A PROJECT REPORT ON

MONEY MARKET ANALYSIS

SUBMITTED BY

SAHIL KUMAR SARAWGI

T.Y.B.F.M [SEMESTER V]
DIV.: A
ROLL NO.: 42

ACADEMIC YEAR

2016-2017

UNDER THE GUIDANCE OF

MRS. POOJA SINGH

DATE OF SUBMISSION
7TH SEPTEMBER, 2017

SVKM’S NARSEE MONJEE COLLEGE OF COMMERCE AND

ECONOMICS
VILE PARLE (W), MUMBAI - 400 056

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 CERTIFICATE

I, MRS. POOJA SINGH, hereby certify that SAHIL KUMAR SARAWGI of

SVKM’s Narsee Monjee College of Commerce and Economics of TYBFM
[Semester V] has completed the project on ‘MONEY MARKET
ANALYSIS’ in the academic year 2017-2018 under my guidance. The
information submitted herein is true and original to the best of my knowledge.

____________________ ____________________
MRS. POOJA SINGH MR. PARAG AJAGAONKAR
BFM CO-ORDINATOR PRINCIPAL
PROJECT GUIDE

____________________
EXAMINER

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 DECLARATION

I, SAHIL KUMAR SARAWGI, of SVKM’s Narsee Monjee College of

Commerce and Economics of TYBFM [Semester V] hereby declare that I have
completed my project, titled ‘MONEY MARKET ANALYSIS’ in the
Academic Year 2017 – 2018. The information submitted herein is true and
original to the best of my knowledge.

____________________

SAHIL KUMAR SARAWGI

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 ACKNOWLEDGEMENT

It has always been my sincere desire as a financial market student to get an

opportunity to express my views, skills, attitude and talent in which I am
proficient. A project is one such avenue through which a student who aspires
to be a future manager does something creative. This project has given me the
chance to get in touch with the practical aspects of management.

I am extremely grateful to the University of Mumbai for having prescribed this

project work to me as a part of the academic requirement in the Bachelor of
Financial Markets (BFM) course.

I wish to appreciate the SVKM management and Narsee Monjee College for
providing all the required facilities. I would like to thank the Principal, Dr.
Parag Aja for her dynamic leadership.

I would also like to thank the BFM Coordinator, and my Project Guide Mrs.
Pooja Ma’am for all her support and help. I also wish to thank her for guiding
me throughout the project and without whose support; the project may not have
taken shape.

I also appreciate all the support provided by the library staff and the teaching
and supporting staff of N.M. College for providing all the necessary academic
content and the entire state of the art infrastructure and resources to enable the
completion of my project.

Finally, I thank all my friends and family members who have directly or
indirectly helped me towards the execution of this project.

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 EXECUTIVE SUMMARY

This project is undertaken to understand the functioning of the Indian Money

Market with an overview of International Money Market.

A financial market is a market in which people and entities can trade financial
securities, commodities, and other fungible items of value at low transaction
costs and at prices that reflect supply and demand.

Money market being the component of the financial market is a market for
dealing with financial assets and securities which have a maturity period of up to
one year. In other words, it’s a market for purely short-term funds. The Indian
money market involves variety of instruments in which different participants
trade. It involves short term borrowing, lending, buying and selling with short
maturities periods.

Objective of the Study

 To gain in depth knowledge about Indian Money Market

 To study the role of various instruments and parties thereon.
 To compare Indian and Global Money Market to a certain extent.
 To examine the development pattern of the market.
 To conclude suggestions for development in Money Market of India.

Scope of the Study

 The analysis includes in-depth study of Indian money market only thereby
allowing room to understand what Indian money market is all about.
 This study can be used for further research and analysis to abstract different
point of views and come up with some other conclusions.
 It can be used to analyze the development and reform pattern of the market.
 It may help to develop new reforms or modification in the Indian money
market.

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 Limitations of the Study

 Time constraint limits the extent and depth of the study.

 Due to unwillingness of providing any information or casual behavior
towards interviews the participant may not give a genuine opinion or answer
thereby affecting conclusion.
 The result of this research may not be completely generalizable.
 The topic being related to corporate institutions, banks, FIIs etc. ignores the
perception of individuals or retail investors.

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 TABLE OF CONTENTS

Serial Content Page

No. Number
I. Introduction 1.

II. Review of Literature 4.

III. Features of Indian Money Market 6.

IV. Functions and Importance of Indian Money 7.
Market
V. Structure of Indian Money Market 10.
VI. Merits of Indian Money Market 12.
VII. De-merits of Indian Money Market 13.
VIII. Money Market Account 15.
IX. Instruments in Indian Money Market 17.
X. Participants in Indian Money Market 33.
XI. Role of Money Market in Context to 35.
Growth of Indian Economy
XII. Developments in the Indian 39.
Money Market
XIII. Monetary Operating Procedure 45.
XIV. Major Reforms in the Indian 51.
Money Market
XV. Measures to Improve Indian 54.
Money Market
XVI. Needs for Assimilate Depth to the Market 56.
Diversifying Investor Base

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XVII. Overview of International Money 60.
Market
XVIII. Primary Data Analysis 62.
XIX. Suggestions 65.
XX. Conclusion 67.
XXI. Bibliography 68.
XXII. Annexure 69.

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 INTRODUCTION

A financial market is a market in which people and entities can trade financial
securities, commodities, and other fungible items of value at low transaction
costs and at prices that reflect supply and demand. Securities include stocks and
bonds, and commodities include precious metals or agricultural goods.

There are both general markets (where many commodities are traded) and
specialized markets (where only one commodity is traded). Markets work by
placing many interested buyers and sellers (including households, firms, and
government agencies) in one "place", thus making it easier for them to find each
other. An economy which relies primarily on interactions between buyers and
sellers to allocate resources without government intervention is known as
a market economy in contrast either to a command economy or to a non-market
economy such as a gift economy.

Financial markets are broadly divided into two categories:

 MONEY MARKET
 CAPITAL MARKET

What is a Money market?

The money market is where financial instruments or assets with high liquidity
and very short maturities are traded. This market deals with borrowing, lending,
buying and selling of financial assets and securities in the short term, with
maturities that usually range from overnight to just under a year. In other words,
it’s a market for purely short-term funds. The money market is one of a
component of the financial markets.

What is a Capital market?

The money market is different from capital market, which is a market for long-
term securities (debt or equity), where business enterprises (companies)
and governments can raise long-term funds. It is defined as a market in which
money is provided for periods longer than a year, as the raising of short-term
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funds takes place on other markets (e.g., the money market). The capital market
includes the stock market (equity securities) and the bond market (debt).

Money markets and capital markets are parts of financial markets. Capital
markets may be classified as primary markets and secondary markets. In primary
markets, new stock or bond issues are sold to investors via a mechanism known
as underwriting. In the secondary markets, existing securities are sold and bought
among investors or traders, usually on a securities exchange, over-the-counter, or
elsewhere.

Different views on Money Market

According to the Reserve Bank of India,

“Money market can be defined as a market for short-term funds with maturities
ranging from overnight to one year and includes financial instruments that are
considered to be close substitutes of money. It provides an equilibrating
mechanism for demand and supply of short-term funds and in the process,
provides an avenue for central bank intervention in influencing both the quantum
and cost of liquidity in the financial system, and important stage in the chain of
monetary policy transmission.”

According to the Geoffrey,

“Money market is the collective name given to the various firms and institutions
that deal in the various grades of the near money.”

According to the McGraw Hill Dictionary of Modern Economics,

“Money market is the term designed to include the financial institutions which
handle the purchase, sale, and transfers of short term credit instruments. The
money market includes the entire machinery for the channelizing of short-term
funds. Concerned primarily with small business needs for working capital,
individual’s borrowings, and government short term obligations, it differs from
the long term or capital market which devotes its attention to dealings in bonds,
corporate stock and mortgage credit.”

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 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 channels of the Indian money market.

The nationalization of banks in 1969, setting up of various committees such as

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
money market development.

Objectives of Indian Money Market

A well-developed and well-structured money market serves the following

objectives:

 To implement the three objectives of Monetary Policy – growth, equity and price
stability.
 To control credit flow according to policy priorities.
 Providing an equilibrium mechanism for ironing out short-term surplus and
deficits.
 To provide a reasonable access to users of short-term funds to meet their
requirements quickly, adequately and at reasonable costs.
 To provide room for overcoming short-term deficits.
 To enable the Central Bank to influence and regulate liquidity in the economy
through its intervention in this market.
 To provide a parking place to employ short-term surplus funds by assisting in
mobilizing the savings.

