1

A PROJECT REPORT

On

MONEY MARKET IN INDIA

in the subject Investment Management

Submitted to
University of Mumbai
For III rd semester of M.Com.

BY

SHWETA CHANDRAKANT SAWANT
Roll No. 48

Under the guidance of
Prof. SUNIL GUJARAN

2014 2015

2



A PROJECT REPORT

On

MONEY MARKET IN INDIA

in the subject Investment Management

Submitted to
University of Mumbai
for III rd semester of M.Com.

BY

SHWETA CHANDRAKANT SAWANT
Roll No. 48

Under the guidance of
Prof. SUNIL GUJARAN

2014 2015

3



C E R T I F I C A T E

This is to certify that the project entitled MONEY MARKET IN INDIA submitted by
Miss. Shweta Chandrakant Sawant Roll No. 48 student of M.Com. Banking &
Finance (University of Mumbai) (IIIrd Semester) examination has not been submitted
for any other examination and does not form a part of any other course undergone by the
candidate. It is further certified that he has completed all required phases of the project.
This project is original to the best of our knowledge and has been accepted for Internal
Assessment.


Internal Examiner External Examiner



Co-ordinator Principal


College seal

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DECLARATION BY THE STUDENT

I, Miss. Shweta C Sawant student of M.Com. (Semester IIIrd) Banking
& Finance, Roll No. 48 hereby declare that the project for the Subject
Financial Services titled, Money Market in India submitted by me to
University of Mumbai, examination during the academic year 2014-2015, is
based on actual work carried by me under the guidance and supervision of
Prof. Sunil Gujaran.

I further state that this work is original and not submitted anywhere else for
any examination.




Shweta Chandrakant Sawant

Signature of student.

ACKNOWLEDGEMENT
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At the beginning, I would like to thank GOD for his shower of blessing. The
desire of completing this project was given by my guide Prof. Sunil
Gujaran. I am very much thankful to him for the guidance, support and for
sparing her / his precious time from a busy schedule.

I would fail in my duty if I dont thank my parents who are pillars of my life.
Finally I would express my gratitude to all those who directly and indirectly
helped me in completing this project.


Shweta C Sawant






EXECUTIVE SUMMARY
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A well regulated financial sector is essential in globalize economy. Financial innovation
has contributed in the economic development. A financial institution is an institution that
provides financial services for its clients or members. Probably the most important
financial service provided by financial institutions is acting as financial
intermediaries. Most financial institutions are highly regulated by government. The
definition of money for money market purposes is not confined to bank notes but
includes a range of assets that can be turned into cash at short notice, such as short-
term government securities, bills of exchange, and bankers acceptances. This paper
analyses the real effects of financial markets subsequent to financial liberalization in an
economy with risk savers and learning by lending. Transition from full financial
repression to full financial liberalization might initially slow down the growth process or
even induce a recession, whenever the initial level of valuable investments known by the
financial intuitions is sufficiently scanty. However, lending activity leads to accumulation
of information (learning by lending) regarding valuable investments. The purpose of this
paper is to advocate and encourage financial markets in the overall development of the
economy. Money Market is a market for short term funds. Money is raised and deployed
for short term in this market. The Money Market is the close substitutes for money with
the short term up to one year. A minimum size of Rs. 20 crores for each transaction was
permitted in the participation of the corporate in the call money market. The maturity
period of Certificates of Deposits should not be less than 15 days and not more than 1
year. On the recommendation of the Sukhmoy Chakravarty Committee and the
Narasimham committee, RBI initiated a series of reform in Indian Money Market. To
provide safety, liquidity and return, MMMFs are formed which collect the small savings
of a large number of savers and invest them in the capital market. Gilt-edged
(Government) Securities security have great demand for the banks to maintain the Net
Demand and Time Liquidities (NDTL) position of the bank through its buying and
selling. Under the reverse repo transactions, securities are purchased with a simultaneous
commitment to resell at a predetermined rate and date.

INDEX
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CHAPTER 1
INTRODUCTION..8
CHAPTER 2
MONEY MARKET...11
ROLE OF MONEY MARKET IN ECONOMY..13
ROLE OF GOVERNMENT & CENTRAL BANK.19
CHAPTER 3
INDIAN MONEY MARKET...22
GROWTH OF MONEY MARKET IN INDIA....24
STRUCTURE OF MONEY MARKET IN INDIA..26
MONEY MARKET MUTUAL FUND.32
CHAPTER 4
CONCLUSION..39








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Chapter: 1
INTRODUCTION:
A financial system refers to a system which enables the transfer of money between
investors and borrowers. A financial system could be defined at an international, regional
or organization level. The term system in Financial System indicates a group of
complex and closely linked institutions, agents, procedures, markets, transactions, claims
and liabilities within a economy.
FIVE BASIC COMPONENTS OF FINANCIAL SYSTEM:
Financial Institutions
Financial Markets
Financial Instruments (Assets or Securities)
Financial Services
Money
FINANCIAL MARKETS:
A financial market is the place where financial assets are created or transferred. It can be
broadly categorized into money markets and capital markets. Money market handles
short-term financial assets (less than a year) whereas capital markets take care of those
financial assets that have maturity period of more than a year. The key functions are: 1.
Assist in creation and allocation of credit and liquidity. 2. Serve as intermediaries for
mobilization of savings. 3. Help achieve balanced economic growth. 4. Offer financial
convenience. One more classification is possible: primary markets and secondary
markets. Primary markets handle new issue of securities in contrast secondary markets
take care of securities that are presently available in the stock market. Financial markets
catch the attention of investors and make it possible for companies to finance their
operations and attain growth.


