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7.2 Participants in Money Market
7.3 Reserve Bank oI India
7.3.1 Interim Liquidity Adjustment Facility
7.3.2 Liquidity Adjustment Facility
7.4 Money at Call and Short Notice
7.4.1 Move towards Pure Inter Bank Call Money Market
7.5 Treasury Bills
7.5.1 Discount and Finance House oI India and Treasury Rills
7.5.2 Commercial Bills oI Exchange
7.6 CertiIicates oI Deposits i
7.7 Commercial Paper
7.8 Let Us Sum Up
7.9 Key Words
7.10 Some UseIul Books
7.11 AnswersIHints to Check Your Progress
This unit deals with the money market in India-its
participants and instruments. AIter going through this
Unit, you will be able to
' Explain the meaning and signiIicance oI the money market,
Describe nature and mechanism oI various instruments
used in the money market, and
Discuss role oI the regulator-Reserve Bank oI India, over
> the money market.
0 have learned in the previous Units that the Iinancial
market plays a very important role in the econoniy oI a
country. These markets are broadly classiIied into two
categories namely, Money Market and Capital Market,
primarily based on the duiation Ior which dealing in Iunds
are transacted. In this Unit, we will discuss the money
rnarket in India. The Capital Market will be taken up i11 the
next Unit. Money Market is the market Ior short-term Iunds,
generally ranging Irom overnight to a year. It helps in
meeting the short-term and very short-term requirements oI
banks, Iinancial institutions, Iirms, companies and also the
Government. On the other hand, thc surplus Iunds Ior
short periods, with' e individuals and other savers, are
inobilised through the harket and made available to the
Banking System and
aIoresaid entities Ior utilisation by them. Thus, the money
market provides a mechanism Ior evening out short-term
liquidity imbalances within an economy. The development
oI the money market is, thus, a prerequisite Ior the growth
and development oI the economy oI a country.
7.2 PARTICIPANTS IN MONEY MARKET
The major participants who supply the Iunds and demand
the same in the money market are as Iollows:
i) Reserve Bank of Inda: Reserve Bank oI India is the
regulator over the money market in India. As the Central
Bank, it injects liquidity in the banking system, when it is
deIicient and contracts the same in opposite situation.
ii) Banks: Commercial Banks and the Co-operative Banks are
the major participants in the Indian money markat. They
mobilise the savings oI the people through acceptance oI
deposits and lend it to business houses Ior their shortterm
working capital requirements. While a portion oI these
deposits is invested in medium and long-term Government
securities and corporate shares and bonds, they provide
short-term Iunds to the Government by investing in the
Treasury Bills. They employ the short-term surpluses in
various money market instruments.
iii) Dscount and Fnance House of Inda Ltd. (DFHI): DFHI
deals both ways in the money market instruments. Hence,
it has helped in the growth oI secondary market, as well as
those oI the money market instruments.
iv) Fnancal and Investment Insttutons: These institutions
(eg. LIC, UTI, GIC, Development Banks, etc.) have been
allowed to participate in the call money market as lenders
; Corporates: Companies create demand Ior Iunds Irom the
banking system. They raise short-term Iunds directly Irom
the money market by issuing commercial paper. Moreover,
they accept public deposits and also indulge in intercorporate
deposits and investments.
v) Mutual Funds: Mutual Iunds also invest their surplus Iunds
in variou~ money market instruments Ior short periods.
They are also permitted to participate in the Call Money
Market. Money Market Mutual Funds have been set up
speciIically Ior the purpose oI mobilisation oI short-term
Iunds Ior investment in money market instruments.
7.3 RESERVE OF INDIA
As the Central Bank oI the countw, the Reserve Bank oI
India plays a very signiIicant role in the Indian Money
Market. The various tasks being perIormed by the Reserve
Bank have been explained in Unit Let us recall that Reserve Bank is the banker to the banks
and Central and
State Governments. It manage9 the liquidity in the money
market by granting reIinance Iacilities to the banks and by
stipulating the reserve requirements. Cas Reserve Rato
(CRR) and Statutory L6udty Re6urements (SLR) are
the prihcipal tools to aIIect the liquidity with the banks.
when the banking system has excess liquidity, Reserve
Bank oI India raises the Cas Reserve Rato (CRR) and
thus, impounds the surplus liquidity and vice-versa.
Statutory Liquidity requirement is raised to divert bank
Iunds mainly to Government and other approved securities
and thereby reducing liquidity with banks.
