S.

K SOMAIYA COLLEGE OF ARTS, SCIENCE & COMMERCE

VIDYAVIHAR (EAST), MUMBAI - 400077

PROJECT ON:
STUDY

OF indian money markets.

MASTERS OF COMMERCE
(BANKING & FINANCE)

PART 2 (SEM III)

(2016-2017)

Submitted:
In Partial Fulfillment of the requirements
For the Award of the Degree of
MASTERS OF COMMERCE
( BANKING & FINANCE )
BY
RIDDHI J SANGOI
ROLL NO : 47
1

DECLARATION

I RIDDHI J SANGOI student of class Mcom (BANKING & FINANCE)

PART 2 (SEM-III), ROLL NO. 47, academic year 2016-2017 Studying at S.K.
SOMAIYA COLLEGE OF ARTS, SCIENCE AND COMMERCE, hereby
declare that the work done on the project Entitled STUDY OF INDIAN
MONEY MARKETS . is true and original and any Reference used in this
project is duly acknowledged.

DATE:
PLACE: MUMBAI
SIGNATURE OF STUDENT
( RIDDHI J SANGOI )

CERTIFICATE
This is to certify that MISS RIDDHI J SANGOI, studying in Mcom (BANKING
& FINANCE) PART 2 (SEM-III), ROLL NO. 47, academic year 2016-2017 at
[Link] COLLEGE OF ARTS, SCIENCE & COMMERCE has
completed the project on STUDY OF INDIAN MONEY MARKETS
under the guidance of Proff. SHAMA SHAH
The information submitted herein is true and original to the best of my
knowledge.

____________________

___________________

Proff. SHAMA SHAH

DR. SANGEETA KOHLI

[PROJECT GUIDE]

____________________
EXTERNAL EXAMINER

[PRINCIPAL]

___________________
MR. RAVIKANT
[CO-ORDINATOR]

DECLARATION BY GUIDE
I, the undersigned Prof. has guided MISS RIDDHI J SANGOI ROLL NO. 47
for her project. She has completed the project on STUDY OF INDIAN
MONEY MARKET. successfully.
I, hereby declare that information provided in this project is true as per the
best of my knowledge.

Prof.
Project Guide

ACKNOWLEDGEMENT

It gives me immense pleasure to present a project on STUDY OF INDIAN

MONEY MARKET . As a Mcom student it is a great honour to undergo a
project work at an graduate level and I would like to thank the University of
Mumbai for giving me such a golden opportunity.
I am eternally grateful to almighty god for giving me the spirit to put in my best
effort towards my project. I owe my sincere gratitude to DR. SANGEETA
KOHLI, the principal of our college. I am also thankful to my project guide
PROFF. SHAMA SHAH for his valuable guidance and for providing an insight
to the subject.
I am also obliged to the library staff of S.K..Somaiya College for the numerous
books made me available for the handy reference.
Although, I have taken every care to check mistake and misprint yet it is difficult
to claim perfection. Any error, omission and suggestion brought to my notice, will
be thankfully acknowledged by me.

INDEX

SR
NO

CHAPTER NAME

PAG
E
NO

1 INTRODUCTION TO INDIAN MONEY MARKET

2 FEATURES & BENEFITS OF INDIAN MONEY MARKET

12

3 PARTICIPANTS IN THE MONEY MARKET

18

4 STRUCTURE OF INDIAN MONEY MARKET

21

5 GROWTH & DEFECTS OF MONEY MARKET

32

CONCLUSION

36

BIBLOGRAPHY

37

CHAPTER 1
INTRODUCTION
6

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

The money market is a market for lending and borrowing of short-term funds.

Money market deals in funds and financial instrument having a maturity period of one
day to one year.

The instruments in the money market are close substitutes for money as they are of shortterm nature and highly liquid.

Definition of Money Market

According to the McGraw Hill Dictionary of Modern Economics, money market is the term
designed to include the financial institutions which handle the purchase, sale, and transfers of
short term credit instruments. The money market includes the entire machinery for the
channelizing of short-term funds. Concerned primarily with small business needs for working
capital, individuals borrowings, and government short term obligations, it differs from the long
term or capital market which devotes its attention to dealings in bonds, corporate stock and
mortgage credit.
7

Following definitions will help us to understand the concept of money market.

According to the Reserve Bank of India, money market is the centre for dealing, mainly of short
term character, in money assets; it meets the short term requirements of borrowings and provides
liquidity or cash to the lenders. It is the place where short term surplus investible funds at the
disposal of financial and other institutions and individuals are bid by borrowers agents
comprising institutions and individuals and also the government itself.
According to Crowther, "The money market is a name given to the various firms and
institutions

that

deal

in

the

various

grades

of

near

money."

