MONEY MARKET

Characteristics & Functions

 Constitutes important segment Indian Financial system.
 Market for financial assets that are close substitutes for
money
 Major function of the money market is to provide
liquidity
 It is not a single market, but a collection of markets for
several instruments
 Not having a physical location (like stock market) ; but
interconnected by communication network.
 Market for overnight to short-term funds
 Instruments having a maturity period of one or less than
1 year.
 It is a wholesale market of short-term debt instruments.
 Credit worthiness of the of the participant is important.
 The main players are
RBI, Banks, Insurance companies, NBFCs, PDs,MFs,
Provident Funds, DFHI, STCI, PSU, Corporate investors,
NRIs.
 Need-based market wherein the demand and supply of
money shape the market.
 Transactions in the money market can be secured and
unsecured.
Functions of Money Market
  Provide balancing mechanism to even out the demand
for and supply of short-term funds.
 Provide focal point for RBI intervention for influencing
liquidity and general level of interest rates in the
economy.
 Plays a central role in the monetary policy transmission
mechanism as through it the operations of monetary
policy are transmitted to financial market and ultimately
to the real economy.
 Provides reasonable access to suppliers and users of
short term funds.
A liquid money market provides an effective source of long
term finance to borrower. Further liquid and vibrant money
market is necessary for the development of a capital market,
foreign exchange market and market in derivative
instruments.
Monetary control through indirect methods (repo and open
market operations) is more effective if the money market is
liquid. In such a market, the market response to central
bank’s policy actions are both faster and less subject to
distortion.
Role of RBI in Money Markets
 Most important constituent of Money Market
 Market comes within the direct purview of Reserve Bank
regulations
Aims of RBI
 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
sectors of the economy.
 To bring about order in the foreign exchange market.
RBI influences liquidity and interest rates through a
number of operating instruments- CRR, Open market
operations, repos, change in bank rates, foreign exchange
swap operations etc.
Developments in Money Market
1) Securities Trading Corporation of India (STCI) was set
up in June 1994 to provide an active secondary
market in Govt dated securities and public sector
bonds.
2) Primary Dealer system in 1995 and Satellite Dealer
system in 1999
3) Liquidity Adjustment Facility introduced in June 2000.
4) Inter-bank liabilities exempted from CRR, SLR
requirements.
5) CCIL was set up in Apr 2002, RTGS introduced in
April2004
6) Collateralised Borrowing and Lending obligation
(CBLO) was operationalized as a money market
instrument through CCIL on Jan20, 2003
 7) Transformation of Call Money Market into a pure
inter-bank market by Aug 2005
8) State Govt securities eligible for LAF operations since
Apr 2007
9) Operationalization of a screen based negotiated
system(NDS-CALL) for clearings in the call/notice and
term money market in Sept 2006. The reporting of all
such transactions made compulsory through NDS-call
in Nov 2012.
Money Market Centres
 At Mumbai, Delhi and Kolkata
 Mumbai is the active money market centre with money
flowing in from all parts of the country getting
transacted there.
Money Market Instruments
1) Treasury Bills(T-Bills)
2) Cash Management Bills(CMBs)
3) Call/Notice Money Market- Call-overnight and notice-14 days
4) Commercial Paper(CP)
5) Certificate of Deposit(CD)
6) Commercial Bills
7) Collateralised Borrowing and Lending Obligations(CBLO)
Call/Notice Money Market and treasury bills form the most
important segments of the Indian money market.
Treasury bills, call money market and certificate of deposit
provide liquidity for government and banks, whereas
Commercial paper and commercial bills provide liquidity for
the commercial sector and intermediaries.
TREASURY BILLS (T-BILLS)
 Most important segment of the money market.
 T-Bills are short term instruments Issued by RBI on
behalf of Govt.
 Vital role in the cash management of the Govt.
 At present, treasury bills are issued in three maturities
— 91-days, 182-days and 364-days.
 Issued in the form of Promissory Note / credit to
Subsidiary General Ledger(SGL) Account
 Available for a minimum amount of Rs.25,000/- and in
multiples thereof.
 Used by Govt to raise short term funds to bridge
seasonal or temporary gaps between its
receipts(revenue and capital) and expenditure.
 Repaid at par on the expiration of its tenor.
 T-Bills issued at Discount. 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, which is known as Discount.
 TDS not applicable
 These bills are negotiable, no default risk, assured yield.
  Eligible for inclusion in the securities for SLR purposes.
 Not issued in scrip form. The purchases and sales are
effected through the Subsidiary General Ledger (SGL)
account.
Process of T-Bills
Sales of T-Bills is conducted through an auction. In case of
auctions, competitive bids are submitted by the participants’
to RBI and the bank decides the cut-off yield/price and makes
allotment on such basis.
These bills are neither rated nor can they be rediscounted
with the RBI. Yields of T-Bills are taken as benchmark for
other short term securities.
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.
RBI receives bids in auction from various participants and
issues the bills subject to some cut-off limits. Thus the yield
is market determined.
Participants in the T-Bills market
RBI, Banks, Mutual Funds, Financial Institutions, Primary
Dealers, Provident Funds, Corporates, Foreign Banks and FIIs
are all T-Bills market participants.
CASH MANAGEMENT BILLS (CMBS)
Issued by RBI on behalf of central Govt. to meet the short
term requirements. The CMBs have the generic character of
T-Bills and issued for maturities less than 91 days.( T-Bills
minimum is 91 days). They are also issued at discount and
redeemed at face value at maturity. These instruments are
tradeable and qualify and qualify for ready forward facility.
COMMERCIAL PAPER (CP)
Corporates and primary dealers (PDs), and the all-India
financial institutions (FIs) that have been permitted to raise
short-term resources under the umbrella limit fixed by
Reserve Bank of India are eligible to issue CP.
A corporate would be eligible to issue CP provided: (a) the tangible
net worth of the company, as per the latest audited balance sheet, is
not less than Rs. 4 crore; (b) company has been sanctioned working
capital limit by bank/s or all-India financial institution/s; and (c) the
borrowal account of the company is classified as a Standard Asset by
the financing bank/s/ institution/s.
 Introduced in Jan 1990
 Unsecured short term promissory note, negotiable and
transferable by endorsement and delivery with a fixed
maturity period
 Issued at discount and minimum rating shall be A3.
 Can be issued to individuals, banks, companies and
other corporate bodies. NRIs can also be issued only on
a non-transferable and non-repatriable basis. FIIs are
also eligible, but within the permissible limits.
  Issued in the form of promissory note and held in
physical form or in a dematerialized form through any of
the approved depositories
 Min.Period 7 days and maximum is 1 year. Investment
minimum amount is Rs.5 lakhs and multiples thereof.
 Corporates are allowed to issue CPs upto 100 per cent of
their fund-based working capital limits.
 Stamp duty applicable.
Trading and Settlement of CP
 All OTC trades in CP shall be reported within 15 minutes
of trade. Settlement thru
 Clearing house of NSE- National Securities Clearing
Corporation Limited(NSCCL)
 Clearing house of BSE- Indian Clearing Corporation
Limited (ICCL)
 Clearing house of the MCX-Stock Exchange-
MCX-SX Clearing Corporation Ltd(CCL)
Compared to other instruments, very little activity in the
secondary market for CPs due to investors preference to hold
instrument till maturity.
COMMERCIAL BILLS
This facility, for working capital requirement is provided by
commercial banks through purchase/discounting commercial
bills.
Introduced in the money market in 1970
It is a short term, negotiable and self-liquidating
instrument with low risk
It enhances the liability to make payment on a fixed
date when goods are bought on credit.
As per NI Act 1881 a bill of exchange is defined as an
instrument in writing containing an unconditional order,
signed by the maker, directing a certain person to pay a
certain sum of money only to, or to the order of a
certain person or to the bearer of the instrument.
Bill of exchange is a negotiable instrument drawn by the
seller(drawer) on the buyer(drawee) for 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 banks.
The bank discounts these bills by keeping a certain
margin and credit the proceeds to the
applicant’s(seller’s) account.
Bank’s when in need of money, can rediscount these
commercial bills with FIs such as LIC, UTI, GIC, and also
with RBI
The eligibility criteria prescribed by the RBI for
rediscounting commercial bills are that the bill should
arise out of genuine commercial transaction showing
evidence of sale of goods and the maturity date of the
bill lshould not exceed 90 days from the date of
rediscounting
 Bill may be demand bill or usance bill. Demand bill is
payable on demand, ie., immediately at sight or on
presentation to the drawee. Usance bill is payable on a
future date or after a specified period.

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, banks can
rediscount the bills in the money market and get ready
money.
It is transferable by endorsement and delivery and it has
high degree of liquidity.
CERTIFICATE OF DEPOSIT(CD)
CDs are issued banks during periods of tight liquidity, at
relatively high interest rates. Banks resort to this source
when the deposit growth is sluggish but credit demand is
high. Compared to other retail deposits, the transaction
costs of CDs is lower.
 Introduced in June 1989
 CDs are unsecured, negotiable, short-term instruments
in bearer form, issued by banks except RRBs and LABs
and development financial institutions.
 Banks have freedom to issue CDs depending on their
funding requirements
 Minimum 1 lakh and in multiples thereof.
 Minimum period 7 days and maximum 1 year. FIs
minimum period is 1 year and maximum 3 years from
the date of issue.
 Issued in dematerialized form or as a Usance Promissory
Note
 CDs are time deposits of specific maturity. But unlike
time deposits CDs are transferable, tradable.
 CRR/SLR applicable
 No loan against CDs and no buy back their own CDs
before maturity.
 Issued at discount on face value
 Stamp duty is applicable.
 Issued to individuals, corporations, companies, trusts,
funds, associates and others. Also to NRIs on non-
repatriable basis.
 Transferability- CDs in physical form are freely
transferable by endorsement and delivery. Demat form
can be transferred as per the procedure applicable to
other demat securities.
 Settlement- All OTC trades in CD cleared and settled thru
authorized clearing house- National Securities Clearing
Corporation Ltd(NSCCL), Indian Clearing Corporation
Limited(ICCL) and MCX stock Exchange clearing
corporation Ltd
 For Payment - The holders of dematted CDs will
approach their respective Depository Participants(DPs)
 and give transfer/delivery instructions to transfer the
value of CDs which is represented by the specific
International Securities Identification Number (ISIN)
CALL / NOTICE MONEY MARKET
Call Period - - Overnight
Notice Period – 2 to 14 days
Required mostly by banks.
 Market where the banks trade their day-to day surplus
funds among themselves.
 It is a key segment of the Indian money market
 When money is borrowed or lent for a day, it is known
as call money. When money borrowed or lent for more
than a day upto 14 days, it is known as notice money
 No collateral security required for covering the
transactions.
 Highly liquid market, risky and extremely volatile.
 Banks borrow mainly for the purpose of maintaining the
CRR, SLR.
 The minimum size of operation is 10 cr.
 Call Rate which is the interest rate paid on call loans, it is
highly volatile and varies day-to-day, hour-to-hour and
sometimes even minute to minute.
 It is very sensitive to change in the demand for and
supply of call loans. Once, within a fortnight rate moved
from 1-2 per cent to over 140 per cent per annum.
COLLATERALISED BORROWING AND LENDING OBLIGATION
(CBLO)
 To provide liquidity to non-bank entities hit by the
restrictions on access to the call money market.
 It is the discounted instrument available in electronic
book entry form for the maturity period ranging from 1
day to 19 days
 CBLO is an obligation by the borrower to return the
borrowed money, at a specified future date, and an
authority to the lender to receive the money lent, at a
specified future date and an authority to the lender to
receive money lent, at a specified future date with an
option/privilege to transfer the authority to another
person for value received. The eligible securities are
central govt securities including treasury bills with a
residual maturity period of more than six months.
 Banks, co-operative Banks, Financial institutions,
Insurance companies, Mutual Funds and Primary
Dealers who are members of negotiated dealing
system(NDS) are allowed to participate in CBLO
transactions.
 Members can access CBLO Dealing system through
INFINET connectivity whereas associate members can
access CBLO Dealing system through internet.
 CBLO market emerged as the preferred overnight
market particularly in 2005-06 since it offers anonymity
 to market participants and provides funds at a lower
cost.
Process of CBLOs
Members can also sell CBLOs held by them to meet their
funds requirement instead of holding till maturity. Members
intending to sell CBLOs(borrow funds) place their offers
directly through order entry form on the CBLO system
indicating the amount and rate for a specific CBLO. Likewise,
members willing to buy CBLOs(lend funds) place their bids
through order entry form specifying the amount and rate for
a particular CBLO. The matching of bids and offers takes
place on Best yield-Time Priority basis.
 Repayment of borrowing under CBLO segment is
guaranteed by CCIL. Hence all CBLO members have to
maintain collateral or cash margin with CCIL as cover.
 CCIL sets up borrowing limits for the members against
their deposits of govt securities as collaterals.
Collaterals means the physical security which is is given
as a guarantee from an acceptable bank and delivered
to lthe CCIL for value to the extent prescribed by CCIL
for participating in the transactions. The interest rate on
the CBLOs mirror call money rates
 Mutual Funds and insurance companies have emerged
as the largest supplier of funds as they are flush with
liquidity.
  The co-operative banks, public and private sector banks
and PDs are large borrowers in this market on account
of favourable borrowing cost in the CBLO segment vis-à-
vis the call market
Tools for Managing Liquidity in Money Market
1) Reserve Requirements
2) Interest Rates
3) Bank Rate
4) Marginal Standing Facility(MSF)
5) Liquidity Adjustment Facility(LAF)
6) Repo / Reverse Repo
7) Market Stabilisation scheme

Reserve Requirements
Two types; CRR and SLR- Techniques of monetary control
used by RBI to achieve specific macro-economic objectives.
 CRR refers to the cash that banks have to maintain with
the RBI as a certain percentage of their DTL- under
Section 42(1) of RBI Act 1934- Current rate is 3 per cent.