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 REVIEW OF LITERATURE

 N. Singhania, A. Singh and J, Prajapat1 (2016), studied the commercial

paper in the Indian money market. They concluded that the commercial
paper market has long been viewed as a base of high liquidity and low risk.
Short-term interest rate environment, credit rating and market liquidity
condition play an influential role in the Indian CP market activity. At
present, Indian commercial paper market is still in its nascent stage of
evolution in terms of borrowing activity in primary CPs market and trading
activity in the secondary CPs market. Its statistics shows that between June
2014 and January 2015, companies issued commercial papers worth Rs
55,910 crore with the outstanding amount as on January 31, 2015, at Rs 2.37
lakh crore, according to Reserve Bank of India data.

 D. Chavan and M. Upadhyaya2 (2013), in their analytical study of Indian

money market tells that money market are the primary and major source of
lending short term funds in the economy so as to maintain liquidity and
stability of interest rates.
The study also aims to analyse the effect of rising inflation rates on the
Indian Money Markets whose analysis reveal that growth in process affects
lending rates of short term financial instruments thus making borrowing
costlier for the market participants.

 S. Ghosh and I. Bhattacharyya3 (2007), in their study examined the

determinants of volatility of call rate and spread in the overnight segment of
the Indian money market. In addition, it analyses the impact of monetary
policy on money market volatility and spreads.
It concluded that volatility has a positive impact on money market spread,
while expansionary monetary policy reduced volatility in market rates,
contractionary policy had negative impact on spread volatility. The other
policy variables like Bank Rate, repo and reverse repo rates have mixed
impact on volatility of call rate and spread.

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 These findings can enhance our understanding of the interaction between
policy announcements and money market microstructure and serve as a
useful guide in furthering money market reforms in India.

 J.R. Verma4, presented evidence on some major distortions in the Indian

money markets. The money market is free from interest rate ceilings, but the
research in his paper shows that interest rate deregulation by itself has not
been sufficient to produce well-functioning markets. Structural barriers and
institutional factors continue to create distortions in the market. He also puts
up that a well-defined yield curve does not exist in the Indian money market
because domestic interest rates other than the call rate is sticky.

1. CA. Neetu Singhania (faculty), Ms. Ashruti Singh and Ms. Janvi Prajapat (students)
are from Thakur Institute of Management Studies and Research.

2. Prof. Deepa Chavan is an associate professor in KG. Mittal Institute of Management,

Mumbai and Dr. Makarand Upadhyaya is an associate professor at College of
Business Administration, Jazan University, Saudi Arabia.

3. Saurabh Ghosh and Indranil Bhattacharyya are assistant advisers in the Financial
Markets Department and Monetary Policy Department, respectively, of the Reserve
Bank of India.

4. Jayanth R. Varma is from Indian Institute of Management, Ahmedabad who

reproduced the matter from the paper first published by IJAF (The ICFAI Journal of
Applied Finance) in 1997.

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 FEATURES OF INDIAN MONEY MARKET

1. It includes financial instruments that are considered to be close substitutes of

money i.e. those which can be considered as cash equivalents. Cash
equivalents are those assets which are either money parked in an institution
like Bank balance, fixed deposits or any liquid asset which can be easily
converted to cash.

2. It provides an equalizing mechanism for meeting the demand and supply of

short term funds which means the lending and providing of funds easily takes
place. Also there is a match between the funds required and funds available.

3. In process of such a match of demand and supply of funds, the money market
provides an avenue for RBI in influencing both the quantum and cost of
liquidity in the financial system. Price differentials for assets of similar type
will tend to be eliminated by the interplay of demand & supply.

4. The sub markets have close inter- relationship & free movement of funds from
one sub-market to another.

5. It is a collection of market for following instruments- Call money, notice

money, repos, term money, treasury bills, commercial bills, certificate of
deposits, commercial papers inter-bank participation certificates, inter-
corporate deposits, swaps, etc.

6. The relationship that characterizes a money market is impersonal in character

so that competition is relatively pure.

7. It is a wholesale market & the volume of funds or financial assets traded are
very large i.e. in crores of rupees.

8. In fact, money market is the first and the most important stage in the chain of
monetary policy transmission. It provides the RBI with all possible measures
to make changes in the monetary policy and stabilize the financial system.

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 FUNCTIONS AND IMPORTANCE OF
INDIAN MONEY MARKET

A well-developed money market is essential for a modern economy. Importance

of a developed money market and its various functions are discussed below:

1. Development of trade and industry:

Though, historically, money market has developed as a result of industrial and
commercial progress, it also has important role to play in the process of
industrialization and economic development of a country. The market makes
liquidity available at the requisite time to the corporates (both industry as well as
traders) for the smooth conduct of the business.

2. Financing Trade:
Money Market plays crucial role in financing both internal as well as
international trade. Commercial finance is made available to the traders through
bills of exchange, which are discounted by the bill market. The acceptance houses
and discount markets help in financing foreign trade.

3. Development of capital market:

The money market rates provide an opportunity to the RBI to influence the
volume and the cost of liquidity on a short-term basis. Changes in the short-term
policy rate provide signals to financial markets, whereby different segments of
the financial system respond by adjusting their return on various instruments.
This in turns affects the long-term interest rates as well as pattern of financing
for the business. This may require firms to change their proportion of debt or
equity depending upon the financing cost i.e. the cost of capital. This leading to
the development of the capital market.

3. Financing Industry:
Money market contributes to the growth of industries in two ways:

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a. Money market helps the industries in securing short-term loans to meet their
working capital requirements through the system of finance bills, commercial
papers, etc.

b. Industries generally need long-term loans, which are provided in the capital
market. However, capital market depends upon the nature of and the
conditions in the money market. The short-term interest rates of the money
market influence the long-term interest rates of the capital market. Thus,
money market indirectly helps the industries through its link with and
influence on long-term capital market.

4. Profitable Investment:
Money market enables the commercial banks to use their excess reserves in
profitable investment. The main objective of the commercial banks is to earn
income from its reserves as well as maintain liquidity to meet the uncertain cash
demand of the depositors. In the money market, the excess reserves of the
commercial banks are invested in near-money assets (e.g. short-term bills of
exchange) which are highly liquid and can be easily converted into cash. Thus,
the commercial banks earn profits without losing liquidity. Also it becomes
convenient for the banks to maintain the statutory requirements of CRR and SLR.

5. Self-Sufficiency of Commercial Bank:

Developed money market helps the commercial banks to become self-sufficient.
In the situation of emergency, when the commercial banks have scarcity of funds,
they need not approach the central bank and borrow at a higher interest rate. On
the other hand, they can meet their requirements by recalling their old short-run
loans from the money market.

6. Help to Central Bank:

Though the central bank can function and influence the banking system in the
absence of a money market, the existence of a developed money market
smoothens the functioning and increases the efficiency of the central bank.
Money market helps the central bank in two ways:

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a. The short-run interest rates of the money market serves as an indicator of the
monetary and banking conditions in the country and, in this way, guide the
central bank to adopt an appropriate banking policy.

b. The sensitive and integrated money market helps the central bank to secure
quick and widespread influence on the sub-markets, and thus achieve effective
implementation of its policy.

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 STRUCTURE OF INDIAN MONEY MARKET

Structure Of
Indian Money
Market

Organized Sector Unorganized Sector Cooperative Sector

ORGANIZED UNORGANIZED

RBI, Commercial Money lenders,

banks Indegenious
bankers

DHFI Primary
dealers, Devp. Nidhis and Chit
Banks funds

The structure of Indian Money Market has 3 sectors:

1. Organized Sector- Those institutions which come directly or indirectly under

the broad regulations of the Reserve Bank constitute the organized sector. All
the participants or the stakeholders needs to follow the proper rules and
guidelines. It consists of the RBI, Commercial banks, DHFI primary dealers,
development banks, etc.

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2. Unorganized sector- Those institutions which fall completely outside the
purview of the central banking regulations, make up the unorganized sector.
This is the sector where the regulations have evolved by the customers and
the practices of trade. It is largely made up of indigenous bankers, money
lenders, traders, chits and nidhis.

3. Cooperative sector- After Indian got its independence in 1947, with the
advent of the planning process cooperatives became an integral part of The
First Five Year Plan. As a result, they emerged as a distinct segment in our
national economy. Different States drew up various schemes for the
cooperative movement for organizing large size-societies and provision of
State partnership and assistance. It consists of state cooperative bank, state
land development banks, etc.

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 MERITS OF INDIAN MONEY MARKET

The following are Money Market advantages, that are available to their
purchasers:

1. Liquidity:
Money Markets are highly liquid instruments, in that you can withdraw from
them at any time, usually without any sort of interest penalty. There are no finite
terms associated with a Money Market instrument. In contrast, a CD (Certificate
of Deposit) requires a minimum amount of duration before you can touch the
principal, and imposes interest penalties for early withdrawal.

2. Money Market Instruments are almost always insured:

That means that they are backed by the government against default, and are one
of the safest investments available.

3. Easy set up:

Money Market instruments are extremely easy to set up. Via the internet, they
can usually be set-up in a matter of hours or maybe 1 business day at the
maximum, if you have a checking account that you can link it to, to initially fund
it.