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Money markets make it possible for businesses to gain access to funds on a short term
basis, while capital markets allow businesses to gain long-term funding to aid
expansion. Without financial markets, borrowers would have problems finding lenders.
Intermediaries like banks assist in this procedure. Banks take deposits from investors and
lend money from this pool of deposited money to people who need loan. Banks
commonly provide money in the form of loans.
TYPES OF FINANCIAL MARKETS:
Within the financial sector, the term "financial markets" is often used to refer just to the
markets that are used to raise finance: for long term finance, the Capital markets; for
short term finance, the Money markets. Another common use of the term is as a catchall
for all the markets in the financial sector, as per examples in the breakdown below.
Capital markets which consist of:
Stock markets, which provide financing through the issuance of shares
or common stock, and enable the subsequent trading thereof.
Bond markets, which provide financing through the issuance of bonds, and enable
the subsequent trading thereof.
Commodity markets, which facilitate the trading of commodities.
Money markets, which provide short term debt financing and investment.
Derivatives markets, which provide instruments for the management of financial risk.
Futures markets, which provide standardized forward contracts for trading products
at some future date; see also forward market.
Insurance markets, which facilitate the redistribution of various risks.
Foreign exchange markets, which facilitate the trading of foreign exchange.



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The capital markets may also be divided into primary markets and secondary markets.
Newly formed (issued) securities are bought or sold in primary markets, such as
during initial public offerings. Secondary markets allow investors to buy and sell existing
securities. The transactions in primary markets exist between issuers and investors, while
in secondary market transactions exist among investors.

Liquidity is a crucial aspect of securities that are traded in secondary markets. Liquidity
refers to the ease with which a security can be sold without a loss of value. Securities
with an active secondary market mean that there are many buyers and sellers at a given
point in time. Investors benefit from liquid securities because they can sell their assets
whenever they want; an illiquid security may force the seller to get rid of their asset at a
large discount.

The financial market is broadly divided into 2 types: 1) Capital Market and 2) Money
market. The Capital market is subdivided into 1) Primary market and 2) Secondary
market. A financial market is a broad term describing any marketplace where buyers and
sellers participate in the trade of assets such as equities, bonds, currencies and
derivatives. Financial markets are typically defined by having transparent pricing, basic
regulations on trading, costs and fees, and market forces determining the prices of
securities that trade.

Financial markets can be found in nearly every nation in the world. Some are very small,
with only a few participants, while others - like the New York Stock Exchange (NYSE)
and the forex markets - trade trillions of dollars daily.



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Chapter: 2
MONEY MARKET:
The Money Market is a very important segment of the Indian financial system. It is the
market where short term monetary assets are dealt in to raise short term requirements of
funds and/ or to park short term surpluses. The main characteristic of the Money Market
is the liquid nature. The money market transactions may range from overnight to one
year. It has minimum transaction cost. This unit encompasses the structure of the Money
Market that has undergone vast changes in the last decade. In this unit, we are going to
discuss the different instruments and the defect of Indian Money Market. The unit also
discusses the bill market. Thus, you will be able to understand through this unit the
structure, instrument as well as the defect of the Indian money market.
Financial openness is often regarded as providing important potential benefits. Access to
money markets expands investors opportunities for a potential for achieving higher risk-
adjusted rates of return. It also allows countries to borrow to smooth consumption in the
face of adverse shocks, the potential growth and welfare gains resulting from such
international risk sharing can be large (Obstfeld, 1994). It has also been argued that by
increasing the rewards of good policies and the penalties for bad policies, free flow of
capital across borders may induce countries to follow more disciplined macroeconomic
policies that translate into greater macroeconomic stability.
An increasingly common argument in favour of financial openness is that it may increase
the depth and breadth of domestic financial markets and lead to an increase in financial
intermediation process by lowering costs and excessive profits associated with
monopolistic or cartelized markets, thereby lowering the cost of investment and
improving resource allocation.



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Organized financial markets have existed in India for more than a century. Today,
markets of varying maturity exist in equity, debt, commodities and foreign exchange.
There are 25 stock markets all over the country, the most important of which, are
the Bombay Stock Exchange and the National Stock Exchange. The rupee has been
convertible on the current account since 1992.
India Financial Market helps in promoting the savings of the economy - helping to adopt
an effective channel to transmit various financial policies. The Indian financial sector is
well- developed, competitive, efficient and integrated to face all shocks. In Indian
financial market there are various types of financial products whose prices are determined
by the numerous buyers and sellers in the market. The other determinant factor of the
prices of the financial products is the market forces of demand and supply.
The India money market is a monetary system that involves the lending and borrowing
of short-term funds. India money market has seen exponential growth just after the
globalization initiative in 1992. It has been observed that financial institutions do employ
money market instruments for financing short-term monetary requirements of various
sectors such as agriculture, finance and manufacturing. The performance of the India
money market has been outstanding in the past 20 years.
Central bank of the country - the Reserve Bank of India (RBI) has always been playing
the major role in regulating and controlling the India money market. The intervention of
RBI is varied - curbing crisis situations by reducing the cash reserve ratio (CRR) or
infusing more money in the economy.