Reserve Bank oI India has been providing in the past
reIinance Iacilities to the banks through diIIerent schemes,
which were in operation Irom time to time. The Narsmam
Commttee on Bankng Sector Reforms, 1998 recommended
that the Reserve Bank oI India should provide
support to the market through a Liquidity Adjustment Facility
(LAF). Reserve Bank oI India accordingly introduced LAF
eIIective Irom June 5, 2000, which was preceded by interim
liquidity Iacility, w.e.I. April, 1997.
7.3.1 Interm M6udty Adjustment Faclty
Under the ILAF Iacility, liquidity was managed through a combination oC
ii) Export credit reIinance
iii) Collateralised lending Iacilities
iv) Open market operations at set rate oI interest
Repo is a method oI borrowing against certain securities Ior
a short period. The borrower undertakes a commitment to
purchase back (or to take back) the same securities aIter
the speciIied period at a pre-determined price. The diIIerence
between the two prices is treated as interest on tbe amount
E Reserve Repo s the opposite practice wherein the lender
lends against the securities with the commitment to take
back the securities Irom the borrower against payment at a
speciIied price. Thus by reverse repos the Reserve Bank
ccntracts liquidity Irom the system.
I Colateralaed Lendng Faclty: Under this Iacility, banks
Mone = Market
Bankng System and were provided Iunds upto 0.25º oI their Iortnightly average
Money Market outstanding aggregate deposits in 1997-98. This Iacilib
was available Ior two weeks at the Bank rate. An Addtonal
Collateralsed Lendng Faclty (ACLF) Ior an equivalent
amount at the Bank rate plus 2º was also made available
to banks. These Iunds.could be utilised beyond two weeks
at a penal rate oI 2.0º. Similarly, Primary Dealers were
provided Level I Liquidity Support (equal to CLF Ior banks)
against collateral of Government securtes Ior period upto
90 days. They were also provided Additional Level I1 Liquidity
Suppart (equal to ACLF) at Bank rate plus 2º Ior a period
up to two weeks at a time. Thus, the Reserve Bank managed
liquidity under the Interim Liquidity Adjustment Facility
which was later on converted into Iull-Iledged Liquidity
7.3.2 L6udty Adjustment Faclty F
This Iacility was introduced with eIIect Irom June 5, 2000
and will be completed in three phases as Iollows:
1) The ACLF Ior banks and Level I1 liquidity support to Primary ~ealer sa, s stated above,
have been replaced by variable
reverse repo auctions. The -Iixed rate rep0 has been replaced
9 by variable rate rep0 auctions.
2) In the second stage, CLF Ior banks and Level I support to
Primary Dealers will be replaced by .variable rate reverse
3) In the third stage the LAF will be operated at diIIerent timings
oI the s h e day, iI necessary.
Thus, aIter the second stage, repos and reverse repos,
together with open market operations, will become the main
instruments oI aIIecting liquidity in the system.
At present repolreverse repa auctions are conducted on
a daily basis except Saturdays with a tenor oI one 'day
except on Fridays and days preceding the holidays. Bids
are invited by Reserve Bank oI India which are accepted
either wholly or partially.
1nterest.rates in respect oI both repos and reverse repos are
decided through cut oII rates emerging Irom auctions on
uniIorm price basis. In August 2000, rep0 auctions oI tenor
between 3 to 7 days were also introduced.
When market liquidity happens to be easy, there are heavy
bids at the Reserve Bank's repos auctions. Repo rate is
an overnight rate. In the beginning oI March 2002, Reserve
Bank oI India reduced the cut oII rate Ior one-day rep0
auctions Irom 6.5º to 6º. Thus, rep0 rate is considered as
the Iloor rate Ior the call rates. It was Iurther reduced to
5.75º w.e.I. 27 June, 2002.
Reserve Bank oI India inIuses liquidity by accepting bids at money Market
the Reverse Repo auctions. The chieI advantage oI the system n Inda
oI LAF is the quantum oI adjustment and also the rates oI
interest would be Ilexible depending upon the needs oI the
system. Moreover, Iunds lent by Reserve Bank oI India
under this Iacility are intended to meet primarily the dayto-
day liquidity mis-match in the system and will not be
permitted to be used Ior meeting the normal Iinancing
requirements oI the banks and other institutions.
Ceck 4ur Progress 1
1) What do you understand'by Money Market? Who are the
major participants in this Market?
What are the salient Ieatures and eigniIicance oI the
Liquidity Adjustments Facility implemented by the Reserve
~ a n k " oIIn dia? _
3) Distinguish between:
(i) Money Market and Capital Market
(ii) Repos and Reverse Repos
7.4 MONEY % CALL SHORT NOTICE'
Market at call and short notice is an important constituent
oI the money market. It deals with short-term Iunds repayable
at call or at a short notice. Initially the commercial banks
used to be the participants in this market. Hence, this
market was called the Inter Bank Call Money Market. The
necessity Ior such inter-bank borrowings arise because some
banks Ieel the need Ior short-term liquidity at a certain
time, while other banks have surplus liquidity at that time
which they can spare Ior a short period, e.g. a day or a Iew
days, and thereby, they intend to earn income.
During the last two decades, the Reserve Bank oI India has
permitted Other Iinancial institutions also to participate in
the ~ a lMi o ney Market, but only as lenders. Such institutions
:--1---1- % :r % _ _ 3 _ C % I . 9 - f
and ~ r h s ot I India, the General Insurance Corporation oI India,
the Industrial Development Bank oI India, the National Bank
Ior Agriculture and Rural Development, and Mutual Funds.
Further, the Reserve Bank oI India also permitted all such
entjtieg which have bulk lendable resources and not having
outstanding borrowings Irom banks, to lend in the Call
Money Market through Primary Dealers. The Discount and
Finance House oI India plays a very signiIicant role in the
Call Money Market and participates both aa a lender and a
borrower. Its leading role in this market may be gauzed only
by the Iact that its aggregate lending in the Call, Notice and
Term Money Market amounted to Rs. 6,57,094 crore during
2000-01 and Rs. 6,77,922 crore during the previous year.
It oIIers two ratea-Bid Rate and OIIer Rate with a small
diIIerence between the two. For example as on 2gth November,
200 1 its bid rate was 6,7096, while the oIIer rate was 6.40°.
Till May 1984 the Call rates were administered by Indian
Banks' Association by imposing a ceiling rate. Since then,
it is now determined by the demand Ior and supply oI
bankable Iunds in the market. The Call rates are very volatile
in behaviour-they shoot up when there is dearth oI liquidity
and ease with abundant supply oI Iunds. This is the case
with the Call lending rates announced by the Discount and
Finance House oI India Ltd also. For example, during the
year 2000-01 the minimum rate touched the level oI 0.50°
during the Iortnight ended on 20th April 2000 and the
maximum rate went up to 35° during the Iortnight ended
2gth June, 2000.
7.4.1 Move Towards Pure Inter-Bank Call 4n0
As we have already noted above, several non-bank entities
such as Iinancial institutions and corporates (which lerd in
the call money market through Primary Dealers) were
permitted to lend in the call/notice money market. Accepting
the recommendation oI the Narasimham Committee 11,
Reserve Bank oI India has decided to move towards a pure
inter-bank (including Primary Dealers) call/notice money
market. In its credit policy oI April 2001, Reserve Bank oI
India announced the steps to gradually phase out these
institutions. Permission to corporates to route their call
transactions through Primary Dealers was given upto June
30, 200 1. Non-bank institutions are required 94 gradually
reduce their participation in call market in Iour stages.
With eIIect Irom May 5, 2001 non-banks have been allowed
to lend upto 85° oI their average daily lending in call
market during 2000-0 1. Their participation will be reduced
to 70°/b, 40° 10° and 0° oI their average daily lending
during 26100-01 with eIIect Irom the dates to be Iixed by
Reserve Bank. The exclusion oI the non-banks Irom the call
money market is expected to reduce the volatility in the
market. Instead, it is intended to develop the reps-market
so that the non-banks can park their excess Iunds there.
In its credit policy announced on April 29, 2002, Reserve
Bank oI India decided to reduce banksJ relance on call/
notice money market. For this purpose, the Iollowing limits
i) Sceduled Commercal Banks' daly lendng in the Call/
notice money market will be restricted to 25° oI their owned
Iunds as at the end oI March oI the previous Iinancial year.
ii) Their daily borrowings in the call/notice money market will
be restricted to 100° oI their owned Iunds or 2° oI their
aggregate deposits at the end oI March oI the previous
Iinancial year, whichever is higher. This will be
implemented by August, 2002.
7 TR-EASURY BILLS
A Treasury Bill is an instrument Ior short-term borrowing
by the Government oI India. It is issued by the Reserve
Bank oI India on behalI oI the Government oI India in the
Iorm oI a promissory note. The necessity Ior issuing treasury
bills .arises because oI the periodic nature oI receipts oI
Government while the Government expenditure is on a
continuing basis. Taxes are payable to the Government
aIter quarterly intervals or so, but Government has to meet
its expenditure on daily or monthly basis. Thus, to bridge
this mis-match between the timings oI Government receipts
and expenditure, Government borrows money on short-term
basis by issuing Treasury Bills.
The Treasury Bills are issued Ior diIIerent maturity periods.
Till May 14, 2001, the maturity periods were 14 days, 91
days,. 182 days and 365 days. But with eIIect Irom May 14,
2001 auctions oI 14 days and 182 days Treasury Bills have
been discontinued. The Treasury Bills are sold through
auctions. While auctions oI 91 days Treasury Bills take
place on a weekly basis, the auctions Ior 364,days Treasury
Bills are held on a Iortnightly basis. The Reserve Bank oI
India also notiIies the amounts in respect oI the Treasury
Bill auctions. The notiIied amounts Ior 14 days, 91 days
Treasury Bills auctions are Rs. 100 crores each. The notiIied
amount Ior 364 day Treasury Bills was raised Irom Rs. 500
crores to Rs. 750 crores during 2000-01 and has been
Iurther raised to Rs. 1000 crores Ior auctions to be held
Out oI the bids received by it, the Reserve Bank oI India
accepts bids upto the notiIied amount aIter determining its
cut-oII rate. The bids may be accepted Ior a lower amount
also. In such cases, the rest oI the amount,(i.e. unsubscribe
Bankng System and amount) devolves on the Reserve Bank oI India. On the
Money Market basis oI the cut-oII price, a yield on the Treasury bill is
calculated. For example, i'n the auction Ior day Treasury
Bills held on 26& Dec., 2000 bids were received but only
5 were accepted Ior Rs. 0 crore at the cut-oII price oI Rs.
996' giving a yield oI which was equal to the yield
in previous auction. Thus, Rs. 0 croqes were devolved on
the Reserve Bank oI India. The yield on Treasury Bills
depends upon the price at the cut oII level. There has been
signiIicant drop in the yield on Treasury Bills in the Financial
Year 20002 as shown in the Table below:
Yeld 4n Treasury Blls
364 days Bll 91 days Bll
Mont 2000-01 2001-02 2000-01 2001-02
April 92 05 06
M ~ Y 95 6 65
June 92 9 26
August 0 1 22 029 69
September 05 2 0 0
October 06 05 96 66
November 05 65 90 6
December 002 90 69
$4urc0: Ec4n42ic $ur;0 200 1:02
7.5.1, Dscount and Fnance House of Inda
and Treasury Blls
DsCount and ~nace'Houseo f Inda (DFHI) was set-up by
the Reserve Bank oI India jointly with public sector banks
and All-India Fipancial Institutions. It was incorporated on
March 9 under the Companies Act, 956 and
commenced its business operatians Irom April 25 9
The main objective oI establishing DFHI was "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." DFHI has a share capital oI '
Rs. 200 crores which has been subscribed by Reserve Bank
oI India, public sector banks and Financial Institutions.
The activities oI DFHI include the Iollowing:
a) Dealng n Treasury Bll: Treasury Bills are issued by the
Reserve Bank oI India on behalI oI the Government oI India.
$ DFHI regularly participates in the auctions through which
these Treasury bills are sold. DFHI provides a ready market Money Market
Ior these Treasury Bills' by oIIering buylsell quotes. n Inda'
b) Re-dscountng sort-term commercal blls: DFHI aims
to impart liquidity to commercial bills, which have already
been discounted by commercial banks or Financial
Institutions. For this purpose, it wnounces its bid and rediscount
rates on a Iortnightly basis.
c) Partcpatng n te Inter-Bank call money, notce money
and term depost market: DFHI has been permitted by the
Reserve Bank oI India to operate in the inter-bank call
money market both as a lender and borrower oI Iunds
ranging Irom overnight money to money Ior 14 days.
d) Dealng n Commercal Papers, Certfcates of Deposts
and Government Securtes: DFHI oIIers its bid rates in
respect oI Commercial Papers and CertiIicates i I Deposit.
The Bid rate is the discount rate at which DFHI is ready to
buy CDs/CPs Irom the market. DFHI also participates in
auctions oI Government dated securities.
Discount and Finance House oI India Ltd. provrdes liquidiw
in the money 'market by dealing in the money market
instruments, including Treasury Bills. It deals in Treasury j
Bills in the primary market and secondgry market as well. '
The Iollowing table shows the Iigure oI its turnover oI such
bills during the Iinancial year 2000-01:.
Table: 7.2 DFHI's Turnover n Treasury Blls
(A) prmary Market Turnover 2410.98
(i) Purchase at auctions 2 186.43
(ii) Maturities 224.55
(B) Se.condary Market Turnover 22082.08
(i) Outright 3946.52
(ii) Repos. 18135.56
Total Turnover (A B) ' 2449.06
DFHI participates in all auctions oI treasury bills and a
minimbm bidding commitment Ior each treasury bills auction '
is prescribed. During 2000-01 the extent oI minimum
commitment was Iixed at 18° as against 15° Ior the previous
year. During 2000-01 DFHI achieved a success rateboI 42.11°
much above the prescribed minimum. DFHI also earned
I underwrite Iee on Treasury sills during the year. But with
eIIect Irom June 2000, Reserve Bank oI India has
discontinued the practise oI payment oI this Iee..
Bankng System and
DFHI's turliover (i.e. p~i rchasea nd, sale) in Treasury Bills in
the Secondary Market comprises both oil outright basis and
on rep0 basis. The Repos imply sale/purchase oI Treasury
Bills on the condition that the b~yers/sellers wil! sell or
buy the Treasury bills Irom the Discount House on a predetermined
price in the coming days. Discount House oI
India provides two-way quotes Ior this purpose--one Ior bids
and the other Ior oIIer. These rates were 6.9°) and 6.85°
respectively as on 30"' November, 200 1 indicrlting a very
small diIIerence between the two.
0ck Your Progress 2
1) What do you understand by Call Money Market?
2) Why are Treasury Bills issued and by whom?
3) Discuss the role oI Discount and Finance House oI India
developing a Secondary Market Ior Treasury Bills.
7.5.2 4220rciaI iIIs 4f Excang0
Commercial Bills oI Exchange arise out oI genuine trade
transactions and are drawn by the seller oI the goods on the
bqyers (i.e. debtors), where goods are sold on credit. They
are called 'Demand Bills', when payable on demand or on
presentment beIore the buyer, who is called the 'drawee' oI
the bill. Alternatively, the bills may be payable aIter a
speciIied period oI time, e.g. 30, 60 or 90 days. Such bills
' are called 'Usance BillsJ and need acceptance by the drawee.
By accepting the bills, the drawee gives his consent to make
payment oI the bills on the due date. Thus, payment oI the
bills is assured on the dates oI maturity. These bills are,
thereIore, called selI-liquidating in nature.
The drawee or the bill (i.e. the seller oI the goods) generally
discounts the bill with a commercial bank. By discounting
is meant that the bill is endorsed in Iavour oI t.he banker,
who makes payment oI the amount oI the bill less discount
( i . ~i.n terest on the amount Ior the period oI the bill) to the
drawee. Thus, the drawee gets payment oI the bill (lcss
discount) immediately. The discounting banker, however,
recovers the money Irom the acceptor oI the bill on the due
date oI the bill. The bill is thereaIter extinguished.
Commercial Bill oI Exchange is a negotiable instrument i.e.
it may be negotiated (or endorsedltransIerred) any number
oI times till its maturity. When the discounting bank Ialls
short oI liquidity, it may negotiate the bill in Iavour oI any
other banklIinancial institution or the Reserve Bank oI
India and may receive payment oI the bill less re-discounting
charges (i.e. interest Ior the unexpired period oI the bill).
This process is called re-discounting oI Commercial Bills
and may be undertaken several times, till the date oI
maturity oI the bill.
The Reserve Bank oI India introduced a Bills Re-discounting
Scheme in 1970. Under this scheme bills are re-discounted
by Reserve Bank oI India or by any scheduled bank/Iinancial
institution/investment instit~tion/mutual Iund. But
important pre-conditions are that the bill should arise out
oI a genuine trade transaction, must be accepted by the
buyer's banker either singly or jointly with him and the
period oI maturity should not exceed 90 days.
