MONEY MARKET INSTRUMENTS IN INDIA

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

2) Definition of Money Market:

According to the McGraw Hill Dictionary of Modern Economics, money market
is the term designed to include the financial institutions which handle the purchase, sale, and
transfers of short term credit instruments. The money market includes the entire machinery
for the channelizing of short-term funds. Concerned primarily with small business needs for
working capital, individuals borrowings, and government short term obligations, it differs
from the long term or capital market which devotes its attention to dealings in bonds,
corporate stock and mortgage credit.
According to the Reserve Bank of India, money market is the centre for dealing,
mainly of short term character, in money assets; it meets the short term requirements of
borrowings and provides liquidity or cash to the lenders. It is the place where short term
surplus investible funds at the disposal of financial and other institutions and individuals are
bid by borrowers agents comprising institutions and individuals and also the government
itself.

MONEY MARKET INSTRUMENTS IN INDIA

General Characteristics of Money Market:

The general characteristics of money market are outlined below:
Short-term funds are borrowed and lent.
No fixed place for conduct of operations, the transactions being conducted even over
the phone and therefore, there is an essential need for the presence of well developed
communications system.
Dealings may be conducted with or without the help the brokers.
The short-term financial assets that are dealt in are close substitutes for money,
financial assets being converted into money with ease, speed, without loss and with
minimum transaction cost.
Funds are traded for a maximum period of one year.
Presence of a large number of submarkets such as inter-bank call money, bill
rediscounting, and treasury bills, etc.

MONEY MARKET INSTRUMENTS IN INDIA

CHAPTER 2
OBJECTIVE OF MONEY MARKET

A well developed money market serves the following objectives:

Providing an equilibrium mechanism for ironing out short-term surplus and deficits.

Providing a focal point for central bank intervention for the influencing liquidity in
the economy.

Providing access to users of short-term money to meet their requirements at a

reasonable price.

MONEY MARKET INSTRUMENTS IN INDIA

History of Indian Money Market:

Till 1935, when the RBI was set up the Indian money market remained highly
disintegrated, unorganized, narrow, shallow and therefore, very backward. The planned
economic development that commenced in the year 1951 market an important beginning in
the annals of the Indian money market. The nationalization of banks in 1969, setting up of
various committees such as the Sukhmoy Chakraborty Committee (1982), the Vaghul
working group (1986), the setting up of discount and finance house of India ltd. (1988), the
securities trading corporation of India (1994) and the commencement of liberalization and
globalization process in 1991 gave a further fillip for the integrated and efficient development
of India money market.

CHAPTER 3
METHODOLOGY
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MONEY MARKET INSTRUMENTS IN INDIA

Research Design:
A research design is the arrangement of conditions for collection and analysis
of data in a manner that aims to combine relevance to the research purpose
with economy in procedure.
Research in a common parlance is a search for knowledge. Research is an art of
scientific and systematic investigation. Thus research comprises defining and
redefining problems, formulating hypothesis or suggested solutions; collecting,
organizing and evaluating data, making deductions and reaching conclusions.
Research methodology is the arrangement of condition for collection and
analysis of data in a manner that aims to combine relevance to the research
purpose with economy in procedure. Research Methodology is the conceptual
structure within which research is conducted. It constitutes the blueprint for the
collection measurement and analysis of the data.
Types of research used:
Descriptive Research:
In the study descriptive research design has been used. As descriptive research
design is the description of state of affairs, as it exists at present. In this type of
research the researcher has no control over the variables; he can only report
what has happened or what is happening
Descriptive research designs are those design which are concerned with
describing the characteristics of particular individual or of the group. In
descriptive and diagnostic study the researcher must be able to define clearly
what he wants to measure and must find adequate method for measuring it.
Sources of Data:
The sources of collection and analysis to be used are those data (a) that have
already been assembled and recorded; and (b) that still requires assembling
and recording. The former kind of data is called Primary Data while the
later kind of data is called Secondary Data.

TYPES OF DATA

2
PRIMARY
DATA

SECONDRY
DATA

MONEY MARKET INSTRUMENTS IN INDIA

I.

Primary Data:

Primary data is the information which is received by the researcher from the
actual field of research. The data in the given study are obtained by means of
questionnaires. In some fields primary data are collected through interview and
observation methods. The observation method, for collecting primary data, may
be both participant and nonparticipant. Such data are known as primary data.
The primary source information is collected through Internet, Direct
observation, Questionnaires, Schedule and Interviews methods.

II.

Secondary Data:

Secondary data are the information which is obtained directly. The researcher
does not obtain them himself or directly. Such data are generally collected form
published and unpublished material. Secondary data gathered from
informations collected from the individuals and institutions through personal
diaries, letters and survey documents etc. There are various sources through
which secondary data is collected such as Biographies, Diaries, Public Records,
Published Data, Journals and Magazines and Newspapers.
This research project totally focuses on the Secondary Data. The secondary
data for the given study is collected through the Reference Book mentioned
along with various websites including the official website of the Research
and methodology of Cadbury.
In this study data have been taken from various secondary sources like:

Internet
Books
Magazines
Newspapers
Journals
CHAPTER 4
The Role of the Reserve Bank of India in the Money Market:

MONEY MARKET INSTRUMENTS IN INDIA

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

Treasury Bills:

MONEY MARKET INSTRUMENTS IN INDIA

Treasury bills are short-term instruments issued by the Reserve Bank on behalf of the
government to tide over short-term liquidity shortfalls. This instrument is used by the
government to raise short-term funds to bridge seasonal or temporary gaps between its receipt
(revenue and capital) and expenditure. They form the most important segment of the money
market not only in India but all over the world as well.
In other words, T-Bills are short term (up to one year) borrowing instruments of the
Government of India which enable investors to park their short term surplus funds while
reducing their market risk
T-bills are repaid at par on maturity. The difference between the amount paid by the
tenderer at the time of purchase (which is less than the face value) and the amount received
on maturity represents the interest amount on T-bills and is known as the discount. Tax
deducted at source (TDS) is not applicable on T-bills.