4. Minimum Deposit:
Today's internet-based Money Markets very often do not require any sort of
minimum deposits. That means, you can open an account with as little as $ 1.

5. Higher Yield:
Internet-based Money Market Instruments generally offer higher yields than their
brick-and-mortar (e.g., banks) counterparts. This is largely due to the reduced
overhead necessary to administrate an internet-based instrument.

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 DEMERITS OF INDIAN MONEY MARKET

1. Absence of a well-organized Banking system:

In India, Branch Banking was extremely low before nationalization of banks in
1969. There were only few big banks in the country and were concentrated in
large towns and cities. This resulted in slow movement of funds.

However, since 1969, and more so after 1992, branch banking has been speeded
up. It is to be noted that the banking system is lacking in the rural areas due to
the problem of overheads or the problem of maintaining branches. Considering
the size of rural areas in India, the percentage of branches must be higher.

2. Shortage of Funds:
The Indian Money Market is characterized by shortage of funds. Demand
for short term funds far exceeds the supply. This results in high interest rates.
However, of late, banks are flush with funds, especially in urban areas, as people
prefer to keep their money in banks rather than investing in shares or keeping as
deposits with unorganized sector.

The shortage of funds is due to:

 Low per capita income and as such low savings.

 Lack of banking habits among people.

 Tendency of the people to indulge in wasteful expenditures.

 Poor Banking facilities in some parts of rural India.

3. Seasonal Stringency of Money:

India is basically an agricultural country. Farm operations do affect demand and
supply of money. There is often shortage of funds and high interest rates during
the busy season (between October to June). During the busy season, additional
funds are required for farm operations and trading in agricultural produce.

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 However, RBI attempts to reduce the seasonal fluctuations in the money market
by pumping money in the money market during the busy season and withdrawing
the same during off season.

4. Inefficient and Corrupt Management:

The inefficiency and corrupt nature of some of the bank officials create problems
for money market in India. The success and performance of money market
largely depends upon the management of banks and FIs. However, in India, some
officials in banks and FIs are inefficient and corrupt. This results in financial
scandals like Securities Scam of 1992 and 2000-2001. For the growth and success
of money market, there is a need for well trained and dedicated workforce in
banks and FIs.

5. Lack of Control over Unorganized Money Market:

There is a need to have control over the unorganized money market not only to
bring about integration in the activities of both the organized and
unorganized money markets, but also to control the malpractices adopted by the
unorganized players in the money market.

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 MONEY MARKET ACCOUNT

A money market account is a financial account that pays interest base on current
interest rates in the money markets. Money market accounts have a high rate of
interest and require minimum balance to earn interest or avoid monthly fees.
Professional money managers will take your cash and invest it in government t-
bills (aka "treasuries"), savings bonds, certificates of deposit, and other safe and
conservative short term commercial paper. They then turn around and pay you,
the owner of the money market, your portion of the interest earned on those
investments.

Most banks offer money market accounts to their customers, although the amount
of interest paid will vary by account size. Generally, the highest interest rates are
paid to those who invest larger amount of money.

Money market accounts are frequently used to park cash between investments.

Money Market Account Interest:

When you put your money into a money market savings account it
earns interest just like in a regular savings account. Interest is money the bank
pays you so that they can use your money to fund loans to other people. That
doesn't mean you can't have your money whenever you want it, though. That's
just how banks make money -- by selling money!
Basically, it works like this:

 You open a money market account at the bank.

 The bank pays you interest on the money that you deposit and leave in that
account
 The bank then loans that money out to other people, only they charge a slightly
higher interest for the loan than what they pay you for your account. The
difference in interest they pay you verses the interest they charge others is part of
how they stay in business.

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Furthermore, we'll take a look at how the interest on money market accounts
works.

Interest on money market accounts is usually compounded daily and paid

monthly. The cool thing about compounded interest is that the bank is paying you
interest on the money they've paid you in interest.

Interest rates paid by money market accounts can vary quite a bit from bank to
bank. That's because some banks are trying harder to get people to open an
account with them than others -- so they offer higher rates.

Another difference you'll sometimes find with money market accounts is that the
more money you have in the account the higher the interest rate you get. Always
check with the bank about how the interest rate may change.

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INSTRUMENTS IN INDIAN MONEY MARKET

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 1. TREASURY BILL

In the short term, the lowest risk category instruments are the treasury bills.
RBI issues these at a prefixed day and a fixed amount. These are four types of
treasury bills.

 14-day T-bill maturity is in 14 days. Its auction is on every Friday of every week.
The notified amount for this auction is Rs. 100 crores.

 91-day T-bill maturity is in91 days. Its auction is on every Friday of every week.
The notified amount for this auction is Rs. 100 crores.

 182-day T-bill maturity is in 182 days. Its auction is on every alternate

Wednesday (which is not a reporting week). The notified amount for this auction
is Rs. 100 crores.

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 364-Day T-bill maturity is in 364 days. Its auction is on every alternate
Wednesday (which is a reporting week). The notified amount for this auction is
Rs. 500 crores.

* If the day of payment falls on a holiday, the payment is made on the day after the
holiday.

A considerable part of the government's borrowings happens through T-bills of

various maturities. Based on the bids received at the auctions, RBI decides the
cut off yield and accepts all bids below this yield. These T-bills, which are issued
at a discount, can be traded in the market. Most of the time, unless the investor
requests specifically, they are issued not as securities but as entries in the
Subsidiary General Ledger (SGL), which is maintained by RBI. The transactions
cost on T-bill are non-existent and trading is considerably high in each bill,
immediately after its issue and immediately before its redemption.

The usual investors in these instruments are banks who invest not only to part
their short-term surpluses but also since it forms part of their SLR investments,
insurance companies and FIs. FIIs so far have not been allowed to invest in this
instrument.

Table 1: Treasury Bills outstanding and Ownership Pattern

Major Holders
As on May Banks Primary State Total
27, 2016 Dealers Governments
1 2 3 4
14-day - - 1040.1 1040.1
19-day 473.3 343.8 490.9 1728.3
182-day 241.1 346.9 55.7 774.4
364-day 459.4 670.1 19.6 1539.7
Source: RBI website retrieved on June 5, 2016

The table shows that the primary dealers are the most major holders or purchasers
of the treasury bills. As they are permitted directly purchase the securities from

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 the market to enjoy the benefits of short term investing. This is followed by banks
who invests in order to meet their liquidity. Also, state government have also
invested in T-Bills but at a much lesser extent than the other two holders. Among
the three prevalent bills 91-day T-Bills are most preferred by all of them.

Yield of a Treasury Bill:

Treasury bills are quoted for purchase and sale in the secondary market on an
annualized discount percentage, or basis. Based on the bids received and bids
accepted the cut off price/ issue price is calculated.
General calculation for the discount yield for Treasury bills is

The returns on T-bills are dependent on the rates prevalent on other investment
avenues open for investors. Low yield on T-bills, generally a result of high
liquidity in banking system as indicated by low call rates, would divert the funds
from this market to other markets. This would be particularly so, if banks already
hold the minimum stipulated amount (SLR) in government paper.

2. CALL MONEY or MONEY AT CALL:

Call/Notice money is a market for uncollateralized lending and borrowing of
funds i.e. no collateral security is required to cover these transactions. The
amount is borrowed or lent on demand for a very short period. If the period is
from 2 days up to 14 days it is called ‘Notice money’ otherwise the amount is
known as ‘Call money’. Intervening holidays and/or Sundays are excluded for
this purpose.
Interbank term money market for deposits of maturity beyond 14 days and up to
three months is referred to as the term money market. The specified entities are
not allowed to lend beyond 14 days.

Features of Call money

The call market enables the banks and institutions to even out their day-to-day
deficits and surpluses of money.

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 Commercial banks, Co-operative Banks and primary dealers are allowed to
borrow and lend in this market for adjusting their cash reserve requirements.

 Specified All-India Financial Institutions, Mutual Funds and certain specified

entities are allowed to access Call/Notice money only as lenders.

 It is a completely inter-bank market hence non-bank entity are not allowed access
to this market.

 Interest rates in the call and notice money market are market determined i.e by
demand and supply of short term funds. In India, 80% demand comes from public
sector banks and remaining 20% from foreign and private sector banks.

 In view of the short tenure of such transactions, both the borrowers and the
lenders are required to have current accounts with the Reserve Bank of India.

 It serves as an outlet for deploying funds on short term basis to the lenders having
steady inflow of funds.

Table 2: Average Daily Turnover in Select Money Markets

Week Ended (Rs. In billion)
Item May 29, 2015 May 20, 2016 May 27, 2016
1 2 3
(1) Call Money 179.9 260.0 314.5
(2) Notice/Term Money 57.1 11.4 10.8
Source: RBI website retrieved on June 5, 2016

As seen in Table 1, the call money market has grown double i.e. from Rs. 179.9
billion to Rs. 314.5 billion during the last week of 2016. Hight liquidity has played
a dominant role in the participation in this avenue. The notice and the term money
market combined have however seen a down swing in the turnover since 2015. This
shows the tendency of reduced preference by the participants in this market.