These definitions help us to identify the basic characteristics of a money market. A money
market comprises of a well organized banking system. Various financial instruments are used for
transactions in a money market. There is perfect mobility of funds in a money market. The
transactions in a money market are of short term nature.

History of Indian Money Market

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

Recommendations of Three Committees

The issue of whether non-bank participants should constitute part of call/notice/term money
market could be traced first in the Report of the Committee to Review the Working of the
Monetary System (Chairman: S. Chakravarty) in 1985. Since then, the Report of the Working
Group on the Money Market (Chairman : N. Vaghul) in 1987 and the Report of the Committee
on Banking Sector Reforms (Chairman : M. Narasimham) in 1998 had also deliberated on this
issue. It needs to be appreciated that the particular set of recommendations from these three
Committees have to be assessed against the specific objectives for which these Committees had
been constituted as well as the differing initial conditions reflecting the state of Indian financial
market which were prevailing at that particular point of time.

Sukhmoy Chakravarty Committee

The call money market for India was first recommended by the Sukhmoy Chakravarty
.Committee was set up in 1982 to review the working of the monetary system. They felt that
allowing additional non-bank participants into the call market would not dilute the strength of
monetary regulation by the RBI, as resources from non-bank participants do not represent any
additional resource for the system as a whole, and their participation in call money market would
only imply a redistribution of existing resources from one participant to another. In view of this,
the Chakravarty Committee recommended that additional nonbank participants may be allowed
to participate in call money market.

The Vaghul Committee

The Vaghul Committee (1990), while recommending the introduction of a number of money
market instruments to broaden and deepen the money market, recommended that the call markets
should be restricted to banks. The other participants could choose from the new money market
instruments, for their short -term requirements. One of the reasons the committee ascribed to
keeping the call markets as pure inter-bank markets was the distortions that would arise in an
environment where deposit rates were regulated, while call rates were market determined.

The Narasimham Committee

9

The Narasimham Committee II (1998) concurred with the Vaghul Committee as it also observed
that call/notice/term money market in India, like in most other developed markets, should be
strictly restricted to banks. It, however, felt that exception should be made for Primary Dealers
(PDs) who have been acting as market makers in the call money market and are formally treated
as banks for the purpose of their inter-bank transactions and, therefore, they should remain as
part of call money market. With regard to non-banks, it expressed concern that these participants
"are not subjected to reserve requirements and the market is characterized by chronic lenders and
chronic borrowers and there are heavy gyrations in the market". It felt that allowing non-bank
participants in the call market "has not led to the development of a stable market with liquidity
and depth and the time has come to undertake a basic restructuring of call money market". Like
the Vaghul Committee, it had also suggested that the non-bank participants should be given full
access to bill rediscounting, Commercial Paper (CP), Certificates of Deposit (CDs), Treasury
Bills (TBs) and Money Market Mutual Funds (MMMFs) for deploying their short-term surpluses

Objectives of Money Market

Money market is an important part of the economy. It plays very significant functions. As
mentioned above it is basically a market for short term monetary transactions. Thus it has to
provide facility for adjusting liquidity to the banks, business corporations, non-banking financial
institutions (NBFs) and other financial institutions along with investors.
A well developed money market serves the following objectives:

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

It

means to keep a balance between the demand for and supply of money for short term
monetary transactions.

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

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

Reasonable price

To promote economic growth. Money market can do this by making funds available to
various units in the economy such as agriculture, small scale industries, etc.
10

To provide help to Trade and Industry. Money market provides adequate finance to trade
and industry. Similarly it also provides facility of discounting bills of exchange for trade
and industry.

To help in implementing Monetary Policy. It provides a mechanism for an effective

implementation of the monetary policy.

CHAPTER 2
11

Features/Characteristics of Indian Money Market

Every money is unique in nature. The money market in developed and developing countries
differ markedly from each other in many senses. Indian money market is not an exception for
this. Though it is not a developed money market, it is a leading money market among the
developing countries.
Indian Money Market has the following major characteristics:

Dichotomic Structure: It is a significant aspect of the Indian money market. It has a

simultaneous existence of both the organized money market as well as unorganized
money markets. The organized money market consists of RBI, all scheduled commercial
banks and other recognized financial institutions. However, the unorganized part of the
money market comprises domestic money lenders, indigenous bankers, trader, etc. The
organized money market is in full control of the RBI. However, unorganized money
market remains outside the RBI control. Thus both the organized and unorganized money
market exists simultaneously.