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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 banks monetary
policy, transmitting its impulses into the economy best. Thus, the development of the
money market smoothes the progress of financial intermediation and boosts lending to
economy, hence improving the countrys 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.
PRODUCING INFORMATION AND ALLOCATING CAPITAL:
The information production role of financial systems is explored by Ramakrishnan
Thakor (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.

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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 analyzing 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 analyzed 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 while avers generally do not like risk, high-return projects tend to be
riskier than low return projects. Thus, financial markets that ease risk diversification tend
to induce a portfolio shift onwards projects with higher expected returns as pointed out by
Greenwood and Jovanovic (1990),Saint-Paul (1992), Devereux and Smith (1994) and
Obstfeld (1994). King and Levine (1993a) show that cross sectional risk diversification
can stimulate risky innovative activity for sufficiently risk-averse agents. The ability to
hold a diversified portfolio of innovative projects reduces risk and promotes investment
in growth-enhancing innovative activities.



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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. Heavy call for funds overnight indicates that the banks are
in need of short term funds and in case of liquidity crunch, the interest rates would go up.
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.

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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 loan able funds helps in the allocation of resources.
1. 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.
2. 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.



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3. 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. Credit policy as an instrument
is important to ensure the availability of the credit in sufficient volumes; it also caters to
the credit needs of various sectors of the economy. The RBI assist the government to
realize its policies related to the credit plans throughout its statutory control over the
banking system of the country.
4. 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.




18

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)banks 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).


19

Role of Government and Role of Central Bank (RBI):

ROLE OF GOVERNMENT:
To increase the constancy of Financial Institutions and Markets Government intervenes
in the interest rates and money supply in the Money Markets. Government has several
ways to control income and interest rates which can be divided into two broad groups
such as,
Fiscal policy
Monetary policy
The government to adjust the exchange rate intervenes with the foreign
exchange markets; there may be a result on the financial base and the supply of money.
When the currency is falling, foreign currencies should be sold and the currency should
be bought to steady its price. The use of deposits of the national currency to do this
suggest that the prepared deposits of the banking sector must be reduced, causing the
financial base to fall, affecting the supply of money. Equally by selling the national
currency to decrease its rate, the monetary base will increase. Securities may be sold on
the open market in an effort to dampen the effects of inflows of the national currency, but
this would imply a raise in interest rates and cause the currency to rise further still. A
number of institutions can affect the supply of money but the greatest impact on
the money supply is had by the Reserve bank and the commercial banks.
By raising or lowering interest rates the demand for money is respectively reduced or
increased. If it sets them at a certain level it can clear the market at level by supplying
sufficient money to match the demand. Alternatively it could fix the money supply at a
convinced rate and let the market clear the interest rates at the balance. Trying to fix
the money supply is not easy so central banks regularly set the interest rate and provide
the amount of money the market demands.


20

ROLE OF CENTRAL BANK (RBI):
Firstly the central bank could do this by setting a necessary reserve ratio, which
would restrict the ability of the commercial banks to increase the money supply by
loaning out money. If this condition were above the ratio the commercial banks would
have wished to have then the banks will have to create fewer deposits and make fewer
loans then they could otherwise have profitably done. If the central bank imposed this
requirement in order to reduce the money supply, the commercial banks will probably be
unable to borrow from the central bank in order to increase their cash reserves if they
wished to make further loans. They might try to attract further deposits from customers
by raising their interest rates but the central bank may retaliate by increasing the
necessary reserve ratio.
The central bank can influence the supply of money through special deposits. These
are deposits at the central bank which the banking sector is required to lodge. These are
then frozen, thus preventing the sector from accessing them even though interest is paid
at the average Treasury bill rate. Making these special deposits reduces the level of the
commercial banks operational deposits which forces them to cut back on lending.
The supply of money can also be prohibited by the central bank by adjusting its
interest rate which it charges when the commercial banks wish to borrow money (the
discount rate). Banks generally have a ratio of cash to deposits which they consider to be
the minimum safe level. If command for cash is such that their reserves fall below this
level they will able to borrow money from the central bank at its discount rate. If market
rates were 8% and the discount rate were also 8%, then the banks might decrease their
cash reserves to their minimum ratio knowing that if demand exceeds supply they will be
able to borrow at 8%. The central bank, even if, may raise its discount rate to a value
above the market level, in order to encourage banks not to reduce their cash reserves to
the minimum during excess loans.


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Chapter: 3

INDIAN MONEY MARKET:

The Indian market can be classified into organized and unorganized sectors. The
unorganized sector consists of money lenders, chit funds, and indigenous bankers. These
people satisfy the credit requirement of a large section of the rural masses. The organized
part comprises commercial banks in India both public sector and private sector banks and
foreign banks. The Reserve bank of India the apex bank is the regulator of the money
market in India. It regulates the flow of the credit and money in the economy. To
influence the liquidity in the system the RBI intervenes in the money market from time to
time either to augment or reduce the supply of credit. The open market operation of the
RBI provides signals for other segments of the financial system regarding the future
monetary and credit policy of the apex bank.
THE WEAKNESS OF THE INDIAN MONEY MARKET:
The indigenous bankers and money lenders are still dominating the semi-urban and rural
areas in India. In India the organized and unorganized money markets exist side by side.
This is a major weakness to the Indian money market. The unorganized money markets
follow its own rules and regulation of banking and finance so it does not come into the
purview of RBI rules and regulations. In the recent days there are large number of Non-
bank Financial companies (NBFC) have come up raising deposits from the public. These
NBFCs perform functions like lending, investing, hire purchase etc. these institutions are
not effectively controlled by the RBI.