21 | P a g e
3. COMMER CIAL PAPER
CPs is negotiable short-term unsecured promissory notes with fixed maturities,
issued by well rated companies generally sold on discount basis. The participants
are primary dealers, all India financial institutions and corporates that have been
permitted by to raise short term resources as fixed by RBI. CP’s have a minimum
maturity period of 15 days and a maximum of 1 year. The special feature of this
instrument is that the issuer can buy back its own security. They are issued in
multiple of 5 lakhs and the minimum size of each issue is 5 lakhs.

For example, Companies can issue CPs either directly to the investors or through
banks /merchant banks (called dealer paper). Merchant bankers and IPA are
appointed and a resolution from the BOD is to be obtained along with approval
by credit rating agencies like CRISIL, ICRA, etc. The issue process should be
complete within a time span of 2 weeks. These are basically instruments
evidencing the liability of the issuer to pay the holder in due course a fixed
amount (face value of the instrument) on the specified due date. These are issued
for a fixed period of time at a discount to the face value and mature at par.

Obtain Obtain Net not less

credit rating working capital than 4 crores
limit
worth

Issuer
Company

Redeem CP Issue CP at discount

on maturity

Investor
Bank/Company

Commercial Paper Issue Mechanism

22 | P a g e
Ideally, the discount rates on CPs ought to be determined by the demand and
supply factors in the money market and the interest rates on the other hand
competing money market instruments such as certificate of deposits(CDs),
commercial bills and treasury bills. It has been noticed that in a comparatively
stable and low rate conditions in the money market, the discount rates in the CP
markets do somewhat soften whereas in the tight money market situation it may
not be possible even for a best rated company to issue CPs at lower rates than the
lending rates on its banks lines of credit. This is partly for the reason that banks
could also firm up the lending rates during such periods. The maturity
management of CPs should also affect the CP rates. It has been observed that in
a period of prolong low and steady money market rates there is no significant
different between the discount rates if CPs for 90 and 180 days.

Advantages of CP’s
 The advantage of CP lies in its simplicity involving less paper work as
large amounts can be raised without having any underlying transaction.
 It gives flexibility to the company by providing an additional option of
raising funds particularly when the conditions prevailing in the money
market are favorable.
 CPs facilitate securitization of loans. As a result a secondary market for
the efficient movements of funds is created.
 For the company, the cost of capital is reduced considerably because it can
raise 75% of its working capital limit through issue of CPs at somewhat
lower interest rates, thereby enables it to reduce the overall cost of short-
term funds.
 The borrowers effective interest cost is lower than the prescribed lending
rate as this system affords flexibility to borrowers to reduce the outstanding
as and when surplus funds accrue to them.
 A well rated company can raise funds from different investors like banks,
NRIs, individual investors, etc.

Hence, a company proposing to issue CPs should have a clear perception as

to its cash flow during the period for which CPs are proposed to be issued and
accordingly fix the discount rates at which the instrument is to be issued.

23 | P a g e
4. CERTIFICATE OF DEPOSIT (CD)
CD is a negotiable money market instrument and issued in dematerialized
form or as a Usance Promissory Note, for funds deposited at a bank or other
eligible financial institutions for a specified time period. Banks can issue CDs
for maturities from 7 days to one a year whereas eligible FIs can issue for
maturities 1 year to 3 years. Due to their negotiable nature, they are also
known as Negotiable Certificate of Deposit (NCD). After treasury bills, the
next lowest risk category investment option is the CD.
CD should be issued in denomination of 1 lakh of maturity value or face value.
They are to be purchased for a minimum of Rs. 1 lakh or in a multiple of Rs.
1 lakh. Bank CDs are usually issued at a discount to the face value, whereas
FIs issue coupon bearing security.

A CD is issued at a discount to the face value, the discount rate being negotiated
between the issuer and the investor. Though RBI allows CDs up to one-year
maturity, the maturity most quoted in the market is for 90 days. The issue of CDs
reached a high in the last two years as banks faced with reducing deposit base
secured funds by these means. The foreign and private banks, especially, which

24 | P a g e
 do not have large branch networks and hence lower deposit base use this
instrument to raise funds. They may be referred to as a receipt for funds
deposited in a FI for a specific time, for a specific interest rate. The rates on
these deposits are determined by various factors. Low call rates would mean
higher liquidity in the market. Also, the interest rate on one-year bank deposits
acts as a lower barrier for the rates in the market.

5. INTER-CORPORATE DEPOSITS MARKET

Apart from CPs, corporate also have access to another market called the inter-
corporate deposits (ICD) market. An ICD is an unsecured loan extended by one
corporate to another. Existing mainly as a refuge for low rated corporate, this
market allows funds surplus corporate to lend to other corporate. Also the better-
rated corporate can borrow from the banking system and lend in this market. As
the cost of funds for a corporate in much higher than a bank, the rates in this
market are higher than those in the other markets. ICDs are unsecured, and hence
the risk inherent in high. The ICD market is not well organized with very little
information available publicly about transaction details.

6. REPO MARKET
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 (Repurchased Option) 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. In simple terms, it is an instrument for
borrowing funds by selling securities with an agreement to repurchase the said
securities on a mutually agreed future date at an agreed price which includes
interest for the funds borrowed.

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.
25 | P a g e
 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.

A Reverse Repo is the mirror image of a repo. For, in a reverse repo, lending of
funds against buying of securities with an agreement to resell the said securities
on a mutually agreed future date at an agreed price which included interest for
the funds lent i.e. securities are acquired with a simultaneous commitment to
resell.

It can be seen from the aforementioned that there are two legs to the same
transactions in a repo/ reverse repo. The duration between the two legs is called
the ‘repo period’. 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 lender’s profit or interest earned for
lending the money. The transaction combines elements of both a securities
purchased/sales operation and also a money market borrowing/lending operation.

7. MONEY MARKET MUTUAL FUNDS (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.

26 | P a g e
 These mutual funds would invest exclusively in money marketinstruments.
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.

Table 3: Money Market Returns as on March 31, 2016

Index 1 Year 2 Year 3 Year 4 Year 5 Year 7 Year 10 Year
(%) (%) (%) (%) (%) (%) (%)
CRISIL- AMFI 8.26 8.60 8.85 8.90 8.90 7.90 7.89
Source: CRISIL-AMFI Money Market Performance Index Factsheet– March
2016

The above table reflects the fact that the money market MF have performed better
than the deposits of a bank due to its diversification into a large number of money
market securities. The 1-year return of the MF has been 8.26% as against 7.25-
7.5% returns of the bank deposits for the financial year 2015-2016.

A mutual fund is one more type of Investment Avenue available to investors.

There are many reasons why investors prefer mutual funds. An investor’s money
is invested by the mutual fund in a variety of shares, bonds and other securities
thus diversifying the investor’s portfolio across different companies and sectors.
27 | P a g e
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.

8. COMMERCIAL BILLS:
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 discounts 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.

Bill Market Scheme, 1952:

The salient features of the scheme were as follows:

(1) The schemes was announced under section 17(4)(c) of RBI Act enables it to
make advances to scheduled banks against the security of issuance of
promissory notes or bills drawn on and payable in India and arising out of
bonafide commercial or trade transaction bearing two or more good signatures
one of which should be that of scheduled bank and maturing within 90 days
from the date of advances.

28 | P a g e
 (2) The scheduled banks were required to convert a portion of the demand
promissory notes obtained by them, from their constituents in respect of
loans/overdrafts and cash credits granted to them into usance promissory notes
maturing within 90 days, to be able to avail of refinance under the scheme;

(3) The existing loan, cash credit or overdraft accounts were, therefore, required
to be split up into two parts viz., (A) one part was to remain covered by the
demand promissory notes, in this account further.

9. GOVERNMENT SECURTIES 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 organizations, 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.
29 | P a g e
 Zero Partly Bonds with Capital
Dated Floating
Coupon Paid Call/ Put Indexed
Securities Rate Bonds
Bonds Stock Option Bonds

Issued at Issued at face A bond

Issued at face discount to value, but paid Issued at issued at call Issued at
value the face in installments face value and put face value
value over a period option

Interest rate
is fixed as a
Interest or Interest or percentage
Interest rate
coupon rate is coupon rate is over a This bond is
is fixed as a
fixed at the fixed at the predefined due for
percentage
time of Do not carry time of benchmark redemption
over the
issuance, and any interest issuance, and rate which in 2012 and
wholesale
remains rate remains may be carries a
price index
constant till constant till Treasury coupon of
at the time
redemption of redemption of bill, bank 6.72%
of issuance.
the security the security rate etc at
the time of
issuance

This bond
The tenor of The tenor of The tenor of The tenor has been The tenor of
security is security is security is of security priced in security is
fixed fixed fixed is fixed line with 5- fixed
year bonds

30 | P a g e
 The The
The security is The security The security is security is This bond principal
redeemed at is redeemed redeemed at redeemed at has been redemption
par (face value) at par (face par (face par (face priced in is linked to
on its maturity value) on its value) on its value) on line with 5- the
date maturity date maturity date its maturity year bonds Wholesale
date Price Index.

