MONEY MARKET INSTRUMENTS

SUBMITTED BY:
(SECTION: Q)

AMIT SINGH 19BSP0312  Commercial paper

 2. Treasury Bill
ANIRUDH KUMAR 19BSP0354  Introduction
 2. Call Money
GUNJAN NISAR 19BSP0989  Repurchase
 2. Suggestion
PAVITRA SHETTY 19BSP1844  Primary Dealers
 2. DFHI
RAJ SALONI 19BSP2115  MMMF

VANSHIKA SHARMA 19BSP3158  1.Commercial Bills

 2.Deficiencies
MADHAV GUPTA 19BSP1434  1.CD
 2.IBP
RAHUL 19BSP2100  1.STCI
KANDALGAONKAR

SUBMITTED ON: SUBMITTED TO:

13.07.2019 PROF. AJAY KULKARNI

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INTRODUCTION OF MONEY MARKET

The money market is not a market in the usual sense of the term. It does not mean a single
trading place or trading organization dealing in money. But “it is a collective name given to the
various forms and institutions that deal with the various grades of near money”.
It is a market in short-term funds in which the lenders of money meet the borrowers of money.
The lenders of money are the Reserve Bank of India, all scheduled commercial banks, co-
operative banks, financial institutions like the LIC, UTI, GIC, foreign exchange banks, and
indigenous bankers, moneylenders, etc.
The borrowers of money are the Central Government, State Governments, local bodies, traders,
merchants, businessmen, exporters, importers, companies, farmers, and the public. Thus the
money market is a market for monetary assets in which the short-term requirements of the
borrowers are met in order to provide liquidity or cash to the lenders.

Nature of Indian Money Market:

The structure of money market in India comprises of both organized and unorganized markets.
The organized money market consists of the Reserve Bank of India, all scheduled commercial
banks, cooperative banks, and financial institutions like Life Insurance Corporation, General
Insurance Corporation and Unit Trust of India and foreign exchange banks, and DFHI.
The unorganized money market includes indigenous bankers, moneylenders, both professional
and non-professional traders, merchants, landlords, pawn brokers, nidhis, and chit funds. Nidhis
are mutual loan associations and chit funds are voluntary loan associations for mobilizing
savings.

Instrument of Indian Money Market:

The constituents of the organized sector of the Indian money market consist of DFHI, STCI, call
money market, treasury bills, commercial bills, inter-corporate funds, certificates of deposits,
commercial paper and Repos.

(i) Call Money Market:

The call money market or the inter-bank call money market is an important constituent of the
organized money market and it functions as an immediate source of short-term funds. The major
suppliers of the funds in the call money market are SBI, LIC, GIC, UTI, IDBI and NAB ARD
and the major borrowers are the scheduled commercial banks. As the participants are mostly
banks, it is called inter-bank call money market. The commercial banks use their unused or
surplus cash to lend for very short periods to bill brokers. The bill brokers, in turn, use them to
discount or purchase bills. Such funds are borrowed at the “call-rate” which varies with the
volume of funds lent by the banks. When the brokers are asked to pay off loans immediately,
then they borrow from SBI, LIC, GIC, UTI, etc. Of the total market for short-term funds, the

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public sector banks account for about 80 per cent of the borrowings. The foreign banks and
private sector banks account for the remaining 20 per cent. While some banks operate both as
lenders and borrowers, others are either only borrowers or lenders in this market.
Non- bank financial institutions such as IDBI, LIC, GIC, etc., participate only as lenders. DFHI
and STCI operate as borrowers and lenders in this market. All call money transactions have a
maturity of one day to a fortnight.
The call money rate is determined by demand and supply of short-term funds in the call money
market The variations in it depend upon busy and slack seasons and the credit policy of the RBI.
When the demand for credit increases in the money market and the RBI does not take any action,
the call money rates rise.
On the contrary, if the RBI influences the money market by reducing CRR or/and Bank Rate
or/and through additional money supply, the call money rates decline.

(ii) Commercial Bills Market:

The commercial bills market in India is under-developed. There is nc proper market for bibs of
exchange. The Reserve Bank of India introduced the bill market scheme in 1952. Its aim was to
provide finance against bills of exchange and promissory notes for 90 days.
The scheduled commercial banks were allowed to convert a part of their advances, loans, cash
credits or overdrafts into usance promissory notes for 90 days for lodging as collateral (security)
for advances from the RBI. Since this scheme was primarily meant to accommodate banks, it did
not help in developing a bill market
On the recommendations of the Narsimham Committee, the RBI introduced the Bill
Rediscounting Scheme on November 1, 1970. Under this scheme, all licensed scheduled
commercial banks are eligible to rediscount with RBI genuine trade bills arising out of sale or
dispatch of goods.
Apart from scheduled commercial banks, certain other financial institutions like LIC, GIC, UTI,
IDBI, ICICI, IRBI, IFCI, ECGC, NABARD, NHB, EXIMB ANK, SCICI, Tourism Development
Finance Corporation, SBI and CANBANK Mutual Funds and select urban cooperative banks are
included in the scheme.
The DFHI participates actively in this market and provides bid rates on daily basis. With the
introduction in October 1988 of the usance promissory note for the purposes of rediscounting of
bills, banks could draw a derivative usance promissory note for suitable sums with maturity
period up to 90 days on the basis of bonafide commercial or trade bills discounted at their
branches. In August 1989, the Government remitted the stamp duty on usance bills and thereby
removed a major administrative constraint in the use of bill system.