There is an absence of a well-organized banking system. Though developed to some
extent in the recent years their presence is insignificant in rural areas even today. The
absence of banking facilities to the rural masses due to slow branch expansion in the
country is a matter of concern.

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GROWTH OF MONEY MARKET IN INDIA:
While the need for long term financing is met by the capital or financial markets, money
market is a mechanism which deals with lending and borrowing of short term funds. Post
reforms period in India has witnessed tremendous growth of the Indian money markets.
Banks and other financial institutions have been able to meet the high expectations of
short term funding of important sectors like the industry, services and agriculture.
Functioning under the regulation and control of the Reserve Bank of India (RBI), the
Indian money markets have also exhibited the required maturity and resilience over the
past about two decades. Decision of the government to allow the private sector banks to
operate has provided much needed healthy competition in the money markets, resulting
in fair amount of improvement in their functioning.
The Indian financial markets remained orderly, notwithstanding the impact of global
developments and tight liquidity conditions in domestic markets. Call rate firmed up in
step with policy rates and tight liquidity conditions. It mostly remained above the upper
bound of the LAF corridor during the third quarter of 2010-11. Both commercial paper
(CP) and certificate of deposit (CD) markets remained active as alternative sources of
finance. The yield curve for Government Securities (G-Sec) shifted, reflecting
expectation of policy rate changes in an inflationary environment. The Indian Rupee
appreciated moderately against the US dollar and stock prices rose on the back of strong
foreign portfolio inflows. Prices in the housing market in general continued the rising
trend during the second quarter of 2010-11.
1. RBI INTERVENTION:
Depending on the economic situation and available market trends, the RBI intervenes in
the money market through a host of interventions. In case of liquidity crunch, the RBI has
the option of either reducing the Cash Reserve Ratio (CRR) or pumping in more money
supply into the system. Recently, to overcome the liquidity crunch in the Indian money
market, the RBI has released more than Rs 75,000 crore with two back-to-
back reductions in the CRR.
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2. LINK WITH FOREIGN EXCHANGE MARKET:
In addition to the lending by the banks and the financial institutions, various companies
in the corporate sector also issue fixed deposits to the public for shorter duration and to
that extent become part of the money market mechanism selectively. The maturities of
the instruments issued by the money market as a whole, range from one day to one year.
The money market is also closely linked with the Foreign Exchange Market, through the
process of covered interest arbitrage in which the forward premium acts as a bridge
between the domestic and foreign interest rates.
3. DETERMINATION OF APPROPRIATE INTEREST FOR DEPOSITS:
Determination of appropriate interest for deposits or loans by the banks or the other
financial institutions is a complex mechanism in itself. There are several issues that need
to be resolved before the optimum rates are determined. While the term structure of the
interest rate is a very important determinant, the difference between the existing domestic
and international interest rates also emerges as an important factor. Further, there are
several credit instruments which involve similar maturity but diversely different risk
factors. Such distortions are available only in developing and diverse economies like the
Indian economy and need extra care while handling the issues at the policy levels.
Typically, the monetary policy instrument, effectively the price of central bank liquidity,
is directly set by the central bank. In view of limited control over long-term interest rates,
central banks adopt a strategy to exert direct influence on short-term interest rates.
Changes in the short-term policy rate provide signals to financial markets, whereby
different segments of the financial system respond by adjusting their rates of return on
various instruments, depending on their sensitivity and the efficacy of the transmission
mechanism. How quickly and effectively the monetary policy actions influence the
spectrum of market interest rates depends upon the level of development of various
segments of financial markets, particularly the money market. Cross-country studies
suggest that as domestic financial markets grow, transmission of monetary policy through
various channels becomes better.
24


STRUCTURE OF THE MONEY MARKET IN INDIA:
In view of the rapid changes on account of financial deregulation and global financial
markets integration, central banks in several countries have striven to develop and deepen
the money markets by enlarging the ambit of instruments5 and participants so as to
improve the transmission channels of monetary policy. The structure of money markets
determines the type of instruments that are feasible for the conduct of monetary
management. Evidence and experience indicate that preference for market oriented an
instrument by the monetary authorities helps to promote broader market development.
The entire money market in India can be divided into two parts. They are organized
money market and the unorganized money market. The unorganized money market can
also be known as an unauthorized money market. Both of these components comprise
several constituents.
1. CALL MONEY MARKET:
It an important sub market of the Indian money market. It is also known as money at call
and money at short notice. It is also called inter bank loan market. In this market money
is demanded for extremely short period. The duration of such transactions is from few
hours to 14 days. It is basically located in the industrial and commercial locations such as
Mumbai, Delhi, Calcutta, etc. These transactions help stock brokers and dealers to fulfill
their financial requirements. The rate at which money is made available is called as a call
rate. Thus rate is fixed by the market forces such as the demand for and supply of money.
Banks and primary dealers in government securities may soon have more flexibility in
borrowing and lending in the call money market. The Reserve Bank of India said that
banks may be allowed to borrow and lend in the interbank call money market based on
their assets and liability match rather than prudential limits.