Commercial bill oI exchange, thus, is an instrument through
which the bankslIinancial institutions/mutual Iunds may
park their surplus Iunds Ior a shorter period as they can
idIord. Thus liquidity imbalances in the Iinancial system are
8 removed or minimised. Reserve Bank oI India has taken
several steps in the past, but the practice oI drawing bills
has not become very popular in India. The obvious reason
is the strict discipline that it imposes on the acceptor oI the
bill to make payment oI the bill on the due date. Bills
purchased and discounted by Scheduled Commercial Banks
in India as on March 31, 2001 constituted just 3.88° oI
their total assets (i.e. Rs. 50224 crores). Rut the outstanding
amount oI commercial bills re-discounted by them with
various Iinancial institutions was Rs. 1013 crores as on the
same date. This shows that bills re-discounting with other
Iinancial institutions is to a limited extent only.
7.6 CERTIFICATES OF DEPOSITS
CertiIicate oI Deposit is a receipt Ior a deposit oI money
with a bank or a Iinancial institution. It diIIers Irom a Iixed
Deposit Receipt in two respects. First, it is issued Ior a big
amount and second, it is Ireely negotiable. The Reserve
Bank oI India announced the scheme oI CertiIicates oI
Deposit in March 1989. The main Ieatures oI 90 scheme
are as Iollows:
i) CertiIicate oI Deposits can be issued by Scheduled
Commercial Banks (excluding Regional Rural Banks) and
the speciIied All-India Financial Institutions like Industrial
Bankng System and Development Bank oI India (IDBI), Industrial Finance
Money Market Corporation oI lndia (IFCI), Industrial Credit and Investment
Corporation oI lndia (ICICI), Small Industries Development
Bank oI India (SIDBI), Industrial Investment Bank oI India
(IDBI), and the Export Import Bank oI India (Exim Bank)).
ii) CertiIicates oI Deposits can be issued to Individuals,
Associations, Companies and Trust Funds.
iii) CertiIicates oI Deposits are Ireely transIerable by
endorsement and delivery aIter an initial lock-in period oI
15 days aIter which they may be sold to any oI the above
participants or to the Discount and Finance House oI India
iv) The maturity period oI CertiIicate oI Deposits issued by
Banks may range Irom 3 months to 12 months while those
issued by speciIied Financial Institutions may range Irom 1
to 3 years.
v) CertiIicate oI Deposits are to be issued at a discount to
the Iace value.
vi) Presently there is no limit on the amount which a Bank
may raise through CertiIicate oI Deposits. Initially,
though, there waa a limit linked ts the Iortnightly
aggt-egate average deposits oI the bank.
vii) The minimum amount Ior which they may be issued is
now pegged at Rs. 5 Lacs. (Reduced Irom #s. 25 Lacs).
viii) The minimum size oI issue oI CertiIicate oI Deposits to
a single investor is Rs. 5 Lacs, theieaIter they can be
issued in multiples oI Rs. 1 Lac, (with eIIect Irom October
ix) Banks and Financial Institutions are required to issue
CDa only in dematerialiaed Iorm with eIIect Irom ·June
30, 2002. Tllc existing CDs are to be converted into
demat Iorms by October 2002.
CertiIicate oI Deposits are a popular avenue Ior companies
to invest their short-term surpluses because CertiIicate oI
Deposits oIIer 3 risk-Iree investment opportunity at rates oI
interest higher than Treasury bills and term deposits, beaides
being Iairly liquid. For the Issuing Banks, CertiIicate of
Deposits provide another source oI mobilizing Iunds in bulk.
The outstanding amount oI CertiIicate oI Deposits oI
scheduled commercial banks declined perceptibly to a level
oI Rs. 12,134 croree Ior the Iortnight ended March 28, 19-97
Irom #s. 16,316 crores Ior the Iortnight ended March 29,
1996. Due lo lack oI demand Ior Iunds and the general
decline in the interest rates, the discount rates range on
CertiIicate oI Deposits declined substantially Irom 12.00-
22.25° Ior the Iortnight ended March 29, 1996 to 7.00-
15.75° Ior the Iartnight ended March 28, 1997 and Iurther
to 7.30- 12 -50° Ior the Iortnight ended September 12, f 997.
In subsequent years, the total amount oI outstarlding CDs
has been continuously on the decline. The amount oI such
CDs declined Irom Rs. 14,584 crores during the Iortnight
ending May 5, 2000. ThereaIter there has been a slight
revival in the amount oI outstanding CDs, when the Iigure
touches Rs. 1,695 crores on October 20, 2000. The eIIective
rate oI interest on CDs has also witnessed sharp decline
Ii-om 8.25 to 24° to 6.30° to 14.06° range during this
77 COMMERCIAL PAPER
Commercial Paper is a short-term usance promissory note
with Iixed maturity, issued by creditworthy and highly rated
corporations. It is negotiable by endorsement and delivery.
The Reserve Bank oI India permitted its introduction in
January 1990 as an additional source oI short-term Iinance
to corporates and also as an avenue Ior investment oI Iunds
by large investors.
Re s e r~eB ank oI India has issued guidelines Ior issuance oI
commercial paper. These guidelines, as amended in October,
2000 have the Iollowing Ieatures:
i) Elgblty: Commercial Paper may be issued by Primary
' Dealers, Secondary Dealers and All India Financial
Institutions, besides the corporates.
The eligibility conditions prescribed Ior the corporates are:
a) Tangible net worth should be Rs. 4 crores,
b) It should have a sanctioned working Capital limit Irom a
bank or Iinancial institution, and
c) The borrowed account should be a standard asset.
ii) Te Instrument sf Commercal Paper oould ave:
a) A minimum maturity period oI 15 days and the
maximum period uptu one year.
b) A minimum amount oI Rs. 5 lakhs and thereaIter in its
c) Minimum credit rating oI P, oI CRISIL or equivalent rating
by ather approved credit rating agencies.
iii) Te Investors n ~ommercPl aper: CPs can be held by
individual banks, corporates, unincorporated bodies, Non-
Resident Indians and Ioreign Iinancial institutions.
Bankng $s902 and '
iv) Metods of Issung Commercal Paper: Only Scheduled
Banks can act as issuing and paying agents. CPs can be
issued as a promissory note or in a dematerialised Iorm.
With eIIect Irom June 30, 2001, it is mandatory that all
Iresh issuance and investments in CPs should be in
dematerialised Iorm. Existing CPs were also required to be
converted into demat Iorm by October 3 1,200 1. Underwrit
is not permitted.
CPs are issued at a discount to Iace value. Discount rate is
Ireely determined by the issuing company. CPs are Ireely
transIerable. The issuing company bearseal1 expenses, e.g.
dealers' Iees, rating agency's Iees and other charges.
CPs are required to be issued as a 'Stand alone' product. I t
means that while the banks and Iinancial institutions fix
' working capital limits Ior the Corporates issuing CPs, they
will take into account all sources oI Iinance available to the
Company, including the CPs.
Commercal Paper n Inda
issuance oI Commercial Paper by (the eligible corporates has
now become an established practise because oI its lower
cost. Total outstanding amounts oI CPs ranged between Rs.
5000 crores and Rs. 8000 crores during January 1999 and
July 2001. The typical eIIective rates oI discount ranged
between 8° to 12° during this period and varied Irom time
Scheduled Commercial Banks have been the predominant
investors in CPs and their outstanding holding was Rs.
6,984 crores as on 23rd March, 2001 (as against the total
~ut s tandinga mount oI Rs. 6,99 1 crores as on 15.3.2001)
Ceck Your Progress 3
State the pre-condition Ior re-discounting a Commercial
Bill by RBI under Re discounting Scheme, 1970.
2) What are CertiIicates oI Deposits? How do they diIIer Irom
Iuted deposits in banks?
3) What do you understand by Commercial Paper? Give the
salient Ieatures oI the guidelines issued by Reserve. Bank 9
oI India in this regard.
7.8 E% U$ $U UP
The Iinancial markets play a signiIicant role in the economy
oI a country. These markpts are oI two types: Money Market
and Capital Market. Money Market deals in short-term Iunds
upto the period oI one-year. Commercialwnd Co-operative
Banks, Discount and Finance House oI India Ltd., Iinancial
and investment iristitutions, Reserve Bank bI India, corporates
and Mutual Funds participate in the money market. As a
Central Bank, Reserve Bank oI India perIorms various tasks
including the eIIective regulation oI Iinancial institutions. It
provides reIinance Iacilities to the banks through the schemes
like Interim Liquidity Adjustment Facility (ILAF) and Liquidity
Adjustment Facility (LAF). Call Money Market and Short
Notice Money Market are important constituents oI the
Earlier several non-bank entities such as Iinancial
institutions and selected corporates were permitted to lend
directly in the call/notice money market. However, with a
view to reduce the volatility in the market, RBI has taken
steps to reduce the participation oI non-bank institutions in
the Call Money Market. Treasury Bills, Commercial Bills oI
Exchange, CertiIicates oI Deposit, Commercial Paper are the '
important instruments Ior short-term borrowings in the
7.9 E WO#$
Call Money Market
This Iacility is in addition to the
collateralised lending Iacility. It is
granted at Bank rate plus
This is the market Ior short-term
Iunds, generally Ior one-day or a
Iew days. Banks lend their shortterm
surplus Iunds in this market
to other banks. Other institutions
also participate as lenders only.