Features of T-bills are:

They are negotiable securities.
They are highly liquid as they are of shorter tenure and there is a possibility of an
interbank repos on them.
There is absence of default risk.
They have an assured yield, low transaction cost, and are eligible for inclusion in the
securities for SLR purpose.
They are not issued in scrip form. The purchases and sales are affected through the
subsidiary general ledger (SGL) account. T-Bills are issued in the form of SGL entries
in the books of Reserve Bank of India to hold the securities on behalf of the holder.
The SGL holdings can be transferred by issuing a SGL transfer form
Recently T-Bills are also being issued frequently under the Market Stabilization
Scheme (MSS).

Types of Treasury Bills:

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MONEY MARKET INSTRUMENTS IN INDIA

Treasury bills (T-bills) offer short-term investment opportunities, generally up to one year.
They are thus useful in managing short-term liquidity. At present, RBI issues T-Bills for three
different maturities : 91 days, 182 days and 364 days. The 91 day T-Bills are issued on
weekly auction basis while 182 day T-Bill auction is held on Wednesday preceding nonreporting Friday and 364 day T-Bill auction on Wednesday preceding the reporting Friday.
There are no treasury bills issued by State Governments.

Advantages of investing in T-Bills:

No Tax Deducted at Source (TDS)
Zero default risk as these are the liabilities of GOI
Liquid money Market Instrument
Active secondary market thereby enabling holder to meet immediate fund
requirement.

Amount:
Treasury bills are available for a minimum amount of Rs.25,000 and in multiples of Rs.
25,000. Treasury bills are issued at a discount and are redeemed at par. Treasury bills are also
issued under the Market Stabilization Scheme (MSS). They are available in both Primary and
Secondary market.

Auctions of Treasury Bills:

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MONEY MARKET INSTRUMENTS IN INDIA

While 91-day T-bills are auctioned every week on Wednesdays, 182 days 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 shown below (table 1.1). It also announces the
exact dates of auction, the amount to be auctioned and payment dates by issuing press
releases prior to every auction.

Participants in the T-bills market:

The Reserve Bank of India, mutual funds, financial institutions, primary dealers, satellite
dealers, provident funds, corporates, foreign banks, and foreign institutional investors are all
participants in the treasury bill market. The sale government can invest their surplus funds as
non-competitive bidders in T-bills of all maturities.
Treasury bills are pre-dominantly held by banks. In the recent years, there has been a growth
in the number of non-competitive bids, resulting in significant holding of T- bills by
provident funds, trusts and mutual funds.

MONEY MARKET INSTRUMENTS IN INDIA

CUT-OFF YIELDS:
T- bills are issued at a discount and are redeemed at par. The implicit yield in the Tbill is the rate at which the issue price (which is the cut-off price in the auction) has to be
compounded, for the number of days to maturity, to equal the maturity value. Yield, given
price, is computed using the formula:

= ((100-Price)*365)/ (Price * No of days to maturity)

Similarly, price can be computed, given yield, using the formula:
= 100/(1+(yield% * (No of days to maturity/365))
For example, a 182-day T-bill, auctioned on January 18, at a price of Rs. 95.510 would have
an implicit yield of 9.4280% computed as follows:
= ((100-95.510)*365)/(95.510*182)
9.428% is the rate at which Rs. 95.510 will grow over 182 days, to yield Rs. 100 on maturity.
Treasury bill cut-off yields in the auction represent the default -free money market rates in the
economy, and are important benchmark rates.

Types of auctions of T-bills:

MONEY MARKET INSTRUMENTS IN INDIA

There are two types of auctions:

Multiple-price auction
Uniform-price auction

Multiple-price auction:
The Reserve Bank invites bids by price, that is, the bidders have to quote the price ( per
Rs.100 face value) of the stock at which they desire to purchase. The bank then decides the
cut-off price at which the issue would be exhausted. Bids above the cut-off price are allotted
securities. In other words, each winning bidder pays the price it bid.
The main advantage of this method is that the Reserve Bank obtains the maximum price each
participant is willing to pay. It can encourage competitive bidding because each bidder is
aware that it will have to pay the price it bid, not just the minimum accepted price. If the
bidders who paid higher prices could face large capital losses if the trading in these securities
starts below the marginal price set at the auction. In order to eliminate the problem, the
Reserve Bank introduced uniform price auction in case of 91-days T-bills.

Uniform-price auction:
In this method, the Reserve Bank invites the bids in descending order and accepts those that
fully absorb the issue amount. Each winning bidders pays the same (uniform) price decided
by the Reserve Bank. The advantages of the uniform price auction are that they tend to
minimize uncertainty and encourage broader participation.
Most countries follow the multiple-price auction. However, now the trend is a shift towards
the uniform-price auction. It was introduced on an experimental basis on November 6, 1998,
in case of 91-days T-bills. Since 1999-2000, 91-day T-bills auctions are regularly conducted
on a uniform price basis.