10. CASH MANAGEMENT BILLS (CMBs)

Government of India, in consultation with the RBI has decided to issue a new
short- term instrument, known as Cash Management Bills (CMBs), to meet
the temporary mismatches in the cash flow of the government. The CMBs
have the generic character of T-Bills but are issued for maturities less than 91-
days. Like T-Bills, they are also issued at a discount and redeemed at face
value at maturity. The tenure, notified amount and date of issue of the CMBs
depends upon the temporary cash requirement by the government. The
announcement of their auction is made by RBI through a Press Release which
will be issued one day prior to the date of auction. The settlement of the
auction is T+1 basis. However, these instruments are tradable and qualify for
ready forward facility. Investments in CMBs is also reckoned as an eligible
investment in government securities by banks for SLR purpose. First set of
CMBs were issued on May 12, 2010.

11. INTER BANK PARTICIPATION CERTIFICATE

The RBI introduced Participation Certificate(PCs) in 1970 with the objective
of:
 Greater mobilization of funds
 Reducing recourse to the RBI
 Diversifying the availability of financial instruments

The PC is an instrument whereby a bank can sell to a third party a part or all
of a loan made by bank to a client. Within a span of a decade PCs became very
popular after which the RBI advised the banks to achieve a significant and
31 | P a g e
lasting reduction in their recourse to PCs. Thus, the PC scheme was replaced
with Inter Bank Participation (IBPs).

There are two types of IBPs:

 On risk sharing basis: These were strictly inter-bank instruments
confined to scheduled commercial banks excluding regional rural banks.
Their purpose was to even out short-term liquidity within the banking
system. The IBPs with risk sharing could be issued for 91 to 181 days
and the rate of interest on them was fixed by the participating banks.
 Without risk sharing: The IBPs without risk sharing was a memory
market instrument with the maturity instrument with the maturity not
exceeding 90 days. The rate of interest on them was fixed by the
participating banks subject to a ceiling which was later removed. The
IBPs without risk were treated as a part of the net demand and time
liabilities of the borrowing banks. These were subject to CRR nad SLR
ratios.

32 | P a g e
 PARTICIPANTS IN INDIAN MONEY MARKET

The major participants who supply the funds and demand the same in the money
market are as follows:

1. Reserve Bank of India:

Reserve Bank of India is the regulator over the money market in India. As the
Central Bank, it injects liquidity in the banking system, when it is deficient and
contracts the same in opposite situation.

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

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

DFHI deals both ways in the money market instruments. Hence, it has helped in
the growth of secondary market, as well as those of the money market
instruments.

4. Financial and Investment Institutions:

These institutions (e.g. LIC, UTI, GIC, Development Banks, etc.) have been
allowed to participate in the call money market as lenders only.

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

33 | P a g e
6. Mutual Funds:
Mutual funds also invest their surplus funds in various money market
instruments for short periods. They are also permitted to participate in the Call
Money Market. Money Market Mutual Funds have been set up specifically
for the purpose of mobilization of short-term funds for investment in money
market instruments.

34 | P a g e
 ROLE OF MONEY MARKET IN CONTEXT TO GROWTH
OF INDIAN ECONOMY

Financial openness is often regarded as providing important potential benefits.

Access to money markets expands investors’ opportunities 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.

Indian 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 India, 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.

Indian 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.

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’

35 | P a g e
liquidity risk. The banking system and the money market represent the exclusive
setting monetary policy operates in. A developed, active and efficient interbank
market enhances the efficiency of central bank’s monetary policy, transmitting
its impulses into the economy best. Thus, the development of the money market
soothes the progress of financial intermediation and boosts lending to economy,
hence improving the country’s economic and social welfare.

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. One importance of
risk sharing on economic growth comes from the fact that while risk-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 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.

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. The repo market is an important means by which
the Federal Reserve conducts monetary policy and provides daily liquidity to
global financial institutions.

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
36 | P a g e
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.

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.

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.

Regulations the Flowing of Credit and Credit Rates:

This role has emerged 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. 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.
37 | P a g e
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. Among the
constituents of the monetary base, the most important constituent is bank
reserves, i.e., the claims that banks hold in the form of deposits with the central
bank.
The banks’ need for these reserves depends on the overall level of economic
activity. This is governed by several factors:

1. 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.

2. Bank’s ability to make loans (asset of the bank) depends on its ability to
mobilize deposits (liability of the bank) as total assets and liabilities of the
bank need to match and expand/contract together.

3. 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, 2000).

To conclude, 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.
38 | P a g e
 DEVELOPMENTS IN THE INDIAN MONEY MARKET

Financial reforms in India began in the early 1990s. However, various segments
of domestic financial markets, viz., money market, debt market and forex market
underwent significant shifts mainly from the 1990s. Earlier, the Indian money
market was characterized by paucity of instruments, lack of depth and distortions
in the market micro-structure. It mainly consisted of uncollateralized call market,
treasury bills, commercial bills and participation certificates.

Following the recommendations of the Chakravarty Committee (1985), the

Reserve Bank adopted a monetary targeting framework. At the same time, efforts
were made to develop the money market following the recommendations of
Vaghul Committee (1987). In this regard, important developments were:

 Setting up of the Discount and Finance House of India (DFHI) in 1988 to

impart liquidity to money market instruments and facilitate money market
transactions for small and medium sized institutions thereby helping the
development of secondary markets in such instruments.

 Introduction of instruments such as certificate of deposits (CDs) in 1989

and commercial papers in 1990 and inter-bank participation certificates
with and without risk in 1988 to increase the range of instruments.

 Freeing of call money rates by May 1989 to enable price discovery.

However, the functioning of the market continued to be hindered by a
number of structural rigidities such as skewed distribution of liquidity and
the prevalence of administered deposit and lending rates of banks.

Recognizing these rigidities, the pace of reforms in money market was

accelerated. Following the recommendations of an Internal Working Group
(1997) and the Narasimham Committee (1998), a comprehensive set of measures
was undertaken by the Reserve Bank to develop the money market. These
included:

39 | P a g e
  Withdrawal of interest rate ceilings in the money market.
 Introduction of auctions in treasury bills.
 Gradual move away from the cash credit system to a loan-based system.

Maturities of other existing instruments such as CP and CDs were also gradually
shortened to encourage wider participation.

Table 4: Major Developments in Money Market since the 1990s

1. Abolition of ad hoc treasury bills in April 1997

2. Full-fledged LAF in June 2000.

3. CBLO for corporate and non-bank participants introduced in 2003

4. Minimum maturity of CPs shortened by October 2004

5. Prudential limits on exposure of banks and PDs to call/notice market in April 2005

6. Maturity of CDs gradually shortened by April 2005

7. Transformation of call money market into a pure inter-bank market by August 2005

8. Widening of collateral base by making state government securities (SDLs) eligible for LAF operations since April 2007

9. Operationalisation of a screen-based negotiated system (NDS-CALL) developed by CCIL 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.
10. Repo in corporate bonds allowed in March 2010.

11. Operationalisation of a reporting platform for secondary market transactions in CPs and CDs in July 2010.

Most importantly, the ad hoc treasury bills were abolished in 1997 thereby
putting a stop to automatic monetisation of fiscal deficit. This enhanced the
instrument independence of the Reserve Bank (Table 4). More importantly,
efforts were made to transform the call money market into primarily an inter-
bank market, while encouraging other market participants to migrate towards
collateralised segments of the market, thereby increasing overall market stability
and diversification. In order to facilitate the phasing out of corporate and the non-
banks from the call money market, new instruments such as market repos and
collateralised borrowing and lending obligations (CBLO) were introduced to
provide them avenues for managing their short-term liquidity. Non-bank entities
completely exited the call money market by August 2005. In order to minimise

40 | P a g e
the default risk and ensure balanced development of various market segments,
the Reserve Bank instituted prudential limits on exposure of banks and primary
dealers (PDs) to the call/notice money market.

Beginning in June 2000, the Reserve Bank introduced a full-fledged liquidity

adjustment facility (LAF) and it was operated through overnight fixed rate repo
and reverse repo from November 2004. This helped to develop interest rate as an
important instrument of monetary transmission. It also provided greater
flexibility to the Reserve Bank in determining both the quantum of liquidity as
well as the rates by responding to the needs of the system on a daily basis (Chart
1).

41 | P a g e
In the development of various constituents of the money market, the most significant
aspect was the growth of the collateralised market vis-à-vis the uncollateralised
market. Over the last decade, while the daily turnover in the call money market either
stagnated or declined, that of the collateralised 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.

