The money market is a market Ior Iinancial assets that are close substitutes Ior money. It is
a market Ior overnight to short-term Iunds and instruments having a maturity period oI one or
less than one year. It is not a physical location (like the stock market), but an activity that is
conducted over the telephone. The money market constitutes a very important segment oI the
Indian Financial System.
As per RBI deIinition: 'A money market is a market Ior short term Iinancial assets that are
close substitute Ior money, Iacilitates the exchange oI money in primary and secondary market.¨
It is a mechanism that deals with lending and borrowing oI short term Iunds. It is a segment oI
Iinancial instruments with high liquidity and very short maturities are traded. It doesn`t actually
deals in cash or money but deals with substitute oI cash like trade bills, promissory notes,
government papers, etc. which can be converted into cash without any loss at low transaction
cost. It includes all individual, institution and intermediaries.
Money market means market where money or its equivalent can be traded. Money is
synonym oI liquidity. Money market consists oI Iinancial institutions and dealers in money or
credit who wish to generate liquidity. It is better known as a place where large institutions and
government manage their short term cash needs. For generation oI liquidity, short term
borrowing and lending is done by these Iinancial institutions and dealers. Money Market is part
oI Iinancial market where instruments with high liquidity and very short term maturities are
traded. Due to highly liquid nature oI securities and their short term maturities, money market is
treated as a saIe place. Hence, money market is a market where short term obligations such as
treasury bills, commercial papers and bankers acceptances are bought and sold.
Indian money market has seen exponential growth just aIter the globalization initiative in
1992. It has been observed that Iinancial institutions do employ money market instruments Ior
Iinancing short-term monetary requirements oI various sectors such as agriculture, Iinance and
manuIacturing. The perIormance oI the India money market has been outstanding in the past 20

Till1935, when the RBI was set up the Indian money market remained highly disintegrated,
unorganized, narrow, shallow and thereIore, very backward. The planned economic
development that commenced in the year 1951 was an important beginning in the annals oI the
Indian money market. The nationalization oI banks in 1969, setting up oI various committees
such as the Sukhmoy Chakraborty Committee (1982), the Vaghul working group (1986), the
setting up oI discount and Iinance house oI India ltd. (1988), these securities trading corporation
oI India (1994) and the commencement oI liberalization and globalization process in 1991 gave a
Iurther Iillip Ior the integrated and eIIicient development oI India money market.
In 1971, Bruce R. Bent and Henry B. R. Brown established the Iirst money market Iund in
the U.S. It was named The Reserve Fund and was oIIered to investors who were interested in
preserving their cash and earning a small rate oI return. Several more Iunds were shortly set up
and the market grew signiIicantly over the next Iew years. Money market Iunds in the US
created a loophole around Regulation which at the time prohibited demand deposit accounts
Irom paying interest and thus money market Iunds can be seen as a substitute Ior bank accounts.

India market news is the topic oI discussion Ior every investor nationwide. The global
economic downturn since the last quarter oI 2008 has been gaining grounds until the Satyam
scam. The Iourth-biggest soItware Iirm - Satyam Computers, ever since its drastic crash and
Iinancial wrongdoing revelations, has been in India news and global news headlines aIIecting the
India money market. India has many Ioreign investors and the economy not being very highly
aIIected despite the global recession; more Ioreign investors are looking towards India as a saIe
and secured investment destination. But as India market news make plain, the Satyam scandal
may prove to be a huge loss to India, prompting Ioreign investors to leave India.
Strengthening oI the Indian rupee and loss oI dollar over the last week oI December 08 and
Iirst week oI January brought in a ray oI hope amongst investors, thus raising the importance oI
India money market. Data released by the India news recorded buying oI local shares by
overseas Iunds. India market news Iurther brought to light that with the Satyam scam, stock
market indices witnessed a 7.1 percent slump. Despite the two weeks' rise oI the rupee, it again
slumped down due to the Satyam eIIect.
India money market is Ilooded with news like 'NSE removing Satyam Irom NiIty,
replacing the position with Reel Capital', 'Satyam losing Rs 10, 000 crore in market cap', etc. The
India market news on 7th evening shook domestic as well as global investor conIidence aIIecting
many other top companies. Overall, the situation is expected to improve and India money market
is again going to witness a rise. Thanks to the corrective measures taken by the RBI as well as
the government. With the lending rate cut by 350 basis points by the RBI as well as the 200
billion rupee ($4 billion) stimulus package announced by the government will help materialize
the 7° growth target. Duties cut on manuIactured products Iurther add to the boost. What the
India news reveals currently is not expected to be same.

Those looking to increase their returns on the moneys in their savings bank account can
invest in this Iund. Investors should consider the Iollowing Iactors beIore buying units in the
Iund: The Iund is suitable Ior investors with a diversiIied portIolio oI Iixed-income investments.
Such investments include long-term government bonds, medium-term corporate bonds and
Iixed-deposits. Investing in TIMMA enhances diversiIication because the Iund takes exposures
in money market instruments. The NAV Ior a Iund having exposure to such instruments is not
based on the market price; the NAV is simply the interest accrued on these instruments on a
daily basis. This means that the NAV will not Iall below the initial investment value, unlike in
the case oI bond Iunds that are marked-to-market.
Now, the call money market is about 4.75 per cent, and other money market instruments
such as commercial papers and T-bills are marginally higher. This means that retail investors can
earn at least 3 percentage points more than the interest on the savings bank account. Besides, the
risk is not signiIicantly diIIerent Irom the savings account. TIMMA and the savings bank
account are exposed to reinvestment risk. II interest rates were to decline Iurther, TIMMA's
portIolio manager will have to reinvest the money at lower rates. Similarly, monies in the
savings bank account will earn lower interest rate when rates decline.


It is not a single market but a collection oI markets Ior several instruments.
It is a wholesale market oI short term debt instruments.
Its principal Ieature is honor where the creditworthiness oI the participants is important.
The main players are:-Reserve Bank oI India (RBI), Discount and Finance House oI India
(DFHI), Mutual Funds, Banks, Corporate Investors, Non-Banking Financial Companies
(NBFC`s), State Governments, Provident Funds , Primary Dealers, Securities Trading
Corporation oI India (STCI), Public Sector Undertakings (PSU`s) and Non-resident
It is a need-based market wherein the demand and supply oI money shape the market.

A money market is generally expected to perIorm three broad Iunctions:
Provide a balancing mechanism to even out the demand Ior and supply oI short-term
Provide a Iocal point Ior central bank intervention Ior inIluencing liquidity and general
level oI interest rates in the economy.
Provide reasonable access to suppliers and users oI short-term Iunds to IulIill their
borrowings and investment requirements at an eIIicient market clearing price.
Besides the above Iunctions, a well-Iunctioning money market Iacilitates the development oI a
market Ior longer-term securities. The interest rates Ior extremely short-term use oI money serve
as a benchmark Ior longer-term Iinancial instruments.

An eIIicient money market beneIits a number oI players. It provides a stable source oI
Iunds to banks in addition to deposits, allowing alternative Iinancing structures and competition.
It allows banks to manage risks arising Irom interest rate Iluctuations and to manage the maturity
structure oI their assets and liabilities. A developed inter-bank market provides the basis Ior
growth and liquidity in the money market including the secondary market Ior commercial paper
and treasury bills. An eIIicient money market encourages the development oI non-bank
intermediaries thus increasing the competition Ior Iunds. Savers get a wide array oI savings
instruments to chose Irom and invest their savings.
A liquid money market provides an eIIicient source oI long term Iinance to borrowers.
Large borrowers can lower the cost oI raising Iunds and manage short-term Iunding or surplus
eIIiciently. A liquid and vibrant money market is necessary Ior the development oI a capital
market, Ioreign exchange market, and market in derivative instruments. The money market
supports the long-term debt market by increasing the liquidity oI securities. The existence oI an
eIIicient money market is a precondition Ior the development oI a government securities market
and a Iorward Ioreign exchange market.
Trading in Iorwards, swaps, and Iutures is also supported by a liquid money market as the
certainty oI prompt cash settlement is essential Ior such transactions. The government can
achieve better pricing on its debt as it provides access oI a wide range oI buyers. It Iacilitates the
government market borrowing program. Monetary control through indirect methods (repos and
open market operations) is more eIIective iI the money market is liquid. In such a market,
the market responses to the central bank`s policy actions are both Iaster and less subject to

The Reserve Bank oI India is the most important constituent oI the money market. The
market comes within the direct preview oI the Reserve Bank regulations. The aims oI the
Reserve Bank`s operations in the money market are:
to ensure that liquidity and short-term interest rates are maintained at levels consistent
with the monetary policy objectives oI maintaining price stability,
to ensure an adequate Ilow oI credit to the productive sectors oI the economy and
to bring about order in the Ioreign exchange market.
The Reserve Bank inIluences liquidity and interest rates through a number oI operating
instruments cash reserve requirement (CRR) oI banks, conduct oI open market operations
(OMOs), repos, change in bank rates and, at times, Ioreign exchange swap operations.
There are money markets centers in India at Mumbai, Delhi and Kolkata. Mumbai is the
only active money market center in India with money Ilowing in Irom all parts oI the country
that are transacted there.

The money market in India is divided into the Iormal (organized) and inIormal
(unorganized) segments. One oI the greatest achievements oI the Indian Iinancial system over
the last IiIty years has been the decline in the relative importance oI the inIormal segment and
increasing presence and inIluence oI the Iormal segment. Several steps were taken in the 1980ss
and 1990s to reIorm and develop the money market. The reIorms in the money market were
initiated in the latter halI oI the1980s.
In the 1980s:-
A committee to review the working oI the monetary system under the chairmanship oI
Sukhamoy Chakravorty was set up in 1985. It underlined the need to develop money market
instruments. As a Iollow up, the Reserve Bank set up a working group on the money market
under the chairmanship oI N.Vagul which submitted its report in 1987. This committee laid the
blueprint Ior the institution oI a money market. Based on its recommendations the Reserve Bank
initiated a number oI measures:-
(i) The Discount and Finance House oI India (DFHI) was set up as a money market
institution jointly by the Reserve Bank, public sector banks, and Iinancial institutions
in 1988to import liquidity to money market instruments and help the development oI
a secondary market in such instruments.
(ii) Money market instruments such as the 182-day Treasury bill, certiIicate
oI deposit, and interbank participation certiIicate were introduced in 1988-
89.Commercial paper was introduced in January 1990.
To enable price discovery, the interest rate ceiling on cal money was Ireed in stages Irom
October 1988. As a Iirst step, operations oI the DFHI in the call/notice money market were Ireed
Irom the interest rates ceiling in 1988. Interest rate ceiling on interbank term money (10.5-11.5
percent), rediscounting oI commercial bills (12.5 percent), and interbank participation without
risks (12.5 percent) were withdrawn eIIective May 1989. All the money market interest rates
are, by and large determined by market Iorces. There has been a gradual shiIt Irom a regime oI
administered interest rates to market-based interest rates.

In the 1990s:-
The government set up a high-level committee in August 1991 under the chairmanship oI
M Narsimhan (Narsimhan Committee) to examine all aspects relating to structure, organization,
Iunctions and procedure oI the Iinancial systems. The committee made several recommendations
Ior the development oI the money market. The Reserve Bank accepted many oI its
(i) The Securities Trading Corporation oI India was set up in June 1994
toprovide an active secondary market in government dated securities and public sector
(ii)Barriers to entry were gradually eased by
(a) Setting up the primary dealer system in 1995 and satellite dealer system in 1999 to inject
liquidity in the market;
(b) Relaxing issuance restrictions and subscription norms in respect oI money market
(c) Allowing the determination oI yields based on the demand and supply oI such paper;
(d) Enabling market evaluation oI associated risks by withdrawing regulatory such as bank
guarantees in respect oI commercial papers;
(e) Increasing the number oI participants by allowing the entry oI Ioreign institutional
investors (FIIs), non- bank Iinancial institutions, mutual Iunds, and so on.
(iii) Several Iinancial innovations in instruments and methods were introduced. Treasury bills
oI varying maturities and RBI repos were introduced. Auctioned treasury bills were
introduced leading to market-determined interest rates.
(iii)The development oI a market Ior short-term Iunds at market-determined rates has been
Iostered by a gradual switch Irom a cash-credit system to a loan based system, shiIting
the onus oI cash management Irom banks to borrowers.

(v) Ad hoc and on-tap 91-day treasury bills were discontinued. They were replaced by Ways
and Means Advances (WMA) linked to the bank rate. The introduction oI WMA led to the
limiting oI the almost automatic Iunding oI the government.
(vi) Indirect monetary control instruments such as the bank rate-reactivated in April 1997,
strategy oI combining auctions, private placements, and open market operations-in 1998-99,
and the Liquidity Adjustment Facility (LAF) in June 2000 were introduced.
(vii) The minimum lock-in period Ior money market instruments was brought down to 15
(viii) The Reserve Bank started repos both on auction and Iixed interest rate basis Iir liquidity
management. Since June 5, 2000, the newly introduced liquidity adjustment Iacility has been
eIIectively used to inIluence short-term rates by modulating day-to-day liquidity conditions.
The transition to LAF was Iacilitated by the experiment with the Interim Liquidity
Adjustment Facility (ILAF) Irom April 1999. This provided a mechanism Ior liquidity
management through a combination oI repos, export credit reIinance, and collateralized
lending Iacilities.
(ix) The interbank liabilities were exempted Irom cash reserve ratio and statutory liquidity
ratio (SLR) stipulations Ior Iacilitating the development oI a term money market.

The instruments traded in the Indian money market are:-
(a) Treasury Bills (T-bills)
(b) Call/notice money market- Call (overnight) and short notice (up to 14 days)
(c) Commercial papers (CP)
(d) CertiIicates oI deposit (CD)
(e) Commercial Bills (CB)
Call/notice money market and treasury bills Iorm the most important segments oI the
Indian money market. Treasury bills, call money market, and certiIicates oI deposit provide
liquidity Ior government and banks while commercial paper and commercial bills provide
liquidity Ior the commercial sector and intermediaries.

Treasury Bills are short-term instruments issued by the Reserve Bank on behalI oI the
government to tide over short-term liquidity shortIalls. This instrument is used by the
government to raise short-term Iunds to bridge seasonal or temporary gaps between its receipts
(revenue and capital) and expenditure. They Iorm the most important segment oI the money
market not only in India but all over the world as well. T-bills are repaid at par on maturity. The
diIIerence between the amount paid by the tenderer at the time oI purchase (which is less than
the Iace value) and the amount received on maturity represents the interest amount on T-bills and
is known as the discount. Tax deducted at source (TDS) is not applicable on T-bills.
(i) They are negotiable securities.
(ii) They are highly liquid as they are oI shorter tenure and there is a possibility oI
interbank repos in them.
(iii) There is absence oI a deIault risk.
(iv) They have an assured yield, low transaction cost, and are eligible Ior inclusion in the
securities Ior SLR purposes
(v) They are not issued in scrip Iorm. The purchased and sales are eIIected through the
Subsidiary General Ledger (SGL) account.
(vi) At present, there are 91-day and 364-day T bills in vogue. The 91-day T-bills are
auctioned by RBI every Friday and the 364-day T-bills every alternate Wednesday
that is, the Wednesday preceding the reporting Friday.
Treasury bills are available Ior a minimum amount oI Rs. 25,000 and in multiples thereoI.

There are three categories oI T-bills:-
(i)On-tap bills:-
On-tap bills, as the name suggests, could be bought Irom the Reserve Bank at any time at
an interest yield oI 4.663 percent. They were discontinued Irom April 1, 1997, as they had lost
much oI their relevance
(ii)Ad hoc bills:-
Ad hoc bills were introduced in 1955. It was decided between the Reserve Bank and the
government oI India that the government could maintain with the Reserve Bank a cash balance
oI not less than Rs. 50 crore on Fridays and Rs. 4 crore on other days, Iree oI obligation to pay
interest thereon, and whenever the balance Iell below the minimum, the government account
would be replenished by the creation oI ad hoc bills in Iavour oI the Reserve Bank. Ad hoc 91-
day T-bills was created to replenish the government`s cash balances with the Reserve Bank.
They were just an accounting measure in the Reserve Bank`s books and, in eIIect, resulted in
automatic monetization oI the government`s budget deIicit. A monetized deIicit is the increase in
the net Reserve Bank credit to the central government which is the sum oI the increase in the
Reserve Bank`s holdings oI:-
(a) The government oI India`s dated securities;
(b) 91-day treasury bills; and
(c) rupee coins Ior changes in cash balances with the Reserve Bank.
In the 1970s and 1980s, a large proportion oI outstanding ad hocs were converted into
long-term dated and undated securities oI the government oI India. This conversation is reIerred
as 'Iunding.¨ Their expansion put a constraint on the Reserve Bank conduct oI monetary policy
and hence they were discontinued Irom April 1, 1997. The outstanding ad hoc T-bills and tap
bills as on March 31, 1997, were Iunded on April 1, 1997, into special securities without any
speciIied maturity at an interest rate oI 4.6 percent per annum. A system oI Ways and Means

Advances Irom April 1, 1997, was introduced to replace ad hoc bills and to accommodate
temporary mismatches in the government oI India receipt and payments.
(iii)Auctioned T-bills:-
Auctioned T-bills, the most active money market instrument, were Iirst introduced in April
1992. The Reserve Bank receives bids in an auction Irom various participants and issues the bills
to some cut-oII limits. Thus; the yield oI this instrument is market determined. These bills are
neither rated nor can they be rediscounted with the Reserve Bank. At present, the Reserve Bank
issues T-bills oI two maturities-91-days and364- days.

The development oI T-bills is at the heart oI the growth oI the money market. T-bills play
a vital role in the cash management oI the government. Being risk Iree, their yields
at varied maturities serve as short-term benchmarks and help in pricing diIIerent Iloating rate
products in the market. The T-bills market is the preIerred central bank tool Ior market
intervention to inIluence liquidity and short-term interest rate. The development oI the T-
bills market is a pre-condition Ior eIIective open market operations.

Ad hoc 91-day treasury bills were introduced in the mid-1950s. These bills were
introduced to replenish an automatic basis, the central government`s cash balance with the
Reserve Bank so that only the minimum required level was maintained. These bills opened up an
era oI uncontrolled monetization oI the central government`s deIicit. BeIore the 1960s, there was
an active T-bills market owing to the weekly auctions the91-day T-bills
In the mid-1960s, the auction system Ior the issue oI 91-day T-bills was replaced by on-
tap-bills. Till 1974, the tap bills rate changed with changes in the bank rate which sustained the
interest oI the participants in the T-bills market. However, aIter 1974, the discount rate on ad hoc
and tap bills was Iixed uniIormly at 4.6 percent. The T-bills market lost luster due to the
administered rate regime. However, the interest in T-bills revived with the introduction oI the
182-day T-bills on auction basis in November 1986, it also revived because oI the constitution
oI the Discount and Finance House oI India in 1988 as a money market institute on. The 182-day
T-bills were discontinued in 1992 and replaced by 364-day auction T-bills in April 1992 as part
oI reIorm measures. Subsequently, 91-day auction T-bills was introduced in January 1993. The
parallel existence oI the 91-day tap T-bills and ad hoc T-bills continued till March 1997.
ThereaIter, the 14-day intermediate T-bills and auction T-bills were introduced in April 1997 to
provide an alternative avenue to state governments and to Iacilitate some Ioreign central banks to
invest surplus Iunds.The 182-day Tbills were reintroduced to provide variety in treasury bills.
However, both the 182-and 14-day T-bills have been discontinued since March-2001.
The Reserve Bank`s purchase and holding oI T-bills have become totally voluntary with the
discontinuation oI ad hoc and on-tap 91-day T-bills. BeIore the introduction oI auctioned T-bills,
a substantial majority oI the T-bills used to be held by the Reserve Bank. With the introduction
oI auctioned oI auctioned T-bills, more than25 percent oI T-bills are held by investors other than
the Reserve Bank. The auction procedures have been streamlined with notiIied amount Ior all
auctions being speciIied in case oI competitive bids and non-competitive bids being accepted
outside the notiIied amount. A uniIorm price-based auction Ior 91-day T-bills was introduced on
an experimental basis in 1998-99. It has been successIully adopted.

The Reserve Bank oI India, banks, mutual Iunds, Iinancial institutions, primary dealers,
satellite dealers, provident Iunds, corporate, Ioreign banks, and Ioreign institutional investors are
all participants in the T-bills market. The state government can invest their surplus Iunds as non
competitive bidders in T-bills oI all maturities.
The sale oI T-bills is conducted through an auction. The method helps in price discovery, a
process wherein prices in the market reIlect the relative cost oI production and consumption
utilities with a view to achieving the optimum allocation oI resources in the economy. In case oI
auctions competitive bids are submitted by the participants to the Reserve Bank and the bank
decides the cut-oII yield price and makes the allotment on such basis. For an auction to be
meaningIul, it is necessary that auctions are conducted on a competitive bidding basis. For this
purpose, the participation should be large and varied in nature. A wider participation in auctions
results in increased competition, yielding better prices and improving the auction results. Primary
dealers, banks, corporate, mutual Iunds, and other participate in the competitive bids.
Besides allotting Tbills through auctions, the Reserve Bank accepts non-competitive bids
Irom state government, non-government provident Iunds, and other central banks. Non-
competitive bids are accepted to encourage participants who do not have expertise in bidding.
Such bids are a more eIIicient way oI encouraging retail participation instead oI having a large
number oI retail investors bidding competitively on their own. The Reserve Bank also
participates on a non-competitive basis to primarily take up the under-subscribed issues. Non-
competitive bidders are allotted T-bills at a weighted average price oI the successIul competitive
bids. Non-competitive bids are accepted outside the notiIied amount.

91-Day T-Bills
Treasury bills were sold on tap since 1965 throughout the week to commercial banks and
the public at a Iixed rate oI 4.6 percent. They were discontinued Irom April 1, 1997.The 91-day
ad hoc T-bills were created in Iavour oI the Reserve Bank but in1997-98 they were phase out
under an agreement with the Reserve Bank and totally discontinued Irom April 1, 1997. The ad
hoc and tap T-bills were converted into special securities without any speciIic maturity at an
interest rate oI 4.6 percent per annum.

Note:-Figures in parentheses indicate per cent to total.
Source:- RBI, Annual Report, various issues.

Size of the 91-Day T-Bills Market
The size oI the treasury bills market is reIlected in gross issues and the amount outstanding.
As seen Irom Table 4.1, gross issues almost doubled in the year 1995-96.A gross amount oI Rs.
24,050 crore was raised through 91-day T-bills. The gross issues declined substantially in the
year 1997-98 as the notiIied amount oI auctions was maintained in a narrow band oI Rs. 100 to
Rs. 300 crore. The volume oI sales oI the91-day T-bills declined in the subsequent years again
due to the low notiIied amount. In order to oIIer an increased amount oI short-term paper, the
notiIied amount in each auction was raised Irom Rs. 100 crore to Rs. 250 crore Irom May 18,
2001. The notiIied amount was then increased to Rs. 500 crore in 2003 which was Iurther raised
to Rs. 2000 crore Irom April 2004. The increase was an amount oI the introduction oI the Market
Stabilization Scheme (MSS).
The amount subscribed by the Reserve Bank as a percent oI gross issue declined in the year
1993-94 and 1994-95 but increased substantially in the year 1995-96 due to stringent liquidity
conditions in the money and credit markets. The decline in this amount in the year 2000-01
reIlects higher market absorption owing to spells oI easy liquidity. The average net holdings oI
the Reserve Bank is around 85 percent in 1992-93were almost nil in 2000-01. This reIlects a
high market interest in these short-term bills and successIul conduct oI open market operations.
Since 2001-02, the Reserve Bank has not subscribed to issues oI 91-day T-bills. There has been a
substantial decline in the amount outstanding Irom 1997-98 to1999-2000 as the notiIied amount
oI each auction was reduced to Rs. 100 crore Irom Rs. 500 crore. However, the amount
outstanding has increased substantially since 2001-2. This reIlects a high level oI liquidity in the

364-Day T-Bills
In April 1992, the 364-day T-bills were introduced to replace the 182-day T-bills. In case
oI the 364-day T-bills, a multiple/discriminatory price auction is conducted where successIul
bidders have to pay prices (yield) they have actually bid. Initially, the auction oI the 364-day T-
bills was conducted on a Iortnightly basis. These auctions evoked a good response Irom investors
such as Iinancial institutions and banks. These bills are not rediscountable with the Reserve
Bank. Since 1998-99 the periodicity oI the auctions has been changed to monthly as against
Iortnightly. The Ieatures oI the 364-day T-bills are similar to those oI the 182-day T-bills. The
investor`s response to these bills depends, among other things on the uncertainties in the
government securities market, variations in the SLR, and yield. The notiIied amount oI these T-
bills was raised Irom Rs. 500 to Rs. 750 crore eIIective December 13, 2000 and to Rs. 1,000
crore Irom April 2002. This was Iurther increased to Rs.2000 crore Irom April 2004 on account
oI the introduction oI the Market Stabilization Scheme (MSS).

Size of the 364-day T-Bills Market
Both the gross issue and the outstanding amount almost doubled Irom 1992-93 to 1997-
98. The gross issues increased in the year 2001-02. These issues contributed towards the
government`s resource mobilization eIIorts. Since 1998-99, the Reserve Bank accepted
devolvement on itselI. This was around 17 per cent oI the gross issues. This devolvement was
accepted to contain the volatility in cut-oII yields. However, there was no devolvement on the
Reserve Bank and Primary Dealers since 2001-02.


Source:- RBI, Annual Report, various issues.

182-Day T-Bills
The 182-day T-bills were introduced in November 1986 to provide short-term investment
opportunities to Iinancial institutions and others. These bills were periodically oIIered Ior sale
on an auction basis by the Reserve Bank. Prior to July 1988, the auctions were held every month.
Since then, however, Iortnightly auctions were held, synchronizing with the reporting Fridays oI
scheduled commercial banks. These bills could not be rediscounted with the Reserve Bank.
These bills were introduced with an objective to develop the short-term money market. It turned
out to be a handy instrument Ior banks, Iinancial institutions, corporate and so on, to invest their
short-term liquid Iunds. The bills were issued at a discount to Iace value Ior a minimum oI Rs. 1
lakh and its multiples thereoI. The amount raised in each auction depended upon the Iunds
available with the market participants. These bills were eligible securities Ior SLR purposes and
Ior borrowing under 'stand by reIinance Iacility¨ oI the Reserve Bank. They were not purchased
by state governments, provident Iunds, and the Reserve Bank. The yield on the 182-day T-bills
was Ireely determined by market Iorces. Also, they had an active secondary market. The notiIied
amount was kept at Rs. 100 crore on each oI the auctions. The Reserve Bank phased out the
auctions oI these bills Irom April 28, 1992 to May 25, 1999. In May 1999, it was reintroduced.
It was discontinued Irom May 2001 to March 2005. In April 2005, it was reintroduced.
Size of the 182-Day T-Bills Market
Table 4.5 exhibits the interest oI the market participants in this bill as both the gross issues
and outstanding amount show an increasing trend Irom 1987-88 to 1991-92. Moreover, the high
average cut-oII yield oI 9.89 percent and a yield which tended to rise each year had made this
bill popular with investors. AIter its reintroduction, the government raised Rs. 5,500 crore
through these bills. Non-competitive bids aggregating to Rs. 600 crore were accepted in 1999-
2000 while there were no non-competitive bids in 2000-01. The devolvement on the Reserve
Bank was Rs. 645 crore during 1999-2000 and Rs. 250 crore during 2000-01.The bill was
discontinued once again in May 2001. It was reintroduced in April 2005 with a notiIied amount
oI Rs. 500 crore.

Source:- RBI, Bulletin and Annual Report., RBI Bulletin, various issues.

14- Day T-Bills
With the 91-day tap T-bills being discontinued, a scheme Ior the sale oI 14-dayintermediate
T-bills was introduced eIIective Irom April 1, 1997, and 14-day auctions T-bills was introduced
eIIective Irom May 20, 1997 to Iacilitate the cash management requirements oI various segments
oI the economy and emergence oI a more comprehensive yield curve. The intermediate T-bills
were introduced to cater help invest the surplus Iunds oI state governments, Ioreign central
banks, and other speciIied bodies with whom the Reserve Bank has special arrangements.
The salient Ieatures oI this bill were as Iollows:-
(i) It was an alternate arrangement in place oI 91-day tap bills.
(ii) It was sold on a non-transIerable basis Ior a minimum amount oI Rs. 1,00,000 or in
multiples thereoI and was issued only in book Iorm.
(iii) It was repaid/renewed at par 14 days Irom its issue.
(iv) The discount rate was at quarterly intervals such that the eIIective yield oI this
instrument was equivalent to the interest on the Ways and Means Advances to the
central government.
(v) The bill was rediscounted at 50 basis points higher than discount rate. On
discounting, the bills were extinguished.

Source:- RBI, Annual Report, various issues.

Size of the 14-Day T-Bills Market
The outstanding amount, which was consistent in the Iirst two year, came down to Rs.
2,383 crore Irom Rs. 7,759 crore. The share oI the state governments in the total outstanding
remained consistent at an average oI 95 percent in the three years. The 14-day auctions T-bills
were introduced to Iacilitate the cash management requirements oI various segments oI the
economy and the emergence oI a more comprehensive yield curve. These bills did not devolve
on the Reserve Bank unlike the 91-day T-bills. Non-competitive bids were kept outside the
notiIied amount so that the cut-oII yield would reIlect liquidity conditions better. Initially, the
notiIied amount varied within the range oI Rs. 100 crore and Rs. 500 crore depending on market
interest. During 2000-01, the notiIied amount was Rs. 100 crore per auction. The 14-day auction
T-bills received a Iavourable response Irom market participants in the Iirst year oI their
introduction. ThereIore, a declining trend was witnessed. The bills were discontinued Irom May
2001, owing to a lack oI market response.

Source:- RBI, Annual Report, various issues.

Treasury bills are sold at a discount. The diIIerence between the sale price and the
redemption value is the return on the treasury bills or the treasury bill rate. This rate was
increased to 4.60 per cent in 1974 Irom 2.252 percent in 1955-56. The rate was not only
administered but it was the lowest rate oI interest prevalent till 1993. Since 1993, the treasury bill
rate is market determined and has been much higher than 4.6 per cent per annum, leading to
a higher yield to investors. The yield is the rate oI return on a particular instrument. Implicit
yield is the yield on an instrument iI it is held till its maturity. This yield is calculated as Iollows.
II a T-bill with a Iace value oI Rs. 100 is issued at Rs. 98, then the implicit yield is

ŵŴŴә ŵŴŴӛ Ÿ
÷ 8.164 percent

The size oI the treasury bills market in terms oI both volume oI sales and outstanding has
increased. The Reserve Bank has made substantial eIIorts to develop the treasury bills market.
The bank discontinued on-tap and ad hoc treasury bills and introduced auctioned treasury bills
which have not only helped in developing the treasury bill market but have also gone a long way
in enhancing the popularity oI this instrument by making the yield market-determined. The
primary dealer and satellite dealer systems were set up to activate the treasury bills market. This
market has the potential to develop Iurther iI the market is broadened even more by increasing
the number oI players and instruments. Moreover, this market can be made more liquid and
attractive iI treasury bills Iutures are introduced.

The Working Group on Money Market in 1987 suggested the introduction oI commercial
paper in India. The Reserve Bank introduced commercial papers in January 1990. Commercial
papers have been in vogue in the United States since the nineteenth century and have become
popular in money markets all over the world since the 1980s. A commercial papers is an
unsecured short-term promissory note, negotiable and transIerable by endorsement and delivery
with a Iixed maturity period. It is generally issued at a discount by the leading creditworthy
and highly rated corporations. Depending upon the issuing company, a commercial paper is
also known as Iinance paper, industrial paper, or corporate paper. Initially only leading, highly
rated corporate could issue a commercial paper. The issuer base has now been widened to broad-
base the market. Commercial papers can now be issued by primary dealers, satellite dealers, and
all-India Iinancial institutions, apart Irom corporate, to access short-term Iunds. EIIective
September 6,1996, and June17, 1998, primary dealers and satellite dealers were also permitted to
issue commercial paper to access greater volume oI Iunds to help increase their activities in the
secondary market.
A commercial paper can be issued to individuals, banks, companies, and other registered
Indian corporate bodies and unincorporated bodies. Non-resident Indians can be issued a
commercial paper only on a non-transIerable and non-repatriable basis. Banks are not allowed to
underwrite or co-accept the issue oI a commercial paper. A commercial paper is usually privately
placed with investors, either through merchant bankers or banks. A speciIied credit rating oI P2
is to be obtained Irom credit rating agencies. A commercial papers is issued as an unsecured
promissory note or in a dematerialized Iorm at a discount. The discount is Ireely determined by
market Iorces. The paper is usually priced between the lending rate oI scheduled commercial
banks and a representative money market rate. Corporate are allowed to issue CPs up to 100
percent oI their Iund-based working capital limits. The paper attracts stamp duty. No prior
approval oI the Reserve Bank is needed to issue a CP and underwriting the issue is not
mandatory. Most CPs has been issued by manuIacturing companies Ior a maturity period
oI approximately three months or less. During 2001-02, manuIacturing and related companies
issued 67.4 per cent oI total CPs, whereas 21.5 per cent oI the total was issued
by leasing and Iinance companies and the balance oI 11.1 per cent by Iinancial institutions.
Scheduled commercial banks are the major investors in commercial paper and their investment is
determined by bank liquidity conditions. Banks preIer commercial paper as an investments
avenue rather than sanctioning bank loans. These loans involve high transaction cost and money
is locked Ior a longer time period whereas a commercial paper is an attractive short-term
instrument Ior banks to park Iunds during times oI high liquidity. Some banks Iund commercial
papers by borrowing Irom the call money market. Usually, the call money market rates are lower
than the commercial paper rates. Hence, banks book proIits through arbitrage between the two
money markets. Moreover, the issuance oI commercial papers has been generally observed to be
inversely related to the money market rates.

With experience, reIinements were made to this instrument by the Reserve Bank by
removing/easing a number oI restrictions on maturity, size oI the commercial paper, requirement
oI minimum current ratio, restoration oI working capital Iinance, and so on. The maturity period
oI a commercial paper has been brought down Irom 91 days-6 months to 15 days-1 year. The
minimum size oI the paper has been reduced Irom Rs. 1crore to Rs. 5 lakh. Until October 1994, a
commercial paper was an important corporate instrument Ior Iinancing working capital
requirements. Corporates could have access to Iunds at rates lower than the prime lending rates
through commercial papers. This low interest rate advantage due to the stand-by Iacility wherein
banks were required to restore the cash credit limit on the maturity oI the paper, guaranteeing the
issuer Iunds at the time oI redemption. This stand-by` Iacility was withdrawn in October 1994.
The corporate were asked to access Iunds through a commercial paper on their own repayment
strength. This withdrawal also imparted independence to the commercial paper as a money
market instrument and its credit rating reIlected the intrinsic strength oI the issuer. The
withdrawal oI this stand-by Iacility led to a crash in the primary market Ior commercial paper in
Later, the commercial paper was carved out oI the cash-credit (CC) limits oI the maximum
permissible bank Iinance (MPBF) that the corporates had with banks. Hence, iI a corporate
issued a commercial paper, the cash credit that it had with its bank was reduced by the same
amount, thereby lowering the attractiveness oI this instrument Ior the corporates. This issuance
limit was delinked Irom the cash-credit limit in October 1996. Corporates now have the Ireedom
to utilize their entire banking limits Ior issuing commercial papers. New guidelines were released
in October 2000 Ior providing Ilexibility, depth, and vibrancy to the commercial paper market.
The Reserve Bank converted the paper into a stand-alone product to enable companies in the
services sector to meet their short-term working capital needs more easily. Banks and Iinancial
institutions now have the Ilexibility to Iix working capital limits aIter taking into account the
resource pattern oI a company`s Iinancing including CPs. An important Ieature oI
the revised guideline was the Ilexibility given to banks and Iinancial institutions to provide
stand-by assistance/credit, back-stop Iacility to issuers. This stand-by Iacility was provided to
aid the long-term growth oI the CP market. In addition, this Iacility assists banks to increase their

Iee-based income. The Ahmedabad Electricity Company was the Iirst company to issue CPs
worth Rs. 40 crore with a standby Iacility provided by the bank. Both the issuer and the bank
provided unconditional stand-by Iacility to the extent oI Rs. 40 crore Ior the entire period during
which the paper remained outstanding. This issue was assigned a P1 rating by CRISIL.
Banks, Iinancial institutions, primary dealers, and satellite dealers have been permitted to
make Iresh investments and hold a CP only in dematerialized Iorm, eIIective Irom June 30, 2001.
In order to provide Ilexibility to both issuers and investors in the CP market, the Reserve Bank
allowed non-bank entities including corporate to provide an unconditional and irrevocable
guarantee Ior credit enhancement Ior CP issue. Banks have been allowed to invest in CP
guaranteed by non-bank entities provided their exposure remains within the regulatory ceiling as
prescribed by the RBI Ior unsecured exposures.

With a view to providing Ilexibility to participants and add depth and vibrancy to the CP
market, the Reserve Bank issued new guidelines Ior the issue oI the paper in October 2000.
Eligibility:- Corporates, primary dealers, satellite dealers, and all-India Iinancial institutions
are eligible to issue a CP. For a corporate to be eligible, it should have tangible net worth Rs. 4
crore and a sanctioned working capital limit Irom a bank or a Iinancial institution and the
borrowal account is a standard asset.
Rating requirement: - The minimum credit rating shall be P2 oI CRISIL or such equivalent
rating by other approved agencies.
Maturity:- Initially, corporate were permitted to issue a CP with a maturity between a
minimum oI three months and a maximum upto six months. At present, the maturity period has
been brought down to a minimum oI 7 days and maximum oI upto one year Irom the date oI

Denomination:- Minimum oI Rs. 5 lakh and multiples thereoI.
Limits and amount:- A CP can be issued as a stand alone` product. Banks and Iinancial
institutions will have the Ilexibility to Iix working capital limits duly taking into account the
resource pattern oI companies Iinancing including CPs.
Issuing and paying agent (IPA):- Only a schedule commercial bank can act as an IPA. It
veriIies all original certiIicates viz., credit rating certiIicates, letter oI oIIer and the board
resolution authorizing issue oI the CP. AIter authentication oI the entire CP document, IPA
issues an IPA certiIicate` to all subscribers oI the CP in the primary market and then reports the
issue to the RBI.
Investment in CP:- A CP may be held by individuals, banks, corporates, unincorporated
bodies, NRIs, and FIIs.
Mode of issuance:- A CP can be issued as a promissory note or a dematerialized Iorm.
Underwriting is not permitted.
Preference for demat:- Issuers and subscribers are encouraged to preIer exclusive reliance
on demat Iorm. Banks, Iinancial institutions, primary dealers, and satellitedealers are advised to
invest only demat Iorm.
Stand-by facility:- It is not obligatory Ior banks Ior Iinancial institutions to provide stand-by
Iacility. They can provide credit enhancement Iacility within the prudential norms.
The Reserve Bank publishes, on a monthly as well as a weekly basis, eIIective interest
rates on CPs issued during a Iortnight. The Discount and Finance House oI India provides the
range oI weekly bid/oIIer rates it oIIers. The DFHIs turnover in CPs Iluctuates highly.

The working capital requirement oI business Iirms is provided by banks through cash-
credits/overdraIt and purchase/discounting oI commercial bills. Commercial bill is a short-term,
negotiable, and selI-liquidating instrument with low risk. It enhances the liability to make
payment on a Iixed date when goods are bought on credit. According to the Indian Negotiable
Instruments Act, 1881, bill oI exchange is a written instrument containing an unconditional
order. Signed by the maker, directing to pay a certain amount oI money only to a particular
person, or to the bearer oI the instrument. Bills oI exchange are negotiable instruments drawn by
the seller (drawer) on the buyer (drawee) Ior the value oI the goods delivered to him. Such bills
are called trade bills. When trade bills are accepted by commercial banks, they are called
commercial bills. The bank discounts this bill by keeping a certain margin and credits the
proceeds. Banks, when in need oI money, can also get such bills rediscounted by Iinancial
institutions such as LIC, UTI, GIC, ICICI, and IRBI. The maturity period oI the bills varies Irom
30 days, 60 days, or 90 days, depending on the credit extended in the industry.

Commercial bill is an important tool to Iinance credit sales. It maybe a demand bill or a
usance bill. A usance bill is payable on demand, that is, immediately at sight or on presentation
to the drawee. A usance bill is payable aIter a speciIied time. II the seller wishes to give some
time Ior payment, the bill would be payable at a Iuture date. These bills can either be clean bills
or documentary bills. In a clean bill, documents are enclosed and delivered against acceptance by
drawee, aIter which it becomes clear. In the case oI a documentary bill, documents are delivered
against payment accepted by the drawee and documents oI Iile are held by bankers till the bill is
Commercial bill can be inland bills or Ioreign bills. Inland bills must be
(a) Be drawn or made in India and must be payable in India; or
(b)Drawn upon any person resident in Indi.

Foreign bills on the other hand are
(a) Drawn outside India and may be payable in and by a party outside India, or may be
payable in India or drawn on a party in India; or
(b)It may be drawn in India and made payable outside India.
A related classiIication oI bills is export bills and import bills. While export bills are drawn
by exporters in any country outside India. Import bills are drawn on importers in India by
exporters abroad.

One oI the objectives oI the Reserve Bank in setting up the Discount and Finance House
oI India was to develop commercial bills market. The bank sanctioned a reIinance limit Ior the
DFHI against collateral oI treasury bills and against the holdings oI eligible commercial bills.
With a view to developing the bills market, the interest rate ceiling oI 12.5 per cent on
rediscounting oI commercial bills was withdrawn Irom May 1, 1989. To develop the bills
market, the Securities and Exchange Board oI India (SEBI) allowed, in 1995-96, 14 mutual
Iunds to participate as lenders in the bills rediscounting market. During 1996-97, seven more
mutual Iunds were permitted to participate in this market as lenders while another Iour primary
dealers were allowed to participate as both lenders and borrowers. In order to encourage the
bills` culture, the Reserve Bank advised banks in October 1997 to ensure that at least 25 per cent
oI inland credit purchases oI borrowers should be through bills.

CertiIicates oI deposit are unsecured, negotiable, short-term instruments in bearer Iorm,
issued by commercial banks and development Iinancial institutions. CertiIicates oI deposit were
introduced in June 1989. Only scheduled commercial banks were allowed to use them initially.
Financial institutions were permitted to issue certiIicates oI deposit in 1992.

CertiIicates oI deposits are time deposits oI speciIic maturity similar to Iixed deposits
(FDs). The biggest diIIerent between the two is the CDs, being in bearer Iorm, are transIerable
and tradable while Iixed deposit are not. Like other time deposits, certiIicates oI deposit are
subject to SLR and CRR requirements. There is no ceiling on the amount to be raised
by banks. The deposits attract stamp duty as applicable to negotiableinstruments. They can be
issued to individuals, corporations, companies, trusts, Iunds, associates and others. NRIs can
subscribe to the deposits on non-repatriable basis. CDs are issued by banks during periods oI
tight liquidity, at relatively high interest rates. They represent a high cost liability. Banks resort
to this source when the deposit growth is sluggish but credit demand is high. Compared to other
retail deposits, the transaction costs oI CDs is lower. A Large amount oI money is mobilized
through these deposits Ior short periods, reducing the interest burden when the demand Ior
credits slack.

In 1989-90, the maximum amount that could be raised through CDs was limited to one per
cent oI the Iortnightly average outstanding aggregate deposits. Since these
depositswere subject to reserve requirements, a bankwise limit on their issue oI CDs was
prescribed. With time, the bank wise limits were raised. From October 16, 1993, these limits
were abolished. In April 1993, scheduled commercial banks were permitted to raise CDs without
any ceiling on the interest rate. This not only enabled banks to raise resources at competitive
rates oI interest but also enabled CDs to emerge as a market-determined instrument. The deposits
serve as relationship instruments, issued by banks on a discretionary basis to high net work
In 1992, six Iinancial institutions-IDBI, IFCI, ICICI, SIDBI, IRBI and EXIM Bank-were
permitted to issue CDs. These institutions could issue CDs with a maturity oI more than one year
and upto three years Ior an aggregate amount oI Rs. 2500 crore. EIIective Iorm May 3, 1997, an
umbrella limit Ior the mobilization oI resources by way oI term money borrowings, CDs, term
deposits, and inter-corporate deposits was prescribed Ior three Iinancial institutions-IDBI, ICICI,
and IFCI-supplanting the instrument wise limits stipulated earlier. The overall ceiling Ior the
umbrella limit was set equal to the net owned Iunds oI the Iinancial institutions. A similar
umbrella limit was also prescribed Ior EXIM Bank and SIDBI in June and August
1997, respectively. The certiIicates oI deposit are issued by commercial banks on a discount to
Iace value basis; those CD`s oI development Iinancial institutions can be coupon bearing. The
discount rate oI a CD is market determined. Coupon rates on the deposits issued by banks and
Iinancial institutions are published by the Reserve Bank on a Iortnightly as well as monthly
In 2000-01, the minimum maturity oI a CD was reduced to 15 days to bring them at par
with other short-term instruments like commercial papers and term deposits. With a view to
broadening the CD market, the minimum size oI issue was gradually scaled down Iorm Rs. 5
lakh to Rs. 1 lakh in June 2002. From June 30, 2002, banks and Iinancial institutions were
required to issue CDs only in the dematerialized Iorm.

CDs oI commercial banks Iorm only 2 per cent oI their (Iinancial institutions) aggregate
deposits. Hence, there is a large scope Ior the development oI this instrument. The Iollowing
Iactors, however, limit the growth oI CDs.
Transactions in the secondary market have not developed because the number oI
participants is limited, interest rates are quite high, and certiIicate oI deposit is not listed.
The secondary market Ior certiIicates oI deposit has been slow to develop. With banks
oIIering higher interest rates on these deposits, investors Iind it proIitable to hold them
till maturity.
The reliance oI Iinancial institutions oI CDs has decreased. It can be increased iI the tenor
oI the certiIicates oI deposit oI the Iinancial institutions is rationalized.
There is no Iacility oI loans against the deposits by banks nor can banks buy them back
The market is limited to Iew investors as the minimum level oI investment is still high.
The stamp duty on the certiIicates oI deposit has also aIIected their growth.
CertiIicates oI deposit carry a Iixed rate oI discount. To enlarge the market oI these deposits, it is
necessary to introduce Iloating rate.

It is by Iar the most visible market as the day-to-day surplus Iunds, mostly oI banks, are
traded there. The call money market accounts Ior the major part oI the total turnover oI the
money market. It is a key segment oI the Indian money market. Since its inception in1955-
56, the call money market has registered a tremendous growth in volume oI activity.
The call money market is a market Ior very short-term Iunds repayable on demand and with a
maturity period varying between one day to a Iortnight. When money is borrowed or lent Ior a
day, it is known as call (overnight) money. Intervening holiday sand/or Sundays are excluded Ior
this purpose. When money is borrowed or lend Ior more than a day and upto 14 days, it is known
as notice money. No collateral security is required to cover these transactions. The call money
market is a highly liquid market, with the liquidity being exceeded only by cash. It is highly
risky and extremely volatile as well.

The Reserve Bank intervenes in the call money market indirectly in two ways-
(i) by providing lines oI Iinance/additional Iunding to the DFHI and other call money
dealers; and
(ii)by conducting repo auctions. Additional Iunding is provided through reverse repo
auctions which increases liquidity in the market and brings down all money rates. The
Reserve Bank`s repo auctions absorb excess liquidity in the economy and push up
depressed call rates. The Reverse Bank`s intervention is necessary as there is a close
linkage between the call money market and other segments oI the money market and the
Ioreign exchange market.

Call money is required mostly by banks. Commercial banks borrow money Irom
other banks to maintain a minimum cash balance known as cash reserve requirement. This inter-
bank borrowing has led to the development oI the call money market.CRR is an important
requirement to be met by all commercial banks. The Reserve Bank stipulates this requirement
Irom time to time. The CRR is a technique Ior monetary control aIIected by the Reserve Bank
Ior achieving speciIic macro-economic objectives such as maintaining desired levels oI inIlation,
growth, exchange rates, and so on. CRR reIers to the cash that banks have to maintain with the
Reserve Bank as a certainpercentage oI their total demand and time liabilities (DTC). The CRR,
a primary instrument oI monetary policy, has been brought down Irom 15 per cent in March
1991 to 4.75 per cent in October 2002. Prior to May 2000; banks were required to maintain 85
per cent oI their Iortnightly reserve requirement on a daily basis. The networking among various
branches oI banks was not developed enough Ior the branches to report their respective net
demand and time liabilities (NDTL) positions to the main branch on the Iirst day oI the Iortnight
itselI. The NDTL oI a bank is the sum oI its liabilities to the banking system and its liabilities to
the public. With a view to providing Iurther Ilexibility to banks and enabling them to choose an
optimum strategy oI holding reserves depending upon their intra-period cash Ilows, several
measures were undertaken recently. In November 1999, a lagged reserve maintenance system
was introduced under which banks were allowed to maintain reserve requirements on the basis oI
the last Friday oI the second (instead oI the Iirst) preceding Iortnight. From May 6, 2000, the
requirement oI minimum 85 per cent oI the CRR balance on the Iirst 13 days to be maintained on
a daily basis was reduced to 65 per cent. With eIIect Irom August 11, 2000, this was reduced to
50 per cent Ior the Iirst seven days oI the reporting Iortnight while maintaining the minimum 65
per cent Ior the remaining seven days including the reporting Friday. The daily minimum CRR
was reduced to enable the smooth adjustment oI liquidity between surplus and deIicit segments
and better cash management to avoid sudden increase in overnight call rates. Hence, once every
Iortnight on a reporting Friday,` banks have to satisIy reserve requirements which oIten entail
borrowing in the call/notice money market. It is a market in which banks trade position to
maintain cash reserves. It is basically an over the counter (OTC) market without the
intermediation oI brokers.

The call money market was predominantly an inter-bank market till 1971 when UTI and
LIC were allowed to operate as lenders. Until March 1978 brokers were also allowed to
participate in the call money market that would eIIect transactions between the lenders and
borrowers Ior a brokerage. In the 1990s, the participation was gradually widened to include
DFHI, STCI, GIC, NABARD, IDBI, money market mutual Iunds, corporates, and private sector
mutual Iunds as lenders in this market. The participants in the call money market as both lenders
and borrowers are scheduled and non-scheduled commercials banks, Ioreign banks, state, district
and urban cooperative banks, and DFHI. Other borrowing participants are the brokers and
dealers insecurities/bullion/bill market, and sometimes individuals oI high Iinancial status. In
1996-97, the Reserve Bank permitted primary dealers to participate in this market as both
borrowers and lenders. Entities that could provide evidence oI surplus Iunds have been permitted
to route their lending through primary dealers. The minimum size oI operations Ior routing
transactions has been reduced Irom Rs. 20 crore to Rs. 3crore, with eIIect Irom May 9, 1998. The
call money market is now a pure inter-bank money market with eIIect Irom August 6, 2005.

Link between Call Money Market and Other Financial Markets
There is an inverse relationship between all rates and short-term money market instruments
such as certiIicates oI deposit and commercial paper. When call rates peak to a high level, banks
raise more Iunds through certiIicates oI deposit. When call money rates are lower, many banks
Iund commercial paper by borrowing Irom the call money market and earn proIits through
arbitrage between money market segments.
A large issue oI government securities also aIIects call money rates. When banks
subscribe to large issues oI government securities, liquidity is sucked out Iorm thebanking
system. This increases the demand Ior Iunds in the call money market which pushes up call
money rates. Similarly, a rise in the CRR or in the repo rate absorbs excess liquidity ad call rates
move up. The call money market and the Ioreign exchange market are also closely linked as
there exist arbitrage opportunities between the two markets. When call rates rise, banks borrow
dollars Irom their overseas branches, swap them Ior rupees, and lend them in the call money
market. At the same time, they buy dollars Iorward in anticipation oI their repayment liability.
This pushes Iorward the premium on the rupee-dollar exchange rates. It happens many a times
that banks Iund Ioreign currency positions by withdrawing Irom the call money market. This
hikes the call money rates.

Call Rate
The interest rate paid on call loans is known as the call rate.` It is highly volatile rate. It
varies Irom day-to-day, hour-to-hour, and sometimes even minute-to-minute. It is very sensitive
to changes in the demand Ior and supply oI call loans. Within one Iort night, rates are known to
have moved Iorm 1-2 per cent to over 140 per cent per annum. Till 1973, the call rate was
determined by market Iorces, that is, by the Iorces oI demand and supply. In December 1973, the
call rate touched a high oI 30 per cent due to tight credit policy wherein the bank rate was raised
and reIinance and rediscount Iacilities were discontinued. As a result, many banks deIaulted and
the Indian Bank Association (IBA) started regulating the call rate by Iixing a ceiling Irom time to
time in an inIormal manner. With eIIect Irom May 1, 1989, call rates were Ireed Irom an
administrative ceiling. Now the rate is Ireely determined by the demand and supply Iorces in the
call money market. There are two call rates in India:-
(i) Inter-bank call rate.
(ii) Lending rte oI DFHI in the call market.
The DFHI rate is usually higher than the bank rat. A reIerence rate in the overall call money
market has emerged recently through NSE and Reuters.

Call Rates Volatility
In India, money and credit situation is subject to seasonal Iluctuation every year. The
volume oI call money transactions and the amount as well as call rate levels characterize
seasonal Iluctuation/volatility. A decrease in the call/notice money requirement is grater in the
slack season (mid-April to mid-October) than in the buy season (mid-October to mid-April).

The National Stock Exchange (NSE) developed and launched the NSE Mumbai Inter-bank
Bid Rate (MIBID) and NSE Mumbai Inter-bank OIIer Rate (MIBOR) Ior the overnight money
markets on June 15, 1998. NSE MIBID/MIBOR are based on rates pooled by NSE Irom a
representative panel oI 31 banks/institutions/ primary dealers. Currently, quotes are pooled and
processed daily by the exchange at 9:40 (IST), Ior the overnight rate and at 11:30 (IST) Ior the
14 day, 1 month, and 24 month rates. The rates pooled are then processed using the boost trap
method to arrive at an eIIicient estimate oI the reIerence rates. This rate issued as a benchmark
rate Ior majority oI the deals stuck Ior Iloating rate debentures and term deposits. Benchmark is
rate at which money is raised in Iinancial markets. These rates are used in hedging strategies as
reIerence points in Iorwards and swaps. Reuters MIBOR (Mumbai Inter-bank Overnight
Average) is arrived at by obtaining a weighted average oI call money transactions oI 22 banks
and other players. MIBOR is a better oIIicial benchmark rate Ior interest rate swaps (IRs) and
Iorward rate agreements (FRAs). MIBOR is transparent, market-determined and mutually
acceptable to counterparties as reIerence.

