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SUBMITTED TO GURU NANAK DEV UNIVERSITY IN PARTIAL FULFILMENT OF THE REQUIREMENT FOR THE DEGREE OF MASTER OF BUSINESS ECONOMICS
UNDER GUIDANCE OF
Mrs. RENU BHATIA
SUBMITTED BY
YASHVANT SINGH
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DECLARATION
Hereby I declare that the project report entitled INDIAN MONEY MARKET submitted for the degree of Master of Business Economics, is my original work and the project report has not formed the basis for the award of any diploma, degree, associate ship, fellowship or similar other titles. It has not been submitted to any other university or institution for the award of any degree or diploma.
Place: Date:
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CERTIFICATE
This is to certify that Ms. YASHVANT SINGH of MBE fourth semester of NEW DELHI INSTITUTE OF MANAGEMENT has completed her project report on the topic PROJECT REPORT ON INDIAN MONEY MARKET under the supervision of Mrs. RENU BHATIA faculty member of NDIM. To best of my knowledge the report is original and has not been copied or submitted anywhere else. It is an independent work done by her.
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ACKNOWLEDGEMENT
Survey is an excellent tool for learning and exploration. No classroom routine can substitute which is possible while working in real situations. Application of theoretical knowledge to practical situations is the bonanzas of this survey. Without a proper combination of inspection and perspiration, its not easy to achieve anything. There is always a sense of gratitude, which we express to others for the help and the needy services they render during the different phases of our lives. I too would like to do it as I really wish to express my gratitude toward all those who have been helpful to me directly or indirectly during the development of this project. First of all I wish to express my profound gratitude and sincere thanks to my professor Mrs. RENU BHATIA who was always there to help and guide me when I needed help. His perceptive criticism kept me working to make this project more full proof. I am thankful to him for his encouraging and valuable support. Working under him was an extremely knowledgeable and enriching experience for me. I am very thankful to him for all the value addition and enhancement done to me. No words can adequately express my overriding debt of gratitude to my parents whose support helps me in all the way. Above all I shall thank my friends who constantly encouraged and blessed me so as to enable me to do this work successfully. YASHAVANT SINGH MBE
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TABLE OF CONTENTS
CHAPTER NUMBER I CHAPTER NAME INTRODUCTION OF INDIAN MONEY MARKET Definition of Money Market Objectives of Money Market General Characteristics of Money Market History of Indian Money II INTRODUCTION OF CHOCOLATE AND COMPANYS PROFILE CHOCOLATE PRODUCTION CONSUMTION OF CHOCOLATE IN INDIA NESTLES PROFILE CADBURYS PROFILE III IV V LITERATURE REVIEW RESEARCH & DESIGN METHODOLOGY FINDINGS & ANALYSIS BASIS OF RESEARCH AND DESIGN ANALYSIS OF DATA FINDINGS CONCLUSION SUGGESTIONS AND RECOMENDETATIONS VI VII BIBLIOGRAPHY ANNEXURE Market HISTORY OF CHOCOLATE CONTENTS Meaning of Money Market PAGE NUMBER
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SUMMARY:
The seventh largest and second most populous country in the world, India has long been considered a country of unrealized potential. A new spirit of economic freedom is now stirring in the country, bringing sweeping changes in its wake. A series of ambitious economic reforms aimed at deregulating the country and stimulating foreign investment has moved India firmly into the front ranks of the rapidly growing Asia Pacific region and unleashed the latent strengths of a complex and rapidly changing nation. India's process of economic reform is firmly rooted in a political consensus that spans her diverse political parties. India's democracy is a known and stable factor, which has taken deep roots over nearly half a century. Importantly, India has no fundamental conflict between its political and economic systems. Its political institutions have fostered an open society with strong collective and individual rights and an environment supportive of free economic enterprise. India's time tested institutions offer foreign investors a transparent environment that guarantees the security of their long term investments. These include a free and vibrant press, a judiciary which can and does overrule the government, a sophisticated legal and accounting system and a user friendly intellectual infrastructure. India's dynamic and highly competitive private sector has long been the backbone of its economic activity. It accounts for over 75% of its Gross Domestic Product and offers considerable scope for joint ventures and collaborations. Today, India is one of the most exciting emerging money markets in the world. Skilled managerial and technical manpower that match the best available in the world and a middle class whose size exceeds the population of the USA or the European Union, provide India with a distinct cutting edge in global competition. The average turnover of the money market in India is over Rs. 40,000 crores daily. This is more than 3 percents of the total money supply in the Indian economy and 6 percent of the total funds that commercial banks have let out to the system. This implies that 2 percent of the annual GDP of India gets traded in the money market in just one day. Even though the money market is many times larger than the capital market, it is not even fraction of the daily trading in developed markets. 2 2
A well developed money market serves the following objectives: Providing an equilibrium mechanism for ironing out short-term surplus and deficits.
Providing a focal point for central bank intervention for the influencing liquidity in the economy.
Providing access to users of short-term money to meet their requirements at a reasonable price.
The general characteristics of money market are outlined below: Short-term funds are borrowed and lent. No fixed place for conduct of operations, the transactions being conducted even over the phone and therefore, there is an essential need for the presence of well developed communications system. Dealings may be conducted with or without the help the brokers. The short-term financial assets that are dealt in are close substitutes for money, financial assets being converted into money with ease, speed, without loss and with minimum transaction cost. Funds are traded for a maximum period of one year.
Presence of a large number of submarkets such as inter-bank call money, bill
To ensure that liquidity and short term interest rates are maintained at levels consistent with the monetary policy objectives of maintaining price stability. To ensure an adequate flow of credit to the productive sector of the economy and To bring about order in the foreign exchange market. The Reserve Bank of India influence liquidity and interest rates through a number of operating instruments - cash reserve requirement (CRR) of banks, conduct of open market operations (OMOs), repos, change in bank rates and at times, foreign exchange swap operations
Treasury Bills:
Treasury bills are short-term instruments issued by the Reserve Bank on behalf of the government to tide over short-term liquidity shortfalls. This instrument is used by the government to raise short-term funds to bridge seasonal or temporary gaps between its receipt (revenue and capital) and expenditure. They form the most important segment of the money market not only in India but all over the world as well. In other words, T-Bills are short term (up to one year) borrowing instruments of the Government of India which enable investors to park their short term surplus funds while reducing their market risk T-bills are repaid at par on maturity. The difference between the amount paid by the tenderer at the time of purchase (which is less than the face value) and the amount received on maturity represents the interest amount on T-bills and is known as the discount. Tax deducted at source (TDS) is not applicable on T-bills.
They have an assured yield, low transaction cost, and are eligible for inclusion in the securities for SLR purpose.
They are not issued in scrip form. The purchases and sales are affected through the
subsidiary general ledger (SGL) account. T-Bills are issued in the form of SGL entries in the books of Reserve Bank of India to hold the securities on behalf of the holder. The SGL holdings can be transferred by issuing a SGL transfer form Recently T-Bills are also being issued frequently under the Market Stabilization Scheme (MSS).
Amount:
Treasury bills are available for a minimum amount of Rs.25,000 and in multiples of Rs. 25,000. Treasury bills are issued at a discount and are redeemed at par. Treasury bills are also issued
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under the Market Stabilization Scheme (MSS). They are available in both Primary and Secondary market.
