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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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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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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, it’s 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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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


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

2) Definition of Money Market:
According to the McGraw Hill Dictionary of Modern Economics, “money market is the term designed to include the financial institutions which handle the purchase, sale, and transfers of short term credit instruments. The money market includes the entire machinery for the channelizing of short-term funds. Concerned primarily with small business needs for working capital, individual’s borrowings, and government short term obligations, it differs from the long term or capital market which devotes its attention to dealings in bonds, corporate stock and mortgage credit.” According to the Reserve Bank of India, “money market is the centre for dealing, mainly of short term character, in money assets; it meets the short term requirements of borrowings and provides liquidity or cash to the lenders. It is the place where short term surplus investible funds at the disposal of financial and other institutions and individuals are bid by borrowers’ agents comprising institutions and individuals and also the government itself.” According to the Geoffrey, “money market is the collective name given to the various firms and institutions that deal in the various grades of the near money.”

3) Objectives of Money Market:
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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.

4) General Characteristics of Money Market:
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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

rediscounting, and treasury bills, etc.

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

5) The Role of the Reserve Bank of India in the Money Market:
The Reserve Bank of India is the most important constituent of the money market. The market comes within the direct preview of the Reserve Bank of India regulations. The aims of the Reserve Bank’s operations in the money market are: 2 2


 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.

Features of T-bills are:
 They are negotiable securities.  They are highly liquid as they are of shorter tenure and there is a possibility of an interbank repos on them.  There is absence of default risk. 2 2


 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).

Types of Treasury Bills:
Treasury bills (T-bills) offer short-term investment opportunities, generally up to one year. They are thus useful in managing short-term liquidity. At present, RBI issues T-Bills for three different maturities : 91 days, 182 days and 364 days. The 91 day T-Bills are issued on weekly auction basis while 182 day T-Bill auction is held on Wednesday preceding non-reporting Friday and 364 day T-Bill auction on Wednesday preceding the reporting Friday. There are no treasury bills issued by State Governments.

Advantages of investing in T-Bills:
 No Tax Deducted at Source (TDS)  Zero default risk as these are the liabilities of GOI  Liquid money Market Instrument  Active secondary market thereby enabling holder to meet immediate fund requirement.

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.

Auctions of Treasury Bills:
While 91-day T-bills are auctioned every week on Wednesdays, 182 days and 364-day T-bills are auctioned every alternate week on Wednesdays. The Reserve Bank of India issues a quarterly calendar of T-bill auctions which is shown below (table 1.1). It also announces the exact dates of auction, the amount to be auctioned and payment dates by issuing press releases prior to every auction.

Participants in the T-bills market:
The Reserve Bank of India, mutual funds, financial institutions, primary dealers, satellite dealers, provident funds, corporates, foreign banks, and foreign institutional investors are all participants in the treasury bill market. The sale government can invest their surplus funds as non-competitive bidders in T-bills of all maturities. Treasury bills are pre-dominantly held by banks. In the recent years, there has been a growth in the number of non-competitive bids, resulting in significant holding of T- bills by provident funds, trusts and mutual funds. The table 1.2 presents holding pattern of outstanding T-bills.


At the end of march ( 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

RBI Banks State Government Others Total t-bills outstanding

43,800 91,988 41,195 1,76,983

Source: RBI, Weekly Statistical Supplement, Various Issues. 2 2


Issuance Process of T-Bills:
Treasury bills (T-bills) are short -term debt instruments issued by the Central government. Three types of T-bills are issued: 91-day, 182-day and 364-day. T- bills are sold through an auction process announced by the RBI at a discount to its face value. RBI issues a calendar of T-bill auctions (Table 1.2) .It also announces the exact dates of auction, the amount to be auctioned and payment dates. T-bills are available for a minimum amount of Rs. 25,000 and in multiples of Rs. 25,000. Banks and PDs are major bidders in the T- bill market. Both discriminatory and uniform price auction methods are used in issuance of T-bills. Currently, the auctions of all T-bills are multiple/discriminatory price auctions, where the successful bidders have to pay the prices they have actually bid for. Non-competitive bids, where bidders need not quote the rate of yield at which they desire to buy these T-bills, are also allowed from provident funds and other investors. RBI allots bids to the non-competitive bidders at the weighted average yield arrived at on the basis of the yields quoted by accepted competitive bids at the auction. Allocations to non-competitive bidders are outside the amount notified for sale. Non-competitive bidders therefore do not face any uncertainty in purchasing the desired amount of T-bills from the auctions. Pursuant to the enactment of FRBM Act with effect from April 1, 2006, RBI is prohibited from participating in the primary market and hence devolvement on RBI is not allowed. Auction of all the Treasury Bills are based on multiple price auction method at present. The notified amounts of the auction is decided every year at the beginning of financial year (Rs.500 crore each for 91-day and 182-day Treasury Bills and Rs.1,000 crore for 364-day Treasury Bills for the year 2008-09) in consultation with GOI. RBI issues a Press Release detailing the notified amount and indicative calendar in the beginning of the financial year. The auction for MSS amount varies depending on prevailing market condition. Based on the requirement of GOI and prevailing market condition, the RBI has discretion to change the notified amount. Also, it is 2 2


