARKET

3.3: CHARACTERISTICS/FEATURES OF MONEY MARKET

i. Highly organised banking system:

ii. Presence of a Central bank:

iii. Availability of proper credit instruments:

iv. Existence of sub-markets:

vi. Demand and supply of funds:

vii. Existence of secondary market:

3.4: FUNCTIONS OF MONEY MARKET

The money market performs a number of functions in the Indian economy.

Chp 4: STRUCTURE OF INDIAN MONEY MARKET

INDIAN MONEY MARKET

Unorganised sector Organised sector Cooperative sector

Indigenous bankers Moneylenders Nidhis Chitfunds

SBI group Other-Nationalised banks

Scheduled banks Non-Schedule banks

Indian banks Foreign banks

I) Unorganised sector of Indian money market:

Unorganised segment of the Indian money market is composed of unregulated

 The following are some of the constituents of unorganised money market in

 Unregulated Non-bank Financial Intermediaries:

exploitation of the borrowers. Moneylenders have become a necessary evil in

 Chit Funds and Nidhis:

II) Organised Sector of Indian Money Market:

 Main constituents of Organised Money Market

 Discount and Finance House of India Ltd. (DFHI):

Chp 5: ROLE OF MONEY MARKET IN ECONOMY

1. Producing information and allocating capital:

5. Encouragements to saving and investment:

6. Controls the price line in economy:

7. Helps in correcting the imbalances in economy:

8. Regulates the flow of credit and credit rates:

9. Transmission of monetary policy:

Chp 6: MONEY MARKET INSTRUMENTS

i) Treasury bills (T- Bills):

ii) Certificates of Deposits:

iv) Repurchase agreement:

v) Banker's Acceptance (BA):

vi) Inter-bank Participation Certificates:

vii) Call Money Market:

CHP 7: PARTICIPANTS IN THE MONEY MARKET

3. Public Sector Undertakings:

4. Scheduled Commercial Banks (SCBs):

5. Private Sector Companies:

7. General Insurance Companies:

8. Life Insurance Companies:

9. Non-banking Finance Companies:

10. Mutual Funds:

11. Primary Dealers:

CHP 8: DEFECTS AND MEASURES FOR DEVELOPMENT OF

8.1 DEFECTS OF MONEY MARKET

3. Inadequate National Market:

4. Interest Rate Disparity: