Money Market and Its Instruments

• The definition of money for money market

purposes is not confined to bank notes but
includes a range of assets that can be turned
into cash at short notice.
• 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
Money Market supply in the Indian economy and 6 percent of
the total funds that commercial banks have let
in India 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.
• 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.
Features of Money Market

Existence of Absence of Diversity in Money Highly volatile call Absence of a well

Unorganised Money Integration Rates of Interest money market organised Banking
Market. Seasonal Stringency System Availability of
of Money Absence of credit instruments
the Bill Market
Role of
Reserve
Bank In
India
 • Till 1935, when the RBI was set up the Indian
money market remained highly disintegrated,
unorganised, narrow, shallow and therefore, very
backward.
• The planned economic development that
History of commenced in the year 1951 market an
important beginning.
Indian • The nationalisation of banks in 1969, setting up of
Money various committees such as the Sukhmoy
Chakraborty Committee (1982), the Vaghul working
Market 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.
 • Deregulation of the Interest Rate : In
recent period the government has adopted
an interest rate policy of liberal nature.
Development • It lifted the ceiling rates of the call money
market, short-term deposits, bills re-
of Money discounting, etc. Commercial banks are
advised to see the interest rate change that
Market in takes place within the limit.
• There was a further deregulation of
India 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
Development corporate and individuals. The upper limit of 50 crore
investments has also been lifted. Financial institutions such
of Money as the IDBI and the UTI have set up such funds.
• Establishment of the DFI : The Discount and Finance
Market in House of India (DFHI) was set up in April 1988 to impart
liquidity in the money market. It was set up jointly by the
India RBI, Public sector Banks and Financial Institutions. DFHI has
played an important role in stabilising the Indian money
market. In the financial world, a discount house is a firm
that specializes in trading, discounting, and
negotiating bills of exchange or promissory notes.
Its transactions are generally performed on a large
scale with transactions that also include government
bonds and Treasury bills.
 • 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
Development of resources.
• Electronic Transactions : In order to
Money Market impart transparency and efficiency in
the money market transaction the
in India 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
Development transactions in government securities,
and repose reported on the Negotiated
of Money Dealing System.
• Development of New Market Instruments :
Market in The government has consistently tried to
introduce new short-term investment
India instruments. Examples: Treasury Bills of various
duration, Commercial papers, Certificates of
Deposits, MMMFs, etc. have been introduced in
the Indian Money Market.
Money Market Instruments
A variety of instrument are available in a developed money market.
In India till 1986, only a few instrument were available. They were,
Treasury bills
Money at call and short notice in the call loan market.
Commercial bills, promissory notes in the bill market.
Following new instrument are available:
Commercial papers.
Certificate of deposit.
Bankers Acceptance.
Repurchase agreement (Repo Markets).
Money Market mutual fund.
Composition of Money
Market
• Money Market consists of a number
of sub- markets which collectively
constitute the money market. They
are,
• Call Money Market
• Commercial bills market or discount
market
• Acceptance market
• Treasury bill market
 • A variety of instrument are available in a
developed money market. In India till 1986,
Instruments only a few instrument were available.
of Money • Treasury Bills
Market • Call Money
• Commercial Bills and Promissory Notes
 • Commercial papers.
• Certificate of deposit.
New • Inter-bank participation certificates.
Instruments • Repo instrument
• Repurchase agreement
• Money Market mutual
 • (T-bills) are the most marketable money
market security.
• They are issued with three-month, six-
month and one-year maturities.
• T-bills are purchased for a price that is less
Treasury Bills than their par (face) value; when they
mature, the government pays the holder
the full par value.
• T-Bills are so popular among money market
instruments because of affordability to the
individual investors.
 • A CD is a time deposit with a bank.
• Like most time deposit, funds can not
withdrawn before maturity without paying a
penalty.
• CD’s have specific maturity date, interest
Certificate of rate and it can be issued in any
Deposit denomination.
• The main advantage of CD is their safety.
• Anyone can earn more than a saving
account interest.
 • CP is a short term unsecured loan issued by
a corporation typically financing day to day
operation.

• CP is very safe investment because the

Commercial financial situation of a company can easily
be predicted over a few months.
Paper
• Only company with high credit rating issues
CP’s.
 • Repo is a form of overnight borrowing and is
used by those who deal in government
securities.
• They are usually very short term
repurchases agreement, from overnight to
Repurchase 30 days of more.
Agreements • The short term maturity and government
backing usually mean that Repos provide
lenders with extreamly low risk.
• Repos are safe collateral for loans.
Repos
• Repo (repurchase agreement) instruments enable
collateralized short-term borrowing through the selling of
debt instruments
• A security is sold with an agreement to repurchase it at a
pre-determined date and rate
• Reverse repo is a mirror image of repo and reflects the
acquisition of a security with a simultaneous commitment
to resell
• Market Repos
• Among banks and with DHFI & STCI
• RBI Repos
Collateralized Borrowing and Lending Obligation (CBLO)

• Operationalized as money market instruments by the Clearing Corporation

of India Limited (CCIL) in 2003
• …..
• Follows an anonymous, order-driven and online trading system
• Liabilities of banks arising out of transaction in CBLO are subject to
maintenance of CRR
 Indigenous bankers
• Individual bankers like Shroffs, Seths, Sahukars, Mahajans, etc. Combine
trading and other business with money lending.
• Vary in size from petty lenders to substantial shroffs
• Act as money changers and finance internal trade through hundis (internal
bills of exchange)
• Indigenous banking is usually family owned business employing own
working capital
• At one point it was estimated that IB met about 90% of the financial
requirements of rural India
RBI and indigenous bankers (1)

• Methods employed by the indigenous bankers are traditional with

vernacular system of accounting.
• RBI suggested that bankers give up their trading and commission business
and switch over to the western system of accounting.
• It also suggested that these bankers should develop the deposit side of
their business
• Ambiguous character of the hundi should stop
• Some of them should play the role of discount houses (buy and sell bills of
exchange)
RBI and indigenous bankers (2)

• IB should have their accounts audited by certified chartered accountants

• Submit their accounts to RBI periodically
• As against these obligations the RBI promised to provide them with
privileges offered to commercial banks including
• Being entitled to borrow from and rediscount bills with RBI
• The IB declined to accept the restrictions as well as compensation from the
RBI
• Therefore, the IB remain out of RBI’s purview
 Development Oriented Banking
• Historically, close association between banks and some traditional
industries- cotton textiles in the west, jute textiles in the east
• Banking has not been mere acceptance of deposits and lending money to
include development banking
• Lead Bank Scheme- opening bank offices in all important localities
• Providing credit for development of the district
• Mobilising savings in the district. ‘Service area approach’
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