discretion of the RBI to accept, reject or partially accept the notified amount depending on prevailing market condition.

Table 1.1 Treasury Bills- Auction Calendar
Type of T-bills 91-day 182-day 364-day * If the day of payment falls on a holiday, the payment is made on the day after the holiday. The calendar for the regular auction of TBs for 2008-09 was announced on March 24, 2008. The notified amounts were kept unchanged at Rs.500 crore for 91-day and 182- day TBs and Rs.1,000 crore for 364-day TBs. However, the notified amount (excluding MSS) of 91-day and 182 TBs and Rs.1,000 crore for 364 day TBs. However, the notified amount (excluding MSS) of 91-day TBs was increased by Rs.2,500 crore each on ten occasions and by Rs.1,500 crore each on ten occasions and by Rs.1,500 crore on one occasion and that of 182 day TBs was increased by Rs.500 crore on two occasions during 2008-09 (upto August 14, 2008). Thus, an additional amount of Rs.27,500 crore (Rs.17,500 crore, net) was raised over and above the notified amount in the calendar to finance the expected temporary cash mismatch arising from the expenditure on farmers’ debt waiver scheme. Day of Auction Wednesday Wednesday of non-reporting week Wednesday of reporting week Day of Payment* Following Friday Following Friday Following Friday

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The summary of T- bill auctions conducted during the year 2007- 08 is in Table 1.3

Table 1.3: T-bill Auctions 2007- 08 - A Summary

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 ( 109,341 210,365 98.06 98.90 4.4612



39,605 46,926 96.17 97.18 5.82

54,000 57,205 92.78 93.84 6.5824



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Source: RBI Bulletin, Various Issues.

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.

Types of auctions of T-bills:
There are two types of auctions:  Multiple-price auction  Uniform-price auction

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 bank’s 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.

Diagram 2.3 Commercial Paper Issue Mechanism

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Obtained credit rating

Obtained working capital limit

Net worth not less than 4 crores

Issuer Company

Redeem CP on maturity

Issue CP at discount

Investor Bank/Company

Commercial Paper Issue Mechanism
Advantage of commercial paper:
 High credit ratings fetch a lower cost of capital.  Wide range of maturity provide more flexibility.  It does not create any lien on asset of the company.
 Tradability of Commercial Paper provides investors with exit options.

Disadvantages of commercial paper:
 Its usage is limited to only blue chip companies.
 Issuances of Commercial Paper bring down the bank credit limits.  A high degree of control is exercised on issue of Commercial Paper.

 Stand-by-credit may become necessary.

Issuance Process of Commercial Paper:

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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 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

RBI Guidelines on Issue of Commercial Paper:
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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 company’s 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.

Growth in the Commercial Paper Market:

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Commercial paper was introduced in India in January 1990, in pursuance of the Vaghul Committee’s 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.

Table 2.2 – Commercial Papers - Trends in Volumes and Discount Rates.
Year Amount Outstanding at Minimum the end of March (Rs. cr.) p.a.) 1993-1994 3,264 9.01 1994-1995 604 10.00 1995-1996 76 13.75 1996-1997 646 11.25 1997-1998 1,500 7.65 1998-1999 4,770 8.50 1999-2000 5,663 9.00 2000-2001 5,846 8.20 2001-2002 7,224 7.10 2002-2003 5,749 5.50 2003-2004 9,131 4.60 2004-2005 14,235 4.47 2005-2006 12,718 5.25 2006-2007 17,838 6.25 Sources: RBI, Handbook of Statistics on Indian Economy, 2006-2007 Maximum p.a.) 16.25 15.50 20.15 20.90 15.75 15.25 13.00 12.80 13.00 11.10 9.88 7.69 9.25 13.35

Discount Rate (% Discount Rate (%

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


Table 2.3 Stamp Duty For Banks And Non-Banks
Period Banks Past I. Upto 3 months II. Above 3 months upto 6 months III. Above 6 months upto 9 months IV. Above 9 months upto 12 months V. Above 12 months 0.05 0.10 0.15 0.20 0.40 Present 0.012 0.024 0.036 0.05 0.10 Non-Banks Past 0.125 0.250 0.375 0.500 1.00 Present 0.06 0.12 0.18 0.25 0.5

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.

Eligibility for Issue of Certificate of Deposits:
Certificate of deposits can be issued by (i) scheduled commercial banks excluding Regional Rural Banks (RRBs) and Local Area Banks (LABs); and (ii) select all-India Financial Institutions that have been permitted by RBI to raise short -term resources within the umbrella limit fixed by RBI. Banks have the freedom to issue certificate of deposits depending on their requirements. An FI may issue certificate of deposits within the overall umbrella limit fixed by RBI, i.e., issue of certificate of deposits together with other instruments, viz., term money, term deposits, commercial papers and inter-corporate deposits should not exceed 100 per cent of its net owned funds, as per the latest audited balance sheet. 2 2


Denomination For Certificate Of Deposits:
Minimum amount of a certificate of deposits should be Rs.1 lakh, i.e., the minimum deposit that could be accepted from a single subscriber should not be less than Rs. 1 lakh and in the multiples of Rs. 1 lakh thereafter. Certificate of deposits can be issued to individuals, corporations, companies, trusts, funds, associations, etc. Non-Resident Indians (NRIs) may also subscribe to certificate of deposits, but only on non-repatriable basis which should be clearly stated on the Certificate. Such certificate of deposits cannot be endorsed to another NRI in the secondary market.

The maturity period of certificate of deposit’s 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.

Discount on Issue of Certificate Of Deposits:
Certificate of deposits may be issued at a discount on face value. Banks/FIs are also allowed to issue certificate of deposits on floating rate basis provided the methodology of compiling the floating rate is objective, transparent and market -based. The issuing bank/FI is free to determine the discount/coupon rate. The interest rate on floating rate certificate of deposits would have to be reset periodically in accordance with a pre -determined formula that indicates the spread over a transparent benchmark.

Reserve Requirement and Transferability:
Banks have to maintain the appropriate reserve requirements, i.e., cash reserve ratio (CRR) and statutory liquidity ratio (SLR), on the issue price of the certificate of deposits. Physical certificate of deposits are freely transferable by endorsement and delivery. Dematted 2 2


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

How Certificate Of Deposits Work:
The consumer who opens a certificate of deposits may receive a passbook or paper certificate, but it now is common for a certificate of deposits to consist simply of a book entry and an item shown in the consumer's periodic bank statements; that is, there is usually no "certificate" as such. At most institutions, the certificate of deposits purchaser can arrange to have the interest periodically mailed as a check or transferred into a checking or savings account. This reduces total yield because there is no compounding. Some institutions allow the customer to select this option only at the time the certificate of deposits is opened. Commonly, institutions mail a notice to the certificate of deposits holder shortly before the certificate of deposits matures requesting directions. The notice usually offers the choice of withdrawing the principal and accumulated interest or "rolling it over" (depositing it into a new certificate of deposits). Generally, a "window" is allowed after maturity where the certificate of deposits holder can cash in the certificate of deposits without penalty. In the absence of such directions, it is common for the institution to "roll over" the certificate of deposits automatically, once again tying up the money for a period of time (though the certificate of deposits holder may be able to specify at the time the certificate of deposits is opened that it is not to be automatically rolled over).

RBI Guidelines on issue of Certificate of Deposits:
The salient features of scheme devised by RBI in issue of certificates of deposit (CDs) by banks are as follows:

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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.

Certificate Of Deposits – Volume And Rates:

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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


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.

Call Money Market:
Call and notice money market refers to the market for short -term funds ranging from overnight funds to funds for a maximum tenor of 14 days. Under Call money market, funds are transacted on overnight basis and under notice money market, funds are transacted for the period of 2 days to 14 days. 2 2


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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Volumes in the Call Money Market:
Call markets represent the most active segment of the money markets. Though the demand for funds in the call market is mainly governed by the banks' need for resources to meet their statutory reserve requirements, it also offers to some participants a regular funding source for building up short -term assets. daily volumes in the call markets. However, the demand for funds for reserve requirements dominates any other demand in the market.. Figure 4.1 displays the average

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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Participants in the Call Money Market:
Participants in call money market include the following:
 As lenders and borrowers: Banks and institutions such as commercial banks, both

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.

Call Money Rates:
The rate of interest on call funds is called money rate. Call money rates are characteristics in that they are found to be having seasonal and daily variations requiring intervention by RBI and other institutions. The concentration in the borrowing and lending side of the call markets impacts liquidity in the call markets. The presence or absence of important players is a significant influence on quantity as well as price. This leads to a lack of depth and high levels of volatility in call rates, when the participant structure on the lending or borrowing side alters. Short-term liquidity conditions impact the call rates the most. On the supply side the call rates are influenced by factors such as: deposit mobilization of banks, capital flows, and banks reserve requirements; and on the demand side, call rates are influenced by tax outflows, government borrowing programme, seasonal fluctuations in credit off take. The external situation and the behaviour of exchange rates also have an influence on call rates, as most players in this market run integrated treasuries that hold short term positions in both rupee and forex markets, deploying and borrowing funds through call markets. Table 4.3: Call Money Rates

year Year

Maximum (% p.a.)

Minimum (% p.a.)

Average (% p.a.)




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

8.0 8.0 7.0 6.5 6.25 6.00 6.00

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.

Repurchase Agreement (Repo):
The major function of the money market is to provide liquidity. To achieve this function and to even out liquidity changes, the Reserve Bank uses repos. Repo is a useful money market instrument enabling the smooth adjustment of short-term liquidity among varied market participants such as banks, financial institutions and so on. Repo is a money market instrument, which enables collateralized short term borrowing and lending through sale/purchase operations in debt instruments. Under a repo transaction, a holder of securities sells them to an investor with an agreement to repurchase at a predetermined date and rate. It is a temporary sale of debt involving full transfer of ownership of the securities, that is, the assignment of voting and financial rights. Repo is also referred to as a ready forward transaction as it is a means of funding by selling a security held on a spot basis and repurchasing the same on a forward basis. Though there is no restriction on the maximum period for which repos can be undertaken, generally, repos are done for a period not exceeding 14 days. Different instruments can be considered as 2 2


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 lender’s 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

therefore, fetch a low interest rate especially in a volatile market.
 Safety: repo is an almost risk-free instrument used to even-out liquidity changes in the

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

11.43% 2015 7 August and 7 February (1)

Market Price of the security offered Rs.113.00

19 January, 2003 7.75% 3 days (2) (3) (4) (5)

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

(3) + (4)-(5) = 118.1435 + 0.0753 - 5.2388 (6) (7)

= 112.98 Cash consideration for the second (5) + (6) = 112.98 + 5.2388 = 118.2188 leg

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Repo Market in India: Some Recent Issues:
Repos being short term money market instruments are necessarily being used for smoothening volatility in money market rates by central banks through injection of short term liquidity into the market as well as absorbing excess liquidity fro m the system. Regulation of the repo market thus becomes a direct responsibility of RBI. Accordingly, RBI has been concerned with use of repo as an instrument by banks or non-bank entities and issues relating to type of eligible instruments for undertaking repo, eligibility of participants to undertake such transactions etc. and it has been issuing instructions in this regard in consultation with the Central Government. After evidence of abuse in the repo market during the period leading to the securities scam of 1992, RBI had banned repos from the markets. It is only in the recent past that these restrictions have been removed, and after the acceptance of the report of the technical sub-group’s recommendations, RBI has initiated efforts for creating an active market for repos. It was decided to adopt the international usage of the term ‘Repo’ and ‘Reverse Repo’ under LAF operations. Thus, when RBI absorbs liquidity it is termed as Reverse Repo and the RBI injecting liquidity is the repo operation. Since forward trading in securities was generally prohibited in India, repos were permitted under regulated conditions in terms of participants and instruments. Reforms in this market has encompassed both institutions and instruments. Both banks and non-banks were allowed in the market. All government securities and PSU bonds were eligible for repos till April 1988. Between April 1988 and mid June 1992, only inter- bank repos were allowed in all government securities. Double ready forward transactions were part of the repos market throughout the period. Subsequent to the irregularities in securities transactions that surfaced in April 1992, repos 2 2


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.

Secondary Market Transaction in Repos:
Secondary market repo transactions are settled through the RBI SGL accounts, and weekly data is available from the RBI on volumes, rates and number of days. Though the NSE WDM also has the facility for reporting repo trades, there were no repo transactions recorded during 2005- 06, 2006-07 and 2007-08.

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Commercial bill market:
Commercial bill is a short term, negotiable, and self-liquidating instrument with low risk. It enhances he liability to make payment in a fixed date when goods are bought on credit. According to the Indian Negotiable Instruments Act, 1881, bill or exchange is a written instrument containing an unconditional order, signed by the maker, directing to pay a certain amount of money only to a particular person, or to the bearer of the instrument. Bills of exchange are negotiable instruments drawn by the seller (drawer) on the buyer (drawee) or the value of the goods delivered to him. Such bills are called trade bills. When trade bills are accepted by commercial banks, they are called commercial bills. The bank discount this bill by keeping a certain margin and credits the proceeds. Banks, when in need of money, can also get such bills rediscounted by financial institutions such as LIC, UTI, GIC, ICICI and IRBI. The maturity period of the bills varies from 30 days, 60 days or 90 days, depending on the credit extended in the industry.

Types of Commercial Bills:
Commercial bill is an important tool finance credit sales. It may be a demand bill or a usance bill. A demand bill is payable on demand, that is immediately at sight or on presentation by the drawee. A usance bill is payable after a specified time. If the seller wishes to give sometime for payment, the bill would be payable at a future date. These bills can either be clean bills or documentary bills. In a clean bill, documents are enclosed and delivered against acceptance by drawee, after which it becomes clear. In the case of a documentary bill, documents are delivered against payment accepted by the drawee and documents of bill are filed by bankers till the bill is paid. 2 2


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.

Measures to Develop the Bills Market:
One of the objectives of the Reserve Bank in setting up the Discount and finance House of India was to develop commercial bills market. The bank sanctioned a refinance limit for the DFHI against collateral of treasury bills and against the holdings of eligible commercial bills. With a view to developing the bills market, the interest rate ceiling of 12.5 per cent on rediscounting of commercial bills was withdrawn from May 1, 1989. To develop the bills market, the Securities and Exchange Board of India (SEBI) allowed, in 1995-96, 14 mutual funds to participate as lenders in the bills rediscounting market. During 1996-97, seven more mutual funds were permitted to participate in this market as lenders while another four primary dealers were allowed to participate as both lenders and borrowers. In order to encourage the ‘bills’ culture, the Reserve Bank advised banks in October 1997 to ensure that at least 25 percent of inland credit purchases of borrowers be through bills.

Size of the Commercial Bills Market:
The size of the commercial market is reflected in the outstanding amount of commercial bills discounted by banks with various financial institutions. The share of bill finance in the total bank credit increased from 1993-94 to 1995-96 but declined subsequently. This reflects the underdevelopment state of the bills market. The reasons for the underdevelopment are as follows:

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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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Bill Market Scheme, 1952 :
The salient features of the scheme were as follows: (1) The schemes was announced under section 17(4)(c) of RBI Act enables it to make advances to scheduled banks against the security of issuance of promissory notes or bills drawn on and payable in India and arising out of bonafide commercial or trade transaction bearing two or more good signatures one of which should be that of scheduled bank and maturing within 90 days from the date of advances.

(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.

Bill Market Scheme, 1970:
In pursuance of the recommendations of the Dehejia Committee, the RBI constituted a working group to evolve a scheme to enlarge the use of bills. Based on the scheme suggested by the study group, the RBI introduced, with effect from November 1, 1970 the new bill market scheme in order to facilitate the re-discounting of eligible bills of exchange by banks with it. To popularize the use of bills, the scope of the scheme was enlarged, the number of participants was increased, and the procedure was simplified over the years.