Beyond the call/notice money market is the term money market. This money market is one
beyond the overnight tenor, with maturity ranging between the three months to one year. In other
words, a term money market is one where Iunds are traded upto a period oI three to six months.
The term money market in India is still not developed. The turnover in this market remained
mostly below Rs. 200 crore in 2001-02. The average daily turnover in the term money market
rose by 52 per cent to Rs. 519 crore in 2003-04 Irom Rs. 341 crore in 2002-03. The volumes are
quite small in this segment as there is little participation Ior large players and a term money yield
curve is yet to develop. Banks do not want to take a view on term money rates as they Ieel
comIortable with dealing only in the overnight money market. Foreign and private sector banks
are in deIicit in respect oI short-term resources; hence they depend heavily on call/notice money
market. The public sector banks are generally in surplus and they exhaust their exposure limit to
them thereby constraining the growth oI the term money market. Corporates preIer cash credit`
rather than loan credit,` which Iorces banks to deploy a large amount oI resources in the
call/notice money market rather than in term money market to meet their demands.
The Reserve Bank has permitted select Iinancial institutions such as IDBI, ICICI, IFCI
IIBI, SIDBI, EXIM Bank, NABARD, IDFC, and NHB to borrow Irom the term money market
Ior three-to six-months maturity. In April 1997, banks were exempted
Irom the maintenance oI CRR and SLR on inter-bank liabilities to Iacilitate the development oI
the term money market. However, market participants are reluctant to an exposure in the term
money market as the market as the market is too shallow.
As stated earlier, the Reserve Bank has planned to convert the call/notice money market
into a pure inter-bank market. Hence, many players such as primary dealers and non-bank
entities who will be phased out oI the call money market may shiIt their Iocus to the term money
market. Moreover, banks have been Iorced to reduce their exposure to the overnight call money
market. These surplus Iunds oI banks may shiIt to the term money market. Increased
participation and suIIicient liquidity could lead to the development oI the term money market.
From April 30, 2005, all NDS members are required to report their term money deals on the
NDS platIorm.

Reserve Requirements:-
Reserve requirements are oI two types:
(i) Cash Reserve Requirements (CRR)
(ii) Statutory Liquidity Ratio (SLR)
They are techniques oI monetary control used by the Reserve Bank to achieve speciIic
macro-economic objectives. CRR reIers to the cash that banks have to maintain with the Reserve
Bank as a certain percentage oI their total demand and time liabilities (DTL) while statutory
liquidity ratio reIers to the mandatory investment and banks have to make in government
securities. The statute governing the CRR under section 42 (1) oI the Reserve Bank oI India Act
requires every bank in the second schedule to maintain an average daily balance with the
Reserve Bank oI India, the amount oI which shall not be less than 3 per cent oI the total demand
and time liabilities. CRR is an instrument to inIluence liquidity in the system as and when
required. SLR is the reserve that is set aside by the banks Ior investment in cash, gold, or
unencumbered approved securities. It is mandatory under section 24 (2A) oI the Banking
Regulation Act, 1949, as amended by the Banking Laws (Amendment) act, 1983
Ior banks to maintain this reserve. The reserve is supposed to provide a buIIer in case oI a run on
the bank .The CRR has been brought down Irom 15 per cent in March 1991 to 4.75 per cent in
October 2002 and to 4.5 per cent in April 2003 while the SLR was brought down Irom its peak
oI 38.5 per cent in April 1992 to 25 per cent on October 25, 1997. Thus, till the early 1990s, both
the CRR and SLR were preempting around 63.5 per cent oI the incremental deposits. Even
though the SLR has been brought down to 25 per cent, most banks currently hold a volume oI
government securities higher than required under the SLR as the interest rate on government
securities is increasingly market-determined. The daily minimum CRR was reduced Irom 85 per
cent oI 65 per cent to enable a smooth adjustment oI liquidity between the surplus and the deIicit
segment and better cash management to avoid a sudden increase in the overall call rates. The
Reserve Bank has announced that it would like to see the CRR level down to3 per cent. The key

constraint in reducing the CRR is the continuing high level oI Iiscal deIicit which cannot be
Iinanced entirely by the market and, thereIore, requires substantial support by the Reserve Bank.
A cut in CRR increases the liquidity in the economy. It also means lower cost Ior the banks
which translates into lower prime lending rates. It also sets a broad direction Ior interest rates in
the Iuture. Since October 2001, the interest rate paid on eligible balances under CRR was linked
to the bank rate. From August 11, 2001, the inter-bank term liabilities with an original maturity
oI 15 days and upto one year were exempted Irom the prescription oI minimum CRR
requirement oI 3 per cent. The CRR will continue to be used to both directions Ior liquidity
management in addition to other instruments.
Interest Rates:-
Interest rate is one oI the distinct monetary transmission channels. An administered
interest rate structure was the central Ieature oI the Indian monetary and credit system during the
1980s. The rationale behind the administered rate structure was to enable certain preIerred or
priority sectors to obtain Iunds at concessional rates oI interest. This brought about an element oI
cross-subsidization resulting in higher lending rates Ior the non-concessional commercial sector.
The deposit rates also had to be maintained at a low level. This system became complex with the
proliIeration oI sectors and segments to which concessional credit was to be provided. Following
the recommendations oI the Chakravarty Committee, set up in 1985, deposit rates were made
attractive to avoid Iinancial repression associated with near zero real deposit rates. However, the
interest rate structure remained complicated. There were about 50 lending categories and a large
number oI stipulated interest rates depending on the loan size, usage, and type oI borrowers. In
1991, the Narasimham Committee recommended that concessional interest rates should not be a
vehicle Ior subvention and there should be real interest rates. In view oI this recommendation,
interest rate reIorms were undertaken in money, credit, and government securities market. Since
the beginning oI 1992-93, interest rate in the government securities
marketwas progressively deregulated with the introduction oI an auction system. The structure oI
interest rates Ior commercial banks was simpliIied. The bank rate was reactivated in April 1997,
linked with deposit rates (up to one year maturity) initially. Since then it has become a signaling
rate. Moreover, with a deregulation oI interest rates, borrowings by the government since 1992
have been at market-related yields. Public sector undertaking and Iinancial institutions which

were largely dependent on budgetary support Ior their resources now resort to the market to raise
their resource requirements.
Thus, with deregulation, interest rate has emerged as a major instrument oI resource allocation.

Prime lending rate:-
The prime lending rate is the minimum lending rate charged by the bank Irom its best
corporate customers or prime borrowers. Prime lending rates have been deregulated gradually
since April 1992 and the interest rate structure Ior commercial banks simpliIied. The six
categories oI lending rates were reduced to Iour in April 1992 and to three in April 1993.The
norms relating to the PLR have been progressively liberalized. From October 18, 1994, interest
rates on loans above Rs 2 lakh were Iree and banks were permitted to determine their prime
lending rates. From April 1998, banks were given the Ireedom to determine the interest rates on
loans up to Rs. 2 lakh, subject to small borrowers being charged at rates not exceeding the PLR.
The Reserve Bank oI India advised banks to reduce the maximum spreads over their prime
lending rates and announce it to the public along with the announcement oI their PLR. The
Reserve Bank also gave banks the Ireedom to evolve diIIerential PLRs. DiIIerential PLRs
are diIIerent prime lending rates Ior diIIerent levels oI maturities. Only a handIul oI banks came
out with diIIerential PLRs. In order to ease the rigidities in the interest rate structure, banks were
given the Ireedom oI oIIer all loans on Iixed or Iloating rates while complying with the PLR
stipulation, Irom April 2000. In April 2001, banks were allowed to oIIer loans at sub-PLR rates,
thereby removing the practice oI treating the PLR as a Iloor Ior loans above Rs. 2 lakh. Although
the PLR ceased to be a Iloor Ior loans over Rs. 2lakh, it continues to operate as a ceiling Ior
loans up to Rs. 2 lakh taking on the role oI a benchmark. At present commercial banks decide the
lending rate to diIIerent borrowers (with credit limit oI over Rs. 2 lakh) subject to the
announcement oI prime lending rate (PLR) as approved by their boards. Banks` PLR will now be
on cost plus` basis, that is, banks have to take into account there:- (i) actual cost oI Iunds,
(ii)operating expenses, and (iii) a minimum gain to cover regulatory requirement
oI provisioning/capital charge and proIit margin, while arriving at the benchmark PLR. The
minimum lending rates have gradually come down to 11 per cent in October 2002Iorm a peak oI

17 per cent in 1992-93. Generally, PLR across banks are aligned with those oI a Iew major banks
who provide the signals Ior change in the prime lending rate. The Reserve Bank publishes
monthly PLRs based on the rates oIIered by Iive leading public sector bank. The PLR oI the
banks is based on the bank rate and has a positive correlation with it.
Bank rate:
The rate oI discount Iixed by the central bank oI country Ior their discounting oI eligible
paper is called the bank rate. It is also the rate changed by the central bank on advances on
speciIied collateral to banks. The bank rate is deIined in section 49 oI the Reserve Bank oI India
Act, 1934, as the standard rate at which the bank is prepared to buy or rediscount bills
oI exchange or other commercial papers eligible Ior purchase under this act. The bank rate was
revised only three times in the period between 1995-96. It was reactivated in April 1997 with
deposit rates (up to one year maturity) linked to it initially. With eIIect Irom April 16, 1997, the
maximum term deposit rate (up to one year) oI scheduled commercial banks was set at 2 per cent
below the bank rate and all interest rates on advances Irom the Reserve Bank were linked to the
bank rate. The deposit rates were completely deregulated in October 1997; the other rates
continued to be linked to the bank rate. From 1997, bank rate emerged as signaling rate to reIlect
the stance oI the monetary policy. The interest rates on diIIerent types oI accommodation Irom
the Reserve Bank including reIinance are linked to the bank rate. The bank rate is the central
bank`s key rate signal, which banks use to price their loans. The announcement impact oI bank
rate changes has been pronounced in the prime lending rates oI commercial banks. The bank rate
has been brought down Irom a high oI 9.0 per cent in May 1998 to6.5 per cent in October 2001.
The Reserve Bank cut the bank rate oI 9.25 per cent in October 2002, its lowest level since 1973.
The bank rate was Iurther brought down to 6.00 per cent in April 2003.The interest rate, as an
instrument oI monetary policy, is evolving. As interest rates in the economy cover credit, money,
and securities markets, there should be linkages not only among these markets but among the
rates as well. Low interest rate is the objective oI the monetary policy. Low interest rates are
subject to stable inIlationary expectations which, in turn, depend on price stability. There are
many constraints which impede the lowering oI interest rates, diminishing the eIIectiveness oI
this tool. The major constraints are high intermediation costs oI the banking system, large non-
perIormance assets 9NPAs) oI the banks, and government`s massive borrowing programme.