Commercial Paper:

MONEY MARKET INSTRUMENTS IN INDIA

Commercial paper was introduced into the Indian money market during the year
1990, on the recommendation of Vaghul Committee. Now it has become a popular debt
instrument of the corporate world.
A commercial paper is an unsecured short-term instrument issued by the large banks and
corporations in the form of promissory note, negotiable and transferable by endorsement
and delivery with a fixed maturity period to meet the short-term financial requirement.
There are four basic kinds of commercial paper: promissory notes, drafts, checks, and
certificates of deposit.
It is generally issued at a discount by the leading creditworthy and highly rated
corporates. Depending upon the issuing company, a commercial paper is also known as
Financial paper, industrial paper or corporate paper. Commercial paper was initially meant
to be used by the corporates borrowers having good ranking in the market as established by a
credit rating agency to diversify their sources of short term borrowings at a rate which was
usually lower than the banks working capital lending rate.
Commercial papers can now be issued by primary dealers, satellite dealers, and allIndia financial institutions, apart from corporatist, to access short-term funds. Effective from
6th September 1996 and 17th June 1998, primary dealers and satellite dealers were also
permitted to issue commercial paper to access greater volume of funds to help increase their
activities in the secondary market. It can be issued to individuals, banks, companies and other
registered Indian corporate bodies and unincorporated bodies. It is issued at a discount
determined by the issuer company. The discount varies with the credit rating of the issuer
company and the demand and the supply position in the money market. In India, the
emergence of commercial paper has added a new dimension to the money market.

MONEY MARKET INSTRUMENTS IN INDIA

Advantage of commercial paper:

High credit ratings fetch a lower cost of capital.
Wide range of maturity provide more flexibility.
It does not create any lien on asset of the company.
Tradability of Commercial Paper provides investors with exit options.

Disadvantages of commercial paper:

Its usage is limited to only blue chip companies.
Issuances of Commercial Paper bring down the bank credit limits.
A high degree of control is exercised on issue of Commercial Paper.
Stand-by-credit may become necessary.

Issuance Process of Commercial Paper:

In the developed economies, a substantial portion of working capital requirement
especially those that are short-term, is promptly met through flotation of commercial paper.
Directly accessing market by issuing short-term promissory notes, backed by stand-by or
underwriting facilities, enables the corporate to leverage its rating to save on interest costs.
Typically commercial paper is sold at a discount to its face value and is redeemed at face
value. Hence, the implict interest rate is function of the size of discount and the period of
maturity.
Scheduled commercial banks are major investors in commercial paper and their
investment is determined by bank liquidity conditions. Banks prefer commercial paper as an
investment avenue rather than sanctioning bank loan. These loans involve high transaction
costs and money is locked for a longer time period whereas a commercial paper is an
attractive short-term instrument for banks to park funds during times of high liquidity. Some
banks fund commercial papers by borrowing from the call money market. Usually, the call
money market rates are lower than the commercial paper rates. Hence, banks book profits

MONEY MARKET INSTRUMENTS IN INDIA

through arbitraged between the two money markets. Moreover, the issuance of commercial
papers has been generally observed to be invested related to the money market rates.

Growth in the Commercial Paper Market:

Commercial paper was introduced in India in January 1990, in pursuance of the Vaghul
Committees recommendations, in order to enable highly rated non-bank corporate borrowers
to diversify their sources of short term borrowings and also provide an additional instrument
to investors. commercial paper could carry on an interest rate coupon but is generally sold at
a discount. Since commercial paper is freely transferable, banks, financial institutions,
insurance companies and others are able to invest their short-term surplus funds in a highly
liquid instrument at attractive rates of return.
A major reform to impart a measure of independence to the commercial paper market
took place when the stand by facility* of the restoration of the cash credit limit and
guaranteeing funds to the issuer on maturity of the paper was withdrawn in October 1994. As
the reduction in cash credit portion of the MPBF impeded the development of the commercial
paper market, the issuance of commercial paper was delinked from the cash credit limit in
October 1997. It was converted into a stand alone product from October 2000 so as to enable
the issuers of the service sector to meet short-term working capital requirements.
Banks are allowed to fix working capital limits after taking into account the resource
pattern of the companies finances, including commercial papers. Corporates, PDs and allIndia financial institutions (FIs) under specified stipulations have permitted to raise shortterm resources by the Reserve Bank through the issue of commercial papers. There is no lock
in period for commercial papers. Furthermore, guidelines were issued permitting investments
in commercial papers which has enabled a reduction in transaction cost.
In order to rationalize the and standardize wherever possible, various aspects of
processing, settlement and documentation of commercial paper issuance, several measures
were undertaken with a view to achieving the settlement on T+1 basis. For further deepening
the market, the Reserve Bank of India issued draft guidelines on securitisation of standard
assets on April 4, 2005.

MONEY MARKET INSTRUMENTS IN INDIA

STAMP DUTY:
The dominant investors in CPs are banks, though CPs are also held by financial institutions
and corporate. The structure of stamp duties for banks and non-banks is presented in
Table 2.3

Table 2.3 Stamp Duty For Banks And Non-Banks

Period

Banks

Non-Banks

Past

Present

Past

Present

I. Upto 3 months

0.05

0.012

0.125

0.06

II. Above 3 months upto 6 months

0.10

0.024

0.250

0.12

III. Above 6 months upto 9 months

0.15

0.036

0.375

0.18

IV. Above 9 months upto 12 months

0.20

0.05

0.500

0.25

V. Above 12 months

0.40

0.10

1.00

0.5

Source: RBI, Report of the Group to review guidelines relating to CPs, March 2004.

CERTIFICATE OF DEPOSITS:
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MONEY MARKET INSTRUMENTS IN INDIA

Certificates of Deposit (CDs) - introduced since June 1989 - are negotiable term deposit
certificates issued by a commercial banks/Financial Institutions at discount to face value at
market rates, with maturity ranging from 15 days to one year.
Certificate of Deposit: The certificates of deposit are basically time deposits that are issued
by the commercial banks with maturity periods ranging from 3 months to five years. The
return on the certificate of deposit is higher than the Treasury Bills because it assumes a
higher level of risk.
Eligibility for Issue of Certificate of Deposits:
Certificate of deposits can be issued by (i) scheduled commercial banks excluding
Regional Rural Banks (RRBs) and Local Area Banks (LABs); and (ii) select all-India
Financial Institutions that have been permitted by RBI to raise short -term resources within
the umbrella limit fixed by RBI.
Banks have the freedom to issue certificate of deposits depending on their
requirements. An FI may issue certificate of deposits within the overall umbrella limit fixed
by RBI, i.e., issue of certificate of deposits together with other instruments, viz., term
money, term deposits, commercial papers and inter-corporate deposits should not exceed 100
per cent of its net owned funds, as per the latest audited balance sheet.