Investors
At the end of march (Rs.in Cr.) 2008 2007 51,770 88,822 27,991 1,68,583 2006 49,187 60,184 8,146 1,17,517 2005 61,724 15,874 11,628 89,226
discretion of the RBI to accept, reject or partially accept the notified amount depending on prevailing market condition.
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The summary of T- bill auctions conducted during the year 2007- 08 is in Table 1.3
91-days No. of issues Number of bids received (competitive & non-competitive) Amount of competitive bids (Rs. cr.) Amount of non-competitive bids (Rs. cr.) 301,904 101,024 54 4,844
182-days 27 1,991
364-days 26 2,569
115,531 7,321
170,499 3,205
Number of bids accepted (competitive & non- 1935 competitive bids) Amount of competitive bids accepted (Rs.Cr.) Devolvement on PDs (Rs. cr.) Total Issue (Rs. cr) Cut-off price - minimum (Rs.) Cut-off price - maximum (Rs.) Implicit yield at cut -off price - minimum (%) Implicit yield at cut -off price - maximum (%) Outstanding amount (end of the year) 39,957.06 (Rs.cr.) 109,341 210,365 98.06 98.90 4.4612
811
849
16,785.00
57,205.30
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CUT-OFF YIELDS:
T- bills are issued at a discount and are redeemed at par. The implicit yield in the Tbill is the rate at which the issue price (which is the cut-off price in the auction) has to be compounded, for the number of days to maturity, to equal the maturity value. Yield, given price, is computed using the formula:
= ((100-Price)*365)/ (Price * No of days to maturity) Similarly, price can be computed, given yield, using the formula: = 100/(1+(yield% * (No of days to maturity/365)) For example, a 182-day T-bill, auctioned on January 18, at a price of Rs. 95.510 would have an implicit yield of 9.4280% computed as follows: = ((100-95.510)*365)/(95.510*182) 9.428% is the rate at which Rs. 95.510 will grow over 182 days, to yield Rs. 100 on maturity. Treasury bill cut-off yields in the auction represent the default -free money market rates in the economy, and are important benchmark rates.
Multiple-price auction:
The Reserve Bank invites bids by price, that is, the bidders have to quote the price ( per Rs.100 face value) of the stock at which they desire to purchase. The bank then decides the cut-off 2 2
price at which the issue would be exhausted. Bids above the cut-off price are allotted securities. In other words, each winning bidder pays the price it bid. The main advantage of this method is that the Reserve Bank obtains the maximum price each participant is willing to pay. It can encourage competitive bidding because each bidder is aware that it will have to pay the price it bid, not just the minimum accepted price. If the bidders who paid higher prices could face large capital losses if the trading in these securities starts below the marginal price set at the auction. In order to eliminate the problem, the Reserve Bank introduced uniform price auction in case of 91-days T-bills.
Uniform-price auction:
In this method, the Reserve Bank invites the bids in descending order and accepts those that fully absorb the issue amount. Each winning bidders pays the same (uniform) price decided by the Reserve Bank. The advantages of the uniform price auction are that they tend to minimize uncertainty and encourage broader participation. Most countries follow the multiple-price auction. However, now the trend is a shift towards the uniform-price auction. It was introduced on an experimental basis on November 6, 1998, in case of 91-days T-bills. Since 1999-2000, 91-day T-bills auctions are regularly conducted on a uniform price basis.
Commercial Paper:
Commercial paper was introduced into the Indian money market during the year 1990, on the recommendation of Vaghul Committee. Now it has become a popular debt instrument of the corporate world. A commercial paper is an unsecured short-term instrument issued by the large banks and corporations in the form of promissory note, negotiable and transferable by endorsement and delivery with a fixed maturity period to meet the short-term financial requirement. There are four basic kinds of commercial paper: promissory notes, drafts, checks, and certificates of deposit. It is generally issued at a discount by the leading creditworthy and highly rated corporates. Depending upon the issuing company, a commercial paper is also known as Financial paper, industrial paper or corporate paper. Commercial paper was initially meant to 2 2
be used by the corporates borrowers having good ranking in the market as established by a credit rating agency to diversify their sources of short term borrowings at a rate which was usually lower than the banks working capital lending rate. Commercial papers can now be issued by primary dealers, satellite dealers, and allIndia financial institutions, apart from corporatist, to access short-term funds. Effective from 6th September 1996 and 17th June 1998, primary dealers and satellite dealers were also permitted to issue commercial paper to access greater volume of funds to help increase their activities in the secondary market. It can be issued to individuals, banks, companies and other registered Indian corporate bodies and unincorporated bodies. It is issued at a discount determined by the issuer company. The discount varies with the credit rating of the issuer company and the demand and the supply position in the money market. In India, the emergence of commercial paper has added a new dimension to the money market.
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Issuer Company
Redeem CP on maturity
Issue CP at discount
Investor Bank/Company
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In the developed economies, a substantial portion of working capital requirement especially those that are short-term, is promptly met through flotation of commercial paper. Directly accessing market by issuing short-term promissory notes, backed by stand-by or underwriting facilities, enables the corporate to leverage its rating to save on interest costs. Typically commercial paper is sold at a discount to its face value and is redeemed at face value. Hence, the implict interest rate is function of the size of discount and the period of maturity. Scheduled commercial banks are major investors in commercial paper and their investment is determined by bank liquidity conditions. Banks prefer commercial paper as an investment avenue rather than sanctioning bank loan. These loans involve high transaction costs and money is locked for a longer time period whereas a commercial paper is an attractive short-term instrument for banks to park funds during times of high liquidity. Some banks fund commercial papers by borrowing from the call money market. Usually, the call money market rates are lower than the commercial paper rates. Hence, banks book profits through arbitraged between the two money markets. Moreover, the issuance of commercial papers has been generally observed to be invested related to the money market rates.
Illustration 1.
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X co.ltd issued commercial paper as per following details: Date of issue Date of maturity 17th January, 2009 17th April, 2009 no. of days interest rate 90 days 11.25% p.a.
What was the net amount received by the company on issue of commercial paper? Let us assume that the company has issued commercial paper worth Rs.10 crores? No of days = 90 days Interest rate = 11.25 % p.a. Interest for 90 days = 11.25% p.a. X 90 days/ 365 days = 10 crores X 2.774 / 100+2.774 = 2.774% = Rs. 26, 99,126 crores = or 0.27 crores Therefore, net amount received at the time of issue = 10 crores 0.27 crores = Rs. 9.73 crores
The summary of RBI guidelines for issue of Commercial paper is given below: Corporate, primary dealers, satellite dealers and all India financial institutions are permitted to raise short term finance through issue of commercial paper, which should be within the umbrella limit fixed by RBI. A corporate can issue Commercial Paper if: 1. Its tangible net worth is not less than Rs.5 crores as per latest balance sheet. 2. Working capital limit is obtained from banks/ all India financial institutions, and 3. Its borrowal account is classified as standard asset by banks/ all India financial institutions. Credit rating should be obtained by all eligible participants in cp issue from the specified credit rating agencies like CRISIL, ICRA, CARE, and FITCH. The minimum rating shall be equivalent to P-2 of CRISIL. Commercial paper can be issued for maturities between a minimum of 15 days and a maximum of upto one year from the date of issue. The maturity date of commercial paper should not exceed the date beyond the date upto which credit rating is valid. It can be issued in denomination of Rs. 5 lakhs or in multiples thereof. Amount invested by a single investor should not be less than Rs. 5 lakhs (face value). A company can issue commercial paper to an aggregate amount within the limit approved by board of directors or limit specified by credit rating agency, whichever is lower. Banks and financial institutions have the flexibility to fix working capital limits duly taking into account the resource pattern of companys financing including commercial papers. The total amount of commercial paper proposed to be issued should be raised within a period of two weeks from the date on which the issuer opens the issue for subscription.
Commercial paper may be issued on a single date or in parts on different dated provided that in the latter case, each commercial paper shall have the same maturity date.
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Every commercial paper should be reported to RBI through issuing and paying agent (IPA). Only a scheduled bank can act as an IPA. Commercial paper can be subscribed by individuals, banking companies, corporate, NRIs and FIIs. It can be issued either in the form of a promissory note or in a dematerialised form. It will be issued at a discount to face value as may be determined by the issuer. Issue of commercial paper should not be underwritten or co-accepted. The initial investor in commercial paper shall pay the discounted value of the commercial paper by means of a crossed account payee cheque to the account of the issuer through IPA. On maturity, if commercial paper is held in physical form, the holder of commercial paper shall present the investment for payment to the issuer through IPA. When the commercial paper is held in demat form, the holder of commercial paper will have to get it redeemed through depository and received payment from the IPA. Commercial paper is issued as a stand alone product. It would not be obligatory for banks and financial institutions to provide stand-by facility to issuers of commercial paper. Every issue of commercial paper, including renewal, should be treated as a fresh issue.
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Commercial paper was introduced in India in January 1990, in pursuance of the Vaghul Committees recommendations, in order to enable highly rated non-bank corporate borrowers to diversify their sources of short term borrowings and also provide an additional instrument to investors. commercial paper could carry on an interest rate coupon but is generally sold at a discount. Since commercial paper is freely transferable, banks, financial institutions, insurance companies and others are able to invest their short-term surplus funds in a highly liquid instrument at attractive rates of return.
A major reform to impart a measure of independence to the commercial paper market took place when the stand by facility* of the restoration of the cash credit limit and guaranteeing funds to the issuer on maturity of the paper was withdrawn in October 1994. As the reduction in cash credit portion of the MPBF impeded the development of the commercial paper market, the issuance of commercial paper was delinked from the cash credit limit in October 1997. It was converted into a stand alone product from October 2000 so as to enable the issuers of the service sector to meet short-term working capital requirements.
Banks are allowed to fix working capital limits after taking into account the resource pattern of the companies finances, including commercial papers. Corporates, PDs and all-India financial institutions (FIs) under specified stipulations have permitted to raise short-term resources by the Reserve Bank through the issue of commercial papers. There is no lock in period for commercial papers. Furthermore, guidelines were issued permitting investments in commercial papers which has enabled a reduction in transaction cost.
In order to rationalize the and standardize wherever possible, various aspects of processing, settlement and documentation of commercial paper issuance, several measures were undertaken with a view to achieving the settlement on T+1 basis. For further deepening the market, the Reserve Bank of India issued draft guidelines on securitisation of standard assets on April 4, 2005.
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Accordingly the reporting of commercial papers issuance by issuing and paying agents (IPAs) on NDS platform commenced effective on April 16, 2005. Activity in the commercial paper market reflects the state of market liquidity as its issuances tend to rise amidst ample liquidity conditions when companies can raise funds through commercial papers at an effective rate of discount lower than the lending rate of bonds. Banks also prefer investing in commercial papers during credit downswing as the commercial paper rate works out higher than the call rate. Table 2.2 shows the trends in commercial papers rates and amounts outstanding.
Stamp Duty:
The dominant investors in CPs are banks, though CPs are also held by financial institutions and corporates. The structure of stamp duties for banks and non-banks is presented in Table 2.3 2 2
Source: RBI, Report of the Group to review guidelines relating to CPs, March 2004.
Certificate of Deposits:
Certicate of deposit are unsecured, negotiable, short-term instruments in bearer form, issued by commercial banks and development financial institutions.
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The scheme of certificates of Deposits (CDs) was introduced by RBI as a step towards deregulation of interest rates on deposits. Under this scheme, any scheduled commercial banks, co-operative banks excluding land development banks, can issue certificate of deposits for a period of not less than three months and upto a period of not more than one year. The financial institutions specifically authorised by the RBI can issue certificate of deposits for a period not below one year and not above 3 years duration. Certificate of deposits, can be issued within the period prescribed for any maturity. Certificates of Deposits (CDs) are short-term borrowings by banks. Certificates of deposits differ from term deposit because they involve the creation of paper, and hence have the facility for transfer and multiple ownerships before maturity. Certificate of deposits rates are usually higher than the term deposit rates, due to the low transactions costs. Banks use the certificates of deposits for borrowing during a credit pick-up, to the extent of shortage in incremental deposits. Most certificates of deposits are held until maturity, and there is limited secondary market activity.
Certificates of Deposit (CDs) is a negotiable money market instrument and issued in dematerialised form or as a Usance Promissory Note, for funds deposited at a bank or other eligible financial institution for a specified time period. Guidelines for issue of certificate of deposits are presently governed by various directives issued by the Reserve Bank of India.
Maturity:
The maturity period of certificate of deposits issued by banks should be not less than 7 days and not more than one year. The FIs can issue certificate of deposits for a period not less than 1 year and not exceeding 3 years from the date of issue.
certificate of deposits can be transferred as per the procedure applicable to other demat securities. There is no lock-in period for the certificate of deposits. Banks/FIs cannot grant loans against certificate of deposits. Furthermore, they cannot buy- back their own certificate of deposits before maturity
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Certificate of deposits can be issued only by scheduled commercial banks. Regional rural banks are not eligible for issue of certificate of deposits. The minimum deposit that cab be accepted from a single subscriber should be Rs. 5 lakhs. Above that, it should be in multiples of Rs. 1 lakhs. Certificate of deposits can be issued to individuals, corporations, companies, trusts, funds, associations etc. NRIs can subscribe to certificate of deposits only on nonrepatriable basis. The minimum maturity period of certificate of depositss is 15 days. Certificate of depositss should be issued at a discount on face value. The issuing bank is free to determine the discount rate. As the certificates of depositss are usance promissory notes, stamp duty would be attracted as per provisions if Indian Stamp Act. The issuing banks have to maintain CRR and SLR on the issue price of certificate of deposits. certificate of deposits are freely transferable by endorsement and delivery. Banks cannot grant loan against security of certificate of deposits. Banks cannot buyback their own certificate of deposits before maturity. certificate of deposits should be issued only in demat form. Rating of the certificate of deposit is not mandatory/ compulsory.
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Table 3.1 shows the trends in rates and volume outstanding of certificate of deposits. Banks and financial institutions are the largest issuers of certificate of deposits, and are also subscribers to the certificate of deposits of one another. There are limited other investors such as mutual funds, in the certificate of deposit markets. Scheduled commercial banks rely on certificate of deposits to supplement their deposit resources to fund the credit demand. The flexibility of timing and return that can be offered for attracting bulk deposits has made certificate of deposits the preferred route for mobilizing resources by some banks. Table 3.1 certificate of deposits Volume and Rates
Year
Amount Outstanding at the end Minimum rate Maximum rate (% of March (Rs. cr.) (% p.a.) p.a.)
1993-1994 5,571 7.00 18.00 1994-1995 8,017 7.00 15.00 1995-1996 16,316 9.00 23.00 1996-1997 12,134 7.00 21.00 1997-1998 14,296 5.00 37.00 1998-1999 3,717 6.00 26.00 1999-2000 1,227 6.25 14.20 2000-2001 771 5.00 14.60 2001-2002 1,576 5.00 11.50 2002-2003 908 3.00 10.88 2003-2004 4,461 3.57 7.40 2004-2005 12,078 1.09 7.00 2005-2006 43,568 4.10 8.94 2006-2007 93,272 4.35 11.90 Source: Handbook of Statistics on the Indian Economy 2002-03, RBI & RBI Bulletin.
The call/notice money market is an important segment of the Indian Money Market. This is because, any change in demand and supply of short-term funds in the financial system is quickly reflected in call money rates. The RBI makes use of this market for conducting the open market operations effectively. Participants in call/notice money market currently include banks (excluding RRBs) and Primary dealers both as borrowers and lenders. Non Bank institutions are not permitted in the call/notice money market with effect from August 6, 2005. The regulator has prescribed limits on the banks and primary dealers operation in the call/notice money market. Call money market is for very short term funds, known as money on call. The rate at which funds are borrowed in this market is called `Call Money rate'. The size of the market for these funds in India is between Rs 60,000 million to Rs 70,000 million, of which public sector banks account for 80% of borrowings and foreign banks/private sector banks account for the balance 20%. Non-bank financial institutions like IDBI, LIC, and GIC etc participate only as lenders in this market. 80% of the requirement of call money funds is met by the non-bank participants and 20% from the banking system. In pursuance of the announcement made in the Annual Policy Statement of April 2006, an electronic screen-based negotiated quote-driven system for all dealings in call/notice and term money market was operationalised with effect from September 18, 2006. This system has been developed by Clearing Corporation of India Ltd. on behalf of the Reserve Bank of India. The NDS -CALL system provides an electronic dealing platform with features like Direct one to one negotiation, real time quote and trade information, preferred counterparty setup, online exposure limit monitoring, online regulatory limit monitoring, dealing in call, notice and term money, dealing facilitated for T+0 settlement type for Call Money and dealing facilitated for T+0 and T+1 settlement type for Notice and Term Money. Information on previous dealt rates, ongoing bids/offers on re al time basis imparts greater transparency and facilitates better rate discovery in the call money market. The system has also helped to improve the ease of transactions, increased operational efficiency and resolve problems associated with asymmetry of information. However, participation on this platform is optional and currently both the electronic platform and the telephonic market are co-existing. After the introduction of NDSCALL, market participants have increasingly started using this new system more so during times of high volatility in call rates.
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Figure 4.2: Average Daily Volumes in the Call Market (Rs. cr.) Committee Recommendation on Call Money Market:
There are various committee suggested recommendation on Call Money Market are as follow: The Sukhumoy Chakravarty Committee: The call money market for India was first recommended by the Sukhumoy Chakravarty Committee, which 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 2 2
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 non-bank participants may be allowed to participate in call money market. The Vaghul Committee Report: 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 II Report: The Narasimham Committee II (1998) also recommended that call money market in India, like in most other developed markets, should be strictly restricted to banks and primary dealers. Since non- bank participants are not subject to reserve requirements, the Committee felt that such participants should use the other money market instruments, and move out of the call markets. Following the recommendations of the Reserve Banks Internal Working Group (1997) and the Narasimhan Committee (1998), steps were taken to reform the call money market by transforming it into a pure inter bank market in a phased manner. The non-banks exit was implemented in four stages beginning May 2001 whereby limits on lending by non-banks were progressively reduced along with the operationalisation of negotiated dealing system (NDS) and CCIL until their complete withdrawal in August 2005. In order to create avenues for deployment of funds by non-banks following their phased exit from the call money market, several new instruments were created such as market repos and CBLO. Various reform measures have imparted stability to the call money market. With the transformation of the call money market into a pure inter-bank market, the turnover in the call/notice money market has declined significantly. The activity has migrated to other overnight collateralized market segments such as market repo and CBLO.
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Indian and foreign, State Bank of India, Cooperative Banks, Discount and Finance House of India ltd. (DFHL) and Securities Trading Corporation of India (STCI).
As lenders: Life Insurance Corporation of India (LIC), Unit Trust of India (UTI),
General Insurance Corporation (GIC), Industrial Development Bank of India (IDBI), National Bank for Agriculture and Rural Development (NABARD), specified institutions already operating in bills rediscounting market, and entities/corporates/mutual funds. The participants in the call markets increased in the 1990s, with a gradual opening up of the call markets to non-bank entities. Initially DFHI was the only PD eligible to participate in the call market, with other PDs having to route their transactions through DFHI, and subsequently STCI. In 1996, PDs apart from DFHI and STCI were allowed to lend and borrow directly in the call markets. Presently there are 18 primary dealers participating in the call markets. Then from 1991 onwards, corporates were allowed to lend in the call markets, initially through the DFHI, and later through any of the PDs. In order to be able to lend, corporates had to provide proof of bulk lendable resources to the RBI and were not suppose to have any outstanding borrowings with the banking system. The minimum amount corporates had to lend was reduced from Rs. 20 crore, in a phased manner to Rs. 3 crore in 1998. There were 50 corporates eligible to lend in the call markets, through the primary dealers. The corporates which were allowed to route their transactions through PDs, were phased out by end June 2001.
Table 4.2: Number of Participants in Call/Notice Money Market Category Bank PD FI MF Corporate Total I. Borrower 154 19 173 II. Lender 154 19 20 35 50 277 Source: Report of the Technical Group on Phasing Out of Non-banks from Call/Notice Money Market, March 2001. 2 2
Banks and PDs technically can operate on both sides of the call market, though in reality, only the P Ds borrow and lend in the call markets. The bank participants are divided into two categories: banks which are pre- dominantly lenders (mostly the public sector banks) and banks which are pre- dominantly borrowers (foreign and private sector banks). Currently, the participants in the call/notice money market currently include banks (excluding RRBs) and Primary Dealers (PDs) both as borrowers and lenders.
year Year
Maximum (% p.a.)
Minimum (% p.a.)
Average (% p.a.)
Bank
rate
(End
March) (% p.a.)
1996 - 97 1997 - 98
14.6 52.2
1.05 0.2
7.8 8.7
12.0 10.5 2 2
1998 - 99 20.2 3.6 7.8 1999 - 00 35.0 0.1 8.9 2000 - 01 35.0 0.2 9.2 2001 - 02 22.0 3.6 7.2 2002 - 03 20.00 0.50 5.89 2003 -04 12.00 1.00 4.62 2004 - 05 10.95 0.6 4.65 Source: Handbook of Statistics on Indian Economy, 2006-07, RBI
During normal times, call rates hover in a range between the repo rate and the reverse repo rate. The repo rate represents an avenue for parking short -term funds, and during periods of easy liquidity, call rates are only slightly above the repo rates. During periods of tight liquidity, call rates move towards the reverse repo rate. Table 4.3 provides data on the behaviour of call rates. Figure 4.3displays the trend of average monthly call rates. The behaviour of call rates has historically been influenced by liquidity conditions in the market. Call rates touched a peak of about 35% in May 1992, reflecting tight liquidity on account of high levels of statutory pre-emptions and withdrawal of all refinance facilities, barring export credit refinance. Call rates again came under pressure in November 1995 when the rates were 35% par.
collateral security for undertaking the ready forward deals and they include Government dated securities, treasury bills. In a typical repo transaction, the counter-parties agree to exchange securities and cash, with a simultaneous agreement to reverse the transactions after a given period. To the lender of cash, the securities lent by the borrower serves as the collateral; to the lender of securities, the cash borrowed by the lender serves as the collateral. Repo thus represents a collateralized short term lending. The lender of securities (who is also the borrower of cash) is said to be doing the repo; the same transaction is a reverse repo in the books of lender of cash (who is also the borrower of securities).
Reserve Repos:
A reverse repo is the mirror image of a repo. For, in a reverse repo, securities are acquired with a simultaneous commitment to resell. Hence whether a transaction is a repo or a reverse repo is determined only in terms of who initiated the first leg of the transaction. When the reverse repurchase transaction matures, the counter- party returns the security to the entity concerned and receives its cash along with a profit spread. One factor which encourages an organization to enter into reverse repo is that it earns some extra income on its otherwise idle cash. The difference between the price at which the securities are bought and sold is the lenders profit or interest earned for lending the money. The transaction combines elements of both a securities purchased/sale operation and also a money market borrowing/lending operation.
Importance of Repos:
Interest Rate: being collateralized loans, repos help reduce counter-party risk and
system. Repos offer safe short-term outlet for temporary excess cash at close to market interest rates. 2 2
Uses: As low-risk and flexible short-term instruments, repos are used to finance
securities held in trading and investment account of security dealers, to establish short positions, to implement arbitrage activities besides meeting specific customer needs. They offer low-cost investment opportunities with combination of yield and liquidity. In India, repo transactions are basically fund management/statutory liquidity reserve (SLR) management devices used by banks.
Cash Management Tool: the repo arrangement essentially serves as a short-term cash
management tool as the bank receives cash from the buyer in return for the securities. This helps the banks to meet temporary cash requirements. This also makes the repos a pure money lending operation. On maturity of repos, the security is purchased back by the seller of the securities.
Liquidity Control: The RBI uses repos as a tool of liquidity control for absorbing
surplus liquidity from the banking system in a flexible way and there preventing interest rate arbitraging. All repo transactions are to be affected at Mumbai only and the deals are to be necessarily put through the subsidiary general ledger (SGL) account with the Reserve Bank of India.
Repo Rate:
Repo rate is nothing but the annualised interest rate for the funds transferred by the lender to the borrower. Generally, the rate at which it is possible to borrow through a repo is lower than the same offered on unsecured (or clean) inter-bank loan for the reason that it is a collateralized transaction and the credit worthiness of the issuer of the security is often higher than the seller. Other factors affecting the repo rate include the credit worthiness of the borrower, liquidity of the collateral and comparable rates of other money market instruments. In a repo transaction, there are two legs of transactions viz. selling of the security and repurchasing of the same. In the first leg of the transaction which is for a nearer date, sale price is usually based on the prevailing market price for outright deals. In the second leg, which is for a future date, the price is structured based on the funds flow of interest and tax elements of funds exchanged. This is on account of two factors. First, as the ownership of securities passes on from seller to buyer for the repo period, legally the coupon interest accrued for the period has to be passed on to the buyer. Thus, at the sale leg, while the buyer of security is required to pay the accrued coupon interest for the broken period, at the 2 2
repurchase leg, the initial seller is required to pay the accrued interest for the broken period to the initial buyer. Generally, norms are laid down for accounting of repos and valuation of collateral are concerned. While there are standard accounting norms, generally the securities used as collateral in repo transactions are valued at current market price plus accrued interest (on coupon bearing securities) calculated to the maturity date of the agreement less "margin" or "haircut". The haircut is to take care of market risk and it protects either the borrower or lender depending upon how the transaction is priced. The size of the haircut will depend on the repo period, risky ness of the securities involved and the coupon rate of the underlying securities. Since fluctuations in market prices of securities would be a concern for both the lender as well as the borrower it is a common practice to reflect the changes in market price by resorting to marking to market. Thus, if the market value of the repo securities decline beyond a point the borrower may be asked to provide additional collateral to cover the loan. On the other hand, if the market value of collateral rises substantially, the lender may be required to return the excess collateral to the borrower.
CALCULATING SETTLEMENT AMOUNTS IN REPO TRANSACTIONS: Repo transactions involve 2 legs: the first one when the repo amount is received by the borrower, and the second, which involves repayment of the borrowing. amount for the first leg consists of: a. Value of securities at the transaction price b. Accrued interest from the previous coupon date to the date on which the first leg is settled. The settlement amount for the second leg consists of: a. Repo interest at the agreed rate, for the period of the repo transaction b. Return of principal amount borrowed. The settlement
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Security offered under Repo Coupon payment dates under Repo (i.e. price of the security in the first leg) Date of the Repo Repo interest rate Tenor of the repo leg* Cash consideration for the first leg
Broken period interest for the first 11.43%x162/360x100=5.1435 (1) + (2) = 118.1435
Repo interest** 118.1435x3/365x7.75%=0.0753 Broken period interest for the second 11.43% x 165/360x100=5.2388 leg Price for the second leg
= 112.98 Cash consideration for the second (5) + (6) = 112.98 + 5.2388 = 118.2188 leg
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were banned in all securities, except Treasury Bills, while double ready forward transactions were prohibited altogether. Repos were permitted only among banks and PDs. In order to reactivate the repos market, the Reserve Bank gradually extended repos facility to all Central Government dated securities, Treasury Bills and State Government securities. It is mandatory to actually hold the securities in the portfolio before undertaking repo operations. In order to activate the repo market and promote transparency , the Reserve Bank introduced regulatory safeguards such as delivery versus payment system during 1995-96. The Reserve Bank allowed all non-bank entities maintaining subsidiary general ledger (SGL) account to participate in this money market segment. Furthermore, NBFCs, mutual funds, housing finance companies and insurance companies not holding SGL accounts were allowed by the Reserve Bank to undertake repo transactions from March 2003 through their gilt accounts maintained with custodians. With the increasing use of repos in the wake of phased exit of non-banks from the call money market, the Reserve Bank issued comprehensive uniform accounting guidelines as well as documentation policy in March 2003. Moreover, the DVP III mode of settlement in government securities (which involves settlement of securities and funds on a net basis) in April 2004 facilitated the introduction of rollover of repo transactions in government securities and provided flexibility to market participants in managing their collaterals.
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Commercial bills can be inland bills or foreign bills. Inland bills must (1) be drawn or made in India and must be payable in India: or (2) drawn upon any person resident in India. Foreign bills, on the other hand, are (1) drawn outside India and may be payable and by a party outside India, or may be payable in India or drawn on a party in India or (2) it may be drawn in India and made payable outside India. A related classification of bills is export bills and import bills. While export bills are drawn by exporters in any country outside India, import bills are drawn on importers in India by exporters abroad. The indigenous variety of bill of exchange for financing the movement of agricultural produce, called a hundi has a long tradition of use in India. It is vogue among indigenous bankers for raising money or remitting funds or to finance inland trade. A hundi is an important instrument in India; so indigenous bankers dominate the bill market. However, with reforms in the financial system and lack of availability of funds from private sources, the role of indigenous bankers is declining. With a view to eliminating movement of papers and facilitating multiple rediscounting, RBI introduced an innovation instruments known as Derivative Usance Promissory Notes, backed by such eligible commercial bills for required amounts and usance period (up to 90 days). Government has exempted stamp duty on derivative usance promissory notes. This has simplified and streamlined bill rediscounting by institutions and made the commercial bill an active instrument in the secondary money market. This instrument, being a negotiable instrument issued by banks, is a sound investment for rediscounting institutions. Moreover rediscounting institutions can further discount the bills anytime prior to the date of maturity. Since some banks were using the facility of rediscounting commercial bills and derivative usance promissory notes of as short a period as one day, the Reserve Bank restricted such rediscounting to a minimum period of 15 days. The eligibility criteria prescribed by the Reserve Bank for rediscounting commercial bills are that the bill should arise out of a genuine commercial transaction showing evidence of sale of goods and the maturity date of the bill should to exceed 90 days from the date of rediscounting. Commercial bills can be traded by offering the bills for rediscounting. Banks provide credit to their customers by discounting commercial bills. This credit is repayable on maturity of the bill. In case of need for funds, and can rediscount the bills in the money market and get ready money. Commercial bills ensure improved quality of lending, liquidity and efficiency in 2 2
money management. It is fully secured for investment since it is transferable by endorsement and delivery and it has high degree of liquidity. The bills market is highly developed in industrial countries but it is very limited in India. Commercial bills rediscounted by commercial banks with financial institutions amount to less than Rs 1,000 crore. In India, the bill market did not develop due to (1) the cash credit system of credit delivery where the onus of cash management rest with banks and (2) an absence of an active secondary market.
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The Reserve Bank made an attempt to promote the development of the bill market by rediscounting facilities with it self till 1974. Then, in the beginning of the 1980s, the availability of funds from the Reserve Bank under the bill rediscounting scheme was put on a discretionary basis. It was altogether stopped in 1981. The popularity of the bill of exchange as a credit instrument depends upon the availability of acceptance sources of the central bank as it is the ultimate source of cash in times of a shortage of funds. However, it is not so in India. The Reserve Bank set up the DFHI to deal in this instrument and extends refinance facility to it. Even then, the business in commercial bills has declined drastically as DFHI concentrates more on other money market instruments such as call money and treasury bills. It is mostly foreign trade that is financed through the bills market. The size of this market is small because the share of foreign trade in national income is small. Moreover, export and import bills are still drawn in foreign currency which has restricted their scope of negotiation. A large part of the bills discounted by banks are not genuine. They are bills created by converting the cash-credit/overdraft accounts of their customers. The system of cash-credit and overdraft from banks is cheaper and more convenient than bill financing as the procedures for discounting and rediscounting are complex and time consuming. This market was highly misused in the early 1990s by banks and finance companies which refinanced it at times when it could to be refinanced. This led to channeling of money into undesirable uses. The development of bills discounting as a financial service depends upon the existence of a full fledged bill market. The Reserve Bank of India (RBI) has constantly endeavored to develop the commercial bills market. Several committees set up to examine the system of bank financing, and the money market had strongly recommended a gradual shift to bills finance and phase out of the cash credit system. The most notable of these were: (1) Dehejia Committee, 1969, (2) Tandon Committee, 1974, (3) Chore Committee, 1980 and (4) Vaghul Committee, 1985.This section briefly outlines the efforts made by the RBI in the direction of the development of a full fledged bill market.
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(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 withdrawals or repayments were as usual being permitted. (B) the other part, which would represent the minimum requirement of the borrower during the next three months would be converted into usance promissory notes maturing within ninety days. (4) This procedure did not bring any change in offering the same facilities as offered before by the banks to their constituents. Banks could lodge the usance promissory notes with the RBI for advances as eligible security for borrowing so as to replenish their loanable funds.
(5) The amount advanced by the RBI was not to exceed the amount lent by the scheduled banks to the respective borrowers.
(6) The scheduled bank applying for accommodation had to certify that the paper presented by 2 2
it as collateral arose out of bona fide commercial transactions and that the party was creditworthy.
of 90 to 120 days is also eligible for rediscount, provided at the time of offering to the RBI for rediscount it has a usance not exceeding 90 days. The bills presented for rediscount should bear at least two good signatures. The signature of a licensed scheduled bank is treated as a good signature; 4) Bill of exchange arising out of the sale of commodities covered by the selective credit control directives of the RBI has been excluded from the scope of the scheme, to facilitate the selective credit controls and to keep a watch on the level of outstanding credit against the affected commodities.
For rediscounting purposes, bills already rediscounted with the RBI may be lodged with it. The unexpired period of the usance of the bills so offered should not be less than 30 days and the bills should to bear the endorsement of the discounting bank in favor of a party other than the RBI.
Banks to hold Bills rediscount: In the first year of operation of the scheme, the banks were required to lodge all eligible bills with the RBI for availing themselves of the rediscounting facilities. In November 1971, actual lodgment of bills of the face value of Rs 2 lakh and below was dispensed with and the banks were authorized to hold such bills with themselves. This limit was increased to Rs10 lakh in November 1973. The banks are required to make declarations to the effect that they hold eligible bills of a particular aggregate value on 2 2
behalf of the RBI as its agents, and on this basis the RBI pays to them the discounted value of such bills. The discounting banks are also required to endorse such bills in favor of the RBI before including them in the declarations and also re-endorse the bills in their own favor when they are retired. Since 1975, banks are permitted to rediscount bills with other commercial banks as well as certain other approved financial institutions. Since June, 1977, there is a ceiling on the rate of rediscount on such bills which has been varied by the banks from time to time.
The bills rediscounting scheme over the years has been gradually restricted and at present this facility is operated by the RBI on discretionary basis. During the year 1981-82 (July-June) no fresh bills rediscounting limits were sanctioned to the banks, and as such, there were no outstanding under the scheme from October 23, 1981. The amount of bills rediscounted each year has shown wide variations, but during each of the four years (1974-75 to 1977-78) (April-March), the volume had been well over Rs 1,000 crore; in subsequent years, a comparative declining trend set in the utilization of the facility due to its being available only on discretionary terms.
months, up to an amount equivalent to 10 per cent of the existing bill limit subject to a ceiling of Rs. 1 crore. 3) Stipulation on ratio of bill acceptance to credit purchases (25 percent).
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4) Setting up of the Discount and finance House of India (DFHI) tobuy/sell/discount short term bills. 5) Reduction in the discount rate on usance bills. 6) Remission of stamp duty on bills drawn on/made by/ in favour ofbank / corporative bank. The procedure requiring the bill to the endorsed and delivered to the re-discounter at every time of rediscounting has been done away with. A derivative usance promissory note is issued by the discounter on the strength of the underlying bills which have tenor corresponding to, or less than, the tenor of the derivatives usance promissory note and in any case not more than 90 days. The derivative promissory note is expected from stamp duty.