It is a receipt Ior deposits made
with a bank or Iinancial institutiun.
It is Ireely transIerable instrument.
~ o n e yM arket
Bankng Syatem and
Collateralsed Under this Iacility, Reserve ank oI
Lendng Faclty India provided Iunds to the Commercial
Banks upto 0.25° oI their
Iortnightly average outstanding
deposits in 999 Such Iacility
was granted Ior two weeks at Bank
Commercal Paper It is an unseamed short-terxn debt
instrument issued by credit worthy
corporates and Iinancial iustitutions.
Its maturity ranges bel-wcen
15 days and one year. I t is
L6bdty Adjustment At present Reserve Bank oI India
Faclty (LAF) manages liquidity in the economy
through the repo and reverse repo
auctions under the l.,iquidity
Adjustment Facility. It absorbs
liquidity Irom the sys tern through
repos and release Iunds tlirough
Money Market Instruments through which Iunds
Instruments are transacted Ior sl~ort-tern1p eriod
in the money rnarket are cailcd
money markzt instruments Ior
example, certiIi~ates oI deposits,
commercial papers, bills oI excl~ange.
Refnance Facltes The Reserve Rank oI I r ~ida, 1 11.1,
SIDBI, NABARD arid lrn Bank
provides loans to banks ,9 nst the
loans granted by them. Such loans
Repo Auctons Repo is the right to repurchase
the security. Under 7.54 aucliotls
the borrower retains ~ h cri gllt to
take back the securily by repaying
the borrowed amount. Ullclcr repo
auctions Reserve Bank oI India
sclls the securities and thus,
coiltracts liquidity, whercvcx there
is excess liquiclity.
Treasury Blls These are instruments Ior shortterm
borrowings by Governl~lel9 i oI
India and are issucd on ls t ) u l ~ ; i l i
by Reserve Bank oI India. At
present they are ssued by a9=c:i9o n
Ior 91 days and 305 clilys.
Varable Reverse Under the reverse rep0 auctions
Repo Auctons Reserve Bank oI India releases
Iunds in the system by buying
securities in the auction.
7.10 SOME USEFUL BOOKS
Bhole (3rd Edition, : Financial Institutions and
Markets, Tata McGraw Hill, Delhi.
P.N. Varshney & Mittal 9Edition, : Financial
System in India, Sultan Chand & Sons, Delhi.
Govt. oI India-Economic survey, 2000, 2001, 2002
Reserve Bank oI India-Annual Reports, 2000, 2001
Report oI the Working Group on Money Market (Chairman:
N. Vaghul), 1987
Report oI the Committee on Banking Sector ReIorms
(Chairman: M Narsimham), 1998
7.11 ANSWERS/HINTS TO CHECK YOUR
Ceck Your Progress 1
1) Money Market is the market khich deals in short-term Iunds
ranging Irom overnight to a year.
The major participants in the money market arem:
Commercial and Co-operative Banks, Discount and Finance
House oI India Ltd (DFHI), RBI, Financial and investment
institutes like LIC, UTI, GIC etc.
2) See Section 7.32
,3) i) Money Market is the market Ior short-term Iunds upto
one-year duration whereas capital market deals in longterm
ii) Repo is a method oI borrowing against certain securities
Ior a short period whereas reverse rep0 is a method oI
lending against the securities with the commitment to
take back the securities Irom the borrower against
payment at a speciIied price.
Ceck Your Progress 2
1) Market Ior money at call and short notice is knows as Call
2) The Treasury Bills are issued to bridge the mismatch
Banking System and
between the timings oI Government receipts and expenditure.
Treasury Bills are issued by RBI.
3) See Sub-section 7.5.1
Ceck Your Progress 3
1) i) The bill should arise out oI a genuine trade transaction.
ii) It must be accepted by the buyer's banker either singly
or jointly with him.
iii) Period oI maturity should not exceed 90 days.
CertiIicate oI Deposit can be deIined as a receipt Ior a deposit
oI money with a bank or a Iinancial institution. They diIIer
Irom Iixed deposits in two senses:
a) certiIicate oI deposit is issued Ior a big amount,
b) it is Ireely negotiable.
3) See Section 7.7
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