Maturity:
The maturity period of certificate of deposits issued by banks should be not less than
7 days and not more than one year. The FIs can issue certificate of deposits for a period not
less than 1 year and not exceeding 3 years from the date of issue.

Discount on Issue of Certificate Of Deposits:

Certificate of deposits may be issued at a discount on face value. Banks/FIs are also
allowed to issue certificate of deposits on floating rate basis provided the methodology of
compiling the floating rate is objective, transparent and market -based. The issuing bank/FI
is free to determine the discount/coupon rate. The interest rate on floating rate certificate of
deposits would have to be reset periodically in accordance with a pre -determined formula
that indicates the spread over a transparent benchmark.

Reserve Requirement and Transferability:

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MONEY MARKET INSTRUMENTS IN INDIA

Banks have to maintain the appropriate reserve requirements, i.e., cash reserve ratio
(CRR) and statutory liquidity ratio (SLR), on the issue price of the certificate of deposits.
Physical certificate of deposits are freely transferable by endorsement and delivery.
Dematted certificate of deposits can be transferred as per the procedure applicable to other
demat securities. There is no lock-in period for the certificate of deposits. Banks/FIs cannot
grant loans against certificate of deposits. Furthermore, they cannot buy- back their own
certificate of deposits before maturity
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. Huge
penalties are paid if one gets out of it before maturity

RBI GUIDELINES ON ISSUE OF CERTIFICATE OF DEPOSITS:

MONEY MARKET INSTRUMENTS IN INDIA

The salient features of scheme devised by RBI in issue of certificates of

deposit (CDs) by banks are as follows:

Certificate of deposits can be issued only by scheduled commercial banks.

Regional rural banks are not eligible for issue of certificate of deposits.

The minimum deposit that cab be accepted from a single subscriber

should be Rs. 5 lakhs. Above that, it should be in multiples of Rs. 1 lakhs.

Certificate of deposits can be issued to individuals, corporations,

companies, trusts, funds, associations etc. NRIs can subscribe to
certificate of deposits only on non- repatriable basis.

The minimum maturity period of certificate of depositss is 15 days.

Certificate of depositss should be issued at a discount on face value. The

issuing bank is free to determine the discount rate.

As the certificates of depositss are usance promissory notes, stamp duty

would be attracted as per provisions if Indian Stamp Act.

The issuing banks have to maintain CRR and SLR on the issue price of
certificate of deposits.

Certificate of deposits are freely transferable by endorsement and delivery.

Banks cannot grant loan against security of certificate of deposits.

Banks cannot buyback their own certificate of deposits before maturity.

Certificate of deposits should be issued only in demat form.

Rating of the certificate of deposit is not mandatory/ compulsory.

CALL MONEY MARKET:

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MONEY MARKET INSTRUMENTS IN INDIA

Call and notice money market refers to the market for short -term funds ranging from
overnight funds to funds for a maximum tenor of 14 days. Under Call money market, funds
are transacted on overnight basis and under notice money market, funds are transacted for
the period of 2 days to 14 days.
The call/notice money market is an important segment of the Indian Money Market.
This is because, any change in demand and supply of short-term funds in the financial
system is quickly reflected in call money rates. The RBI makes use of this market for
conducting the open market operations effectively.
Participants in call/notice money market currently include banks (excluding RRBs)
and Primary dealers both as borrowers and lenders. Non Bank institutions are not permitted
in the call/notice money market with effect from August 6, 2005.

The regulator has

prescribed limits on the banks and primary dealers operation in the call/notice money
market.
Call money market is for very short term funds, known as money on call. The rate at
which funds are borrowed in this market is called `Call Money rate'. The size of the market
for these funds in India is between Rs 60,000 million to Rs 70,000 million, of which public
sector banks account for 80% of borrowings and foreign banks/private sector banks account
for the balance 20%. Non-bank financial institutions like IDBI, LIC, and GIC etc participate
only as lenders in this market. 80% of the requirement of call money funds is met by the nonbank participants and 20% from the banking system.

Participants in the Call Money Market:

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MONEY MARKET INSTRUMENTS IN INDIA

Participants in call money market include the following:

As lenders and borrowers: Banks and institutions such as commercial banks, both
Indian and foreign, State Bank of India, Cooperative Banks, Discount and Finance
House of India ltd. (DFHL) and Securities Trading Corporation of India (STCI).
As lenders: Life Insurance Corporation of India (LIC), Unit Trust of India (UTI),
General Insurance Corporation (GIC), Industrial Development Bank of India (IDBI),
National Bank for Agriculture and Rural Development (NABARD), specified
institutions

already

operating

in

bills

rediscounting

market,

and

entities/corporates/mutual funds.
The participants in the call markets increased in the 1990s, with a gradual opening up
of the call markets to non-bank entities.

Initially DFHI was the only PD eligible to

participate in the call market, with other PDs having to route their transactions through
DFHI, and subsequently STCI. In 1996, PDs apart from DFHI and STCI were allowed to
lend and borrow directly in the call markets.