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few stocks and not get the desired diversification. These are some of the reasons why mutual funds have gained in popularity over the years
CHARACTERISTIC OF MUTUAL FUND The ownership is in the hands of the investors who have pooled in their funds.
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The investors share is denominated by units whose value is called as Net Asset Value (NAV) which changes every day and investors subscription is accounted as unit capital.
The investment portfolio is created according to the stated investment objectives of the fund.
individual stocks or bonds, the investors risk is spread out and minimized up to certain extent. The idea behind diversification is to invest in a large number of assets so that a loss in any particular investment is minimized by gain in others.
2. Professional Management The basic advantage of funds is that, they are professional
managed, by well qualified professional. Investors purchase funds because they do not have the time or the expertise to manage their own portfolio. A mutual fund is considered to be relatively less expensive way to make and monitor their investment. 2 2
3. Economies of scale Mutual fund buy and sell large amounts of securities at a time,
thus help to reducing transaction costs, and help to bring down the average cost of the unit for their investors.
4. Liquidity Just like an individual stock, mutual fund also allow investors to liquidate
available instruments in the market, and the minimum investment is small. Most AMC also have automatic purchase plans whereby as little as Rs. 2000, where SIP start with just Rs. 50 per month basis.
addition to disclosure on the specific investments made by your scheme, the proportion invested in each class of assets and the fund manager's investment strategy and outlook.
plans and dividend reinvestment plans; you can systematically invest or withdraw funds according to your needs and convenience
8. Liquidity Just like an individual stock, mutual fund also allow investors to liquidate
available instruments in the market, and the minimum investment is small. Most AMC
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also have automatic purchase plans whereby as little as Rs. 2000, where SIP start with just Rs. 50 per month basis.
10. Transparency - Investors get regular information on the value of your investment in
addition to disclosure on the specific investments made by your scheme, the proportion invested in each class of assets and the fund manager's investment strategy and outlook.
their management is not dynamic enough to explore the available opportunity in the market, thus many investors debate over whether or not the so-called professional are any better than mutual fund or investor himself, for picking up stock.
2. Costs The biggest source of AMC income is generally from the entry and exit load
which they charge from investors, at the time of purchase. The mutual fund industries are thus charging extra cost under layers of jargon.
3. Dilution Because funds have small holdings across different companies, high returns
from a few investments often dont make much difference on the overall return. Dilution is also the result of a successful fund getting to big. When money pours into funds that have had strong success, the manager often has trouble finding a good investment for all the new money.
4. Taxes When making decision about your money, fund managers dont consider your
personal tax situation. For example, when a fund manager sells a security, a capital gain tax is triggered, which affect how profitable the individual is from the sale. It might have been more advantageous for the individual to defer the capital gains liability. 2 2
their management is not dynamic enough to explore the available opportunity in the market, thus many investors debate over whether or not the so-called professional are any better than mutual fund or investor himself, for picking up stock.
6. Costs The biggest source of AMC income is generally from the entry and exit load
which they charge from investors, at the time of purchase. The mutual fund industries are thus charging extra cost under layers of jargon.
7. Taxes When making decision about your money, fund managers dont consider your
personal tax situation. For example, when a fund manager sells a security, a capital gain tax is triggered, which affect how profitable the individual is from the sale. It might have been more advantageous for the individual to defer the capital gains liability.
8. Restrictive gains - Diversification helps, if risk minimization is your objective. However, the lack of investment focus also means you gain less than if you had invested directly in a single security. Assume, Reliance appreciated 50 per cent. A direct investment in the stock would appreciate by 50 per cent. But your investment in the mutual fund, which had invested 10 per cent of its corpus in Reliance, will see only a 5 per cent appreciation.
9. Management risk - Assume, Reliance appreciated 50 per cent. A direct investment in the stock would appreciate by 50 per cent. But your investment in the mutual fund, which had invested 10 per cent of its corpus in Reliance, will see only a 5 per cent appreciation.
1. Residents including: a) Resident Indian Individual b) Indian Companies c) Indian trust/charitable trusts d) Banks e) Non Banking Finance companies f) Insurance companies g) Provident funds
3. Foreign entities: a) Foreign Institutional Investors registered with SEBI. Foreign citizens/entities are however now allowed to invest in India.
securities do not carry risk and are as good as gold as the government guarantees the payment of interest and the repayment of principal. They are, therefore, referred to as gilt-edged securities. The government securities market is the largest market in any economic system and therefore, is the benchmark for other markets. The Government securities market consists of securities issued by the State government and the Central government. Government securities include Central Government securities, Treasury bills and State Development Loans. They are issued in order to finance the fiscal deficit and managing the temporary cash mismatches of the Government. All entities registered in India like banks, financial institutions, Primary Dealers, firms, companies, corporate bodies, partnership firms, institutions, mutual funds, Foreign Institutional Investors, State Governments, Provident Funds, trusts, research organisations, Nepal Rashtra bank and even individuals are eligible to purchase Government Securities. They are generally by banks and institutions with the Reserve Bank of India in Subsidiary General Ledger accounts. They can be held in special accounts known as Constituent Subsidiary General Ledger (CSGL) accounts which can be opened with banks and Primary Dealers or in dematerialized form in demat accounts maintained with the Depository Participants of NSDL. The securities are issued at par value (Rs 100) and have a coupon rate which is decided at the time of issue by auction technique. These securities pay interest at the coupon rate on a half yearly basis and are redeemed at par value on maturity. These are called dated securities because these are identified by their date of maturity and the coupon, e.g., 7.99% GOI 2017 is a Central Government security maturing in 2017, which carries a coupon of 7.99% payable half yearly. Government securities are highly liquid instruments available both in the primary and secondary market. In the primary market Government securities are issued through auctions (yield based or price based auctions) which are conducted by the Reserve Bank of India. There is a scheme of non-competitive bidding in these auctions wherein retail investors can participate for small amounts ranging from Rs 10,000 to Rs 2 cr face value. The tenor of these securities ranges from 1 year to 30 years. State Development Loans are securities issued by the State Governments to finance their expenditures. These securities are generally issued by auction technique which is carried 2 2
out by the Reserve Bank of India. They also pay half-yearly interest at the coupon rate. The secondary market consists of both a telephonic market wherein brokers provide quotes to market participants and the electronic trading system operated by the Reserve Bank of India known as Negotiated Dealing System Order Matching (NDS-OM). The instruments traded on the NDS OM include G-secs, T-Bills and SDLs. The membership of this electronic system is open to most institutional players including banks, primary dealers, insurance companies and financial institutions. The settlement of all such trades takes place through the Clearing Corporation of India which guarantees the settlements. The market trades from 9 a.m. to 5.30 p.m. from Monday to Friday
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Government securities are issued by the central government, state governments and semi-governments authorities which also include local government authorities such as city corporations and municipalities. The major investors in this market, besides the Reserve bank, are the nationalized banks as they have to subscribe these securities to meet their requirements. The other investors are insurance companies, state government, provident funds, individuals, corporates, non-banking finance companies, primary dealers, financial institutions and to a limited extent, foreign institutional investors and non-resident Indian (NRIs). These investors can be classified into three segments: 1. Wholesale market segment namely institutional players such as banks, financial institutions, insurance companies, primary dealers and mutual funds. 2. Middle segment comprising corporates, provident funds, trusts, non-banking finance companies and small cooperative Banks with an average liquidity ranging from Rs 7 crore to Rs.25 Crore. 3. Retail segment consisting of less active investors such as individuals and non-institutional investors. The government securities market is mostly an institutional investors market as standard lots of trade are around Rs 1 crore and 99 per cent of all trades are done through the Subsidiary General ledger (SGL) account, which is a kind of depository account held by the Reserve bank. Individuals cannot open SGL accounts. They have to open SGL-II accounts with a bank or a primary dealer provided they have a huge balance and agree to trade on an ongoing basis.