Seasonality: The demand for money in Indian money market is of a seasonal nature. India
being an agriculture predominant economy, the demand for money is generated from the
agricultural operations. During the busy season i.e. between October and April more
agricultural activities takes place leading to a higher demand for money.

Multiplicity of Interest Rates: In Indian money market, we have many levels of interest
rates. They differ from bank to bank from period to period and even from borrower to
borrower. Again in both organized and unorganized segment the interest rate differs. Thus
there is an existence of many rates of interest in the Indian money market.

12

Lack of Organized Bill Market: In the Indian money market, the organized bill market is
not prevalent. Though the RBI tried to introduce the Bill Market Scheme (1952) and then
New Bill Market Scheme in 1970, still there is no properly organized bill market in India.

Absence of Integration: This is a very important feature of the Indian money market. At
the same time it is divided among several segments or sections hitch are loosely
connected with each other. There is a lack of coordination among these different
components of the money market. RBI has full control over the components in the
organized segment but it cannot control the components in the unorganized segment.

High Volatility in Call Money Market: The call money market is a market for very short
term money. Here money is demanded at the call rate. Basically the demand for call
money comes from the commercial banks. Institutions such as the GIC, LIC, etc suffer
huge fluctuations and thus it has remained highly volatile.

Limited Instruments: It is in fact a defect of the Indian money market. In our money
market the supply of various instruments such as the Treasury Bills, Commercial Bills,
Certificate of Deposits, Commercial Papers, etc. is very limited. In order to meet the
varied requirements of borrowers and lenders, It is necessary to develop numerous
instruments.

13

Importance of Indian money market

Wide-ranging reforms have been undertaken to develop the money market and strengthen its role
in the transmission mechanism of monetary policy. Three major considerations that have guided
rationalization of the structure in the money market are: (i) ensuring balanced development of
various constituents of the money market, especially the growth of the collateralized market Vis-vis the uncollateralized market; (ii) preserving integrity and transparency of the money market
by ensuring better disclosure of information; and (iii) rationalizing various classes of participants
across different market segments in order to strengthen the efficacy of the LAF of the Reserve
Bank. It provides a stable source of fund to banks in addition to deposits, allowing alternative
financing structure.
As a result of various reform measures, the money market in India has undergone significant
transformation in terms of volume, number of instruments and participants, and adoption of risk
management practices.
Market Development
Greater Flexibility for Participants in the Call Money Market
In view of the transformation of the call money market into a pure inter-bank market, there is a
need to consider greater flexibility to banks and PDs to borrow or lend in this market, provided
they have put in place appropriate risk management systems which would address the assetliability mismatches in their balance sheets. In this context, banks have already started operating
in an environment that requires greater harmonization between sources and deployment of funds
for asset-liability management (ALM) purposes. Direct regulation in the form of prudential
limits on borrowing and lending eventually would need to graduate to a system, where such
limits are taken care of by banks own internal systems of ALM framework. This would correct
large mismatches between sources and uses of funds by banks and thereby help the Reserve
Bank in the proper assessment of market conditions for the conduct of its liquidity management
14

operations. There is also, at the same time, a greater need for closely monitoring the movements
of call money rates.
Extension of the Repo Market
It has been the endeavor of the Reserve Bank to develop the repo market not only for easing
pressure from the uncollateralized call money market but also to facilitate the emergence of a
short-term rupee yield curve for pricing fixed income securities. At present, only Central and
State Governments securities are eligible for market repo. However, State Government securities
do not have wider acceptability as there are hardly any repo operations based on them. As the
fixed income money market has been overwhelmingly dependent upon Central Government
securities, there is a need to consider broad-basing the pool of eligible securities. In future, the
growth of market repo will be driven by the short selling activity in the government securities
market as a reposed security can now be delivered up to five days in view of the recent changes
in the regulations governing short sales
Development of a Vibrant Term Money Market
The term money market has not developed for several reasons. One of the major reasons for this
is that market participants have been unable to take a long-term view of interest rates despite
availability of Treasury Bills of varying maturities and a reasonably developed swap market. In
order to enable market participants to take a long-term view on interest rates, it is imperative that
the ALM framework is strengthened and greater flexibility is allowed to the personnel managing
treasury operations in banks. The skewness in liquidity in the money market in terms of chronic
lenders and borrowers would get corrected as banks develop better ALM systems. The
development of the term money market is vital for strengthening proper linkages between the
foreign exchange market and the domestic currency market, which, in turn, would provide an
impetus to the derivative segment.
Relook at Inter-Bank Participation Certificates

