Arsh Advani - 1

Abhishek Dhariwal 8
Pooja Jain - 17
Priyanka
Majmundar - 32
Himanshu Sanghvi -

INDIAN MONEY
MARKET
MEANING OF MONEY MARKET
A money market is a market for borrowing and lending of short-term funds. It
deals in funds and financial instruments having a maturity period of one day
to one year. It is a mechanism through which short-term funds are loaned or
borrowed and through which a large part of financial transactions of a
particular country or of the world are cleared.
It is different from stock market. It is not a single market but a collection of
markets for several instruments like call money market, Commercial bill
market etc. The Reserve Bank of India is the most important constituent of
Indian money market. Thus RBI describes money market as the center for
dealings, mainly of a short-term character, in monetary assets, it meets the
short-term requirements of borrowers and provides liquidity or cash to
lenders.

PLAYERS OF MONEY MARKET

In money market transactions of large amount and high volume take place. It
is dominated by small number of large players. In money market the players
are:- Government, RBI, DFHI (Discount and finance House of India) Banks,
Mutual Funds, Corporate Investors, Provident Funds, PSUs (Public Sector
Undertakings), NBFCs (Non-Banking Finance Companies) etc.
The role and level of participation by each type of player differs from that of
others.

FEATURES OF MONEY MARKET

Money market is a market for short term funds meant for use for a period of
up to one year. Generally money market is the source of finance for working
capital. Transactions of money market include lending and borrowing of cash
for a short period of time and also sale and purchase of securities having one
year term or which gets redeemed (paid back) within one year period. Money
market is not a fixed geographical area but it constitutes all organizations

and institutions which deal with short term debts. The common institutes are
Reserve Bank of India, State Bank of India, other Commercial Banks, LIC, GIC,
UTI etc. Many of these institutions deal on telephone and fax only.
In the nations money market, loans have an original maturity of one year or
less. Money market loans are used to help corporations and governments
pay the wages and salaries of their workers, make repairs, purchase
inventories, pay dividends and taxes, and satisfy other short-term workingcapital needs. In this respect the money market stands in sharp contrast to
the capital market. The capital market deals in long-term credit that has over
a year to maturity and is usually used to finance capital investment projects
whereas the money market deals with the market for short-term credit.
Distinguishing features of money market are given below:
1. Constituents of Money Market:
Like other markets, money market also has three constituents: (a) It has
buyers and sellers in the form of borrowers and lenders, (b) It has a
commodity; it deals with short-maturity credit instruments, like commercial
bills, treasury bills, etc. (c) It has a price in the form of rate of interest which
is an item of cost to the borrower and return to the lender.
2. Heterogeneous Market:
The money market is not a single homogeneous market but consists of
several sub-markets, each market dealing with a specific short-term credit
instrument, e.g., call money market, trade bill market, etc. Thus, it is difficult
to talk about a general money market.
3. Dealers of Money Market:
The financial institutions in the money market meet the short-term needs of
the borrowers. The borrowers in the money market are traders,
manufactures, speculators, and even government institutions. The lenders in
the money market are commercial banks, central banks, non-bank financial
intermediaries, etc.
4. Short-term Loans:
Money market deals with short-term loans. In a money market, the borrowers
can obtain funds for periods varying from a day, a week, a month, or three to
six months.
5. Near-Money Assets:

Money market does not deal in money, but in short-term financial

instruments or near-money assets. These assets are relatively liquid and
readily marketable. The assets against which the funds can be borrowed in
the money market include short-term government securities, bills of
exchange, bankers' acceptances, etc.
6. Physical Contact Not Necessary:
Money market does not refer to a specific place where borrowers and lenders
meet each other. In fact, it is not necessary that the borrowers and lenders
should have personal contact with each other at a particular place. They may
carry on their negotiations through telephone or mail. Thus, money market
simply relates to the arrangement which establishes direct and indirect
contact between the borrowers and lenders.
7. Different from Capital Market:
Money market is different from capital market on the basis of maturity
period. Money market deals with the short-term lending and borrowing of
funds, while capital market deals with medium and long-term lending and
borrowing of funds.
8. Association with Big Cities:
Generally, money markets are associated with important places or localities.
Almost every big city has a money market. In this way, we have London
money market, New York money -market, Bombay money market, etc.
9. Change with Place and Time:
Though the functions of money markets in different countries are broadly the
same, the instruments, institutions and practices of these markets vary
considerably from country to country. Money markets also change with time.
For example, in London money market, bill of exchange used to be of great
importance. But, now because of change in business practices and the
growth of public debt, government treasury bills have become more
important.