Presently there are 18 primary dealers

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

Call Money Rates:

MONEY MARKET INSTRUMENTS IN INDIA

The rate of interest on call funds is called money rate. Call money rates are
characteristics in that they are found to be having seasonal and daily variations requiring
intervention by RBI and other institutions.
The concentration in the borrowing and lending side of the call markets impacts
liquidity in the call markets. The presence or absence of important players is a significant
influence on quantity as well as price. This leads to a lack of depth and high levels of
volatility in call rates, when the participant structure on the lending or borrowing side alters.
Short-term liquidity conditions impact the call rates the most. On the supply side the
call rates are influenced by factors such as: deposit mobilization of banks, capital flows, and
banks reserve requirements; and on the demand side, call rates are influenced by tax
outflows, government borrowing programme, seasonal fluctuations in credit off take. The
external situation and the behaviour of exchange rates also have an influence on call rates, as
most players in this market run integrated treasuries that hold short term positions in both
rupee and forex markets, deploying and borrowing funds through call markets.
Source: Handbook of Statistics on Indian Economy, 2006-07, RBI
During normal times, call rates hover in a range between the repo rate and the
reverse repo rate. The repo rate represents an avenue for parking short -term funds, and
during periods of easy liquidity, call rates are only slightly above the repo rates. During
periods of tight liquidity, call rates move towards the reverse repo rate. Table 4.3 provides
data on the behaviour of call rates. Figure 4.3displays the trend of average monthly call
rates.
The behaviour of call rates has historically been influenced by liquidity conditions in
the market. Call rates touched a peak of about 35% in May 1992, reflecting tight liquidity on
account of high levels of statutory pre-emptions and withdrawal of all refinance facilities,
barring export credit refinance. Call rates again came under pressure in November 1995
when the rates were 35% par.

Repurchase Agreement (Repo):

MONEY MARKET INSTRUMENTS IN INDIA

The major function of the money market is to provide liquidity. To achieve this
function and to even out liquidity changes, the Reserve Bank uses repos. Repo is a useful
money market instrument enabling the smooth adjustment of short-term liquidity among
varied market participants such as banks, financial institutions and so on.
Repo is a money market instrument, which enables collateralized short term
borrowing and lending through sale/purchase operations in debt instruments. Under a repo
transaction, a holder of securities sells them to an investor with an agreement to repurchase
at a predetermined date and rate. It is a temporary sale of debt involving full transfer of
ownership of the securities, that is, the assignment of voting and financial rights.
Repo is also referred to as a ready forward transaction as it is a means of funding by
selling a security held on a spot basis and repurchasing the same on a forward basis. Though
there is no restriction on the maximum period for which repos can be undertaken, generally,
repos are done for a period not exceeding 14 days. Different instruments can be considered
as collateral security for undertaking the ready forward deals and they include Government
dated securities, treasury bills.
In a typical repo transaction, the counter-parties agree to exchange securities and
cash, with a simultaneous agreement to reverse the transactions after a given period. To the
lender of cash, the securities lent by the borrower serves as the collateral; to the lender of
securities, the cash borrowed by the lender serves as the collateral. Repo thus represents a
collateralized short term lending. The lender of securities (who is also the borrower of cash)
is said to be doing the repo; the same transaction is a reverse repo in the books of lender of
cash (who is also the borrower of securities).

Reserve Repos:

MONEY MARKET INSTRUMENTS IN INDIA

A reverse repo is the mirror image of a repo. For, in a reverse repo, securities are
acquired with a simultaneous commitment to resell. Hence whether a transaction is a repo or
a reverse repo is determined only in terms of who initiated the first leg of the transaction.
When the reverse repurchase transaction matures, the counter- party returns the security to
the entity concerned and receives its cash along with a profit spread. One factor which
encourages an organization to enter into reverse repo is that it earns some extra income on
its otherwise idle cash.
The difference between the price at which the securities are bought and sold is the
lenders profit or interest earned for lending the money. The transaction combines elements of
both a securities purchased/sale operation and also a money market borrowing/lending
operation.

Importance of Repos:
Interest Rate: being collateralized loans, repos help reduce counter-party risk and
therefore, fetch a low interest rate especially in a volatile market.
Safety: repo is an almost risk-free instrument used to even-out liquidity changes in
the system. Repos offer safe short-term outlet for temporary excess cash at close to
market interest rates.
Uses: As low-risk and flexible short-term instruments, repos are used to finance
securities held in trading and investment account of security dealers, to establish short
positions, to implement arbitrage activities besides meeting specific customer needs.
They offer low-cost investment opportunities with combination of yield and liquidity.
In India, repo transactions are basically fund management/statutory liquidity reserve
(SLR) management devices used by banks.
Cash Management Tool: the repo arrangement essentially serves as a short-term
cash management tool as the bank receives cash from the buyer in return for the
securities. This helps the banks to meet temporary cash requirements. This also makes
the repos a pure money lending operation. On maturity of repos, the security is
purchased back by the seller of the securities.
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Liquidity Control: The RBI uses repos as a tool of liquidity control for absorbing
surplus liquidity from the banking system in a flexible way and there preventing
interest rate arbitraging. All repo transactions are to be affected at Mumbai only and
the deals are to be necessarily put through the subsidiary general ledger (SGL)
account with the Reserve Bank of India.

Repo Rate:
Repo rate is nothing but the annualised interest rate for the funds transferred by the
lender to the borrower. Generally, the rate at which it is possible to borrow through a repo is
lower than the same offered on unsecured (or clean) inter-bank loan for the reason that it is a
collateralized transaction and the credit worthiness of the issuer of the security is often
higher than the seller. Other factors affecting the repo rate include the credit worthiness of
the borrower, liquidity of the collateral and comparable rates of other money market
instruments.
In a repo transaction, there are two legs of transactions viz. selling of the security and
repurchasing of the same. In the first leg of the transaction which is for a nearer date, sale
price is usually based on the prevailing market price for outright deals. In the second leg,
which is for a future date, the price is structured based on the funds flow of interest and tax
elements of funds exchanged. This is on account of two factors. First, as the ownership of
securities passes on from seller to buyer for the repo period, legally the coupon interest
accrued for the period has to be passed on to the buyer. Thus, at the sale leg, while the buyer
of security is required to pay the accrued coupon interest for the broken period, at the
repurchase leg, the initial seller is required to pay the accrued interest for the broken period
to the initial buyer.