15

Inter-Bank Participation Certificates, which can be used for evening out short-term liquidity
mismatches by banks, were introduced in October1988 in order to infuse greater degree of
flexibility in their credit portfolios. In view of rapid credit growth in recent years, interest in
IBPCs has again arisen. In this context, since considerable time has elapsed since the guidelines
on the scheme of IBPCs were issued, the IBPC scheme with respect to duration, quantum in
terms of the proportion to the loan amount, eligible participants and transferability of IBPCs
needs a thorough review. Depending on the results of such a review, extending the use of this
instrument could also facilitate the asset liability management by banks,
improve day-to-day liquidity management and help develop a market for credit risk transfer
instruments between banks.
Futures on Policy Linked Interest Rates
Going forward, an Indian variant of the Federal Funds Futures on interest rates linked to the
Reserve Banks key policy rates may emerge. Trading in the futures market would reveal
important information about market expectation on the future course of monetary policy. For
instance, the trading of the Federal Funds Futures provides key information to the Federal Open
Market Committee (FOMC) in the US in formulating its monetary policy.
Promoting Financial Stability
Default risk in the money market has the potential to create a contagion in the financial markets
and, therefore, needs to be mitigated. In this regard, experiences of developed economies show
that generally the self-regulatory organizations (SROs) regulate activities of participants in the
money market in terms of their capital adequacy and conduct of business. Also, default
resolution in most of these markets is undertaken through the Contract Law and the Bankruptcy
Law. In view of international experience, there may be a case for empowering a suitable selfregulatory organization appropriately to act as a catalyst for the development of market
microstructure.
One of the fundamental forces that could contribute to more organic integration across various
segments of the financial market is the technological up gradation of the payment and settlement

16

system. The accomplishment of virtual Public Debt Office (PDO) and Deposit Accounts
Department (DAD) at the Reserve Bank, coupled with the operationalization of the centralized
funds management system (CFMS).

Benefits / Advantages of Money Market

A liquid money market provides an effective source of long term finance to borrower
A liquid and vibrant money market is necessary for the development of a capital market, foreign
exchange market and market in derivative instruments.
Helps in pricing different floating interest products
It helps in:

Development of trade & industry.

Development of capital market.

Smooth functioning of commercial banks.

Effective central bank control.

Formulation of suitable monetary policy.

17

CHAPTER 3
Participants in the Money Market

The transactions in the money market are of high volume involving large amount. So, money
market is dominated by a small number of large players.
Some of the important players in the money market are:

Reserve Bank of India.

Discount and finance House of India.

Financial Institution.

Non-banking finance companies.

Securities Trading Corporation of India.

Public sector undertakings (PSU).

The role of important players in the money market is discussed below:

18

*RESERVE BANK OF INDIA:

The reserve Bank of India is the most important player in the Indian Money Market.

The Organized money market comes under the direct regulation of the RBI.

The RBI operates in the money market is to ensure that the levels of liquidity and shortterm interest rates are maintained at an optimum level so as to facilitate economic growth
and price stability.

RBI also plays the role of a merchant banker to the government. It issues Treasury Bills
and other Government Securities to raise funds for the government.

The RBI thus plays the role of an intermediary and regulator of the money market.

*GOVERNMENT:

The Government is the most active player and the largest borrower in the money market.

It raises funds to make up the budget deficit.

The funds may be raised through the issue of Treasury Bills (with maturity period of
91day/182day/364 days) and government securities.

*CORPORATE FIRMS:

Corporate firms operate in the money market to raise short-term funds to meet their
working capital requirements.

They issue commercial papers with a maturity period of 7 days to 1 year. These papers
are issued at a discount and redeemed at face value on maturity.

These corporate firms use both organized and unorganized sectors of money market.

*BANKS:
19

Commercial Banks play an important role in the money market.

They undertake lending and borrowing of short term funds.

The collective operations of the banks on a day to day basis are very predominant and
hence have a major impact and influence on the interest rate structure and the liquidity
position.

*FINANCIAL INSTITUTIONS:

Financial institutions also deal in the money market.

They undertake lending and borrowing of short-term funds.

They also lend money to banks by rediscounting Bills of Exchange.

Since, they transact in large volumes, they have a significant impact on the money
market.

*INSTITUTIONAL PLAYERS:

They Consist of Mutual Funds, Foreign Institutional Players, Insurance Firms, etc.

