PROJECT ON

JAPANESE MANAGEMENT
SUBMITTED BY:
SNEHA DUBEY
T.Y.BMS
2010- 2011

PROJECT GUIDE

UNIVERSITY OF MUMBAI

PRAHLADRAI DALMIA LIONS COLLEGE OF

COMMERCE & ECONOMICS
MALAD (WEST). MUMBAI 400 064

wCERTIFICATE
Dr. B.P
hereby certify that SNEHA DUBEY of T.Y.BMS,
PRAHHLADRAI DALMIA LIONS college of commerce and economics has
completed the project titled JAPANESE MANAGEMENT in the Academic
year 2010-201. The information submitted is true and original to the best of my
knowledge.

Signature of the project guide

signature of the Principal

Of the institute.

DECLARATION
SNEHA DUBEY OF TYBMS, PRAHHLADRAI DALMIA LIONS college of
commerce, hereby declare that I have completed the project titled JAPANESE
MANAGEMENT in the Academic year 2010-201. The information submitted
is true and original to the best of my knowledge.

Signature of the student

(Sneha Dubey)

ACKNOWLEDGEMENT

I would like to thank the University of Mumbai for giving me this

opportunity of taking such a challenging project, which has enhanced my
knowledge about the Money Market.
Its with deep sense of gratitude I would like to thank

Under whose

guidance I was successfully able to complete my project. I wish to thank him

for all useful discussions and timely suggestions on the related topics of my
work and the invaluable help during the selection and preceding the project.
At last, I would like to thank all the people who helped me to complete this
project by one way or the other.

INDEX

No.

Contents

01
02
03
04
05
06

Introduction to Money Market

History of Indian Money Market
Importance & Functions of Money Market
Types of Money Market Instruments
Credit Ratings of Money Market Instruments
Defects & Measures for Development of Money

07

Market
Capital Market V/s. Money Market

08
09

Capital Market & Money Market Similarities

Executive Summary
Bibliography

Page
number
1
2
3-7
8-34
35-40
41-48
49-51
52-54
56

INTRODUCTION TO MONEY MARKET

A market where short-term funds are borrowed and lent is called
money market is a market for short-term financial assets, which are near
substitutes for money. The instruments dealt within the money market are
liquid and can be turned over quickly at low transaction cost and without
loss.
The money market comprises individuals, institutions, and the
government. These agencies create demand for money and also ensure
supply of money for a short-term period. The demand for money emanates
from merchants, traders, brokers, manufacturers, speculators and even
government institutions, the suppliers include commercial banks, insurance
companies, nonbanking financial concerns and the Central Bank of the
country. Thus, the money market represents the countrys pool of short-term
investible funds to meet the short-term requirements of the economy.
Refwww.investopedia.com/university/moneymarket

DEFINITION
1. According to the McGraw Hill Dictionary of Modern Economics,
Money market is the term designed to include the financial
institutions which handle the purchase, sale, and transfers of shortterm credit instruments. The money market includes the entire
machinery for the canalizing of borrowing, and government shortterm obligations; it differs from the long-term or capital market which
devotes its attention to dealings in bonds, corporate stocks and
mortgage credit.
2. According to Geoffrey, money market is the collective name given
to the various firms and institutions that deal in the various grades of
the near-money.
3. According to the Reserve Bank of India, a money market is the
centre for dealings, mainly of short-term character in money assets; it
meets the short-term requirements of borrowers and provides
liquidity or cash to the lenders. It is the place where short-term
surplus investible funds at the disposal of financial and other
institutions and individuals are bid by borrowers agents comprising
institutions and individuals and also the government itself.
Refwww.investorglossary.com/money-market.htm

HISTORY OF INDIAN MONEY MARKET

Till 1935, when the RBI was set up, the Indian money market
remained highly disintegrated, unorganized, narrow, shallow and
therefore, very backward. The planned economic development
that commenced in the year 1951 marked an important beginning
in the annals of the Indian money market. The nationalization of
banks in Group (1986), the setting up of Discount and Finance
House of India Ltd (1988), the Vaghul working of India (1994) and
the commencement of liberalization and globalization process in
1991 gave a further fillip for the integrated and efficient
development of Indian money market.
Refglossary.reuters.com/index.php?title=Money_Market...history

IMPORTANCE & FUNCTION OF MONEY MARKET

GENERAL CHARACTERISTIC
The general characteristics of a money market are outlined below:
1. Short-term funds are borrowed and lent.
2. 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.
3. Dealings may be conducted with or without the help of brokers.
4. 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 transactions cost.
5. Funds are traded for a maximum period of one year.
6. Presence of a large number of submarkets such as inter-bank call
money, bills rediscounting, treasury bills, etc.
Ref ..www.citeman.com/4365-characteristics-of-the-money-market

OBJECTIVES
A well-developed money market serves the following objectives:
1. Providing an equilibrium mechanism for ironing out short-term
surplus and deficits.
2. Providing a focal point for central bank intervention for influencing
liquidity in the economy.
3. Providing access to users of short-term money to meet their
requirements

at

reasonable

Ref.www.scribd.com/doc/17856735/Indian-Money-Market

price.

IMPORTANCE
The functioning of an efficient money market in a country is helpful to its
various segments as detailed below:
Ref..ezinearticles.com/?The-India-Money-Market
SOURCE OF CAPITAL

Money market is an important source of financing for trade and industry.

The short-term finances are made available through bills, commercial
papers, etc. The happenings in the money market influence the availability
of finances both for the national and international trade. Besides trade and
industry, money market offers to the government an important noninflationary avenue of raising short-term funds through bills that are
subscribed by commercial banks and the public.
www.financialexpress.com/...source-of-capital...india/288830

IDEAL INVESTMENT

Money market offers an ideal source of investment for the commercial

banks. The market helps them invest their short-term surplus funds so as to
meet statutory reserve requirements. For instance, the requirements of Cash
Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) vary every
fortnight depending on banks Net Demand and Time Liability (NDTL).
www.dwsinvest.co.in/showpage.aspx?pageID=33

EFFECTIVE MONETARY MANAGEMENT

An efficient money market being sensitive in nature allows for the effective
implementation of monetary policy of the central bank and thus paves way
for the efficient monetary management of the country. In fact, the money

market events serve as an important guide to the government in formulation,

revising and implementing its monetary policy. This is rightly so, given the
fact that the conditions prevailing in money market serve as an indicator of
monetary state of an economy.
The monetary authority uses the money market for diffusing the
effects of its actions throughout the banking system and the economy, so as
to promote economic growth with stability.
linkinghub.elsevier.com/retrieve/pii/S0161893807000890

ECONOMIC DEVELOPMENT

Money market being an integral part of a countrys economy, contributes

substantially to the economic development of a country. A developed money
market is indispensable for the rapid development of the economy. In fact,
the stage of development of the economy will be reflected in the stage of
development of a money market. This is borne out by the fact that illdeveloped nature of a money market is responsible for the primitive nature
of economic development of a country. The absence of a well-developed
money market would constrain the economies from making available, on a
continuous basis the supply of adequate funds.
EFFICIENT BANKING SYSTEM

The existence of a developed money market greatly facilitates the smooth

and efficient functioning of the banking and financial system. Such an
advantage contributes to the promotion of trade and industry in the economy.
Further the mediating role played by the commercial bankers ensures
delivery of credit at the most opportune time. Similarly, money market
enables the commercial banks to meet much of their unexpected needs for

funds quickly and cheaply. It is possible for the commercial banks to utilize
their funds profitably and with liquidity.
www.jiskha.com/.../stockmarket/indian_financial_market.html

FACILITATING TRADE

Money market is of immense help to the business community in the

following ways:
1. Providing an ideal payment mechanism making it possible for
expeditious transfer of large sums of money.
2. Meeting the working capital requirements for carrying out the
production and marketing activities.
3. Making efficient investment of surplus funds into near-money assets
which can be quickly converted into money as and when needed.
HELPFUL TO GOVERNMENT

The government uses the money market as an arena in which short-term

funds are raised by floating treasury bills. It helps the government manage
its monetary position smoothly through the central bank of the county.

GENERAL FUNCTIONS

Money market performs diverse functions within the banking system of an

economy, as discussed below:
INVESTMENT FUNCTION

The money market provides an ideal source for investment of the funds for a
short period of time for commercial banks, non banking financial concerns,
business corporations and other investors. It enables businessmen, with
temporary surplus funds, to invest them for a short period.
FINANCING FUNCTION

Money market provides an ideal source for short-term financing for

businessmen,

industrialists,

traders,

etc

to

meet

their

day-to-day

requirements of working capital. Funds are available for borrowing by the

government and its agencies also.
FACILITATING FUNCTION

Money market provides an ideal play ground for the central monetary
authority of the country to carry out various regulatory operations relating to
the banking and financial system of the country. The sensitive nature of the
money market helps the central bank to make it an ideal arena for the
execution of various credit control measures.

Ref..moneymarkettalk.wordpress.com/2008/.../nature-and-functions

TYPES OF MONEY MARKET INSTRUMENTS

INSTRUMENTS
Traditionally when a borrower takes a loan from a lender, he enters into an
agreement with the lender specifying when he would repay the loan and
what return (interest) he would provide the lender for providing the loan.
This entire structure can be converted into a form wherein the loan can be
made tradable by converting it into smaller units with pro rata allocation of
interest and principal. This tradable form of the loan is termed as a debt
instrument.
Therefore, debt instruments are basically obligations undertaken by the
issuer of the instrument as regards certain future cash flows representing
interest and principal, which the issuer would pay to the legal owner of the
instrument. Debt instruments are of various types. The key terms that
distinguish one debt instrument from another are as follows:
Issuer of the instrument
Face value of the instrument
Interest rate
Repayment terms (and therefore maturity period/tenor)
Security or collateral provided by the issuer

MONEY MARKET INSTRUMENTS:

By convention, the term "money market" refers to the market for short-term
requirement and deployment of funds. Money market instruments are those

instruments, which have a maturity period of less than one year. The most
active part of the money market is the market for overnight and term money
between banks and institutions (called call money) and the market for repo
transactions. The former is in the form of loans and the latter are sale and
buy back agreements - both are obviously not traded. The main traded
instruments are commercial papers (CPs), certificates of deposit (CDs) and
treasury bills (T-Bills). All of these are discounted instruments ie they are
issued at a discount to their maturity value and the difference between the
issuing price and the maturity/face value is the implicit interest. These are
also completely unsecured instruments. One of the important features of
money market instruments is their high liquidity and tradability. A key
reason for this is that these instruments are transferred by endorsement and
delivery and there is no stamp duty or any other transfer fee levied when the
instrument changes hands. Another important feature is that there is no tax
deducted at source from the interest component. A brief description of these
instruments is as follows:
1. Certificate of Deposits
2. Commercial Papers
3. Treasury Bills
4. Ready Forward Contracts ((Repos)
5. Money Market Mutual Funds (MMMFs)

CERTIFICATE OF DEPOSIT
Meaning of CDs

A marketable document of title to a time deposits for a specified period may

be referred to as a Certificate of Deposit (CD). It takes the form of a
receipt given by a bank or any other institution for funds deposited with it by
the depositor.
Features
Certificates of deposits process the following distinguishing characteristics:
1. Negotiable instruments CDs are negotiable term-deposit certificates
issued by commercial bank/financial institutions at discount to face
value at market rates. The Negotiable Instruments Act governs CDs.
2. Maturity The maturity period of CDs ranges from 15 days to one
year.
3. Nature CDs are in the form of usance promissory notes and hence
easily negotiable by endorsement and delivery.
4. Ideal source CDs constitute a judicious source of investments as
these certificates are the liabilities of commercial banks/financial
institutions.

www.economywatch.com/market/money-market/money-market-instruments

PROFILE

A distinguishing profile of Certificate of Deposit as operating in India is

presented below:
THE TAMBE WORKING GROUP

The Tambe working Group set up in 1982 in India, reported that banks and
financial institutions were not willing to support the launch of money market
instruments such as CDs, and therefore advised against the introduction of
these instruments. The Group cited many reasons for the non-popularity of
these instruments including the absence of secondary market, administered
interest rate structure on bank deposits and the danger of CDs giving rise to
a large number of fictitious transactions.
THE VAGHUL WORKING GROUP

The Vaghul Working Group set up in 1987, again reviewed the issue and
expressed itself against the launch of the instrument by the RBI. The Group
reported that the introduction of CDs as a money market instrument would
be meaningful only where the short-term deposit rates were aligned with
other rates in the financial system. The Group instead recommended, as a
prelude, the setting up of a discount house and the alignment of short-term
deposit rates.
Based on the recommendations of the Group, the RBI constituted the
Discount and Finance House of India Ltd. (DFHI) in the year 1988. In the
same manner, RBI rationalized the interest rate structure in March 1989 by
abolishing fixed deposits of shortest terms with maturity of 15 to 45 days.

THE LAUNCH

The RBI launched the scheme of CDs with effect from March 27, 1989.
Following guidelines were laid down in this regard.
ELIGIBLE ISSUERS
The institutions that are eligible to issue CDs are scheduled commercial
banks (excluding RRBs) and specified all-India financial institutions,
namely, IDBI, IFCI, ICICI, SIDBI, IRBI, and EXIM bank.
ELIGIBLE SUBSCRIBERS
The parties who are eligible to buy CDs are individuals, associations,
companies, corporations, trust funds, etc. NRI an also subscribe to the CDs.
How ere, this is possible only on a non-repatriation basis. It is not possible
for an NRI to endorse CDs to another NRI in the secondary market.
NEGOTIATION
CDs are freely transferable by endorsement and delivery after the initial lock
in period of 15 days. The instrument can be purchased by any of the above
subscribers and DFHI in the secondary market.
MATURITY
The maturity period of CDs issued by banks ranges from 3 days to 12
months and that issued by specified financial institutions can have a maturity
period up to 3 years. With the announcement of credit policy on April27,
2000 the maturity period was reduced from 3 month to 15 days.

DISCOUNT

CDs are to be issued at a discount to face value, with the maturity period not
having any grace period.
LIMITS OF ISSUE
The maximum amount of issue by a bank, which was originally fixed at 1
percent of its fortnightly aggregate average deposits, was raised to 10
percent in 1992. This was subsequently abolished totally. The minimum size
of issue to a single investor, which was originally fixed at Rs.10 lakhs, was
reduced to Rs. 5lakhs with effect from October 21, 1997. Issue of CDs
above Rs.5 lakhs can now be made in multiples of Rs.1 lakhs. CDs can now
be CRR on issue price of CDs for which there is no ceiling.
STAMP DUTY
Stamp duty is payable on CDs as applicable to any other negotiable
instrument.
SECURITY PAPER
CDs are transferable by endorsement and delivery, and shall therefore be
issued on a good quality security paper.
OTHER REQUIREMENTS
1. No loans can be granted by banks against CDs.
2. Banks cannot have any buyback arrangement of their own CDs before
maturity.
3. Banks are to submit fortnightly report on their CDs to the RBI under
section 42 of the RBI Act, 1935.

4. Banks are to show CDs under the head liabilities in the balance
sheet.
YIELD
CDs are offered at interest rates higher than the time deposits of banks.
However, the rate of interest is dependent upon many factors such as
urgency of requirement for funds, alterative opportunities for investment of
funds mobilized, etc. The rate of discount being deregulated is now
determined by the demand and supply of CDs. CDs are issued at a discount
to their face value and redeemed at par. CDs are issued at a front-end
discount and in such a case; the effective rate of interest is higher than the
quoted discount rate.
Effective rate of interest may be calculated as follows.
ERRR= [(1+QDR/100*N/M) N/M-1]*100
Where,
ERR = Effective rate of interest
QDR = Quoted discount rate
N

= Total period in a year. Say 12 months or 365 days etc

= Maturity period in months or days as the case may be

ROLE OF DFHI
The Discount and Finance House of India Ltd. Functions as a market maker
in CDs market. It offers bid rate, the rate of discount at which it is prepared
to buy CDs, and offer rate at which it would be willing to sell the CDs. The
DFHI acts as an ideal conduit for disinvestments of CD holdings, which is
done through their banker in Mumbai. DFHI also engages in buying CDs

from the bank at its bid discount rate. Settlements are effected through RBI
cheque.
ROLE OF BANKS
Scheduled commercial banks are the active players in the realm of CDs
market segment. CDs are used as an important money market instrument.
CDs provide an ideal avenue of investment money market instrument. CDs
provide ideal avenue of investment for bankers. CDs are considered safe,
liquid, and attractive in returns for both scheduled commercial bank and
investors.
It is not necessary for banks to encash CDs before maturity under the
RBI Act. Banks are under obligation to maintain usual reserve requirements
(SLR and CRR) on issue price of CDs. CDs offer the opportunity for banks
for the bulk mobilization of resources as part of effective fund management.
Besides, offering an attractive yield help bankers utilize them eligible assets
for determination of Net Demand and Time Liabilities (NDTL). According
to the RBI guidelines, it will not be possible for banks to enter into buyback
arrangement with the subscriber of CDs. Similarly, they cannot grant loans
against CDs issued by them.
It is possible for investors to sell CDs in secondary market before their
maturity. This offers investors the advantage of liquidity through ready
marketability. However, the tendency on the part of holders of CDs to hold
the instruments till maturity date has not made possible for the creation of an
effective secondary market for them, although the primary market for CDs
has shown a considerable improvement.

COMMERCIAL PAPER
Debt instrument that are issued by corporate houses for raising short-term
financial resources from the money market are called Commercial Papers
(CPs).
FEATURES
Following are the features of commercial papers:
NATURE

These are unsecured debts of corporate. They are issued in the form of
promissory notes. These are redeemable at par to the holder at maturity. The
issuing company should have a minimum tangible net worth to the extent of
Rs.4 crores. Moreover, the working capital (fund-based) limit of the
company should not be less than Rs. 4 crores and this allows corporate to
issue CPs up to 100 per cent of their fund based working capital limits. CPs
are issued at a discount to face value in multiples of Rs.5 Lakhs. CPs attracts
stamp duty. No prior approval of RBI is needed to issue CPs and no
underwriting is mandatory. The issuing company has to bear all expense
(Such as dealers fees, rating agency fee and charges for provision of standby facilities) relating to the issue of CP. The issue of CPs serves the purpose
of releasing the pressure on bank funds for small and medium sized
borrowers, besides allowing highly rated companies to borrow directly from
the market.
www.answers.com/topic/money-market-instruments

MARKET

The market for the Cps comprises of issues made by public sector and
private sector enterprises CPs issued by top rated corporate are considered as
sound investments. Conditions attached to the issue are less stringent than
those applicable for raising CPs. Beginning from September 1996, Primary
Dealers (PDs) were also permitted by RBI to issue CPs for augmenting their
resources. This is one of the steps initiated by the RBI to make the CPs
market popular.
RATING

As per the guidelines of the RBI, CPs are required to be graded by the
organization issuing them. Accordingly, a rated CP is considered to be a
quality and sound instrument. With the liberalization of interest rate
structure, the rate of interest is market-determined. This causes wide
variation in the prevailing rates of interest.
INTEREST RATES

The rate of interest applicable to CPs varies greatly. This variation is

influenced by a large number of factors such as credit rating of the
instrument, economic phase, the prevailing rate of interest in CPs market,
call rates, the position in foreign exchange market, etc. It is however to be
noted that there is no benchmark for the interest rate.
MARKETABILITY

The marketability of the CPs is influenced by the rates prevailing in the call
money market and the foreign exchange market. Accordingly where

attractive interest rates prevail in these markets, the demand for Cps will be
affected. This is because; investors will divert their investment into these
markets.
CPS IN LIEU OF WC

The nature of credit policy announced by the RBI to allows highly rated
corporate to have the advantage of banks offering an automatic restoration of
working capital limits on the repayment of CP. Accordingly, short-term
working capital loans were substituted with cheaper CPs. This was done by
the RBI to hasten the growth of the CP market.

SATELLITE DEALERS (SDs)

Dealers who are enlisted with the RBI to deal in the Government securities
market, are called Satellite Dealers. With effect from June 17, 1998, they
are allowed to issue CPs, with prior approval from RBI. The purpose was to
enable them to have access to short-term borrowings through CP route.
Following are the conditions to be satisfied in this regard:
RATING

In order that the satellite dealers are permitted to trade in CPs, it is essential
that the issuing corporate obtain the minimum specified credit rating from a
credit rating agency. Such a rating must have been approved by the months.
MATURITY

The CPs shall be issued for a maturity period ranging from 15 days to one
year from the dated is issue.

TARGET MARKET

The issue of CPs may be targeted to such persons as individuals, banks,

companies, other corporate bodies registered or incorporated in India and
unincorporated bodies and non-resident Indian (NRI) on non-repatriation
basis subject to the condition that it shall be transferable.
LIMITS OF ISSUE

Each issue of CPs (including renewal) shall be treated as a fresh issue. The
CPs issue may take place in multiples of Rs. 5 Lakhs. The investment by any
single investor shall be for a minimum amount of Rs. 25 Lakhs (face Value)
and the secondary market transactions may be dealt in for amounts of Rs.
5Lakhs or multiples thereof. The RBI shall fix the total amount of issue. The
issue amount shall be raised within a period of 2 week from weeks from the
date of approval by the Reserve Bank or ma be issued on a single day or in
parts on different days as the case may be.
NATURE

The CPs shall be in the form of usance promissory note. It shall be

negotiable by endorsement and delivery. It is issued at discount to face
value, discount being determined by the SD issuing the CPs. The SDs shall
bear the expenses of the issue, including dealers fee, rating agency fee, etc.

TREASURY BILL
www.economywatch.com/market/money-market/money-market-instruments

TREASURY BILLS (TBs)

A kind of finance bills, which are in the nature of promissory notes, issued
by the government under discount for a fixed period, not exceeding one year,
containing a promise to pay the amount stated therein to the bearer of the
instrument, are know as treasury bills.
GENERAL FEATURES
Treasury bills incorporate the following general features:
1. Issuer TBs are issued by the government for raising short-term funds
from institutions or the public for bridging temporary gaps between
receipts (both revenue and capital) and expenditure.
2. Finance bills TBs are in the nature of finance bills because they do
not arise due any genuine commercial transaction in goods.
3. Liquidity TBs are not self-liquidating like genuine trade bills,
although they enjoy higher degree of liquidity.
4. Vital source Treasury bills are an important source of raising shortterm funds by the government.
5. Monetary management TBs serve as an important tool of monetary
used by the central bank of the county to infuse liquidity in to the
economy.

FEATURES OF INDIAN TBs

www.sbidfhi.com/cwm/glossary/26/

HISTORY
It was in the year 1877 that Treasury Bills (TBs) came to be issued for the
first time in the world. Later, it acquired wide popularity around the world
both in developing and developed countries. TBs were first issued in India in
October1971. The issue aimed at raising resources for financing the First
World War efforts of the government and for mopping liquidity in the
economy due to heavy war expenditure.
TBs that were initially sold by the government had a maturity period
of 3 months, 6 months, 9 months and 12 months. Later on, with the setting
up of the RBI in 1935, the issue profile of TBs underwent a lot of changes.
Accordingly, RBI came to issue two type of TBs such as Tap Bills that were
issued at all times and Intermediate Bill that were sold between auctions, to
nongoverment investors. However, in the year 1965, a sale of TBs to public
through auction was suspended and issue took place on top basis at a
discount. Thus commercial banks began to invest in them.
ISSUE
TBs, which were first up to 1935 by the Government of India directly, came
to be issued by the RBI since its inception in 1935. Thereafter, TBs are
issued at a discount by the RBI on behalf of the Government of India.
TYPES

There are two types of treasury bills. They are ordinary treasury bills and ad
hoc treasury bills. The freely marketable treasury bills that are issued by the
Government of India to the public, banks and other institution for raising
resources to meet the short-term finance needs takes the form of ordinary
TBs.
Ad hoc TBs, on the other hand, are issued in favor of the RBI only.
They are used by RBI as reserve against which the issue department issue
currency notes. In addition, they are also issue to serve the purpose of
replenishing cash balance of the central government. Besides, ad hoc TBs
provide an investment avenue to state government, semigoverment
department and foreign central banks for parking their temporary surplus
and for earning income. Since ad hoc TBs are not marketable in India, the
holders of these bills can always sell them back to the RBI.
MATURITY PERIOD
A lot of changes taken place in the realm of the periodicity of treasury bills,
changes having being brought about by the policy announcements made by
RBI from time to time. A brief account of the changes in the period of
maturity of TBs is outlined below:
1. Maturity period of TBs at the close of the First World War was of 3, 6,
9, and 12 months duration.
2. Maturity periods of tap bills and Intermediate Bills introduces by RBI
immediately after its inception was 91 days which was continued up
to November 1986.
3. Maturity period of 182 days recommended by Chakraborty
Committee was issued up to April 1992.
4. Maturity period of 365 days beginning from April 1992.

5. Maturity period of 14 days introduced in May 1997 and of 28 days

introduced on October21, 1997.
6. Maturity period of 182 days reintroduced with effect from May26,
1999.
PARTICIPANTS
The participants in the TBs market include the Reserve Bank of India, the
State Bank Of India, Commercial Banks, State Governments and other
approved bodies, Discounts and Finance House of India as a market maker
in TBs, the Securities Trading Corporation of India (STCI), other financial
institutions such as, LIC, UTI, GIC, NABRAD, IDBI, IFCI, ICICI, etc
corporate entities and general public and Foreign Institutional Investors.
Of the above-mentioned participants, RBI and commercial banks are
the most popular players. This essentially arises from the nature of
relationship between them. TBs are least popular among the corporate
entities and the general public.
THE ISSUE PROCEDURE
The procedure followed by the RBI for successful issue of treasury bills is
briefly outlined below.
NOTIFICATION The RBI issues notifications for the sale of
91day TBs on tap basis throughout the week and the 14-days, 28days, 91-days, and 364-days, TBs through fortnightly auction. The
notification mentions the date of auction and the last date for
submission of tenders.

TENDERING Immediately after the issue of notification by the

RBI, investors are permitted to submit bids through separate
tenders. The result of the auction mentioning the price up to which
the bids have been accepted is displayed. The successful bidders
are expected to collect letter of acceptance from the RBI and
deposit the same together with a cheque on RBI.
SGL SGL is maintained by the RBI for facilitating the purchases
and sales of TBs by the investors like Commercial Banks, DFHI,
STCI and other financial institutions.
DFHI Where the SGL facility is not available to certain investors,
purchase and sale takes DFHI. TBs sold to such investors are held
by DFHI on their behalf, which pays the proceeds of the TBs held,
to the investor on the date of maturity. DFHI takes an active part in
the primary auctions of TBs, besides operating in the secondary
market by quoting tow-way rates. In addition, the DFHI also gives
buyback and sell-back commitments for periods up to 14 days at
negotiated

interest

rates,

to

commercial

banks,

financial

institutions and public sector undertakings.

AUCTIONING METHODS.
UNIFORM PRICE AUCTION
The system of uniform price auction system in respect of 97-days, TBs was
introduced as to broaden market participation. (Winners curse is a
phenomenon whereby those bidding at lower than the cut-off, end up paying
a premium.) The introduction of uniform price auction is expected to reduce

uncertainty associated with the bidding process. This is peculiar to the

underdeveloped nature of Indian money market, which is afflicted by the
lack of reliable information, causing wide differences in the yield
expectations before the auctions. The amounts of issue are notified in respect
of 97-days TBs auctions and the dated securities auctions.
TREASURY BILLS AUCTION
Auction in TBs takes place both on Competitive as well as on
noncompetitive basis. The State Governments, Provident Funds and the
Nepal Rastra Bank are the noncompetitive bidders. Commercial banks and
other financial institutions comprise competitive bidders. It is to be noted
that the merits of enhanced market efficiency and price discovery take place
through the competitive bids.
POLICY MEASURES
With a view to improving the depth and liquidity in the government
securities market, RBI announced the following policy measures relating to
Treasury Bills with effect from October1999:
1. Price based auction of government dated securities.
2. Auction of 182-day Treasury Bills.
3. A calendar of Treasury Bills Issuance
TB RATE
The discount rate at which the RBI sells TBs known as Treasury Bills rate.
The effective yield on TBs depends on such factors as the rate of discount,
difference between the issue price and the redemption value, and time period
of their maturity.

The treasury bills rate is computed as follows:

Y= {[(FV-IP)/IP]*[364/MP]}*100.
Where,
FV = Face Value TBs
IP = Issue Price of TBs
MP = Maturity Period of TBs in days
D = Discount.
www.rbi.org.in/scripts/SDDS_ViewDetails.aspx?ID=13

BENEFITS
TBs being an important money market instruments provide the following
benefits:
LIQUIDITY
Treasury bills command high liquidity. A number of institutions such as
RBI, the DFHI, STCI, commercial banks, etc take part in the TB market. In
addition, the Central bank is always prepared to purchased or discount TBs.
NO DEFAULT RISK
Since there is a guarantee by the central government, TBs are absolutely free
from the risk of default of payment by the issuer. Moreover, the government
itself issues the TBs.
AVAILABILITY
RBI has the policy of making available on a steady basis, the TBs especially
through the Tap route since July 12, 1965. This greatly helps banks and
other institutions to park their funds temporarily in TBs.

LOW COST
Trading in TBs involves less transaction costs. This is because two-way
quotes with a fine margin are offered by the DFHI on a daily basis.
SAFE RETURN
The biggest advantage of TBs is that they offer a steady and sage return to
investors. There are not many fluctuations in the discount rate. It is also
possible for the investors to earn attractive return by keeping investment in
nonearning cash to the minimum and supplementing it with TBs.
NO CAPITAL DEPRECIATION
Since TBs command high order of liquidity, safely and yield, there is very
little scope for capital depreciation in them.
SLR ELIGBILITY
TBs are of great attraction to commercial banks as it helps them park their
funds (Net Demand and Time Liabilities) as per the norms or SLR
announced b the RBI from time to time. This reason makes commercial
banks dominate dealers in TBs.