25

In the call money market, banks can currently borrow not beyond 100 % of their capital
funds on a fortnightly average basis and on daily basis it cannot exceed 125 %they can
lend up to 25 % of their capital fund on a fortnightly average basis and 50 % on daily
basis. With the rising credit demand, the RBI will also review the Inter-bank participation
certificates scheme to improve assets liability management and liquidity management.
The debt market would require more investor if the statutory liquidity ratio of banks is
cut, the RBI said.
With respect to SLR, the central bank said, The investor base needs to be widened in the
views of possibilities of reduction in the captive investor base resulting from the scaling
down of the SLR from the present level.
2. COMMERCIAL BILL MARKET:
It is a market for the short term, self liquidating and negotiable money market instrument.
Commercial bills are used to finance the movement and storage of agriculture and
industrial goods in domestic and foreign markets. The commercial bill market in India is
still underdeveloped.
3. TREASURY BILL MARKET:
This is a market for sale and purchase of short term government securities. These
securities are called as Treasury Bills which are promissory notes or financial bills issued
by the RBI on behalf of the Government of India. There are two types of treasury bills. (i)
Ordinary or Regular Treasury Bills and (ii) Ad Hoc Treasury Bills. The maturity period
of these securities range from as low as 14 days to as high as 364 days. They have
become very popular recently due to high level of safety involved in them.
Treasury Bills, one of the safest money market instruments, are short term borrowing
instruments of the Central Government of the Country issued through the Central Bank
(RBI in India). They are zero risk instruments, and hence the returns are not so attractive.
It is available both in primary market as well as secondary market.
26

It is a promise to pay a said sum after a specified periods-bills are short-term securities
that mature in one year or less from their issue date. They are issued with three-
month, six-month and one-year maturity periods. The Central Government issues T- Bills
at a price less than their face value (par value). They are issued with a promise to pay full
face value on maturity. So, when the T- Bills mature, the government pays the holder its
face value. The difference between the purchase price and the maturity value is the
interest income earned by the purchaser of the instrument. T-Bills are issued through a
bidding process at auctions. The bid can be prepared either competitively or non-
competitively. In the second type of bidding, return required is not specified and the one
determined at the auction is received on maturity. Whereas, in case of competitive
bidding, the return required on maturity is specified in the bid. In case the return specified
is too high then the T-Bill might not be issued to the bidder.
At present, the Government of India issues three types of treasury bills through auctions,
namely, 91-day, 182-day and 364-day. There are no treasury bills issued by State
Governments. Treasury bills are available for a minimum amount of Rs.25K and in its
multiples. While 91-day T-bills are auctioned every week on Wednesdays, 182-day and
364- day T-bills are auctioned every alternate week on Wednesdays. The Reserve Bank
of India issues a quarterly calendar of T-bill auctions which is available at the Banks
website. It also announces the exact dates of auction, the amount to be auctioned and
payment dates by issuing press releases prior to every auction. Payment by allotters at the
auction is required to be made by debit to their/ custodians current account. T-
bills auctions are held on the Negotiated Dealing System (NDS) and the members
electronically submit their bids on the system. NDS is an electronic platform for
facilitating dealing in Government Securities and Money Market Instruments. RBI issues
these instruments to absorb liquidity from the market by contracting the money supply.
Primary yields on Treasury Bills (TBs) firmed up during Q1 of 2011-12 in line with the
spike in short-term interest rates (Table1). The rise in yields reflected a sharp increase in
Government short-term borrowing, through issuances of TBs over and above the amount
as per the indicative calendar announced in March 2013.
27


4. REPO (REPURCHASE) TRANSACTION:
Repo or Reverse Repo are transactions or short term loans in which two parties agree to
sell and repurchase the same security. They are usually used for overnight borrowing.
Repo/Reverse Repo transactions can be done only between the parties approved by RBI
and in RBI approved securities viz. GOI and State Government Securities, T-Bills, PSU
Bonds, FI Bonds, Corporate Bonds etc. Under repurchase agreement the seller sells
specified securities with an agreement to repurchase the same at a mutually decided
future date and price. Similarly, the buyer purchases the securities with an agreement to
resell the same to the seller on an agreed date at a predetermined price. Such a transaction
is called a Repo when viewed from the perspective of the seller of the securities and
Reverse Repo when viewed from the perspective of the buyer of the securities.
Thus, whether a given agreement is termed as a Repo or Reverse Repo depends on which
party initiated the transaction. The lender or buyer in a Repo is entitled to receive
compensation for use of funds provided to the counterparty. Effectively the seller of the
security borrows money for a period of time (Repo period) at a particular rate of interest
mutually agreed with the buyer of the security who has lent the funds to the seller. The
rate of interest agreed upon is called the Repo rate. The Repo rate is negotiated by the
counterparties independently of the coupon rate or rates of the underlying securities and
is influenced by overall money market conditions.
5. MARKET FOR CERTIFICATE OF DEPOSITS (CDs):
It is again an important segment of the Indian money market. The certificate of deposits
is issued by the commercial banks. They are worth the value of Rs. 25 lakh and in
multiple of Rs. 25 lakh. The minimum subscription of CD should be worth Rs. 1 Crore.
The maturity period of CD is as low as 3 months and as high as 1 year. These are the
transferable investment instrument in a money market.
28