Their level of Participation depends on the regulations.

For instance the level of participation of the FIIs in the Indian money market is restricted
to investment in Government Securities.

*DISCOUNT HOUSES AND PRIMARY DEALERS:

They are the intermediaries in the money market.

20

Discount Houses discount and rediscount commercial bill and Treasury Bills.

Primary Dealers were introduced by RBI for developing an active secondary market for
Government securities.

They also underwrite Government Securities.

CHAPTER 4

Structure of Indian Money Market - Chart

The entire money market in India can be divided into two parts. They are organized money
market and the unorganized money market. The unorganized money market can also be known
as an unauthorized money market. Both of these components comprise several constituents. The
following chart will help you in understanding the organizational structure of the Indian money
market.

21

Structure
The Indian money market consists of two main sectors:

1) ORGANISED SECTOR:

The RBI is the apex institution that controls and monitors all the organizations in the
organized sector.

Also, the organized money market is composed of various components/ instruments that
are highly liquid in nature.
22

The instruments traded are call money, treasury bills, commercial bills, certificate of
deposits, commercial papers, repos etc.

The organized money market is further diversified with the establishment of the Discount
and finance House of India, and Money market Mutual Funds.

The Instruments of the Organized Money Market Are:-

i) CALL

MONEY AND

NOTICE

MONEY MARKET:

The

call money market is

the

most important
segment of the Indian

money

market. It is also

called

as inter-bank call

money

market.

23

Under call money market, funds are transacted on an over-night. Generally, banks rely on
call money market where they raise funds for a single day.

The notice money market funds are transacted for a period of 2 to 14 days. The loans are
to be repaid at the option of either the lender or the borrower.

The rate at which funds are borrowed / lent in this market is called the call money rate.

The main participants in the call money market are commercial banks (excluding RRBs),
co-operative banks and primary dealers.

The Discount and finance House of India and non-banking financial institutions like LIC,
GIC, UTI, NABARD, etc, also participate in the call money market.

Call money markets are generally concentrated in large commercial centre like Mumbai,
Delhi, Chennai, Kolkata and Ahmadabad.

The RBI intervenes in the call money market because it is highly sensitive and it is the
indicator of liquidity position in the organized money market.

The call money rate (that depends on depends on demand for and supply of funds) is
highly variable from day to day and from centre to centre.

ii) TREASURY BILLS MARKET:

Treasury bills are short-term securities issued by the RBI on behalf of the Government of
India.

24

Treasury bills are of three types: 91 day treasury bills, 182 days treasury bills and 364 day
treasury bills.

Since these bills are issued through auctions, interest rates on all types of treasury bills
are determined by market forces.

Treasury bills are highly liquid and are readily available.

They give assured yields at a low transaction cost.

Treasury Bills are eligible for inclusion in the SLR.

Moreover, they have negligible capital depreciation.

Treasury Bills are available for a minimum amount of Rs 25000 and in multiples of RS
25000.

Treasury Bills are traded in the secondary market. Commercial banks, Primary Dealers,
Mutual Funds, Corporate, and Financial Institutions, Provident / Pension funds and
Insurance companies participate in the treasury Bills Market.

However Treasury Bills Market in India is very narrow and undeveloped.

iii) COMMERCIAL BILLS:

A commercial bill is a short- term, negotiable, selfliquidating instrument drawn by the seller on
the buyer for the value of goods delivered by him.
25

Such bills are called trade bills / bills of exchange and when they are accepted by banks,
they are called commercial bills.

Generally the bill is payable at a future date (mostly, the maturity period is up to 90
days).

During this period, the seller may discount the bill with the banks. The commercial banks
may rediscount these bills with FIs like EXIM bank, SIDBI, IDBI, etc.

Thus, commercial bills are very important for providing short-term credit to trade and
commerce.

iv) CERTIFICATES OF DEPOSITS: (CDs)

Certificates of Deposits are unsecured, negotiable promissory notes issued by commercial

banks and development financial institutions.

CDs are marketable receipts of funds deposited in a bank for a fixed period at a specified
rate of interest.

They are highly liquid and riskless money market instruments.

CDs were originally introduced in India to enable commercial banks to raise funds from
the market.