OBJECTIVES OF MONEY MARKET

The broad objectives of the money market are threefold:
First, it should provide an equilibrating mechanism for evening out shortterm surpluses and deficits. Secondly, the money market should provide a
focal point for central bank intervention for influencing liquidity in the
economy. Thirdly, it should provide reasonable access to users of short-term

money to meet their requirements at a realistic price. To achieve these

objectives, the Reserve Bank has accorded prime attention to the
development of the money market as it is the key link in the transmission
mechanism of monetary policy to financial markets and finally, to the real
economy.
In the past, development of the money market was hindered by a system of
administered interest rates and lack of proper accounting and risk
management systems. With the initiation of reforms and the transition to
indirect, market-based instruments of monetary policy, the Reserve funk
made conscious efforts to develop an efficient, stable and liquid money
market by creating a favourable policy environment through appropriate
institutional changes, instruments, technologies and market practices.

The following are the important objectives of a money market:

1) To provide a parking place to employ short-term surplus funds.
2) To provide room for overcoming short-term deficits.
3) To enable the Central Bank to influence and regulate liquidity in the
economy through its intervention in this market.
4) To provide a reasonable access to users of Short-term funds to meet their
requirements quickly, adequately and at reasonable costs.

FUNCTIONS OF MONEY MARKET

A well-developed money market is essential for a modern economy. Though,
historically, money market has developed as a result of industrial and
commercial progress, it also has important role to play in the process of
industrialization and economic development of a country. Importance of a
developed money market and its various functions are discussed below:
1. Financing Trade:
Money Market plays crucial role in financing both internal as well as
international trade. Commercial finance is made available to the traders
through bills of exchange, which are discounted by the bill market. The
acceptance houses and discount markets help in financing foreign trade.
2. Financing Industry:

Money market contributes to the growth of industries in two ways:

(a) Money market helps the industries in securing short-term loans to meet
their working capital requirements through the system of finance bills,
commercial papers, etc.
(b) Industries generally need long-term loans, which are provided in the
capital market. However, capital market depends upon the nature of and the
conditions in the money market. The short-term interest rates of the money
market influence the long-term interest rates of the capital market. Thus,
money market indirectly helps the industries through its link with and
influence on long-term capital market.

3. Profitable Investment:
Money market enables the commercial banks to use their excess reserves in
profitable investment. The main objective of the commercial banks is to earn
income from its reserves as well as maintain liquidity to meet the uncertain
cash demand of the depositors. In the money market, the excess reserves of
the commercial banks are invested in near-money assets (e.g. short-term
bills of exchange) which are highly liquid and can be easily converted into
cash. Thus, the commercial banks earn profits without losing liquidity.
4. Self-Sufficiency of Commercial Bank:
Developed money market helps the commercial banks to become selfsufficient. In the situation of emergency, when the commercial banks have
scarcity of funds, they need not approach the central bank and borrow at a
higher interest rate. On the other hand, they can meet their requirements by
recalling their old short-run loans from the money market.
5. Help to Central Bank:
Though the central bank can function and influence the banking system in
the absence of a money market, the existence of a developed money market
smoothens the functioning and increases the efficiency of the central bank.
Money market helps the central bank in two ways:
(a) The short-run interest rates of the money market serves as an indicator of
the monetary and banking conditions in the country and, in this way, guide
the central bank to adopt an appropriate banking policy,

(b) The sensitive and integrated money market helps the central bank to
secure quick and widespread influence on the sub-markets, and thus achieve
effective implementation of its policy.

IMPORTANCE OF MONEY MARKET

If the money market is well developed and broad based in a country, it
greatly helps in the economic development of a country. The central bank
can use its monetary policy effectively and can bring desired changes in the
economy for the industrial and commercial progress in the country. The
importance of money market is given, in brief, as under:

1. Financing Industry:
A well-developed money market helps the industries to secure short term
loans for meeting their working capital requirements. It thus saves a number
of industrial units from becoming sick.
2. Financing trade:
An outward and a well-knit money market system play an important role in
financing the domestic as well as international trade. The traders can get
short term finance from banks by discounting bills of exchange. The
acceptance houses and discount market help in financing foreign trade.
3. Profitable investment:
The money market helps the commercial banks to earn profit by investing
their surplus funds in the purchase of. Treasury bills and bills of exchange,
these short term credit instruments are not only safe but also highly liquid.
The banks can easily convert them into cash at a short notice.
4. Self sufficiency of banks:
The money market is useful for the commercial banks themselves. If the
commercial banks are at any time in need of funds, they can meet their
requirements by recalling their old short term loans from the money market.
5. Effective implementation of monetary policy:

The well-developed money market helps the central bank in shaping and
controlling the flow of money in the country. The central bank mops up
excess short term liquidity through the sale of treasury bills and injects
liquidity by purchase of treasury bills.
6. Encourages economic growth:
If the money market is well organized, it safeguards the liquidity and safety
of financial asset. This encourages the twin functions of economic growth,
savings and investments.
7. Help to government:
The organized money market helps the government of a country to borrow
funds through the sale of Treasury bills at low rate of interest The
government thus would not go for deficit financing through the printing of
notes and issuing of more money which generally leads to rise in an increase
in general prices.
8. Proper allocation of resources:
In the money market, the demand for and supply of loan able funds are
brought at equilibrium. The savings of the community are converted into
investment which leads to pro allocation of resources in the country.

ADVANTAGES OF MONEY MARKETS

1) Money Markets exist to facilitate efficient transfer of short-term funds
between holders and borrowers of cash assets. For the lender/investor, it
provides a good return on their funds. For the borrower, it enables rapid and
relatively inexpensive acquisition of cash to cover short-term liabilities.
2) Money Markets are highly liquid instruments, in that you can withdraw
from them at any time, usually without any sort of interest penalty.
3) Money market accounts are one of the safest investment vehicles in which
to earn money. Many people use money market accounts to produce returns
during a downturn in the stock market and as an assurance that at least
some of their money is growing at a steady pace.
4) Money market funds allow easy access by individuals, which is an
advantage of these investment vehicles over the stock market, options
trading and other investments. Money market accounts can typically be
created through a local bank or financial institution.

DRAWBACKS OF THE INDIAN MONEY MARKET

Though the Indian money market is considered as the advanced money
market among developing countries, it still suffers from many drawbacks or
defects such as:
1) Absence of Integration: The Indian money market is broadly divided into
the Organized and Unorganized Sectors. The former comprises the legal
financial institutions backed by the RBI. The unorganized statement of it
includes various institutions such as indigenous bankers, village money
lenders, traders, etc. There is lack of proper integration between these two
segments.
2) Multiple rate of interest: In the Indian money market, especially the banks,
there exists too many rates of interests. These rates vary for lending,
borrowing, government activities, etc. Many rates of interests create
confusion among the investors.
3) Insufficient Funds or Resources: The Indian economy with its seasonal
structure faces frequent shortage of financial resource. Lower income, lower
savings, and lack of banking habits among people are some of the reasons
for it.
4) Shortage of Investment Instruments: In the Indian money market, various
investment instruments such as Treasury Bills, Commercial Bills, Certificate
of Deposits, Commercial Papers, etc. are used. But taking into account the
size of the population and market these instruments are inadequate.
5) Shortage of Commercial Bill: In India, as many banks keep large funds for
liquidity purpose, the use of the commercial bills is very limited. Similarly
since a large number of transactions are preferred in the cash form the scope
for commercial bills are limited.
6) Lack of Organized Banking System: In India even though we have a big
network of commercial banks, still the banking system suffers from major
weaknesses such as the NPA, huge losses and poor efficiency. The absence of
the organized banking system is major problem for Indian money market.

STRUCTURE
The entire money market in India can be divided into two parts. They are
organized money market and the unorganized money market. The

unorganized money market can also be known as an unauthorized money

market. Both of these components comprise several constituents.

TYPES OF MONEY MARKET INSTRUMENTS IN INDIA

Money market instruments are also called as debt securities. When the
maturity date is one year or less, the debt contracts are called as "money
market instruments" and they trade on the "money market." The money
market consists of individual investors and governments, corporations and
municipal borrowers. The instruments include treasury bills, commercial
paper, certificates of deposit and short-term or medium-term notes.
Money market instruments provide for borrowers' short-term needs and gives
needed liquidity to lenders. The types of money market instruments are
treasury bills, repurchase agreements, commercial papers, certificate of
deposit, and banker's acceptance.
Treasury Bills (T-Bills)
Treasury bills began being issued by the Indian government in 1917. They
are short-term instruments issued by the Reserve Bank of India. They are
one of the safest money market instruments because they are risk free, but
the returns from this instrument are not very large. The primary as well as
the secondary markets circulates this instrument. They have 3-month, 6month and 1-year maturity periods. T-bills are issued with a separate price
from their face value. The face value is achieved upon maturity, as is the
interest earned on the buy value. The buy value is set by a bidding process
in auctions. Treasury bills bare purchased for a price that is less than their
face value when they mature the government pays the holder the full face
value. Treasury bills are so popular among money market instrument
because of affordability to the individual investors. At present, the
Government of India issues three types of treasury bills through auctions,
namely, 91-day, 182-day and 364-day.
Repurchase Agreements
Repurchase agreements are also known as repos. They are short-term loans
that buyers and sellers agree to sell and repurchase. As of 1992, repo
transactions are allowed only between RBI-approved securities such as state
and central government securities, T-bills, PSU bonds, FI bonds and corporate
bonds. Repo is a form of overnight borrowing and is used by those who deal
in government securities. Repurchase agreements are sold by sellers with a
promise of purchasing them back at a given price and on a given date in the
future. The buyer will also purchase the securities and other instruments in

the repurchase agreement with a promise of selling them back to the seller.
The short term maturity and government backing usually means that repos
provide lenders with extremely low risk. Repos are safe collateral for loans.
Commercial Papers (CPs)
Commercial paper is a low-cost alternative to bank loans. It is a short term
unsecured promissory note issued by corporates and financial institutions at
a discounted value on face value. They are usually issued with fixed maturity
between one to 270 days and for financing of accounts receivables,
inventories and meeting short term liabilities. Say, for example, a company
has receivables of Rs 10 lacs with credit period 6 months. It will not be able
to liquidate its receivables before 6 months. The company is in need of
funds. It can issue commercial papers in form of unsecured promissory notes
at discount of 10% on face value of Rs 10 lacs to be matured after 6 months.
The company has strong credit rating and finds buyers easily. The company
is able to liquidate its receivables immediately and the buyer is able to earn
interest of Rs 1 lac over a period of 6 months. They yield higher returns as
compared to T-Bills as they are less secure in comparison to these bills;
however chances of default are almost negligible but are not zero risk
instruments.
Commercial paper being an instrument not backed by any collateral, only
firms with high quality credit ratings will find buyers easily without offering
any substantial discounts. They are issued by corporates to impart flexibility
in raising working capital resources at market determined rates. Commercial
Papers are actively traded in the secondary market since they are issued in
the form of promissory notes and are freely transferable in demat form.
Commercial Papers can be issued in denominations of Rs.5 lakh or multiples
thereof.

Corporates, primary dealers (PDs) and the All-India Financial Institutions (FIs)
are eligible to issue Commercial Papers. A corporate would be eligible to
issue CP provided

The tangible net worth of the company, as per the latest audited
balance sheet, is not less than Rs. 4 crore
Company has been sanctioned working capital limit by banks or allIndia financial institutions
The borrowal account of the company is classified as a Standard Asset
by the financing banks/institutions &
The company should have a minimum credit rating of A-2.

Certificate of Deposits (CDs)

It is a short term borrowing more like a bank term deposit account. It is a
promissory note issued by a bank in form of a certificate entitling the bearer
to receive interest. The certificate bears the maturity date, the fixed rate of
interest and the value. It can be issued in any denomination. They are
stamped and transferred by endorsement. Its term generally ranges from
three months to five years and restricts the holders to withdraw funds on
demand. However, on payment of certain penalty the money can be
withdrawn on demand also. The returns on certificate of deposits are higher
than T-Bills because it assumes higher level of risk. CDs can be issued by:
(i) Scheduled commercial banks {excluding Regional Rural Banks and Local
Area Banks}; and
(ii) Select All-India Financial Institutions (FIs) that have been permitted by RBI
to raise short-term resources within the umbrella limit fixed by RBI.
While buying Certificate of Deposit, return method should be seen. Returns
can be based on Annual Percentage Yield (APY) or Annual Percentage Rate
(APR). In APY, interest earned is based on compounded interest calculation.
However, in APR method, simple interest calculation is done to generate the
return. Accordingly, if the interest is paid annually, equal return is generated
by both APY and APR methods. However, if interest is paid more than once in
a year, it is beneficial to opt APY over APR. Minimum amount of a CD 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 multiples of Rs. 1 lakh
thereafter.
Advantages of Certificate of Deposit as a money market instrument:
1. Since one can know the returns from before, the certificates of deposits
are considered much safe.
2. One can earn more as compared to depositing money in savings account.

Disadvantages of Certificate of Deposit as a Money Market instrument:

1. As compared to other investments the returns is less.
2. The money is tied up along with the long maturity period of the Certificate
of Deposit. Huge penalties are paid if one gets out of it before maturity.
Bankers Acceptance
A banker's acceptance, or BA, is a promised future payment, or time draft,
which is accepted and guaranteed by a bank and drawn on a deposit at the

bank. The banker's acceptance specifies the amount of money, the date, and
the person to which the payment is due. After acceptance, the draft becomes
an unconditional liability of the bank. But the holder of the draft can sell
(exchange) it for cash at a discount to a buyer who is willing to wait until the
maturity date for the funds in the deposit.
A banker's acceptance starts as a time draft drawn on a bank deposit by a
bank's customer to pay money at a future date, typically within six months,
analogous to a post-dated check. Next, the bank accepts (guarantees)
payment to the holder of the draft, analogous to a post-dated check drawn
on a deposit with over-draft protection.
The party that holds the banker's acceptance may keep the acceptance until
it matures, and thereby allow the bank to make the promised payment, or it
may sell the acceptance at a discount today to any party willing to wait for
the face value payment of the deposit on the maturity date. The rates, at
which they trade, calculated from the discount prices relative to their face
values, are called banker's acceptance rates or simply discount rates. The
banker's acceptance rate with a financial institution's commission added in is
called the all-in rate.
Banker's acceptances make a transaction between two parties who do not
know each other safer, because they allow the parties to substitute the
bank's credit worthiness for that who owes the payment. They are used
widely in international trade for payments that are due for a future shipment
of goods and services. For example, an importer may draft a banker's
acceptance when it does not have a close relationship with and cannot
obtain credit from an exporter. Once the importer and bank have completed
an acceptance agreement, whereby the bank accepts liabilities of the
importer and the importer deposits funds at the bank (enough for the future
payment plus fees), the importer can issue a time draft to the exporter for a
future payment with the bank's guarantee.

RECENT DEVELOPMENTS
Reforms made in the Indian Money Market are:-

Deregulation of the Interest Rate: In recent period the government has

adopted an interest rate policy of liberal nature. It lifted the ceiling rates of
the call money market, short-term deposits, bills rediscounting, etc.
Commercial banks are advised to see the interest rate change that takes
place within the limit. There was a further deregulation of interest rates
during the economic reforms. Currently interest rates are determined by the
working of market forces except for a few regulations.
Money Market Mutual Fund (MMMFs): In order to provide additional
short-term investment revenue, the RBI encouraged and established the
Money Market Mutual Funds (MMMFs) in April 1992. MMMFs are allowed to
sell units to corporate and individuals. The upper limit of 50 crore
investments has also been lifted. Financial institutions such as the IDBI and
the UTI have set up such funds.
Establishment of the DFI: The Discount and Finance House of India (DFHI)
was set up in April 1988 to impart liquidity in the money market. It was set
up jointly by the RBI, Public sector Banks and Financial Institutions. DFHI has
played an important role in stabilizing the Indian money market.
Liquidity Adjustment Facility (LAF): Through the LAF, the RBI remains in
the money market on a continue basis through the repo transaction. LAF
adjusts liquidity in the market through absorption and or injection of financial
resources.
Electronic Transactions: In order to impart transparency and efficiency in
the money market transaction the electronic dealing system has been
started. It covers all deals in the money market. Similarly it is useful for the
RBI to watchdog the money market.
Establishment of the CCIL: The Clearing Corporation of India limited
(CCIL) was set up in April 2001. The CCIL clears all transactions in
government securities, and repose reported on the Negotiated Dealing
System.
Development of New Market Instruments: The government has
consistently tried to introduce new short-term investment instruments.
Examples: Treasury Bills of various durations, Commercial papers,
Certificates of Deposits, MMMFs, etc. have been introduced in the Indian
Money Market.
These are major reforms undertaken in the money market in India. Apart
from these, the stamp duty reforms, floating rate bonds, etc. are some other
prominent reforms in the money market in India. Thus, at the end we can
conclude that the Indian money market is developing at a good speed.