Commercial bill market:

MONEY MARKET INSTRUMENTS IN INDIA

Commercial bill is a short term, negotiable, and self-liquidating instrument with low
risk. It enhances he liability to make payment in a fixed date when goods are bought on
credit. According to the Indian Negotiable Instruments Act, 1881, bill or exchange is a
written instrument containing an unconditional order, signed by the maker, directing to pay a
certain amount of money only to a particular person, or to the bearer of the instrument. Bills
of exchange are negotiable instruments drawn by the seller (drawer) on the buyer (drawee) or
the value of the goods delivered to him. Such bills are called trade bills. When trade bills are
accepted by commercial banks, they are called commercial bills. The bank discount this bill
by keeping a certain margin and credits the proceeds. Banks, when in need of money, can also
get such bills rediscounted by financial institutions such as LIC, UTI, GIC, ICICI and IRBI.
The maturity period of the bills varies from 30 days, 60 days or 90 days, depending on the
credit extended in the industry.

Types of Commercial Bills:

Commercial bill is an important tool finance credit sales. It may be a demand bill or a
usance bill. A demand bill is payable on demand, that is immediately at sight or on
presentation by the drawee. A usance bill is payable after a specified time. If the seller wishes
to give sometime for payment, the bill would be payable at a future date. These bills can
either be clean bills or documentary bills. In a clean bill, documents are enclosed and
delivered against acceptance by drawee, after which it becomes clear. In the case of a
documentary bill, documents are delivered against payment accepted by the drawee and
documents of bill are filed by bankers till the bill is paid.
Commercial bills can be inland bills or foreign bills. Inland bills must (1) be drawn
or made in India and must be payable in India: or (2) drawn upon any person resident in
India. Foreign bills, on the other hand, are (1) drawn outside India and may be payable and by
a party outside India, or may be payable in India or drawn on a party in India or (2) it may be
drawn in India and made payable outside India. A related classification of bills is export bills
and import bills. While export bills are drawn by exporters in any country outside India,
import bills are drawn on importers in India by exporters abroad.

MONEY MARKET INSTRUMENTS IN INDIA

Money Market mutual fund (MMMFS):

A mutual fund is a professionally managed type of collective investment scheme that
pools money from many investors and invests it in stocks, bonds, short- term money market
instruments and other securities. Mutual funds have a fund manager who invests the money
on behalf of the investors by buying / selling stocks, bonds etc.
Money market mutual funds (mmmfs) were introduced in April 1991 to provide an
additional short-term avenue for investment and bring money market investment within the
reach of individuals. These mutual funds would invest exclusively in money market
instruments. Money market mutual funds bridge the gap between small investors and the
money market. It mobilizes saving from small investors and invests them in short-term debt
instruments or money market instruments.
There are various investment avenues available to an investor such as real estate,
bank deposits, post office deposits, shares, debentures, bonds etc. A mutual fund is one more
type of Investment avenue available to investors. There are many reasons why investors
prefer mutual funds. An investors money is invested by the mutual fund in a variety of
shares, bonds and other securities thus diversifying the investors portfolio across different
companies and

sectors. This diversification helps in reducing the overall

risk of the

portfolio. It is also less expensive to invest in a mutual fund since the minimum investment
amount in mutual fund units is fairly low (Rs. 500 or so). With Rs. 500 an investor may be
able to buy only a few stocks and not get the desired diversification. These are some of the
reasons why mutual funds have gained in popularity over the years
Indians have been traditionally savers and invested money in traditional savings instruments
such as bank deposits. Against this background, if we look at approximately Rs. 5 lakh
crores which Indian Mutual Funds are managing, then it is no mean an achievement. A
country traditionally putting money in safe, risk-free investments like Bank FDs, Post Office
and Life Insurance, has started to invest in stocks, bonds and shares thanks to the mutual
fund industry.

CHARACTERISTIC OF MUTUAL FUND

MONEY MARKET INSTRUMENTS IN INDIA

The ownership is in the hands of the investors who have pooled in their funds.
It is managed by a team of investment professionals and other service
providers.
The pool of funds is invested in a portfolio of marketable investments.
The investors share is denominated by units whose value is called as Net
Asset Value (NAV) which changes every day and investors subscription is
accounted as unit capital.
The investment portfolio is created according to the stated investment
objectives of the fund.

ADVANTAGES OF MUTUAL FUNDS TO INVESTORS:

1. Portfolio Diversification purchasing units in a mutual fund instead of buying
individual stocks or bonds, the investors risk is spread out and minimized up to
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MONEY MARKET INSTRUMENTS IN INDIA

certain extent. The idea behind diversification is to invest in a large number of assets
so that a loss in any particular investment is minimized by gain in others.
2. Professional Management The basic advantage of funds is that, they are
professional managed, by well qualified professional. Investors purchase funds
because they do not have the time or the expertise to manage their own portfolio. A
mutual fund is considered to be relatively less expensive way to make and monitor
their investment.
3. Economies of scale Mutual fund buy and sell large amounts of securities at a time,
thus help to reducing transaction costs, and help to bring down the average cost of the
unit for their investors.
4. Liquidity Just like an individual stock, mutual fund also allow investors to liquidate
their holdings as and when they want.
5. Simplicity Investments in mutual fund is considered to be easy, compare to other
available instruments in the market, and the minimum investment is small. Most AMC
also have automatic purchase plans whereby as little as Rs. 2000, where SIP start with
just Rs. 50 per month basis.
6. Transparency - Investors get regular information on the value of your investment in
addition to disclosure on the specific investments made by your scheme, the
proportion invested in each class of assets and the fund manager's investment strategy
and outlook.
7. Flexibility - Through features such as regular investment plans, regular withdrawal
plans and dividend reinvestment plans; you can systematically invest or withdraw
funds according to your needs and convenience
8. Liquidity Just like an individual stock, mutual fund also allow investors to liquidate
their holdings as and when they want.
9. Simplicity Investments in mutual fund is considered to be easy, compare to other
available instruments in the market, and the minimum investment is small. Most AMC
also have automatic purchase plans whereby as little as Rs. 2000, where SIP start with
just Rs. 50 per month basis.