The RBI has modified its original scheme for CDs. the following are the recent guidelines for the
issue of CDs:a. ELIGIBILITY: CDs can be issued by commercial banks (except RRBs and Local Area
Banks) and financial institutions that have been permitted to raise short-term loans by
RBI.
26

b. AMOUNT: while banks can issue CDs depending on the requirements, financial
institutions can issue CDs within the limit fixed by the RBI.
c. MINIMUM SIZE: the minimum size of an issue for a single investor is Rs 1 lakh and it
can be increased in multiples of Rs 1 lakh.
d. DISCOUNT RATE: CDs are issued at a discount to face value. Bank / Financial
institutions are free to determine discount rates on floating rate basis.
e. INVESTORS: CDs are issued to individuals, corporations, companies, trusts, etc.
f. TRANSFERABILITY: CDs are freely transferable by endorsements / delivery.
However demitted CDs have to transfer as per specified procedures. There is no lock-in
period for CDs.
g. MATURITY: Commercial banks can issue CDs with a maturity period between 7 days
to 1year. Financial institutions can issue CDs with amaturity period between 1 year to 3
years.
h. RESERVE REQUIREMENTS: CDs are subject to CRR and SLR since banks have to
report CDs to RBI.
i. LOANS / BUY-BACK: Commercial banks / FIs cannot give loans against CDs.
Similarly, they cannot buy-back their own CDs before maturity period.
j. FORMAT: Banks /FIs should issue CDs only in the dematerialized form. However,
investors have the option to seek CDs in physical form.

Due to absence of a well-developed secondary market in CDs, the size of CD market in

India is quite small.

v) COMMERCIAL PAPERS:

27

Commercial paper is an unsecured, highly liquid money market instrument in the form of
a promissory note / a dematerialized form through any of the depositories registered with
SEBI.

It has fixed maturity whereby the purchaser is promised a fixed amount at a future date.

Commercial papers are issued by leading nationally reputed manufacturing and finance
companies (Public / private sector).

They are issued on a discount to face value.

Commercial papers are issued (by corporate / primary dealers / all India financial
institutions) on the following conditions:

a) The tangible net worth of the issuing company should not be less than RS4 crores.
b) The working capital limit of the company has been sanctioned by banks /financial institution.
c) The borrowal a/c of the company is rated as a standard asset by banks /financial institutions.

All eligible participants should have a minimum rating P2 from CRISIL.

Commercial Papers have maturity period between 7days and 1year from the date of issue.

CPs are issued in denominations of Rs 5 lakhs (minimum) or multiples of Rs5 lakhs.

Individuals, banks, corporate bodies, NRIs and FIIs can invest in commercial papers.

Every issuer must appoint an IPA (Issuing and Paying Agent) for issuance of commercial
papers. Only a scheduled commercial bank can act as an IPA.

vi) REPOS AND REVERSE REPOS:

The RBI achieves the function of maintaining liquidity in the money market through
REPOS / REVERSE REPOS.
28

The repo / reverse repo is a very important money market instrument to facilitate shortterm liquidity adjustment among banks, financial institutions and other money market
players.

A repo / reverse repo is a transaction in which two parties agree to sell and repurchase the
same security at a mutually decided future date and price.

From the sellers point of view, the transaction is called a repo; whereby the seller gets
immediate funds by selling the securities with an agreement to repurchase the same at a
future date.

Similarly, from the buyers point of view, the transaction is called a reverse repo,
whereby the purchaser buys the securities with an agreement to resell the same at a future
date.

The RBI, commercial banks and primary Dealers deal in the repos and reverse repo
transactions.

The financial institutions can deal only in the reverse repo transactions i.e. they are
allowed only to lend money through reverse repos to the RBI, other banks and Primary
dealers.

The maturity date varies from 1 day to 14 days.

The two types of repos are:

a. Inter-bank repos (the transaction takes place between banks and DFHI).
b. RBI repos (The repos / reverse repos are undertaken between banks and the RBI to
stabilize and maintain liquidity in the market).

Repos and Reverse Repos are used for following purposes:-

a.

for injection / absorption of liquidity.

29

b. to create an equilibrium between the demand for and supply of short-term funds.
c.

to borrow securities to meet SLR requirements.

d. to increase returns on funds.

e. to meet shortfall in cash positions.

vii) DISCOUNT AND FINANCE HOUSE OF INDIA (DFHI)

The Discount and Finance House of India is jointly owned by the RBI, the public sector
banks and all India financial institutions.

The DFHI helps in developing and stabilizing the money market by stimulating activity
in the money market instruments and developing secondary market in those instruments.

The DFHI deals in treasury bills, commercial bills certificates of deposits, commercial
papers, short term deposits, call money market and govt securities. It also participates in
repo operations.