(iii) Inter-Bank Participation (IBP):

The Reserve Bank of India has introduced a new instrument called Inter-Bank Participations
with a view to facilitate the adjustment of short-term liquidity within the banking system. These
participations are of two types—one on risk sharing basis and the other without risk sharing.
IBPs on risk sharing basis can be for 91- 180 days at an interest rate to be determined between
the issuing bank and the participating bank. IBP without risk taking can have a tenure not
exceeding 90 days at an interest rate to be determined between the concerned banks. IBPs

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without risk taking are treated as a part of the demand and time liabilities of the borrowing bank
and subject to reserve requirements.

(iv) Certificates of Deposit (CD):

In March 1989, the Reserve Bank of India introduced the certificates of deposit in order to widen
the range of money market instruments and give investors greater flexibility in the deployment of
their short- term surplus funds. The minimum size of the issue of CDs to a single investor is Rs.5
lakh in multiple of Rs.1 lakh at present. There is no bank-wise limit for issue of CDs and banks
are free to issue CDs depending upon their requirements.
The CD can be issued at a discount on face value and the discount rate can be freely determined.
The maturity period of CDs is between 3 months and one year. The CDs can be freely
transferable by endorsement and delivery but only after 15 days from the date of issue. CDs are
subject to the reserve requirements. Banks are also required to maintain CRR and SLR on the
issue price of CDs.
The DFHI also operates in the secondary market for CDs. Six all India financial institutions, viz.,
IDBI, ICICI, IFCI, IRBI, SIDBI and EXIM Bank have also been permitted to issue CDs with
maturity of more than one year and up to 3 years. The interest rates on CDs with a maturity of 3
months have been less than that for one year and more up to 3 years, as is the case with term
deposits.

(v) Commercial Paper (CP):

The commercial paper is a short-term money market instrument. It is in the nature of an

unsecured promissory note. It can be either sold directly by the issuer to the investors or placed
by an intermediary bank or securities dealer. It is not tied to any specific transaction. It attracts
stamp duty.
It does not carry any collateral security. In brief, the aim of CP is to enable high-rated corporate
borrowers to diversify their sources of short-term borrowings and to provide an additional
instrument to investors to deploy their short-term surplus funds.

(vi) Treasury Bills Market:

The treasury bills are short-term monetary instruments issued by the Government of India at a
discount and for a fixed period. There are treasury bills of varied maturities. There are : 14-day
and 28-day Treasury Bills, that are auctioned on a weekly basis. 182-day Treasury Bills are
auctioned on a fortnightly basis and 364-day Treasury Bills on a monthly basis.
These Treasury Bills provide investors with financial instruments of varying short-term
maturities and facilitate the cash management requirements of various segments of the economy.

(vii) Repurchase Auctions (Repos):

The RBI introduced the Repurchase Agreements Auctions (Repos) in the Central Government-
dated securities on 10 December, 1992 to even out interest rates in the call money market. Repos
are repurchase agreements for the sale and subsequent repurchase of Government Securities.

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They allow the holder of the security to raise cash using the security as collateral, Under repos
transacting a part of one kind of asset is liquidated in order to buy it back. In the case of banks,
repos result in the substitution of either cash or RBI balance for securities.
The RBI indirectly intervenes in the money market through reverse repo operations to undo
pressure on overnight call money rates. Initially, repos/reverse repo auctions were conducted on
a daily basis (Monday through Friday) and with one-day maturity (except on Fridays/days
preceding holidays) were introduced.
Subsequently, multiple repo/reverse repo auctions with 3-7 days maturity period were introduced
in August, 2000. Interest rates in respect of both repo and reverse repos are the cut-off yields
which arise from auctions conducted on a uniform price basis. The transactions of repos are
conducted through SCL (Subsidiary Central Ledger) of the RBI.