FUNDS MOBILIZATION
TBs are used as an ideal tool by the government for raising short-term funds
required for meeting temporary budget deficit.
MONETARY MANAGEMENT

It is also possible for the government to mop up excess liquidity in the

economy through the issue of TBs. Since TBs are subscribed by the
investors other than the RBI, the issue would neither lead to inflationary
pressure nor result in monetization.
BETTER SPREAD
TBs facilitate proper spread of asset mix different maturity as they are
available on tap basis as well as in fortnightly auctions.
PERFECT HEDGE
TBs can be used as a hedge against volatility of call loan market and interest
rate fluctuations.
FUND MANAGEMENT
TBs serve as effective tools of fund management because of the following
reasons:
1. Ready market availability, both for sale and purchase at market driven
prices, thus imparting flexibility.
2. Facility of rediscounting TBs on tap basis.
3. Facility of refinancing from the RBI.
4. Plethora of options available to fund managers to invest in TBs and
for raising funds against TBs especially through and with the help of
DFHI
5. Ideally suited for investment of temporary surplus
6. Possibility of building up portfolio of TBs with dates of maturities
matching the dates of payment of liabilities, such as certificates of
deposits and deposits of short-term maturities.

7. Possibility of meeting the temporary difficulties of funds by entering

into buyback transactions for surplus TBs and reversing the
transactions when the financial need is over
8. Possibility of making enhanced profit by indulging in quick raising of
money against TBs for investing in call money market when call rates
are high and doing the reverse when call rates dip.
www.business-standard.com/india/news/fii...t-bills.../195294/

REPOS
The term Repo is used as an abbreviation for Repurchase Agreement or
Ready Forward. A Repo involves a simultaneous sales and repurchase
agreements.
A Repo works as follow as follows. Party A needs short-term funds
and Party B wants to make a short-term investment. Party A sells securities
to Party B at a certain price and simultaneously agrees to repurchase the
same after a specified time at a slightly higher price. The difference between
the sale price and repurchase price represent the interest cost to Party A (the
party doing the repo) and conversely the interest income for Party B (the
party doing the Reverse Repo). Reverse Repos are a safe and convenient
form of short-term investment.
www.investopedia.com/university/.../moneymarket7.asp

BENEFITS & FEATURES

1. Interest Rate Being collateralized loans, repos help reduce counter
party risk & therefore, fetch a low interest rate.
2. Contract The Repo contract provides the seller bank to get money
by partying with its security and the buyer bank in turn to get the
security by parting with its money. It becomes a Reserve Repo deal
for the purchaser of the security. Securities are sold first to a buyer
bank and simultaneously another contract is entered in to with buyer
to repurchase them at a predetermine date and price in future. The
price of the sale and repurchase of securities is determined before
entering into deal.

3. Safety Repo is an almost risk free instrument used to even out

liquidity changes in the system. Repos offer short-term outlet for
temporary excess cash at close to the market interest rate.
4. Hedge tool As purchaser of the repo requires title to the securities for
the term of agreement and as the repurchase price is locked in at a
time of sale itself. It is possible to use repos as an effective hedge-tool
to arrange the others repos or to sell them outright or to deliver them
to another party to fulfill the delivery commitment in respect of a
forward or future contract or a short sale or a maturing reveres repo.
5. Period The minimum period for Ready Forward Transaction Bill will
be 3 day. However, RBI withdraws this restriction for the minimum
period with the effect from October 30, 1998.
6. Liquidity Control The RBI uses Repo as a tool of liquidity control
for absorbing surplus liquidity from the banking system in a flexible
way and thereby preventing interest rate arbitraging. All Repo
transaction are to be effected at Mumbai only and the deals are to be
necessary put through the subsidiary General Ledger (SGL) account
with the Reserve Bank of India.
7. Cash Management Tool The Repo arrangement essential serves as a
short term cash management tool as the bank receive cash from the
buyer of the securities in return for the securities. This helps the
banker meet temporary cash requirement. This also makes the repo a
pure money lending operation. On the maturity of the repos the
security is purchased back by the seller bank from the buyer-bank by
returning the money to the buyer.
www.derivativesstrategy.com/magazine/.../0297fea1.asp

MONEY MARKET MUTUAL FUNDS (MMMFS)

The Reserve Bank of India introduced the Money Market Mutual Funds
(MMMFs) scheme in April 1972. The schemes aim at providing additional
short-term avenues to individual investor in order to bring Money Market
Instrument within their reach. MMMFs are expected to be more attractive to
banks and financial institutions, ho would find them providing greater
liquidity and depth to the money market.
www.investorwords.com/.../money_market_mutual_fund.html

FEATURES
He Silent features of the MMMFs are as follows.
Eligibility
The MMMFs can be set up by schedule commercial banks and public
financial institution as define under section 4A of the companies Act, 1956,
either directly or through their existing Mutual Funds / Subsidiaries who are
engaged in fund management. In addition, private sector Mutual Funds may
also set up MMMFs with the prior approval of RBI, subject to fulfillment of
certain terms and conditions. SEBIs clearance is required in the event of
MMMFs being set up in the private sector.
Structure
MMMFs can be set up either as Money Market Deposit Accounts (MMDAs)
or Money Market Mutual Funds (MMMFs)
Size

There is no ceiling prescribed for the MMMFs for raising resources.

Investors
The MMMFs are primary indented to serve as a vehicle for individual
investor to participate in the Money Market, the units / shares of MMMFs
can be issued only to individuals. In addition, individual Non Resident
Indian (NRIs) may also subscribe to the share / units of MMMFs. The
dividend / income on such subscription will be allowed to be repatriated,
through the principle amount of subscription will be allowed to be
repatriated, though the principal amount of subscription will not.
Minimum Size of Investment.
MMMFs would be free to determine the minimum size of the investment by
single investor. The investor cannot be guaranteed of a minimum rate of
return, the minimum lock-in period for the investment would be 46 days.
Investment by MMMFs
The resources mobilized by MMMFs should be invested exclusively in the
various money market instruments as listed below.
1. Treasury Bills and dated Government Securities having an unexpired
maturity up to 1 year with no minimum limit
2. call / notice money with no maximum limit
3. Commercial Paper with no maximum limit, the exposure to the
commercial paper issue by the individual company being limited to
3% of the resources of the MMMFs as the prudential requirement.

4. Commercial bills arising out of genuine trade / commercial

transactions and accepted / co-accepted by banks with no maximum
limits.
5. Certificate of deposit with no limit.
Reserve Requirements
In the MMMFs set up by banks, the resources mobilized by them would not
to be consider part of their net demand, and time liabilities, and as such
would be free of any reserve requirement.
Stamp duty
The share / units issued by MMMFs would be subject to Stamp duty.
Regulatory Authority
RBI is the regulatory that gives the approval for the setting of MMMFs.
Beside this, banks their subsidiaries and public financial institution would
also be required to comply with the guidelines and directives that may be
issued by RBI from time to time for the setting and operation of MMMFs.
Similarly, the Private Sector MMMFs would need to clearance of SEBI, as
also approval of RBI.
www.fundsavvy.com/mutual_funds.../market-mutual-funds.htm

CREDIT RATING OF INSTRUMENT

Credit rating is the process of assigning standard scores which summarize

the probability of the issuer being able to meet its repayment obligations for
a particular debt instrument in a timely manner. Credit rating is integral to
debt markets as it helps market participants to arrive at quick estimates and
opinions about various instruments. In this manner it facilitates trading in
debt and money market instruments especially in instruments other than
Government of India Securities.
Rating is usually assigned to a specific instrument rather than the company
as a whole. In the Indian context, the rating is done at the instance of the
issuer, which pays rating fees for this service. If it is unsatisfied with the
rating assigned to its proposed instrument, it is at liberty not to disclose the
rating given to it. There are 4 rating agencies in India. These are as follows:
CRISIL - The oldest rating agency was originally promoted by ICICI.
Standard & Poor, the global leader in ratings, has recently taken a small 10%
stake in CRISIL.
ICRA - Promoted by IFCI. Moodys, the other global rating major, has
recently taken a small 11% stake in ICRA.
CARE - Promoted by IDBI.