Thus, the DFHI has helped corporate entities, banks and financial institutions to invest
their short-term surpluses in money market instruments.

viii) MONEY MARKET MUTUAL FUNDS: (MMMFs)

The RBI introduced Money Market Mutual Funds to enable small investors to participate
in the money market. Thus, MMMFs mobilizes saving of mutual funds and invest them
in such money market instruments that mature in less than one year.

30

The following are the important features of MMMFs:-

a.

MMMFs can be set by scheduled commercial banks and public finance institutions.

b. Individuals, corporates, etc can invest in MMMFs.

c. the lock-in period has been reduced to 15 days.
d. MMMFs are under the regulation of SEBI.
e. NRIs and Overseas Corporate Bodies can invest in MMMFs (on anon-repatriation basis)
floated by commercial banks / public sector financial institutions / private sector financial
institutions. However, they do not need separate permission from the RBI.
f. MMMFs are ideal for investors seeking low-risk investment for short-term surpluses.

2) UNORGANISED SECTOR:

The unorganized Indian money market mainly comprises of indigenous bankers, money
lenders and unregulated non-banking financial intermediaries.

Though they may exist in urban centers, their activities are mainly concentrated in rural
areas. In fact, 36% of rural households depend on these for their financial requirement.

The main components of unorganized money market are:

i) INDIGENOUS BANKERS:

These financial intermediaries operate as banks by receiving deposits, giving loans and
dealing in hundies (The hundi is a short term indigenous bill of exchange)

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The rate of interest varies from market to market / bank to bank.

However they do not solely depend on deposits, they may use their own funds.

They are called by different names like Kathawals, Saraf, Shroffs,Chettis, etc.

They provide loans to trade and industry and agriculture.

The main advantages of indigenous bankers are simple and flexible operations, informal
approach, personal contact, quick services and availability of timely funds.

However, they have their drawbacks like a very high rate of interest (18%to 36%),
combining banking with trade, interest in non-banking activities like general merchants,
brokers, etc.

ii)MONEY LENDERS:

Money lenders predominate in villages and they deal in the business of lending money.

Their interest rates are very high

Loans are given to agricultural labourers, marginal and small farmers, artisans, factory
workers, etc for unproductive purposes.

Their services are prompt, informal and flexible.

CHAPTER 5
The Growth of Money Market in India
32

While the need for long term financing is met by the capital or financial markets, money market is
a mechanism which deals with lending and borrowing of short term funds. Post reforms period in
India has witnessed tremendous growth of the Indian money markets. Banks and other financial
institutions have been able to meet the high expectations of short term funding of important sectors
like the industry, services and agriculture. Functioning under the regulation and control of the
Reserve Bank of India (RBI), the Indian money markets have also exhibited the required maturity
and resilience over the past about two decades. Decision of the government to allow the private
sector banks to operate has provided much needed healthy competition in the money markets,
resulting in fair amount of improvement in their functioning.
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.
Depending on the economic situation and available market trends, the RBI intervenes in the money
market through a host of interventions. In case of liquidity crunch, the RBI has the option of either
reducing the Cash Reserve Ratio (CRR) or pumping in more money supply into the system.
Recently, to overcome the liquidity crunch in the Indian money market, the RBI has released more
than Rs 75,000 crore with two back-to-back reductions in the CRR.
In addition to the lending by the banks and the financial institutions, various companies in the
corporate sector also issue fixed deposits to the public for shorter duration and to that extent
become part of the money market mechanism selectively. The maturities of the instruments issued
by the money market as a whole, range from one day to one year. The money market is also
closely linked with the Foreign Exchange Market, through the process of covered interest arbitrage
in which the forward premium acts as a bridge between the domestic and foreign interest rates.

33

Scope of Indian Money Market

The India money market is a monetary system that involves the lending and borrowing of shortterm funds. India money market has seen exponential growth just after the globalization initiative
in 1992. It has been observed that financial institutions do employ money market instruments for
financing short-term monetary requirements of various sectors such as agriculture, finance and
manufacturing. The performance of the India money market has been outstanding in the past
twenty 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.