 SLR refers to the mandatory investment that banks have
to make in govt securities- under Section 24 of BR Act
1949
CRR is an instrument to influence liquidity in the system as
and when required whereas SLR is the reserve that is set
aside by the banks for investment in cash, gold, or
unencumbered approved securities. A cut in the CRR
increases the liquidity in the economy. It also means lower
cost for the banks.
Interest Rates
 One of the distinct monetary transmission channels
 Administered interest rate structure was central feature
during 1980s
 In view of the Narasimham committee
recommendations, interest rate reforms were
undertaken in money, credit and government securities
market.
Bank Rate
Bank rate is the standard rate at which the RBI is prepared to
buy or rediscount bills of exchange or other commercial
papers eligible for purchase. – Section 49 of RBI Act 1934.
The interest rates on different types of accommodation from
the RBI including refinance were linked to bank rate
Marginal Standing Facility (MSF) scheme
 Effective from May 2011
 All Scheduled Commercial Banks having Current Account
and SGL account with RBI are eligible to participate in
the MSF scheme
  Under this facility, the eligible entities can avail
overnight, upto one percent of their respective Net
Demand and Time Liabilities(NDTL) outstanding at the
end of the second preceding fortnight.
 Eligible securities- all SLR eligible transferable GOI dated
securities/treasury bills.
Liquidity Adjustment Facility(LAF)
Implemented as per the recommendations of Narasimham
Committee on Banking Sector Reforms (Report II 1998).
 Introduced from June5, 2000
 LAF is operated thru repos and reverse repos.
 LAF is a tool of day-to-day liquidity management
through the injection or absorption of liquidity by way of
sale or purchase of securities followed by their
repurchase or resale under repo/reverse repo
operations.
 Repo/reverse repo auctions are conducted on a daily
basis except on Saturdays. The tenor of repos is one day
except on
 Fridays and days preceding holidays
 LAF operations combined with the judicious use of open
market operations have emerged as the principal
operating instrument of the monetary policy.
Repo / Reverse Repo
To achieve liquidity and to even out liquidity changes, RBI
uses Repos. Repo is a useful money market instrument
enabling the smooth adjustment of short term liquidity
among varied market participants such as banks and financial
institutions.
Repo transactions may be undertaken in
i) dated securities and treasury bills issued by the Central
Govt and (ii) dated securities issued by the state govts
Participants- Scheduled Banks, PDs,NBFCs, MFs, HFCs,
Insurance companies, pension funds, PFs, FIs like
NABARD,SIDBI,EXIM Bank, NHB
Repo refers to a transactions in which a participant acquires
immediate funds by selling securities and simultaneously
agrees to the repurchase of the same or similar securities
after a specified time at a specified price.
All repo traansactions shall be settled in SGL account
maintained with the RBI, with Clearing Corporation of India
Ltd(CCIL).
Banks can undertake repo transactions only in securities held
in excess of the prescribed SLR requirements.
In otherwords, it enables collateralized short term
borrowings and lending through sale/purchase operations in
debt instruments. It is a temporary sale of debt involving full
transfer of ownership of the securities.
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.
Reverse Repo is exactly the opposite of repo- a party buys a
security from another party with a commitment to sell it back
to the latter at a specified time and price. In other words,
while for one party the transaction is repo for another party
is reverse repo. A reverse repo is undertake to earn
additional income on idle cash
 It signifies lending on a collateral basis. It is also a good
hedge tool because the repurchase price is locked in at
the time of sale itself.
 Repo rate is the annual interest rate for the funds
transferred by the lender to the borrower
Importance of Repos
Repos are safer than pure call/notice/term money and inter-
corporate deposit markets which are non-collateralised:
repos are backed by securities and are fully collateralized.
Ownership titles of eligible securities is immediately
transferred. Thus, counterparty risks are minimum
Market Stabilisation scheme
Introduced w.e.f.Apr 1, 2004.
To manage the foreign exchange rate, the RBI intervenes in
the forex market by buying dollars flowing into the economy.
This leads to a release of large rupee supply in the system
which results in a flood of rupee liquidity. Inorder to dry off a
part of this supply, RBI then sells bonds to banks.
The main purpose of introducing the scheme was to absorb
surplus liquidity of a more enduring nature, thus reducing the
burden of sterilization on the LAF window. These bonds have
a tenor of two years and the proceeds from them remain in a
separate account of the RBI. This account is utilized solely for
redeeming the principal amount of the market stabilization
bonds. The liability of the govt is restricted to interest
payment.
This scheme has enabled the RBI to improve liquidity
management in the system, maintain stability in the foreign
exchange market and conduct monetary policy in accordance
with the stated objectives.
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