Duff and Phelps - Co-promoted by Duff and Phelps, the worlds 4th largest
rating agency.
CRISIL is believed to have about 42% market share followed by ICRA with
about 36%, CARE with 18% and Duff and Phelps with 4%.
Grading system
Each of the rating agencies has different codes for expressing rating for
different instruments; however, the number of grades and sub-grades is
similar e.g. for long term debentures/bonds and fixed deposits, CRISIL has 4
main grades and a host of sub grades. In decreasing order of quality, these
are AAA, AA+, AA, AA-, A+, A, A-, BBB-, BBB, BBB+, BB+, BB, BB-,
B+, B, B-, C and D. ICRA, CARE and Duff and Phelps have similar grading
systems. The following table contains a key to the codes used by CRISIL
and ICRA.
Credit rating is a dynamic concept and all the rating companies are
constantly reviewing the companies rated by them with a view to changing
(either upgrading or downgrading) the rating. They also have a system
whereby they keep ratings for particular companies on "rating watch" in case
of major events, which may lead to change in rating in the near future.
Ratings are made public through periodic newsletters issued by rating
companies, which also elucidate briefly the rationale for particular ratings.
In addition, they issue press releases to all major newspapers and wire
services about rating events on a regular basis.
en.wikipedia.org/wiki/Money_market

Factors involved in credit rating Credit rating depends on several factors,

some of which are tangible/numerical and some of which are judgmental and
intangible. Some of these factors are listed below:

Overall fundamentals and earnings capacity of the company and

volatility of the same

Overall macro economic and business/industry environment

Liquidity position of the company (as distinguished from profits)

Requirement of funds to meet irrevocable commitments

Financial flexibility of the company to raise funds from outside

sources to meet temporary financial needs

Guarantee/support from financially strong external bodies

Level of existing leverage (borrowings) and financial risk

As mentioned earlier ratings are assigned to instruments and not to

companies and two different ratings may be assigned to two different
instruments of the same company e.g. a company may be in a fundamentally
weak business and may have a poor rating assigned for 5 year debentures
while its liquidity position may be good, leading to the highest possible
rating for a 3 month commercial paper. Very few companies may be
assigned the highest rating for a long term 5 or 7 year instrument e.g.
CRISIL has only 20 companies rated as AAA for long term instruments and
these companies include unquestionable blue chips like Videsh Sanchar
Nigam, Bajaj Auto, Bharat Petroleum, Nestle India apart from institutions
like ICICI, IDBI, HDFC and SBI.
www.immfa.org/about/faq/default.asp

Derived ratings and structured obligations

Sometimes, debt instruments are so structured that in case the issuer is
unable to meet repayment obligations, another entity steps in to fulfill these
obligations. Sometimes there is a documented, concrete mechanism for
recourse to the third party, while on other occasions the arrangement is
loose. On such occasions, the debt instrument in question is said to be
"credit enhanced" by a "structured obligation" and the rating assigned to the
instrument factors in the additional safety mechanism. The extent of
enhancement is a function of the rating of the "enhancer", the nature of the
arrangement etc and usually there is a suffix to the rating which expresses
symbolically that the rating is enhanced e.g. A bond backed by the guarantee
of the Government of India may be rated AAA (SO) with the SO standing
for structured obligation.
www.rocw.raifoundation.org/management/mba/.../lecture-41.pdf

Limitations of credit rating - rating downgrades

Rating agencies all across the world have often been accused of not being
able to predict future problems. In part, the problem lies in the rating process
itself, which relies heavily on past numerical data and standard ratios with
relatively lower usage of judgment and understanding of the underlying
business or the country economics. Data does not always capture all aspects
of the situation especially in the complex financial world of today. An
excellent example of the meaningless over reliance on numbers is the poor
country rating given to India. Major rating agencies site one of the reasons

for this as the low ratio Indias exports to foreign currency indebtedness.
This completely ignores two issues firstly, India gets a very high quantum
of foreign currency earnings through remittances from Indians working
abroad and also services exports in the form of software exports which are
not counted as "merchandise" exports. These two flows along with other
"invisible" earnings accounted for almost US$11bn in FY 99. Secondly,
since India has tight control on foreign currency transactions, there is very
little error possible in the foreign currency borrowing figure. As against this,
for a country like Korea, the figure for foreign currency borrowing increased
by US$50bn after the exchange crisis began. This was on account of hidden
forward liabilities through swaps and other derivative products.
In general, Indian rating agencies have lost some amount of their credibility
in the last two years due to their inability to predict defaults in many
companies, which they had rated quite highly. Sometimes, some of the
agencies had an investment grade rating in place when the company in
question had already defaulted to some of the fixed deposit holders. Further,
rating agencies resorted to mass downgrading of 50-100 companies as a
reaction to public criticism, which further eroded their credibility. The major
reasons for these downgrades are as follows
Corporate earnings fell very sharply due to persistent recessionary
conditions prevailing in the economy. Many of the corporate are in
commodity sectors where fluctuations in selling prices of products can be
very sharp - leading to complete erosion of profitability. This problem was
compounded by the Asian crisis, which led to increased competition from
cheap imports in many product categories.

Rating agencies substantially overestimated financial flexibility of corporate

especially from traditional corporate houses. Much of the financial
flexibility was implicit on raising money from new issues from the capital
market, which has been impossible in the last 3 years.
In the case of finance companies, widespread defaults like CRB and
tightening of regulations made it virtually impossible for them to raise
money in any form. These finance companies had been in the habit of
investing in longer term, illiquid assets by borrowing shorter term fixed
deposits. When the flow of credit stopped, they faced liquidity problems.
These were further compounded by defaults by some of the companies to
which they had on lent money.
The experience is no different from the international scenario where reputed
and highly experienced rating agencies like Standard & Poor (S&P) and
Moodys were unable to predict the Asian crisis and had to face the
embarrassment of seeing the credit rating of South Korea as a country go
from A+ to BB+ in a short span of 3 months.
By and large, the rating is a very good estimate of the actual
creditworthiness of the company; however, it is not able to predict extreme
situations such as the ones described above, which are unlikely to have been
predicted by most investors in any case. Investors should realize that a credit
rating is not sacrosanct and that one has to do ones own due diligence and
investigation before investing in any instrument. They should use the rating
as a reference and a base point for their own effort. One good way of doing
this is examining the behavior of the stock price in case the stock is listed.
As a collective, the market is far smarter at predicting problems than any

credit rating agency. Witness the sharp erosion in stock prices of companies
much before their credit ratings were downgraded. Witness also the fact that
foreign currency bonds from Indian issuers trade at yields lower than
countries which have been rated higher by rating agencies.
www.efama.org/index2.php?option=com_docman&task
www.managementparadise.com/forums/...php/t-22086.html

DEFECTS & MEASURES FOR DEVELOPMENT

DEFECTS
1.

UNORGANIZED MONEY MARKET The presence of indigenous

bankers, village money lenders, etc. in villages and semi-urban areas

make the Indian money market highly unorganized.

They follow

their own rules and practices of finance and banking and are not
subject to the regulation and control of the Reserve Bank of India.
There are not in place adequate and proper rules and regulations in
order to allow for the orderly growth of the money market in India.
2.