(viii) Discount and Finance House of India (DFHI):

The Discount and Finance House of India Limited (DFHI) was set up on 25 April, 1988 with its
own resources of Rs.100 crores and the financial support of RBI.
Its aims are:
 to bring into the fold of the Indian money market the entire financial system comprising
the scheduled commercial banks, public sector banks, foreign banks and private sector
banks, cooperative banks, state cooperative banks, scheduled urban cooperative banks,
all-India financial institutions, and non-banks in the public and private sectors.
 to equilibrate short-term surpluses and deficits of these instruments at market related rates
through inter-bank transactions in the case of banks, and through money market
instruments in the case of banks and others. It deals in call funds (including notice funds),
Treasury bills, commercial bills, certificates of deposit, commercial paper, term deposits
and Central Government dated securities.
The DFHI aims at increasing the liquidity of these money market instruments. It operates both as
a borrower and a lender. It aims at stabilising the call money market rates by building up a large
turnover, while retaining for itself only a small spread between the borrowing and lending rates.

(ix) Securities Trading Corporation or India (STCI):

The STCI was set up in May 1994 with a fully issued paid-up capital of Rs100 crores. It started
operating from June 1994. It aims at developing secondary market in Government securities and
Treasury Bills. It undertakes ready forward transactions in Treasury Bills and Government dated
securities.
These transactions take place in Mumbai and are routed through the SGL accounts maintained by
the RBI. Like the DFHI, it borrows and lends in the call/notice money market. It receives
liquidity support from the RBI in the form of “reverse Repos facility” and in Government dated
securities and Treasury Bills. It has also become a primary dealer in Government securities.

(x) Primary Dealers (PDs):

Besides the DFHI and the STCI, there are 13 more primary dealers who are operating in
Government securities. They are the ICICI Securities, the SBI Gilts Ltd., the PNB Gilts Ltd., the

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Gilt Securities Trading Corporation Ltd., etc. Like the DFHT and the STCI, they receive
liquidity support from the RBI in the form of reverse Repos facility in Government dated
securities and Treasury Bills.
The RBI pays to PDs commission for underwriting Government of India dated securities and
Treasury Bills. PDs are provided advances against the security of their holdings of Government
dated securities and Treasury Bills in Subsidiary General Ledger (SGL) Accounts of the RBI.

(xii) Money Market Mutual Funds (MMMFs):

The RBI allowed scheduled commercial banks and public financial institutions to set up
MMMFs in April 1992. They invest their resources mobilised from the public in such money
market instruments as Treasury Bills, Government dated securities and rated corporate bonds and
debentures with a maturity up to one year, call/notice money, commercial paper, accepted or co-
accepted commercial bills by banks, and certificates of deposit. MMMFs have not made any
progress in the money market because their number has come down to three from eight.

Deficiencies in the Indian money market:

(i) Dual Character:

The Indian economy has dichotomic money markets with an organised sector and an
unorganised sector.

(ii) Captive Market:

The Indian money market is captive. It is governed by a few institutions which participate in it.

(iii) Narrow Based:

The Indian money market is narrow based and is functioning with limited number of
instruments.

(iv) Small Geographical Area:

The Indian money market is confined to a small geographical area comprising four capital cities
of India, viz., Delhi, Mumbai, Kolkata and Chennai.

(v) Slow Rate of Monetization:

The slow rate of monetization is another factor which has kept the Indian money market under-
developed.

(vi) Shortage of Capital:

There is shortage of capital in the Indian money market which fails to meet the requirements of
the trade and industry.

(vii) Defects in the Call Money Market:

The Call Money Market is highly skewed with a few predominant lenders and a large number of
borrowers.

(viii) Defects in the Bill Market:

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Despite the introduction of the Bill Market Scheme in 1952 and the Bill Rediscounting Scheme
in 1970, the bill market in India continues to remain underdeveloped.

Suggestions to Improve the Indian Money Market:

(i) Control over Indigenous Bankers:

After nationalisation of banks in 1969, banking facilities have considerably expanded in rural
India under the branch expansion scheme of commercial banks, lead bank scheme, regional rural
banks, cooperative banks, etc. But the hold of the indigenous bankers still continues over the
majority of villagers.

(ii) Control over Chit Funds:

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

(iii) Standard Forms of Hundis:

In the unorganised sector of the money market, large transactions are performed by discounting
hundis by indigenous bankers. But these hundis are not accepted by commercial banks.

(iv) Development of Bill Market:

In the organised sector of the money market, a properly developed bill market is essential for the
growth of money market in India. For this purpose, the Government should direct departmental
undertakings and public sector organisations that payments for all credit purchases should be in
the form of bills which should be strictly honoured on due dates.

(v) Growth of Money Market in Other Centres:

The money market is restricted to four major cities in India. To expand the money market in
other cities, banking and clearing house facilities should be provided on a larger scale.

(vi) Creation of Secondary Market:

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

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 BIBLIOGRAPHY

 http://www.economicsdiscussion.net/india/money-market/money-market-in-india-
features-structure-constituents-participants-and-defects/31348

 https://www.inc.com/encyclopedia/money-market-instruments.html

 http://www.preservearticles.com/economics/what-are-the-measures-taken-for-the-
improvement-of-indian-monetary-market/20123

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