Advantages of Certificate of Deposit as a money market instrument:
1. Since one can know the returns from before, the certificates of deposits are considered
much safe.
2. One can earn more as compared to depositing money in savings account.
3. The Federal Insurance Corporation guarantees the investments in the certificate of
deposit.
Disadvantages of Certificate of deposit as a money market instrument:
1. As compared to other investments the returns is less.
2. The money is tied along with the long maturity period of the Certificate of Deposit.
3. Huge penalties are paid if one gets out of it before maturity.
6. MARKET FOR COMMERCIAL PAPERS (CPs):
It is the market where the commercial papers are traded. Commercial paper (CP) is an
investment instrument which can be issued by a listed company having working capital
more than or equal to Rs. 5 cr. The CPs can be issued in multiples of Rs. 25 lakhs.
However the minimum subscription should at least be Rs. 1 cr. The maturity period for
the CP is minimum of 3 months and maximum 6 months. This was introduced by the
government in 1990.
7. SHORT TERM LOAN MARKET:
It is a market where the short term loan requirements of corporate are met by the
Commercial banks. Banks provide short term loans to corporate in the form of cash credit
or in the form of overdraft. Cash credit is given to industrialists and overdraft is given to
businessmen.


29

8. BANKERS ACCEPTANCE:
It is a short term credit investment created by a non financial firm and guaranteed by a
bank to make payment. It is simply a bill of exchange drawn by a person and accepted by
a bank. It is a buyers promise to pay to the seller a certain specified amount at certain
date. The same is guaranteed by the banker of the buyer in exchange for a claim on the
goods as collateral. The person drawing the bill must have a good credit rating otherwise
the Bankers Acceptance will not be tradable. The most common term for these
instruments is 90 days. However, they can vary from 30 days to180 days. For
corporations, it acts as a negotiable time draft for financing imports, exports and other
transactions in goods and is highly useful when the credit worthiness of the foreign trade
party is unknown. The seller need not hold it until maturity and can sell off the same in
secondary market at discount from the face value to liquidate its receivables.
9. PASS THROUGH CERTIFICATES:
This is an instrument with cash flows derived from the cash flow of another underlying
instrument or loan. The issuer is a special purpose vehicle (SPV), which only receives
money, from a multitude of may be several hundreds or thousands, underlying loans and
passes the money to the holders of the PTCs. This process is called securitization. Legally
speaking PTCs are promissory notes and hence tradable freely with no stamp duty
payable on transfer. Most PTCs have 2-3 year maturity because the issuance stamp duty
rate makes shorter duration PTCs unviable.
10. DATED GOVERNMENT SECURITIES:
These are securities issued by the Government of India and State Governments. The date
of maturity is specified in the securities therefore they are known as dated securities. The
Government borrows funds through the issue of long term dated securities, the lowest
risk category instruments in the economy received.
30

MONEY MARKET MUTUAL FUND:
A money market mutual fund is a kind of mutual fund that invests in ultra-safe or low
risk securities. The purpose of the fund is to conserve the capital of the fund and it is
unusual to see the NAV of a money market mutual fund go below one. The NAV can go
below one if the securities do badly but it is quite rare to happen.
A Money Market Mutual fund is meant for people who wish to maintain their capital and
park their short-term cash into a safety that gives - stable but low returns. It is also used
by citizens who want to balance their portfolio and build in some security. If you have a
lot of stocks in your portfolio then money market funds can balance your overall portfolio
by providing capital safety.
Money Market Mutual Funds present - securities of domestic and foreign issuers. They
are securities that are naturally - high quality (low risk) short term securities that can have
a fixed, floating or changeable interest rate.
A money market mutual fund usually invests in the following type of assets:
Bank certificates of deposits
Bankers Acceptance
Bank Time Deposits
Commercial Paper
Repurchase Agreements
A money market fund is a mutual fund that invests solely in money market
instruments. Money market instruments are forms of debt that mature in less than one
year and are very liquid. Treasury bills make up the bulk of the money market
instruments. Securities in the money market are relatively risk-free.


31


Money market funds are generally the safest and most secure of mutual fund investments.
The goal of a money-market fund is to preserve principal while yielding a modest return.
Money-market mutual fund is akin to a high-yield bank account but is not entirely risk
free. When investing in a money-market fund, attention should be paid to the interest
rate that is being offered.

TYPES OF MONEY MARKET MUTUAL FUNDS
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.
Retail Money Market Mutual Funds:
Retail money market 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.

SPECIAL FEATURES OF MONEY MARKET MUTUAL FUNDS:
Money market mutual funds are one of the safest instruments of investment for the retail
low income investor. The assets in a money market fund are invested in safe and stable
instruments of investment issued by governments, banks and corporations etc.
Generally, money market instruments require huge amount of investments and it is
beyond the capacity of an ordinary retail investor to invest such large sums. Money
market funds allow retail investors the opportunity of investing in money market
instrument and benefit from the price advantage.



32

There are different classes of money market funds based on where they invest their funds.
Here is a list of some Money Market Mutual Funds:

UTI Liquid Short Term Plan (G)
Tata Treasury Manager-RIP (G)
LIC MF Liquid Fund (G)
ING Treasury Mgmt Fund (G)
UTI Money Market Fund (G)
SBI Magnum Cash-Liq Floater -G
HDFC Cash Mgmt. Fund - SP (G)
ING Treasury Plus - RP (G)
Reliance Liquid Fund TP (G)
AIG India Liquid Fund-RP (G)
Birla Sun Life CM (G)
ICICI Pru Liquid Plan (G)
Kotak Liquid Regular (G)
Sundaram Money Fund (G)
IDFC Cash Fund (G) Not Rated
JM Money Manager Fund -RP (G)
Templeton (I) Cash Mgmt (G)
Bharti AXA Liquid Fund-RP (G)
Edelweiss Liquid Fund -RP (G)





33


DEFECTS OF INDIAN MONEY MARKET:
Money market is the market for lending and borrowing of short term funds. A well
developed money market denotes an implementation of effective monetary policy. But
the Indian money market suffers from many weaknesses.