ABSENCE OF INTEGRATION This is the serious lacuna afflicting the

Indian money market. Several sectors are very loosely connected with
each other. Often, there used to be hostility among the different
sections of the money market. There is hardly any cohesive working
relationship between the organized banking system and the
unorganized indigenous bankers.
3.

INADEQUATE NATIONAL MARKET The has been a late entry of

national level players such as the DFHI, STCI, etc in the Indian

financial system. This to great extent retarded the early growth of the
money market. The so-called advancements in computerization and
telecommunications are also very limited and confined mostly to
urban and semi-urban areas. Coordination between various money
markets and their constituents is lacking. It is imperative that a wellcoordinated and operationally uniform money market has to emerge in
the country.
4.

INTEREST RATE DISPARITY A major defect of the Indian money

market has been that the interest rate varies from place to place, from
time to time and from segment to segment. Wide disparity in money
rates exists. This condition makes it difficult for any worthwhile
regulatory mechanisms to be put in place.
5.

DEFICIENT BILL MARKET Lack of popularity of bill culture among

the traders both at national and international arena, has given rise to a
sick and a deficient bill market. This has greatly affected the
development of the money market. The transactions relating to bill
discounting and purchasing are limited. Besides, they also constitute
only a small part of total money market operations in the country. It is
a sad commentary that the different sub markets in the bill market
have not shown much development too. For instance, the market for
government and semigoverment securities is narrow. This has greatly
affected the efficient use of the monetary control measures of the RBI
so as to curb the inflationary pressure or to keep the slump away from
the economy.
Moreover, the investment in government securities is largely
confined to

Institutional investors comprising mainly the Reserve Bank of India,

Commercial Banks, Life Insurance Corporation of India, and in certain
cases, provident Fund schemes and other trust funds. This prevents the RBI
from using these instruments effectively for influencing the level of liquidity
in the money market, through open market operations. Similarly,
transactions in the interbank call money market, despite constituting the
fulcrum of the Indian money market, are not appreciably large enough to
form a sensitive segment.
Despite a series of serious measures initiated by the RBI over a period
of time, the plight of Indian bill market largely remains secluded,
constrained, and under developed much to the chagrin of the monetary
managers.
6.

LIMITED FUNDS There has been noticed a perceptible shortage in the

supply of loan able funds. The far exceeding demand has created a
wide chasm in the Indian money market. This situation can be
attributed to such factors as lower savings rate on account of poverty,
inadequate banking facilities, poor banking habits among the people,
inadequate facilities for investment of small saving and the existence
of a parallel economy with vast amount of black money defying all
regulations.
7.

SEASONAL VARIATIONS

An essential characteristic of the Indian

money market is the existence of seasonality of the demand for money

and short-term funds. This seasonal variation follows the pattern of
the seasonal variations in agricultural activities. Accordingly during
the busy season from October to April, the demand for money is more,

as more funds are needed for financing the post harvest movement for
the marketing of agricultural products, for the financing of seasonal
industries such as sugar, etc and also for financing the higher tempo
economic activities in general, after the dull rainy season. This is one
of the problems faced by the Indian money market. The frequent
seasonal variations in demand and the supply of funds, rates of
interest, etc could be attributed to the seasonal nature of the Indian
agriculture. Similarly, the cyclical fluctuations in the industrial sector
also debilitate the working of the Indian money market.
8.

UNSTABLE CONDITIONS The variations in the rates of interest,

demand and supply of funds, etc create unstable conditions in the

money market. This affects the ability of the central bank of the
country to monitor the functioning of the various segments.
9.

LACK OF WELL-ORGANIZED BANKING SYSTEM Developed money

market presupposes the existence of a well-organized commercial

banking system. But, unfortunately, the development in the realm of
commercial banking sector has been uneven, although it has been
expanding rapidly. Moreover, the banking facilities are inadequate,
highly urban-centric and organized inefficiently. Banks are still
lacking computerization, technological up gradation and welldeveloped branch network.
10. INADEQUATE FOREIGN FUNDS An important perquisite for the
successful conduct of operations in all the segments of the money
market is the movement of foreign funds on a higher scale. Although

there has been an enhanced inflow of funds from abroad with the
commencement of the process of liberalization under various routes
such as the FDI, it is not in keeping with the actual requirements of
the market. This has also affected the development of the Indian
money Market.
11. INADEQUATE INSTRUMENTS A significant deficiency of the Indian
money market has been the non availability of adequate number of
quality credit instruments especially for a short period. Supply of
short-term instruments such as commercials bills, treasury bills, etc is
highly inadequate. This to a very large extent retards the development
in the Indian money market.
12. CONSTRICTED SECONDARY MARKET The true development of a
financial market depends on the extent of secondary market facilities
are available in the country. As far as the Indian money market
concern, the secondary market for the money market instrument is
mainly restricted to rediscounting of commercial bills and treasury
bills. Absence of sufficient number of credit instrument also adds to
the woes. Further, there has been reluctance on the part of the some of
the big borrowers to avail finances against discount of commercial
bills.
13.

LIMITED PARTICIPANTS

The highly regulated kind of regimen

prevailing in the Indian capital market deters the free entry and exit of
large numbers of players. For instance, institutions such as DFHI,
STCI, banks, specified all-India financial institutions and a few big

companies chiefly dominate the market. There is also a lopsided

growth in the number of participants spared across the different
domains of money markets causing considerable disharmony.
www.jiskha.com/.../stockmarket/indian_money_market.html

MEASURES FOR DEVELOPMENT

Keeping in mind the need for a developed money market for a fast
growing economy like India, and based on series of recommendations put
forth by the committees such Chakraborty Committee on Monetary
System and Vaghul Working Money Market the following measures were
initiated by RBI towards developing the Indian money market:
1. INFRASTRUCTURE RBI undertook several measures for setting
institutions, to help hasten the Growth and development in the
Indian money market. Accordingly, the discount and Finance
House of India Ltd. (DHFI) was established to broaden and deepen
the money market operations. It acts as a market maker. Similarly,
the Securities and Exchanges Board of India (SEBI) was set up to
function as an apex regulatory body relating to all aspects of
security market activities. Credit Rating agencies such as CRLSIL,
ICRA, etc. were promoted for making possible easy raising of
funds from the money market.

2..DEVELOPING BILL CULTURE The RBI, to develop the bill culture

by promoting and encouraging credit transactions, made all-out efforts

by introducing rediscounting of bills, besides giving stamp duty
exemptions for rediscounting of derivatives usance promissory notes
arising out of genuine trade bill transaction.
3.INNOVATIVE SUBMARKETS

Very recently, several innovative

markets such as certificate of deposit, call money market, collateral

loan market, commercial paper market, MMMFs, etc came to be
introduced to strength to the money market.
4..CREDIT CONTROL MEASURES

Credit control measures such as

CRR and SLR are efficiently manipulated to tone up and buoy the
money market operations especially in the commercial banking sector.
5..REPO OPERATIONS

the reintroduction of repos (ready forward)

in November 1996, was aim at mopping up excess liquidity thus

reducing volatility in call money market and the foreign money
markets. Beginning October 21, 1997, repo facility was further
extended to corporate debt and PSU Bonds. Under these
arrangements, RBI made reverse repo facility available to primary
dealers in government security market, at the bank rate, on a
discretionary basis and subject to certain regulations from time to
time.
6.MMMFS