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Alongside, the rates of return on various instruments in the money market have
shown greater co-movement. Such co-movement can be identified especially since
the introduction of LAF (Table 5 & Chart 5).

Table 5: Interest Rates in the Money Market

(Percent per annum: Annual Averages)

Repo Rate Call Rate CBLO Market 91-day, 364-day, CP Rate CD Rate
Rate Repo Rate T-Bills T- Bills
1 2 3 4 5 6 7 8 9

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

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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
8.0 8.1 7.9 8.0 8.2 8.1 9.3 9.0
far)

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 MONETARY OPERATING PROCEDURE

The development of money market as well as its growing inter-linkages with

other segments of financial markets enabled the Reserve Bank to alter the
operating procedures of monetary policy consistent with the objectives of the
monetary policy. Based on the recommendations of Chakravarty Committee
(1985), a monetary targeting framework with feedback was introduced during the
mid-1980s, under which reserve money was used as operating target and broad
money (M3) as an intermediate target. By the mid-1990s, this framework was
rendered increasingly inadequate due to several developments. Structural reforms
and financial liberalization led to a paradigm shift in the financing of government
and commercial sectors with increasingly market-determined interest rates and
exchange rate. Development in the various segments of the financial market led
to deepening of the financial sector. This provided the Reserve Bank to
effectively transmit policy signals through indirect instruments such as interest
rates. On the other hand, increase in liquidity emanating from capital inflows
raised the ratio of net foreign assets to reserve money and rendered the control of
monetary aggregates more difficult. With financial innovations, the stability in
the demand function for money also came under question.

Recognizing these challenges and the growing complexities of monetary

management, RBI switched to a multiple indicators approach in 1998-99. Under
this approach, a host of macroeconomic indicators including interest rates in
different segments of financial markets, along with other indicators on currency,
lending by banks and financial institutions, fiscal position, trade, capital flows,
inflation rate, exchange rate, refinancing and transactions in foreign exchange
available on high frequency basis are juxtaposed with output data for drawing
implications for monetary policy formulation. However, the approach itself
continued to evolve and was further augmented by forward-looking indicators
drawn from Reserve Bank’s various surveys and a panel of parsimonious time
series models (Mohanty, 2011).

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Along with the multiple indicators approach, operating procedure also underwent
a change following the recommendation of Narasimham Committee II (1998).
The RBI introduced the Interim Liquidity Adjustment Facility (ILAF) in April
1999, under which liquidity injection was done at the Bank Rate and liquidity
absorption was through fixed reverse repo rate. The ILAF gradually transited into
a full-fledged liquidity adjustment facility (LAF) with periodic modifications
based on experience and development of financial markets and the payment
system. The LAF was operated through overnight fixed rate repo and reverse repo
from November 2004, which provided an informal corridor for the call money
rate.

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 below the reverse repo rate in extreme surplus conditions (and
vice versa). Recognising these shortcomings, a new operating procedure
was put in place in May 2011.

Let’s elaborate on the key features of the new operating procedure.

 First, the weighted average overnight call money rate was explicitly
recognised as the operating target of monetary policy.
 Second, the repo rate was made the only one independently varying policy
rate.
 Third, a new Marginal Standing Facility (MSF) was instituted under which
scheduled commercial banks (SCBs) could borrow overnight at 100 basis
points above the repo rate up to one per cent of their respective net demand
and time liabilities (NDTL). This limit was subsequently raised to two per
cent of NDTL and in addition, SCBs were allowed to borrow funds under
MSF on overnight basis against their excess SLR holdings as well.

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  Fourth, the revised corridor was defined with a fixed width of 200 basis
points. The repo rate was placed in the middle of the corridor, with the
reverse repo rate at 100 basis points below it and the MSF rate as well as
the Bank Rate at 100 basis points above it (Chart 6). Thus, under the new
operating procedure, all the three other rates announced by the Reserve
Bank, i.e., reverse repo rate, MSF rate and the Bank Rate, are linked to the
single policy repo rate.

The new operating procedure was expected to improve the implementation and
transmission of monetary policy for the following reasons. First, explicit
announcement of an operating target makes market participants clear about the
desired policy impact. Second, a single policy rate removes the confusion arising
out of policy rate alternating between the repo and the reverse repo rates, and
makes signaling of monetary policy stance more accurate. Third, MSF provides
a safety valve against unanticipated liquidity shocks. Fourth, a fixed interest rate
corridor set by MSF rate and reverse repo rate, reduces uncertainty and
communication difficulties and helps keep the overnight average call money rate
close to the repo rate.

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Let me now turn to a brief evaluation of the experience with the new operating
procedure. In the implementation of the new procedure, the Reserve Bank prefers
to keep the systemic liquidity in deficit mode as monetary transmission is found
to be more effective in this situation (RBI, 2011). The Reserve Bank also
announced an indicative liquidity comfort zone of (+)/ (-) 1.0 per cent of net
demand and time liabilities (NDTL) of banks.

Since May 2011, the liquidity conditions can be broadly divided into three
distinct phases. After generally remaining within the Reserve Bank’s comfort
zone during the first phase during May-October 2011, the liquidity deficit crossed
the one per cent of NDTL level during November 2011 to June 2012. This large
liquidity deficit was mainly caused by forex intervention and increased
divergence between credit and deposit growth. The deficit conditions were
further aggravated by frictional factors like the build-up of government cash
balances with the Reserve Bank that persisted longer than anticipated and the
increase in currency in circulation. Accordingly, the Reserve Bank had to actively
manage liquidity through injection of liquidity by way of open market operations
(OMOs) and cut in cash reserve ratio (CRR) of banks. This was supported by
decline in currency in circulation and a reduction in government cash balances
with the Reserve Bank. As a result, there was a significant easing of liquidity
conditions since July 2012 with the extent of the deficit broadly returning to the
Reserve Bank’s comfort level of one per cent of NDTL (Chart 7).

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Since its implementation, the systemic liquidity has been in deficit mode, which
has helped in better transmission of policy rate to various segments of money
markets. First, the overnight interest rate has been more stable since its
implementation (Chart 8).

Second, the repo rate and weighted call rate are far more closely aligned under
the new operating procedure than earlier; implying improved transmission of
monetary policy in terms of movement in call money market interest rate (Chart
9).

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Third, the call money rate in turn is observed to be better aligned with other
money market interest rates after the implementation of new operating procedure
than before (Chart 10).

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On all the points being accounted, the researcher concludes that the development
of money market and refinements in operating procedures of monetary policy
have moved in tandem. Financial sector reforms along with Reserve Bank’s
emphasis on development of various segments of financial market enabled shifts
in operating procedures based on direct quantity-based instruments to indirect
interest rate-based instruments. The Reserve Bank has been able to better transmit
monetary policy signals in the money market through a single policy repo rate.
Evidence so far suggests a significant improvement in monetary policy
transmission under the new operating framework.

MAJOR REFORMS IN INDIAN MONEY MARKET

Deregulation of Interest Rates:

Some of the important policies in the deregulation of interest rates have been:

1. The lending and deposit rates have been, considerably opened up and freed.
Deposit rates beyond one year have been freed, and deposit rates less than one
year linked or pegged to the Bank Rate. All re-finance; the OMO operations
and liquidity to the Primary Dealers (PDs) have been linked to the Bank Rate.
To that extent the Bank Rate has been emerging as a kind of reference rate in
the interest rate scenario.

2. The second interesting aspect has been that the borrowings by the
government (since 1992) have been at market rates i.e., the rate of interest are
presently determined by the market forces of demand and supply.

Integration of Markets
The other important aspect of the fixed income market is the close inter-linkage
between the money and debt segments. The Call, Notice & Term money markets

51 | P a g e
are to be made purely inter-bank markets. The non-bank participants are being
shifted to the Repo market. However, the existing players have been allowed to
park their short-term investments till they find other avenues. The corporates
have the facility of routing their call transactions through the PDs.

Primary Dealers
In order to make the government securities market more vibrant, liquid and to
ensure market making capabilities outside RBI a system of PD’s was established.
The PDs have been allowed to operate a current account and along with a
Subsidiary General Ledger (SGL) account. RBI has provided them liquidity
support facility. In order to facilitate their continued presence in auctions the RBI
invites bids for underwriting in respect of all auctions. Routing of operations in
the call money market is allowed through PD’s. They are allowed the facility
of funds from one centre to another under RBI’s Remittance facility scheme. The
number of PDs has been increased from 7 to 13. In fact, the introduction of PDs
has added to the liquidity in the market.

Promotion of Bill Culture:

The corporate firms have always shown a tendency of availing cash credit and
overdrafts rather than drawing a bill on the customers. The banks also earlier did
not have refinance option in respect of their bills. As a result they discouraged
customers from drawing and discounting bills. The DFHI was specifically
established to provide banks with a financial resource so that they do not have to
wait for the recovery of the funds from the drawee. Also, the RBI provides
rediscounting facilities to the commercial banks. Thus, the bill culture is
promoted.