1. LACK OF INTEGRATION:
The Indian Money Market is divided into two sectors viz, the organized and unorganized
money market. But both the markets are completely separate from each other. They are
working independently and have little effect on each other. RBI is fully effective in
controlling the organized sector. But, it has very less control on the unorganized sector.
2. LACK OF RATIONAL INTEREST RATES STRUCTURE:
The Indian Money Market exist too many interest rates. For example, the deposit and lending
rates of commercial banks, the borrowing rate of Government etc. In the past these created excess
demand for credit and the RBI had to rely often on cash reserve ratio. Though the RBI has tried to
bring rationality in the interest rates, the situation in the Indian money market is still not effective.
3. EXISTENCE OF UNORGANISED MONEY MARKET:
The existence of the unorganized sector in money market still prevails in Indian Money
Market. The indigenous banker does not make any distinction between short term and
long-term finance. They have no coordination with each other and have no link with
other banking sectors. They do not follow any sound banking regulations. The RBI has
no control over these bankers.


34


4. ABSENCE OF AN ORGANISED BILL MARKET:
In Indian Money Market, there is an absence of adequate bill market. There is an absence
of commercial bill market or a discount for short term commercial bills. There are many
factors responsible for the underdeveloped bill market such as (i) relying more on cash
transaction, (ii) cash credit of commercial bank, (iii) sellers limited use of bills, (iv)
imposition of heavy stamp duty, (v) absence of acceptance houses etc.
5. SHORTAGE OF FUNDS IN THE MONEY MARKET:
The lack of banking habit, inadequate banking facility, less saving habit, etc created has
shortage of fund in the money market. On the other hand, the increasing demand for loan
able funds in the money market far exceeds its supply.
6. INADEQUATE BANKING FACILITY:
Now-a-days, the commercial banks have opened many new branches of banking
facilities. But, it still leaves much scope for further development. In a developing country
like India, people live below poverty line and have less saving habit. Their savings are
very small and they do not have much access to banking facilities till now.
7. SEASONAL STRINGENCY OF MONEY:
During the part of the year the interest rates are become high due to the increasing
demand for funds in the money market for the operation in the agricultural sector.
Basically, it is seen in the period from October to June.



35

Measure:
The major drawback of India Money Market is its high volatility. Gradually the money
market transaction is increasing. But, on the recommendation of the Sukhmoy
Chakravarty Committee (on the review of the working of the Monetary System) and the
Narasimham committee (on the Report on the working of the financial system in India,
1991), RBI initiated a series of reform in Indian Money Market. The following are some
of the measures undertaken:
1. INTRODUCING NEW MONEY MARKET INSTRUMENT:
Many new money market instruments are introduced like Commercial Papers,
Certificates of Deposits, 182-day Treasury, 364-day Treasury etc. The Discount and
Finance House have also developed. These facilitate different short term borrowings to
the different borrowers to collect fund as and when required to maintain their financial
position.
2. RELAXATION OF INTEREST RATE REGULATIONS
The all types of interest rates like lending as well as deposit rates of the banks and
financial institution are controlled and regulated by RBI. But, gradually the interest rates
of the bank loans are controlled by the market forces which result decontrolled of it.
3. REMITTING THE STAMP DUTIES:
In August 1989, Government remitted the stamp duty. But, it is not effective till it
discourages the cash credit system in favor of using the bill system.
4. SECTOR SPECIFIC REFINANCE:
Export credit refinance and general refinance are two refinance schemes that are in
operation in the current financial system. The refinance is used by the central bank to
control credit conditions and the liquidity positions in the system.
36


5. INTRODUCTION OF REPO:
This is used by the banks for short term liquidity through sale or purchase of debt
instruments. It is an agreement to repurchase them at a predetermined rate and date
between the RBI and commercial banks.
6. INTRODUCING MONEY MARKET MUTUAL FUNDS:
The Money Market Mutual Funds were introduced in April 1991. The collection of the
small savings invested generates short term avenues to the different investors.
7. SETTING THE DISCOUNT AND FINANCE HOUSE IN INDIA:
The DFHI equilibrated the surplus of fund and the deficit amounts of the banks. The
DFHI helps in lending and borrowing of funds to the different banks as well as financial
institutions.
Money market rates also reflect market expectations of how the policy rate could evolve
in the near term. As per standard expectations hypothesis, money market rates for
different time duration should equal expected future short-term rates, plus term premium
and risk premium. Bernanke (2004) had examined how expectations of the likely future
course of the federal funds rate respond to the Federal policy actions and statements. Our
findings support the view that FOMC statements have proven a powerful tool for
affecting market expectations about the future course of the federal funds rate.