The introduction of Money Market Mutual Funds

(MMMFs) for investment in money market instrument marked an

important development in the realm of Indian Money Market. MMMF

are required to invest in call/notice money, certificates of deposits
(CDs), commercial papers (CPs), commercial bill arising out of
genuine trade/commercial transactions, treasury bills and dated
government securities having an unexpired maturity up to 1 year.
Pioneer Money Market Account was launched on February 24, 1997
as Indias first MMMF. The UTI Money Market Mutual Fund
launched on April 23, 1997 followed this.
7.DERIVATIVE PRODUCTS The latest and the most innovative of all

the financial instruments came to be introduced in the Indian Money

Market. Instrument such as options, futures, swaps, forwards; forward
rate agreements, etc are now available for trading by investors.
Derivatives have biggest advantage in them, in that they facilitate
hedging and thereby help minimize the credit risks.
www.favaro.net/john/home/publications/pursuit.pdf

SIMILARITIES & DIFFRENCE BETWEEN

CAPITAL MARKET INSTRUMENT & MONEY
MARKET INSTRUMENT
SIMILARITIES OF CAPITAL MARKET
INSTRUMRNT & MONEY MARKET INSRUMENT

In many respects, both money market and capital markets exhibit similar
characteristics as specified below.
1. TRANSFER OF RESOURCES TRANSFER of resources takes place
from surplus units to deficit units both in money market and capital
market.
2. COMMERCIAL BANKS Commercial banks provide both short-term
and long-term finance and therefore, take an active part in the money
market as well as capital market.
3. LIQUIDITY ADJUSTMENT Nonbanking financial institution and
special financial institutions approach money and capital markets to a
limited degree in order to adjust their liquidity positions. Besides,
financial institutions operate on both sides of the market, borrowing
and lending and participate in both money and capital market.
4. FLOW OF FUNDS As lenders and borrowers of funds have access to
both capital and money market, there is a substantial flow of funds
between capital and money markets.
5. PREFERENCE FOR INVESTORS Preference is available for most of
the suppliers of funds operate in both the markets, as investors
simultaneously invest in various investment avenues such as savings
bank, units, fixed deposits, national saving certificate schemes, life
insurance, government and industrial securities, real estate, bullion,
etc
6. INTEREST RATES There is an interdependency of short and longterm rates of interest. This is because, rise in interest rate in money
make influence long-term interest rates also.
www.businessknowledgesource.com/.../the_difference_ between_capital_marke
ts_and_money_markets_024885.html

DIFFRENCE BEWTEEN CAPITAL MARKET

INSTRUMRNT & MONEY MARKET INSRUMENT
Sl

Point of

Capital market

Money Market

No.

1.

Difference
Term of

Instrument
Provides long-term funds

Instrument
Provides short-term funds

2.

finance
Nature of

Capital used for fixed and

Capital usually used for

3.

Capital
Main

working capital needs

working capital needs
Mobilization and effective Lending and borrowing to

Function

utilization through lending facilitate liquidity

4.

5.
6.
7.
8.

9.

Main

Primary and secondary

adjustment
Call money market,

Constituent

markets, with stock

treasury bills market,

exchange acting as a

commercial bills market,

bridge for buying and

market for Certificate of

selling of securities

Deposit & Commercial

Link

Acts as a link between

Paper, etc
Act as a link between

Underwriting
Institution

investor & entrepreneur

It is a primary function
Investment house and

depositor and borrower

Not a primary function
Commercial banks and

Development

mortgage banks
Provided to central and

discount house
Provided to government

Assistance

state governments, public

by discounting treasury

Negotiation

and local bodies, etc

Funds are lent after a

bills etc.
Dealing can take place

prolonged negotiation

without any personal

between lending financial

contact and negotiation are

institution and the

10. Market Place

not formal

borrowing corporate entity

Dealings are conducted
Dealing are conducted
through the mechanism of

through the over-the-

stock exchanges
Bonds & Shares

phone-market
Financial claims, assets,

12. Risk

High credit & market risk

and securities
Low credit & market risk

13. Price

High

Not much

Low
Besides central bank,

High
Central Bank

11. Claims

14.
15.

Fluctuations
Liquidity
Regulator

Special regulatory
authority like SEBI, etc

www.improvingyourworld.com/.../the_ difference_between_capital_markets_an
d_money_markets_001673.html

EXECUTIVE SUMMARY

Debt Instruments which have a maturity of less than one year at the time of
issue are called money market instrument. These instruments are highly
liquid and have negligible risk. The major money market instruments are
Treasury Bills, Certificate of Deposit, Commercial Paper, Money market
Mutual Fund, & Repos. The money market is dominated by the
Government, financial institutions, banks, and corporate. Individual

investors scarcely participate in the money market directly. A brief

description of money market instruments is given below.
Treasury Bills (TBs)-:
Treasury bills are the most important money market instrument. They
represent the obligation of the Government of India which has a primary
tenor like 91 days and 364 days. They are sold on an auction basis every
week in certain minimum denominations by the Reserve Bank of India.
They do not carry an explicit interest rate. Instead, they are sold at a discount
and redeemed at par. Hence the implicit yield of a Treasury bill is a function
of the size of the discount and the period of maturity.
Though the yield on Treasury bills is somewhat low, yet they have an
appeal for the following reasons: (a) These can be transacted readily and
there is a very active secondary market for them. (b) Treasury bills have nil
credit risk and negligible price risk.

Certificate of Deposit (CDs) -:

Certificate of Deposits (CDs) represent short-term deposits which are
transferable from one party to another. Banks and financial institution are the
major issuers of CDs. The principal investors in CDs are banks, financial
institutions, corporate, and mutual funds. CDs are issued in either bearer or
registered form. They generally have a maturity of 3 months to one year.
CDs carry a certain interest rate.

CDs are a popular form of short-term investment for companies for

the following reasons: (i) Banks are normally willing to tailor the
denominations and maturities to suit the needs of the investors. (ii) CDs are
generally risk-free. (iii) CDs generally offer a higher rate of interest than
Treasury bills or term deposits.
Commercial Paper (CPs) -:
A commercial paper represents short-term unsecured promissory note issued
by firms that are generally considered to be financially strong. A commercial
paper usually has a maturity period of 90 to 180 days. It is sold at a discount
and redeemed at par. Hence the implicit rate is a function of the size of
discount and the period of maturity.
Money Market Mutual Funds (MMMFs) -:
The Reserve Bank of India introduced the Money Market Mutual Funds
(MMMFs) scheme in April 1972. The schemes aim at providing additional
short-term avenues to individual investor in order to bring Money Market
Instrument within their reach. MMMFs are expected to be more attractive to
banks and financial institutions, ho would find them providing greater
liquidity and depth to the money market.
Repos -:
A Repo works as follow as follows. Party A needs short-term funds and
Party B wants to make a short-term investment. Party A sells securities to
Party B at a certain price and simultaneously agrees to repurchase the same
after a specified time at a slightly higher price. The difference between the

sale price and repurchase price represent the interest cost to Party A (the
party doing the repo) and conversely the interest income for Party B (the
party doing the Reverse Repo). Reverse Repos are a safe and convenient
form of short-term investment.

REFERENCES

www.investopedia.com/university/moneymarket
linkinghub.elsevier.com/retrieve/pii/S0161893807000890
Refwww.investorglossary.com/money-market.htm
www.improvingyourworld.com/.../the_ difference_between_capital_mark
ets_and_money_markets_001673.html

www.favaro.net/john/home/publications/pursuit.pdf
www.derivativesstrategy.com/magazine/.../0297fea1.asp
www.economywatch.com/market/money-market/money-marketinstruments

www.investorwords.com/.../money_market_mutual_fund.html

www.immfa.org/about/faq/default.asp

BIBLIOGRAPHY

www.google.com
www.rbi.org.in
www.calypso.com
www.yahoo.com
The Economic Times
Financial Services & Markets ( Reference book)
- Dr. Gurusamy