MONEY MARKET INSTRUMENTS IN INDIA

10. Transparency - Investors get regular information on the value of your investment in
addition to disclosure on the specific investments made by your scheme, the
proportion invested in each class of assets and the fund manager's investment strategy
and outlook.
DISADVANTAGES OF MUTUAL FUNDS TO INVESTORS
1. Professional Management Some funds doesnt perform in neither the market, as
their management is not dynamic enough to explore the available opportunity in the
market, thus many investors debate over whether or not the so-called professional are
any better than mutual fund or investor himself, for picking up stock.
2. Costs The biggest source of AMC income is generally from the entry and exit load
which they charge from investors, at the time of purchase. The mutual fund industries
are thus charging extra cost under layers of jargon.
3. Dilution Because funds have small holdings across different companies, high
returns from a few investments often dont make much difference on the overall
return. Dilution is also the result of a successful fund getting to big. When money
pours into funds that have had strong success, the manager often has trouble finding a
good investment for all the new money.
4. Taxes When making decision about your money, fund managers dont consider your
personal tax situation. For example, when a fund manager sells a security, a capital
gain tax is triggered, which affect how profitable the individual is from the sale. It
might have been more advantageous for the individual to defer the capital gains
liability.
5. Professional Management Some funds doesnt perform in neither the market, as
their management is not dynamic enough to explore the available opportunity in the
market, thus many investors debate over whether or not the so-called professional are
any better than mutual fund or investor himself, for picking up stock.
6. Costs The biggest source of AMC income is generally from the entry and exit load
which they charge from investors, at the time of purchase. The mutual fund industries
are thus charging extra cost under layers of jargon.

MONEY MARKET INSTRUMENTS IN INDIA

7. Taxes When making decision about your money, fund managers dont consider your
personal tax situation. For example, when a fund manager sells a security, a capital
gain tax is triggered, which affect how profitable the individual is from the sale. It
might have been more advantageous for the individual to defer the capital gains
liability.

8. Restrictive gains - Diversification helps, if risk minimization is your objective.

However, the lack of investment focus also means you gain less than if you had
invested directly in a single security. Assume, Reliance appreciated 50 per cent. A
direct investment in the stock would appreciate by 50 per cent. But your investment in
the mutual fund, which had invested 10 per cent of its corpus in Reliance, will see
only a 5 per cent appreciation.

9. Management risk - Assume, Reliance appreciated 50 per cent. A direct investment in

the stock would appreciate by 50 per cent. But your investment in the mutual fund,
which had invested 10 per cent of its corpus in Reliance, will see only a 5 per cent
appreciation.

INVESTORS IN MUTUAL FUNDS:

Mutual funds in India are open to investment by following investors:
1. Residents including:
a) Resident Indian Individual
b) Indian Companies
c) Indian trust/charitable trusts
d) Banks
e) Non Banking Finance companies
f) Insurance companies
g) Provident funds
2. Non Residents Including:
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MONEY MARKET INSTRUMENTS IN INDIA

a) Non residents Indians

b) Overseas corporate bodies
3. Foreign entities:
a) Foreign Institutional Investors registered with SEBI.
Foreign citizens/entities are however now allowed to invest in India.

Government Securities Market (GSM):

One of the important sources of borrowing funds is the government securities market
(GSM). The government raises short term and long term funds by issuing securities. These
securities do not carry risk and are as good as gold as the government guarantees the payment
of interest and the repayment of principal. They are, therefore, referred to as gilt-edged
securities. The government securities market is the largest market in any economic system
and therefore, is the benchmark for other markets.
The Government securities market consists of securities issued by the State
government and the Central government. Government securities include Central Government
securities, Treasury bills and State Development Loans. They are issued in order to finance
the fiscal deficit and managing the temporary cash mismatches of the Government. All
entities registered in India like banks, financial institutions, Primary Dealers, firms,
companies, corporate bodies, partnership firms, institutions, mutual funds, Foreign
Institutional Investors, State Governments, Provident Funds, trusts, research organisations,
Nepal Rashtra bank and even individuals are eligible to purchase Government Securities.
They are generally by banks and institutions with the Reserve Bank of India in Subsidiary
General Ledger accounts. They can be held in special accounts known as Constituent
Subsidiary General Ledger (CSGL) accounts which can be opened with banks and Primary
Dealers or in dematerialized form in demat accounts maintained with the Depository
Participants of NSDL.

MONEY MARKET INSTRUMENTS IN INDIA

The securities are issued at par value (Rs 100) and have a coupon rate which is
decided at the time of issue by auction technique. These securities pay interest at the coupon
rate on a half yearly basis and are redeemed at par value on maturity.
Government securities are highly liquid instruments available both in the primary and
secondary market. In the primary market Government securities are issued through auctions
(yield based or price based auctions) which are conducted by the Reserve Bank of India.
There is a scheme of non-competitive bidding in these auctions wherein retail investors can
participate for small amounts ranging from Rs 10,000 to Rs 2 cr face value. The tenor of
these securities ranges from 1 year to 30 years.