Term Rate
Inter-bank CRR, other than minimum 3% has been done away with. In this
direction the Interest Rate Swaps (IRS) have been introduced for the participants
to hedge their interest risks. For benchmarking we have the 14, 91 & 364 T-Bills.
Also we have the CPs. Now it is to the participants to use this opportunity.

Entry of Money Market Mutual Funds (MMMFs)

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Many Mutual Funds have started funds which specifically focus on money
market. This is due to increasing preference of the investors towards mutual funds
and the consolidation of the mutual fund industry. They have also been permitted
to invest in rated corporate bonds and debentures with a residual maturity of up
to only one year, within the ceiling existing for CP.

Repos and Reverse Repos

Non-bank entities, which are currently permitted to take Repos, have
been permitted to borrow money through reverse Repos at par with banks and
PDs. There is no restriction for the duration of a Repo. All government securities
have been made available for Repo. The Repos have also been permitted in PSU
bonds and private corporate debt securities provided they are held in demat form
in a depository and the transactions are done in recognized stock exchanges.

Widening of the call money market:

A large number of development institutions like the LIC, IDBI, UTI etc have
been although set up for different purposes, they have been permitted to enter the
call money market as lenders. Also specified MFs have been allowed to enter the
call money market. Thus, the market is expanding definitely thereby the
activeness of the market is also moving at interesting levels.

Others:
 The securities have been revalued. Banks have been required to mark 70%
of their portfolio to market from the year 1998-99 and 75% from 1999-
2000.
 FIIs have been allowed to trade in T. Bills within the overall debt ceiling.
They now have access to all types debt instruments.

53 | P a g e
 MEASURES TO IMPROVE INDIAN MONEY MARKET

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), following are some of the measures undertaken,

1. Introducing new money market instrument:

Many new money market instruments were introduced like Cash Management
Bills(CMBs) in 2010, Dated Government Securities and Collateralized
Borrowing and Lending Obligation (CBLO) to meet the changing requirements
of the growing economy. These facilitate different short-term borrowings to the
different borrowers to collect fund as and when required to maintain their
financial position.

2. Setting the Discount and Finance House in India:

It was a major step towards developing a secondary market for the money
instruments. 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.

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3. 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.

4. 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.

5. 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. But if
the excessive funds supplies into the system do not result any the development
then it could be highly distorted one.

6. Launching various Schemes:

With the expansion of bank branches and measures by the government to bring a
large part of the population under the financial ambit the Government of India
has launched schemes to attract these people to the formal sector. The Pradhan
Mantri Jan Dhan Yojana and the Atal Pension Yojana have been very
instrumental towards this aspect.

7. 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.

8. Setting Up of Securities Trading Cooperation of India:

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STCI was set up in 1994 to provide a secondary market in government securities.
It operated only in respect of T-Bills and money at call and short notice. Post
2011, Finance Ltd. was added to its name and was the first and most prominent
PD in India. Currently it undertakes lending and financing activities along with
trading in corporate securities, government bonds, money market and derivative
instruments.

NEEDS FOR ASSIMILATE DEPTH TO THE MARKET

DIVERSIFYING INVESTOR BASE

Active participation by a number of investor segments, with diverse views and

profiles, would make the market more liquid. In order to attract retail investors
there is need to exempt the interest income from income tax. The mutual funds
are expected to take the markets in a big way.

Settlement system reforms

In the settlement and transfer of wholesale trades, though Delivery versus
Payment (DVP) settlement has been introduced, inter-city settlement continues
to be a problem. It is not possible to buy and sell a security on the same day as
transactions are settled on a gross basis and short selling is not allowed. The RBI
plans to introduce the Real Time Gross Settlement (RTGS), which will be used
for high-value transactions that require and receive immediate clearing thereby
increasing efficiency.

Transparency

56 | P a g e
RBI has embarked upon the technological upgradation of the debt market. This
includes screen-based trade reporting system with the use of VSAT
communication network complimented by a centralized SGL accounting system.
It shall also facilitate logging bids in auctions of dated securities and T-Bills. This
will broaden the participation in the auction system. The participants would be
required to provide two-way quotes. The system will be integrated with the
regional current account system. Nothing seems to have been finalized as of now.

Anyway this system may not really be effective enough to substitute the
telephonic mode of operation. The system as has been planned does not provide
for a participant to withhold his identity. Now this factor alone could lead to
inefficiencies in Price discovery, as in the case of a major participant having to
reveal his buy/sell interest. In fact, the market participants seem to be divided
over this issue. Some believe that the system as planned is proper while many
others believe that there would be no significant improvement. Anyway the RBI
seems to have decided to eliminate the brokers from the system. The banks feel
that the brokers would remain. The brokers maintain that this system would not
lead to the best price discovery. It is not very wise for the participants to release
their identity and interest.

PDs and Short selling

The participants feel that this would add to the depth of the market and also
help in providing two-way quotes. However, it is not evident whether the RBI
will be allowing this. The banks maintain that with all the benefits provided to
them they should be providing fine two-way quotes at market rates. For this the
PDs feel that it is essential to allow the short selling of securities and that every
participant provides a two-way quote.

Awareness
The government along with the RBI has decided to do some publicity work.

Retailing of government securities

Since the beginning of the reforms it has been recognized that a strong retail
segment for government segment needs to be developed. The basic objective of
setting up of primary and Satellite Dealers was to enhance distribution channels
57 | P a g e
 and encourage voluntary holding of government securities among a wider
investor base. To give a fillip to this scheme for availing of liquidity up port from
RBI has been made available to them. Now banks are allowed to buy or sell freely
government securities on an outright basis and retail government securities to
non-bank clients without any restriction on the period between sale and purchase.
The big question is whether the banks would actually take interest in the task, as
this will affect their deposits. Towards this end there is the need for introducing
STRIPS. Further to enable dematerialization of securities of retail holders,
institutions such as NSDL, SHCIL, and NSCCL have been allowed to open SGL
accounts with RBI. SD’s have also been extended the facility of Repo
transactions since March 1998.

Market Microstructure
To develop the primary and the secondary markets the following points need
careful evaluation.

1. At present the PDs underwrite a sizeable portion of the market loans and also
quote an underwriting commission. It has been suggested that it be made
compulsory for them to bid for a minimum percent for a minimum percent of
the notified amount. By increasing the number of PDs the total bids should be
brought upto 100% of the notified amount.

2. The RBI should try and move out of the primary auctions but this transition
could take upto 20% of the notified amount. In case of the issue being not
fully subscribed the RBI should have the option of canceling the entire issue.

3. Gradually the RBI should move out of the 14-day and 91-day T-Bill auction
and then the 364 -day auction and then finally from the dated of securities.
The RBI should have a strong presence in the secondary market by means
of providing two-way quotes.

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Standardization of Practices
Standard practices in the market need to be evolved with regard to the manner of
quotes, conclusion of deals, etc. It has been proposed that the Primary Dealers
Association and FIMMDA quickly setup a timeframe for CP. The minimum the
documentation and market practices, minimum the lock in period. If needed RBI
will come forward and indicate a time frame. Most importantly the code of
conduct will have to be compatible with the contemplated dealing screen and the
technological upgradation.

Risk Management
Investors in debt instrument face three major types of risks namely credit risk,
interest rate risk and foreign currency risk. In case of the government securities
the credit risk is zero. For the domestic investors the foreign exchange risk is
none. Investment in all debt instruments is exposed to interest rate risk.
Introduction of rupee derivatives will go a long way in providing investors an
opportunity to hedge their exposures. IRS and FRA have already been
introduced. Also there is a need for the dealers (especially in PSU banks) to be
provided with more freedom to make decisions. Finally it remains on the
willingness of the participants to trade. This indeed would provide the needed
fillip to the market.

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 OVERVIEW OF INTERNATIONAL MONEY MARKET
The International Monetary Market (IMM) was introduced in December 1971
and formally implemented in May 1972, although its roots can be traced to the
end of Bretton Woods through the 1971 Smithsonian Agreement and Nixon's
suspension of U.S. dollar's convertibility to gold. The IMM Exchange was
formed as a separate division of the Chicago Mercantile Exchange, and as of
2009, was the second largest futures exchange in the world. The primary purpose
of the IMM is to trade currency futures, a relatively new product previously
studied by academics as a way to open a freely traded exchange market to
facilitate trade among nations.

A System for Transactions

With new competition, a transaction system was desperately needed. The CME
and Reuters Holdings created the Post Market Trade (PMT) to allow a global
electronic automated transaction system to act as a single clearing entity and link
the world's financial centers like Tokyo and London. Today, PMT is known
as Globex, which facilitates not only clearing but electronic trading for traders
around the world. In 1975, U.S. T-bills were born and began trading on the IMM

60 | P a g e
in January 1976. T-bill futures began trading in April 1986 with approval from
the Commodities Futures Trading Commission.