The salient features of the scheme:
Eligible Institutions: All licensed scheduled banks and those which do not require a license (i.e. the State Bank of India, its associate banks and nationalized banks) are eligible to offer bills of exchange to the RBI for rediscount. There is no objection to a bill, accepted by such banks, being purchased by others banks and financial institutions but the RBI rediscounts only those bills as are offered to it by an eligible bank. Eligibility of Bills: The eligibility of bills offered under the scheme to the RBI is determined by the statutory provisions embodied in section 17(2)(a) of the Reserve Bank of India Act, which authorize the purchase, sale and rediscount of bills of exchange and promissory notes, drawn on and payable in India and arising out of bona fide commercial or trade transactions, bearing two or more good signatures one of the which should be that of a scheduled bank or a state cooperative bank ands maturing: 1) In the case of bills of exchange and promissory notes arising out of any such transaction relating to the export of goods from India, within one hundred and eighty days. 2) In any other case, within ninety days from the date of purchase or rediscount exclusive of days of grace; 3) The scheme is confined to genuine trade bills arising out of genuine sale of goods. The bill should normally have a maturity of not more than 90 days. A bill having a maturity 2 2


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.

Procedure For Rediscounting of Commercial Bill:
Eligible banks are required to apply to the RBI in the prescribed form, giving their estimated requirements for the 12 months ending October of each year, and limits are sanctioned / renewed for a period of one year running from 1st November to 31st October of the following year. The RBI presents for payment, bills of exchange rediscounted by it and such bills have to taken delivery of by the rediscounting banks against payment, not less than three working days before the dates of maturity of the bills concerned. In case the bills are retired before the dates, pro-rata refund of discount is allowed by the RBI.

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.

Revitalizing Bill Market:
In order to revitalize the bill market scheme, several committees made recommendations in the light of the experience of the operation of the scheme. On the basis of these, several measures were initiated by the RBI to promote bill financing. The important ones being: 1) A ceiling on the proportion of receivables (75 per cent) eligible for financing under the cash credit systems.
2) Discretion to banks to sanction additional ad hoc limits for a period not exceeding 3

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.

Money Market mutual fund (MMMFS):
A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors and invests it in stocks, bonds, short- term money market instruments and other securities. Mutual funds have a fund manager who invests the money on behalf of the investors by buying / selling stocks, bonds etc. Money market mutual funds (mmmfs) were introduced in April 1991 to provide an additional short-term avenue for investment and bring money market investment within the reach of individuals. These mutual funds would invest exclusively in money market instruments. Money market mutual funds bridge the gap between small investors and the money market. It mobilizes saving from small investors and invests them in short-term debt instruments or money market instruments. There are various investment avenues available to an investor such as real estate, bank deposits, post office deposits, shares, debentures, bonds etc. A mutual fund is one more type of Investment avenue available to investors. There are many reasons why investors prefer mutual funds. An investor’s money is invested by the mutual fund in a variety of shares, bonds and other securities thus diversifying the investors portfolio across different companies and sectors. This diversification helps in reducing the overall risk of the portfolio. It is also less expensive to invest in a mutual fund since the minimum investment amount in mutual fund units is fairly low (Rs. 500 or so). With Rs. 500 an investor may be able to buy only a

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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

An Overview - Money Market Mutual Funds:
Currently, the worldwide value of all mutual funds totals more than $US 26 trillion. The United States leads with the number of mutual fund schemes. There are more than 8000 mutual fund schemes in the U.S.A. Comparatively, India has around 1000 mutual fund schemes, but this number has grown exponentially in the last few years. The Total Assets under Management in India of all Mutual funds put together touched a peak of Rs. 5, 44,535 crs. at the end of August 2008. . As of today there are 41 Mutual Funds in the country. Together they offer over 1000 schemes to the investor. Many more mutual funds are expected to enter India in the next few years. Indians have been traditionally savers and invested money in traditional savings instruments such as bank deposits. Against this background, if we look at approximately Rs. 5 lakh crores which Indian Mutual Funds are managing, then it is no mean an achievement. A country traditionally putting money in safe, risk-free investments like Bank FDs, Post Office and Life Insurance, has started to invest in stocks, bonds and shares – thanks to the mutual fund industry.

CHARACTERISTIC OF MUTUAL FUND  The ownership is in the hands of the investors who have pooled in their funds.

 It is managed by a team of investment professionals and other service providers.

 The pool of funds is invested in a portfolio of marketable investments.

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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.


1. Portfolio Diversification – purchasing units in a mutual fund instead of buying

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

their holdings as and when they want.

5. Simplicity – Investments in mutual fund is considered to be easy, compare to other

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.

6. 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.

7. Flexibility - Through features such as regular investment plans, regular withdrawal

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

their holdings as and when they want.

9. Simplicity – Investments in mutual fund is considered to be easy, compare to other

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.


1. Professional Management – Some funds doesn’t perform in neither the market, as

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 don’t 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 don’t 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


5. Professional Management – Some funds doesn’t perform in neither the market, as

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 don’t 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.