Defects or Drawbacks of Money Market

Though the Indian money market is considered as the advanced money market among
developing countries, it still suffers from many drawbacks or defects. These defects limit the
efficiency of our market.
Some of the important drawbacks of Indian Money Market are:1. MULTIPLE RATE OF INTEREST: In the Indian money market, especially the banks,
there exist too many rates of interests. These rates vary for lending, borrowing, government
activities, etc. Many rates of interests create confusion among the investors.
2. DICHOTOMY: Dichotomy i.e. existence of two markets (organized money market and
unorganized money market) is a major defect of the Indian Money Market. The unorganized
money market comprises of indigenous bankers, moneylenders, chit funds, nidhis , loan
companies and finance brokers that do not come under the control and supervision of the
RBI. This unorganized sector is mainly concentrated in the rural areas and it does not
34

differentiate between short term and long term finance and between the purposes of finance.
This puts a limit on the RBIs control over the money market.
3. LACK OF INTEGRATION: The RBI finds it difficult to integrate the organized and the
unorganized money market. While the RBI can control and supervise the working of the
organized sector effectively, the heterogeneous unorganized sector is out of RBIs control.
There is no uniformity in the practices and operations of the unorganized money market.
Moreover, the interest rates in both the markets are also different. Thus there is lack of
integration in the Indian money market.
4. MULTIPLICITY IN INTEREST RATES: There is diversity in rates of interest in the
Indian money market. This multiplicity in the interest rates is due to lack of mobility of funds
from one section of the money market to another. The rates differ from institution to
institution even for funds of the same duration. Although the wide differences are being
narrowed down, the existing differences do hamper the efficiency of the money market.
5. ABSENCE OF ORGANISED BILL MARKET: The existence of a well-organized bill
market is essential for effective linking up various credit agencies. It refers to a mechanism
where bills of exchange are purchased and discounted by commercial banks / financial
institutions. The bill market is not yet developed in India due to the following reasons:

Banks keeping large amount of cash.

Preference for borrowing rather than discounting bills.

Overdependence on cash / cheque transactions.

High stamp duty on usance bill, etc.

6. SHORTAGE OF FUNDS: The Indian money market is characterized by shortage of funds.

Various factors like inadequate banking facilities, low savings, lack of banking habits,
existence of parallel economy, etc lead to shortage offends. Thus, demand for short-term
funds far exceeds the supply. This results in high interest rate. However now banks are flush

35

with funds especially in urban area as people prefer to invest their money with banks rather
than keeping them as deposits in the unorganized sector.
7. SEASONAL STRINGENCY OF MONEY: Since agriculture continues to play a major role
in the Indian economy, farm operations do influence the demand for and supply of money.
Thus seasonal stringency of money and high interest rate during the busy season (November
to June) is a striking feature of the Indian money market. Also, there a wide fluctuations in
the interest rates from one reason to another. However, the RBI makes attempt to reduce the
fluctuations by adding money into the money market during the busy season and
withdrawing the funds during the slack season.
8. INADEQUATE CREDIT INSTRUMENTS: The Indian money market lacked adequate
short-term paper instruments till1985-86. Only call money market and bill market existed.
Also there were no specialized dealers / brokers in the money market. After 1985-86 the RBI
Introduced new credit instruments in the market like CDs, CPs, MMMF, etc, but they are not
yet fully developed in India.
9. ABSENCE OF a WELL-ORGANISED BANKING SECTOR IN RURALAREA: There
is poor banking system in the rural area due to the problems of overheads and maintenance of
branches. The commercial bank branches in rural area are only 40% of the total bank
branches. This also hampers the development of money market in India.
10. INEFFICIENT AND CORRUPT MANAGEMENT: Faulty selection, lack of training,
poor performance appraisal and faulty promotions result in inefficiency and corruption in the
banking sector. This adversely affects the success and performance of money market. These
are some of the major drawbacks of the Indian money market; many of these are also the
features of our money market.

Conclusions

36

The money market is a vibrant market, affecting our everyday lives. As the shortterm market for money, money changes hands in a short time frame and the players
in the market have to be alert to changes, up to date with news and innovative with
strategies and products. The withdrawal of non-bank entities from the inter-bank
call-money market is linked to the improvement of settlement systems. Any timebound plan for the evolution of a pure inter-bank call/notice money market would
be ineffective till the basic issue of settlements is addressed.
In brief, various policy initiatives by the Reserve Bank have facilitated
development of a wider range of instruments such as market repo, interest rate
swaps, CDs and CPs. This approach has avoided market segmentation while
meeting demand for various products. These developments in money markets have
enabled better liquidity management by the Reserve Bank

Biblography
37

[Link]
[Link]
RBIs site --- [Link]
SBI DFHIs site --- [Link]
Indian Institute Of Banking & Finance --- [Link]
[Link]
[Link]
[Link]/weekly statistical supplement/ various [Link]
[Link]
[Link]
[Link]
[Link]

[Link]

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39