Financial Crises and Liquidity

In financial crisis situations, central bankers must provide liquidity to stabilize
markets because risk may trade at premiums to a bank's target rates, called money
rates, which central bankers can't control. Central bankers then provide liquidity
to banks that trade and control rates. These are called repo rates, and they are
traded through the IMM. Repo markets allow participants to undertake rapid
refinancing in the interbank market independent of credit limits to stabilize the
system. A borrower pledges securitized assets such as stocks in exchange for cash
to allow its operations to continue.

Asian Money Markets and the IMM

Asian money markets linked up with the IMM because Asian governments,
banks and businesses needed to facilitate business and trade in a faster way rather
than borrowing U.S. dollar deposits from European banks. Asian banks, like
European banks, were saddled with dollar-denominated deposits because all
trades were dollar-denominated as a result of the U.S. dollar's dominance. So,
extra trades were needed to facilitate trade in other currencies, particularly euros.

61 | P a g e
 Asia and the E.U. would go on to share not only an explosion of trade but also
two of the most widely traded world currencies on the IMM.

For this reason, the Japanese yen is quoted in U.S. dollars, while Eurodollar
futures are quoted based on the IMM Index, a function of the three-
month LIBOR. The IMM Index base of 100 is subtracted from the three-month
LIBOR to ensure that bid prices are below the ask price. These are normal
procedures used in other widely traded instruments on the IMM to insure market
stabilization.

PRIMARY DATA ANALYSIS

After interviewing certain participants in the Money Market these are few of the
important things that the researcher has concluded by the responses of the
respondents:

 The current status of Indian Money Market is discussed as follows:

 The money markets in India face many infrastructural problems. Due

to lack of information technology developments there’s less
participation from the participants.
 Although, money market is considered to be providing liquidity
advantage, it remains one of the major problems being faced by many
participants.
 Lack of funds to develop the money market in India is one of the major
causes of weak money market in India.
 Lots of documentation due to weak computerization have lead in
discouraging the participants from entering the money market.

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 Many new regulations have come up including:

 The net worth requirements have been introduced, i.e., participants

need to have specified minimum net worth to invest in money market.
 The scope of Money Market has been widened due to which
participation of banks and financial institutions has increased.

 There are few changes that should be incorporated in the money market which
are as follows:

 More liberalization and better infrastructural developments in the

money market in India.
 There should be reduction in the regulations and documentations. This
can be done by making all the documentations and form submissions
computerized.
 Inform the participants of the risks that are involved while investing in
the money market.

 Commercial Papers are one of the instruments that are strongly recommended
by the respondent to invest in. Also, there should be an amendment to bring
down the minimum deposit of the commercial papers. They comparatively
give higher returns. Only banks and private companies are allowed to issue
these papers.

 An investor before investing in the money market instruments should always

take care of:

 The risk involved in the investment.

 Investment shall be done on the basis of whether the investor is
conservative, moderate or aggressive.
 The amount of return that the instrument would yield to the investor.
 Time period of the investment.
 Whether the investment involves capital appreciation.

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 While differentiating the Global Money Market with the Indian Money
Market, following differences can be noticed:

 The investments are more liquid in the Global Money Market as

compared to Indian Money Market.
 More concentration is given to debt markets rather than to equity
markets.
 Global Money Market have more innovative products or instruments to
be offered.
 Investors outside India are more risk prone compared to India.
Therefore, investors outside India can easily take advantage of Indian
short-term market.
 Credit risk is quite common in both the economies. But defaults happen
more globally because they lie more risk prone.
 Trades in credit default swaps is more outside because there are less
chances of defaults in India due to risk averse nature of Indians.

 The respondent feels that individuals should not be allowed to invest in the
money market. There are about 12 million retail investors which accounts in
Indian stock market. It’s been difficult to stem present investors due to lack
of infrastructure and technology, so if individuals were to be allowed in the
market, chaos shall be the outcome to be expected. Also, this market requires
large amount of minimum investment which is outside the purview of
individuals.

 After acknowledging the requirement of the market and issues faced the
respondents have suggested an instrument whose features are as follows:

 Minimum deposit should be of 2,00,000 – 2,50,000.

 Less documentations and computerized form fillings.
 More participants shall be allowed to invest as there would be less
reforms. Moreover, this instrument would lie in between Commercial
Papers and Certificates of Deposits.

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  Only Qualified Institutional Buyers should be allowed to as there would
be less participants and it would be easier to get hold over them.
 The increase in rates should be issuer specific on their credit rating.

SUGGESTIONS

Following are some of the suggestions and opinions with respect to Indian Money
Market:

1. The LAF is not the appropriate instrument for managing the liquidity of more
enduring nature. As the system is expected to be in deficit, there is a need to
develop term repo to minimize daily requirement of liquidity.

2. The lock-in period of CDs and CPs should be completely removed in a phase
manner.

3. Besides, Repo mechanism, call money market, needs to be supplemented by

Open Market Operation (OMO). OMO can influence interest rate as well as
volumes in the market.

4. Non-bank segment should be brought under the same regulation on par with
the banks early as possible.

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5. Transparency should be ensured in money market transaction. There should
be screen based trading with two-way quotes for each money market
instruments.

6. Notwithstanding significant advances in developing the market, the term

structure in the money market is incomplete. It is, therefore, desirable to
extend the yield curve beyond the overnight rate by developing a term-money
market.

7. Currently FIIs are allowed in government dated securities in primary as well

as secondary market. More FII participation could be encouraged.

8. Money Market Mutual Funds should be set up by various banks and

institutions. This would increase the retail participation in the market.

9. Retailing of government papers should be encouraged. The PDs can play a

very important role in this context.

[Link] should be a mechanism to make the call range bound which may reduce
uncertainty and provide confidence to the bankers for lending/borrowing. In
the context, it is emphasized that Repos and Reverse Repos conducted by RBI
has the potential to set the floor and ceiling in the call money market.

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 CONCLUSION

The Indian money market was controlled by tight controls and administered interest
rate structure up to late 1980s. However, following the policy measures during the
early 1990s the money market has become broad based with the enlargement of
participants and instruments, and change in liquidated conditions is quickly
transmitted. The reform measures have greatly contributed to the development
of inter-linkages; increasing liquidity across various segments of the money market.
The market determined interest rate is gradually emerging as an important
intermediate target with the ultimate objective of achieving price stability and
economic growth.

Radical measures are taken to transform the Indian money market from a closed,
inward and narrow domestic space to open, outward-looking. Interest rates have
been freed at certain level of bank deposits and lending, FFIs have been allowed to
invest in domestic market.

Liberalization and globalization of money market has brought many distortions

without necessarily increasing the efficiency of institutions and allocation of
resources. Credit does not reach the productive sector, whether agriculture or
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industry, whereas banks and financial institution are flush with funds. In our dualistic
economy where the rural sector dominates, money market reform should start from
reorganizing rural financial structure so that funds can sufficiently flow to the
wider activities. In doing this government has important role of regulation and
redirection of financial institutions under liberalization.

Recently, to overcome the liquidity crunch in the Indian money market, the RBI has
released more than Rs. 75,000 crores with two back-to-back reductions in the CRR.
The average turnover of the money market in India is over Rs 40,000 crores daily.
This is more than 3% of the total money supply in the Indian economy and 6% of
the total funds that commercial banks have let out to the system. This implies that
2% of the annual GDP of India gets traded in the money market in just one day.

BIBLIOGRAPHY

The researcher specifically acknowledges the contribution of the following in

providing relevant information to support the content of this research project.

 Money market, author - Sanchita Roy

 Economic Times (newspaper and application)
 Money control Application
 [Link]
 [Link]
 Online Journals
 ISSN 2454-1362
 ISSN 2394-1537
 ISSN 2277-3622
 [Link]

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  [Link]
 [Link]

ANNEXURE

The primary data was developed by interviewing few people who are well
conversant with the Indian Money Market.

Firstly, from Mr. Rajinder Gupta who is the founder of First Investment Advisors
(which focuses on Financial Literacy) holding degrees of MBA and Diploma from
NMIMS. Secondly, the name is kept anonymous on the request of the respondent.
He is a MBA in Finance, Financial consultant and a Social Entrepreneur. He is also
co-founder at Vikaas which also primarily focuses on Financial Literacy.

These were the questions asked by the researcher:

 What is the current status of the Money Market in India?

 What are the recent developments that you have acknowledged in the Indian
Money Market?
 What would you suggest to an investor to take care of before investing in the
Indian Money Market?

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 What are the loopholes in the Indian Money Market and changes that you
recommend?
 One instrument that you would strongly recommend an investor should invest
in?
 Your views about global Money Market.
 What is the difference between the Global and Indian Money Market?
 Should individuals be allowed to invest in money market instrument? Please
give reasons for your perception.
 Any new instruments that you have thought of that shall be developed in the
Indian Money Market?

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