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Government securities are of two types: treasury bills and government dated securities. The latter carry varying coupons rates and are of different maturities. Sometimes, the Reserve Bank converts maturing treasury bills into bonds thereby rolling over the governments debt. Discount and Finance House of India Ltd. (DFHI), a unique institution of its kind, was set up in April 1988. The share capital of DFHI is Rs 200 crores, which has been subscribed by Reserve Bank of India (10.5%), Public sector banks (62%) and Financial Institutions (26.6%). The discount has been established to deal in money market instruments in order to provide liquidity in the money market. Thus the task assigned to DFHI is to develop a secondary market in the existing money market instruments. The establishment of a discount House was recommended by a Working Group on Money market. The main objective of DFHI is to facilitate the smoothening of the short term liquidity imbalances by developing an active money market and integrating the various segments of the money market. At preset DFHIs activities are restricted to: 1. Dealing in 91 days and 364 days Treasury Bills 2. Re-discounting short term commercial bills. 3. Participating in the inert bank call money, notice money and term deposits and 4. Dealing in Commercial Paper and Certificate of deposits. 5. Government dated Securities Treasury bills are issued by Reserve bank of India on behalf of the Government of India. Such bills are sold at fortnightly auctions. The Discount House regularly participates in such auctions. Moreover, it provides a ready market to other institutions/individuals to buy or sell the Treasury Bills. It purchases the same either as outright purchase or on repos basis. Repos mean the right to re-purchase the same bills again. For this purpose the DFHI quotes two way prices with fine spread. Such operations in Treasury Bills impart greater flexibility to banks in their funds management. Moreover, with the creation of a secondary market for treasury Bills, corporate bodies and other institutions could also invest their short term surplus funds in such bills.
The Discount House aims at imparting liquidity to Commercial bills which have already been discounted by banks and financial institutions. It further re-discounts them and also enables banks and other institutions to re-discount from it such bills. For this purpose DFHI announces its bid and offers re-discount rates on a fortnightly basis. Call Money Market and Term Deposit: DFHI has been permitted by the Reserve bank of India to operate in the inter-bank call money market, both as lender and borrower of overnight call and notice money up to 14 days. DFHI also renders service to banks in the call money market by arranging or placing funds for banks. The DFHI is authorized to argument its resources with lines of credit from sector and refinance lines from the Reserves bank, The amount and the rate of interest charged by Reserve Bank on refinance would be flexible, so that Reserve Bank can have its impact on the money market by varying the quantum of refinance and the rate of interest thereon.
entrepreneurs. 4. Re-discounting of short term bills arising out of sale of products of small scale sector. 5. Sources support to National Small industries Corporation and other institutions concerned with small industries 2 2
Banker's Acceptance:
It is a short-term credit investment. It is guaranteed by a bank to make payments. The Banker's Acceptance is traded in the Secondary market. The banker's acceptance is mostly used to finance exports, imports and other transactions in goods. The banker's acceptance need not be held till the maturity date but the holder has the option to sell it off in the secondary market whenever he finds it suitable.
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1) What is your annual income? below 1 lakhs between 1 lakhs- 3 lakhs between 3 lakhs- 5 lakhs above 5 lakhs
2) How do you invest your savings? Deposits in Banks Invest in Real Estate Invest in Capital Market Invest in Money Market Mutual Funds
3) Do you have any knowledge about Money Market Instruments? Yes No Heard but not know
4) How long would you like to hold your Money Market Instruments? Long term period Short term period 5) How much risk would you be willing to take? Low Average Medium High 2 2
6) In your opinion, what is expected rate of return in a year? below 10 % between 10 % - 20% between 20% - 30% above 30%.
7) How would rate your experience with Indian Money Market? Poor Average Good Excellent
Sampling objective: to find out individual investors for the age group of 18 -55 years. Sampling area: Mumbai
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No. of investors 13 07
11
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09
Investment of Savings
Investment in Money Market 23%
Investment in Real Estate 18% Investment in Real Estate Investment in Money Market
The above pie diagram show how the pattern of investment of saving by individual investors in various field of investment
No. of Investors 03 05 15 17
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R isk Involvement
High 42%
Low 8%
Average 13%
Medium 37%
Low
RBI may migrate from OF (Owned Fund) to capital funds (sum of Tier I and Tier II capital) as the benchmark for fixing prudential limits for call/notice money market for scheduled commercial banks. RBI may, however, continue with the present norm 2 2
associated with co-operative banks (i.e., Aggregate Deposit), PDs (i.e., Net Owned Fund) and non-banks (i.e., 30 per cent of their average daily lending during 2000-01).
Call/notice money market transactions should be conducted on an electronic negotiated quote driven platform. Banks and PDs with appropriate risk management systems in place and balance sheet structure may be allowed more flexibility to borrow in call/notice money market. Upon accomplishing the call/notice money market into a pure inter-bank one, larger freedom in lending in call/notice market should be afforded to banks and PDs.
2) Repos/CBLO :
Consequent upon coming into effect of the FRBM Act 2003, there would be a need to broad-base the pool of securities to act as collateral for repo and CBLO markets. The possibility of conducting repo transactions on an electronic, anonymous order driven trading system may be explored.
3) Term Money:
Reporting of term money transactions on NDS platform may be made compulsory to improve transparency. Term money market transactions on an electronic, negotiated quote driven platform should be introduced.
4) CD
Maturity period of CDs to be reduced to 7 days, in line with that under CP and fixed deposit.
5)Commercial Paper
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Development of a transparent benchmark Presence of a term money market Development of policies that provide incentives for banks and financial institutions to manage risk and maximise profit
Increasing secondary market activity in commercial paper and certificate of deposit. In
case of commercial paper, underwriting should be allowed and revolving underwriting finance facility and Asset backed commercial paper should be introduced. In case of Certificate of deposits the tenure of those of the financial institutions certificate of deposits should be rationalised. Moreover, floating rate certificate of deposits can be introduced. Rationalisation of the stamp duty structure. Multiple prescription of stamp duty leads to in the administrative costs and administrative hassles. Change in the regulatory mindset of the Reserve Bank by shifting the focus of control from quantity of liquidity to price which can lead to an orderly development of money market. Good debt and cash management on the part of the government which will not only be complementary to the monetary policy but give greater freedom to the Reserve Bank in setting its operating procedures.
BIBLIOGRAGHY:
BOOKS REFERENCE: DYNAMICS OF INDIAN FINANCIAL SYSTEM BY - PREETY SINGH INDIAN FINANCIAL SYSTEM BY BHARATI V. PATHAK 2 2
FINANCIAL SERVICE AND MARKET-BY DR.S.GURUSWAMY NSE DEBT MARKET (BASIC MODULE) WORK BOOK
WEBSITES:
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