37

Major Developments in Money Market since the 1990s
Abolition of ad hoc treasury bills in April 1997
Full fledged LAF in June 2000.
CBLO for corporate and non-bank participants introduced in 2003
Minimum maturity of CPs shortened by October 2004
Prudential limits on exposure of banks and PDs to call/notice market in April 2005
Maturity of CDs gradually shortened by April 2005
Transformation of call money market into a pure inter-bank market by August 2005
Widening of collateral base by making state government securities (SDLs) eligible for LAF
operations since April 2007

Operationalisation of a screen-based negotiated system (NDS-CALL) for all dealings in the
call/notice and the term money markets in September 2006. The reporting of all such
transactions made compulsory through NDS-CALL in November 2012.

Repo in corporate bonds allowed in March 2010.
Operationalisation of a reporting platform for secondary market transactions in CPs and
CDs in July 2010.


38

In order to improve transparency and efficiency in the money market, reporting of all
call/notice money market transactions through negotiated dealing system (NDS) within
15 minutes of conclusion of the transaction was made mandatory. Furthermore, a screen-
based negotiated quote-driven system for all dealings in the call/notice and the term
money markets (NDS-CALL), developed by the Clearing Corporation of India Limited
(CCIL), was operationalised in September 2006 to ensure better price discovery as shown
in chart1.



39

CASE STUDY
In the development of various constituents of the money market, the most significant aspect was
the growth of the collateralized market vie- -via the uncollateralized market. Over the last
decade, while the daily turnover in the call money market either stagnated or declined, that of the
collateralized segment, market repo plus CBLO, increased manifold (Chart 2). Since 2007-08,
both the CP and CD volumes have also increased very significantly (Chart 3). Furthermore,
issuance of 91-treasury bills has also increased sharply (Chart 4). The overall money market now
is much larger relative to GDP than a decade ago.


40






41


The rates of return on various instruments in the money market have shown greater co-
movement, especially after the introduction of LAF.
Table-2 & Chart-5:
Table 2: Interest Rates in the Money Market
(Percent per annum: Annual Averages)

Repo
Rate
Call
Rate
CBLO
Rate
Market
Repo Rate
91 day T-
Bills
364-day T
Bills
CP
Rate
CD
Rate
1 2 3 4 5 8 9 6 7
2000-01 11.2 9.1 - - 9.0 9.8 10.8 9.6
2001-02 8.5 7.2 - - 7.0 7.3 9.2 8.0
2002-03 7.7 5.9 - - 5.8 5.9 7.7 6.6
2003-04 7.0 4.6 - - 4.6 4.7 6.1 5.3
2004-05 6.0 4.7 - - 4.9 5.2 5.8 5.0
2005-06 6.2 5.6 5.3 5.4 5.7 6.0 6.7 6.1
2006-07 7.0 7.2 6.2 6.3 6.6 7.0 8.5 7.9
2007-08 7.8 6.1 5.2 5.5 7.1 7.5 9.3 9.1
2008-09 7.4 7.1 6.1 6.5 7.1 7.2 10.7 9.2
2009-10 4.8 3.2 2.7 2.8 3.6 4.4 5.3 5.4
2010-11 5.9 5.7 5.4 5.5 6.2 6.6 8.7 7.7
2011-12 8.0 8.1 7.8 7.9 8.4 8.4 10.1 9.6
2013-14 (so far) 8.0 8.1 7.9 8.0 8.2 8.1 9.3 9.0




42




Though the LAF helped to develop interest rate as an instrument of monetary
transmission, two major weaknesses came to the fore. First was the lack of a single policy
rate, as the operating policy rate alternated between repo during deficit liquidity situation
and reverse repo rate during surplus liquidity condition. Second was the lack of a firm
corridor, as the effective overnight interest rates dipped (rose) below (above) the reverse
repo (repo) rate in extreme surplus (deficit) conditions.


43


Chapter: 4
CONCLUSION:
To sum up, the money market is a key component of the financial system as it is the
fulcrum of monetary operations conducted by the central bank in its pursuit of monetary
policy objectives. It is a market for short-term funds with maturity ranging from
overnight to one year and includes financial instruments that are deemed to be close
substitutes of money. The money market performs three broad functions.
Firstly, it provides an equilibrating mechanism for demand and supply of short-term
funds. Secondly, it enables borrowers and lenders of short-term funds to fulfil their
borrowing and investment requirements at an efficient market clearing price. Three, it
provides an avenue for central bank intervention in influencing both quantum and cost of
liquidity in the financial system, thereby transmitting monetary policy impulses to the
real economy.
The objective of monetary management by the central bank is to align money market
rates with the key policy rate. As excessive money market volatility could deliver
confusing signals about the stance of monetary policy, it is critical to ensure orderly
market behavior, from the point of view of both monetary and financial stability. Thus,
efficient functioning of the money market is important for the effectiveness of monetary
policy.
Though the LAF helped to develop interest rate as an instrument of monetary
transmission, two major weaknesses came to the fore. First was the lack of a single policy
rate, as the operating policy rate alternated between repo during deficit liquidity situation
and reverse repo rate during surplus liquidity condition. Second was the lack of a firm
corridor, as the effective overnight interest rates dipped (rose) below (above) the reverse
repo (repo) rate in extreme surplus (deficit) conditions.

44

REFERENCE:
WEBLIOGRAPHY:
www.fxcmmarkets.com
www.kkhsou.in/main/EVidya2/commerce/indian_money.htm
study-material4u.blogspot.com/.../chapter-5-indian-money-market.html
www.rbi.org.in/scripts/bs_viewmmo.asp
www.vitt.in/market/moneyt