Issuers, Investors, and Types of Government Securities:

Government securities are issued by the central government, state governments and
semi-governments authorities which also include local government authorities such as city
corporations and municipalities.
The major investors in this market, besides the Reserve bank, are the nationalized banks as
they have to subscribe these securities to meet their requirements. The other investors are
insurance companies, state government, provident funds, individuals, corporates, nonbanking finance companies, primary dealers, financial institutions and to a limited extent,
foreign institutional investors and non-resident Indian (NRIs).
These investors can be classified into three segments:
1. Wholesale market segment namely institutional players such as banks, financial
institutions, insurance companies, primary dealers and mutual funds.
2. Middle segment comprising corporates, provident funds, trusts, non-banking finance
companies and small cooperative Banks with an average liquidity ranging from Rs 7 crore to
Rs.25 Crore.
3. Retail segment consisting of less active investors such as individuals and non-institutional
investors.

MONEY MARKET INSTRUMENTS IN INDIA

The government securities market is mostly an institutional investors market as standard lots
of trade are around Rs 1 crore and 99 per cent of all trades are done through the Subsidiary
General ledger (SGL) account, which is a kind of depository account held by the Reserve
bank. Individuals cannot open SGL accounts. They have to open SGL-II accounts with a bank
or a primary dealer provided they have a huge balance and agree to trade on an ongoing basis.

Types of Government Securities:

Government securities are of two types: treasury bills and government dated
securities. The latter carry varying coupons rates and are of different maturities. Sometimes,
the Reserve Bank converts maturing treasury bills into bonds thereby rolling over the
governments debt.
Discount and Finance House of India Ltd. (DFHI), a unique institution of its kind,
was set up in April 1988. The share capital of DFHI is Rs 200 crores, which has been
subscribed by Reserve Bank of India (10.5%), Public sector banks (62%) and Financial
Institutions (26.6%). The discount has been established to deal in money market instruments
in order to provide liquidity in the money market. Thus the task assigned to DFHI is to
develop a secondary market in the existing money market instruments.
The establishment of a discount House was recommended by a Working Group on
Money market. The main objective of DFHI is to facilitate the smoothening of the short term
liquidity imbalances by developing an active money market and integrating the various
segments of the money market.
Treasury bills are issued by Reserve bank of India on behalf of the Government of
India. Such bills are sold at fortnightly auctions. The Discount House regularly participates in
such auctions. Moreover, it provides a ready market to other institutions/individuals to buy or
sell the Treasury Bills. It purchases the same either as outright purchase or on repos basis.
Repos mean the right to re-purchase the same bills again. For this purpose the DFHI quotes
two way prices with fine spread. Such operations in Treasury Bills impart greater flexibility
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MONEY MARKET INSTRUMENTS IN INDIA

to banks in their funds management. Moreover, with the creation of a secondary market for
treasury Bills, corporate bodies and other institutions could also invest their short term
surplus funds in such bills.

CHAPTER 5
RECOMMENDATION
Financial sector reforms and monetary policy measures the governor announced certain
structural and other policy recommendation to strengthen and rationalise the functioning of
money market.
1) Call/Notice Money Market:

RBI may migrate from OF (Owned Fund) to capital funds (sum of Tier I and Tier II
capital) as the benchmark for fixing prudential limits for call/notice money market for
scheduled commercial banks. RBI may, however, continue with the present norm
associated with co-operative banks (i.e., Aggregate Deposit), PDs (i.e., Net Owned
Fund) and non-banks (i.e., 30 per cent of their average daily lending during 2000-01).

Call/notice money market transactions should be conducted on an electronic

negotiated quote driven platform.

Banks and PDs with appropriate risk management systems in place and balance sheet
structure may be allowed more flexibility to borrow in call/notice money market.

Upon accomplishing the call/notice money market into a pure inter-bank one, larger
freedom in lending in call/notice market should be afforded to banks and PDs.

2) Repos/CBLO:

MONEY MARKET INSTRUMENTS IN INDIA

Consequent upon coming into effect of the FRBM Act 2003, there would be a need to
broad-base the pool of securities to act as collateral for repo and CBLO markets.

The possibility of conducting repo transactions on an electronic, anonymous order

driven trading system may be explored.

3) Term Money:

Reporting of term money transactions on NDS platform may be made compulsory to

improve transparency.

Term money market transactions on an electronic, negotiated quote driven platform

should be introduced.

4) CD

Maturity period of CDs to be reduced to 7 days, in line with that under CP and fixed
deposit.

5)Commercial Paper

Asset-backed CP should be introduced in the Indian market

Development of a transparent benchmark

Presence of a term money market
Development of policies that provide incentives for banks and financial institutions to
manage risk and maximise profit
Increasing secondary market activity in commercial paper and certificate of deposit.
In case of commercial paper, underwriting should be allowed and revolving
underwriting finance facility and Asset backed commercial paper should be
introduced. In case of Certificate of deposits the tenure of those of the financial
institutions certificate of deposits should be rationalised. Moreover, floating rate
certificate of deposits can be introduced.

MONEY MARKET INSTRUMENTS IN INDIA

Rationalisation of the stamp duty structure. Multiple prescription of stamp duty leads
to in the administrative costs and administrative hassles.
Change in the regulatory mindset of the Reserve Bank by shifting the focus of control
from quantity of liquidity to price which can lead to an orderly development of money
market.
Good debt and cash management on the part of the government which will not only
be complementary to the monetary policy but give greater freedom to the Reserve
Bank in setting its operating procedures.

CHAPTER 6
BIBLIOGRAGHY:
1. WEBSITES:
2. www.rbi.org.in/weekly statistical supplement/various issues.co.in
3. www.investopedia.com.
4. www.bseindia.com
5. www.nseindia.com
6. www.economics.indiatimes.com/