Mutual funds in India are open to investment by following investors: 2 2


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

2. Non Residents Including: a) Non residents Indians b) Overseas corporate bodies

3. Foreign entities: a) Foreign Institutional Investors registered with SEBI. Foreign citizens/entities are however now allowed to invest in India.

Government Securities Market (GSM):
One of the important sources of borrowing funds is the government securities market (GSM). The government raises short term and long term funds by issuing securities. These 2 2


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

Importance of the Government Securities:
GSM constitutes the principal segment of the debt market. It not only provides resources to the government for meeting its short term and long term needs but also acts as a benchmark for pricing corporate papers of varying maturities. The government securities issues are helpful in implements the fiscal policy of the government. It is critical in bringing about an effective and reliable transmission channels for the use of indirect instruments of monetary control. The working of the two of the major techniques of monetary control – Open Market Operations (OMOs) and Statutory Liquidity Ratio are closely connected with the dynamics of this market. Government securities provide the highest type of collateral for borrowing against their pledge. They have the highest degree of security of capital and the return on each security depends on the coupon rate and period of maturity. They are traded for both long and short term periods depending on the investment and liquidity preference of the investors. Switches between the short dated and long dated securities take place on the basis of difference in redemption yields.

Issuers, Investors, and Types of Government Securities:

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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.

Types of Government Securities:

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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 government’s 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 DFHI’s 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.

Re-discounting of commercial Bills:
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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.

Small Industries Development Bank of India:
In the field of financing of small scale industries in India, a separate apex development bank has started its operations from April 2, 1990. The small industries Development Bank of India (SIDBI) has been set up as an Act of parliament and the principal financial institution for promotion, financing and development of industry in the tiny and small scale sector. It coordinates the functions of other institutions engaged in similar activities. The SIDBI was established as a wholly-owned subsidiary of the Industrial Development bank of India. It has taken over IDBI’s financing activities relating to the small scale sector.The major activities undertaken by this bank are as follows: 1. Refinancing of term loans granted by banks and other eligible financial institutions, namely the state Financial Corporation and State industrial Development Corporations.
2. Direct discounting as well as re-discounting of bills arising out of sale of machinery. 3. Equity type assistance under national Equity Funds and by way of seed capital to

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


6. Share capital and resources support to factoring organizations.

Inter-Corporate Deposits (ICD):
An Inter-Corporate Deposit (ICD) is an unsecured borrowing by corporates and FIs from other corporate entities registered under the Companies Act 1956. The corporate having surplus funds would lend to another corporate in need of funds. This lending would be an uncollateralized basis and hence a higher rate of interest would be demanded by the lender. The short term credit rating of the corporate would determine the rate at which the corporate would be able to borrow funds. Further the credit spreads demanded even for the top rated corporates would be higher than similar rated banks and the rates on ICDs would higher than those in the Certificate of Deposit (CD) market. The tenor of ICD may range from 1 day to 1 year, but the most common tenor of borrowing is for 90 days. Primary Dealers are only permitted to borrow in the ICD market. The borrowing under ICD is restricted to 50% of the Net Owned Funds and the minimum tenor of borrowing is for 7 days.

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.

Questionnaire For Indian Money Market
Name: Age: Contact No. Gender: Profession:

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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

8) Is recession had affected your investment decision? □ Yes □ No

Sampling objective: to find out individual investors for the age group of 18 -55 years. Sampling area: Mumbai

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Particulars Deposits in Banks Investment in Real Estate Investment in Capital Market

No. of investors 13 07


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Investment in Money Market


Investment of Savings
Investment in Money Market 23%

Deposits in Banks 32%

Investment in Capital Market 27%

Investment in Real Estate 18% Investment in Real Estate Investment in Money Market

Deposits in Banks Investment in Capital Market

The above pie diagram show how the pattern of investment of saving by individual investors in various field of investment

Risk Involvement Low Average Medium High

No. of Investors 03 05 15 17

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R isk Involvement

High 42%

Low 8%

Average 13%

Medium 37%


Average Medium High

Recommendation on Indian Money Market by RBI:
Financial sector reforms and monetary policy measures the governor announced certain structural and other policy recommendation to strengthen and rationalise the functioning of money market.

1) Call/Notice Money Market:

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

Asset-backed CP should be introduced in the Indian market.

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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.




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• • • • • statistical supplement/various

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