Also, the system oI administered interest rates on certain government saving instruments, such as
small savings and provident Iund, leads to segmented market behaviour resulting in low
convergence oI rates oI return on various Iinancial instruments.
The major Iunction oI the money market is to provide liquidity. To achieve this Iunction
and to even out liquidity changes, the Reserve Bank uses repos. Repo is a useIul money market
instrument enabling the smooth adjustment oI short-term liquidity among varied market
participants such as banks, Iinancial institutions, and so on. Repo reIers to a transaction in which
a participant acquires immediate Iunds by selling securities and simultaneously agrees to the
repurchase oI the same or similar securities aIter a speciIied time at a speciIied price.
In other words, it enables collateralized short-term borrowing and lending through sale/
purchase operations in debt instruments. It is a temporary sale oI debt involving Iull transIer oI
ownership oI the securities, that is, the assignment oI voting and Iinancial rights. Repo is also
reIerred to as a ready Iorward transaction as it is a means oI Iunding by selling a security held on
a sport basis and repurchasing the same on a Iorward basis. Reverse repo is exactly the opposite
oI repo-a party buys a security Irom another party with a commitment to sell it back to the latter
at a speciIied time and price. In other words, while Ior one party the transaction is repo, Ior
another party it is reverse repo. A reverse repo is undertaken to earn additional income on idle
cash. In India, repo transactions are basically Iund management/SLR management devices used
by banks. The diIIerent between the price at which the securities are bought and sold is the
lender`s proIit or interest earned Ior lending the money. The transaction combined elements oI
both a securities purchase/sale operation and also a money market borrowing/lending operation.
It signiIies lending on a collateral basis. It is also a good hedge tool because the repurchase price
is locked in at the time oI the sale itselI. The terms contract is in terms oI a repo rate,`
representing the money market borrowing/lending rate. Repo rate is the annual interest rate Ior
the Iunds transIerred by the lender to the borrower. The repo rate is usually lower than that
oIIered on unsecured inter-bank rate as it is Iully collateralized.

The Discount and Finance House of India
The DFHI was set up in April 1988 by the Reserve Bank with the objective oI deepening
and activating the money market. It commenced its operations Irom July 28, 1988. It is a joint
stock company in Iorm and is jointly owned by the Reserve Bank, public sector banks and all-
India Iinancial institutions which have contributed to its-paid up capital oI Rs. 200 crore in the
proportion oI 5:3:2. In addition, reIinance Iacility with the Reserve Bank and credit oI Rs. 100
crore Irom 28 public sector banks on a consortium basis are the sources The role oI the DFHI is
to Iunction as a specialized money market intermediary Ior stimulating activity in money market
instruments and develop secondary market in these instruments. It also undertakes short-term
buy-back operations I the government and approved dated securities. DFHI mobilizes
Iunds/resources Irom commercial/cooperative banks, Iinancial institutions, and corporate entities
having resources to lend (which individually may not represent tradable volumes in wholesale
market) which are pooled and lent in the money market. The two-way regular quotes in money
market instruments provided by DFHI serve as a base to broaden the secondary market and give
an assured liquidity to the instruments. DFHI was categorized as an eligible institutions under the
relevant provisions oI the RBI Act, 1934, in November 1989 so that the placement oI Iunds with
DFHI can be included as an asset with the banking system Ior netting purposes while calculating
the net demand and time liabilities Ior reserve purposes. DFHI is also an authorized institution to
undertake repo transactions in treasury bills and all dated government securities to impart greater
liquidity to these instruments.
Since November 13, 1995, DFHI is an accredited primary dealer. With thisaccreditation, its
role has undergone a transIormation. Now it acts as a market maker, giving two-way quotes and
takes large positions on its account in government securities. The DFHI deals in treasury bills,
commercial bills, certiIicates oI deposits, commercial paper, short-term deposits, call/notice
money market and government securities. The presence oI the DFHI as an intermediary in the
money market has helped the corporate entities, banks, and Iinancial institutions to raise short-
term money and invest short-term surpluses. The DFHI also extends repos, that is, buy-back
Iacility upto14 days, to banks and Iinancial institutions in respect oI money market instruments.

The cumulative turnover in each oI these instruments is shown in Table 4.17. The cumulative
turnover oI the DFHI in all Iinancial transactions increased Iour-Iold in a span oI nine years.
The major part oI the turnover was in call money Iollowed by government dated securities
and treasury bills, Its business in CDs and CPs was negligible and business in commercial bills
declined sharply in the 1990s. Its dealings in government securities exceeded those in treasury
bills aIter being accredited as a primary dealer. The DFHI has been concentrating on the call
money market rather than activating other money market instruments like CPs, CDs and CBs.
These instruments need to be developed Iurther Ior activating and deepening the money market.

Money Market Mutual Funds (MMMFs) were introduced in April 1991 to provide an
additional short-term avenue Ior investment and bring money market investment within the reach
oI individuals. These mutual Iunds would invest exclusively in money market instruments.
MMFs bridge the gap between small individual investors and the money market. MMMF
mobilizes savings Irom small investors and invests them in short-term debt instruments or money
market instruments. A Task Force was constituted to examine the broad Iramework outlined in
April1991 and consider the implications oI the scheme. Based on the recommendations oI the
Task Force, a detailed scheme oI MMMFs was announced by the Reserve Bank in April1992.
The MMMFs portIolio consists oI short-term money market instruments. An
investor investing in MMMFs gets a yield close to short-term money market rates coupled with
adequate liquidity. The Reserve Bank has been making several modiIications to the scheme
since1995-96 to make it more Ilexible and attractive to a large investor base such as banks,
Iinancial institutions and corporate besides individuals.
ModiIications such as the removal oI ceiling Ior raising resources, allowing the private
sector to set up MMMFs, permission to MMMFs to invest in rated corporate bonds and
debentures, reduction in the minimum lock-in period to 15 days, and so on are steps towards
making the MMMFs scheme attractive. MMMFs were allowed to oIIer a cheque writing
Iacility` in a tie up with banks to provide more liquidity to unit holders. Earlier, MMMFs could
be set up either in the Iorm oI a Money Market Deposit Account (MMDA) or as a separate
entity. Now, all MMMFs have to be set up as separate entities only in the Iorm oI a Trust.` The
growth in MMMFs has been less than expected. Though, in principle, approvals were granted to
10 entities, only three MMMFs have been set up-one in the private sector-Kothari Pioneer
Mutual Iund, and the other two by IDBI and UTI. The total size oI these Iunds is not very large.
The MMMFs, earlier under the purview oI the Reserve Bank, come under the purview oI the
SEBI regulation since March 7, 2000.MMMFs can grow only when the money market grows in
volume and acquires depth.

The development oI a money market is a prerequisite Ior improving the operational
eIIectiveness oI the monetary policy. The objective oI reIorms in the money market was to
remove structural liquidities and ineIIiciencies so as to increase participation and strengthen inter
linkages between money market segments and other Iinancial markets. This called Ior
the introduction oI sophisticated Iinancial instruments and innovations in market prices to ensure
liquidity in various segments oI the money market and Ior the development oI a short-term yield
curve. A review oI the money market development and current eIIorts Ior
Iurther development show that a base has been created with a variety oI products introduced in
the market. The treasury bills market has expanded in terms oI size and volume oI growth. The
markets Ior commercial paper, certiIicates oI deposit, and commercial bills are less liquid. The
call money market has not only become more active but the call money rate has also
become more volatile in recent years. With the deregulations oI interest rates, the rates have
emerged as an important mechanism Ior asset allocation.
New, indirect tools oI managing liquidity like repos and liquidity adjustment Iacility
operations have emerged and are increasingly used by the Reserve Bank. Agencies like the
National Stock Exchange and Reuters have taken the initiative in creating overnight MIBOR
rates as benchmark/reIinance rates. The Reserve Bank`s objective has been to develop a short-
term rupee yield curve. To this end, a IourIold strategy has been adopted which includes
conducting oI LAF operations with a view to keeping short-term interest rates within a corridor,
development oI call money market as a pure inter-bank market, rationalization oI the traditional,
Sector-speciIic reIinance support, and developing the repo market so that non-bank participants
get an access to this market. Inspite oI an increase in the number oI instruments and players and
the recent eIIorts as mentioned above, the money market has not acquired the required depth in
terms oI volume and liquidity. Partly, it was the Reserve Bank`s policy which inhibited the
growth oI the money market. The Reserve Bank`s decisions oI banning repos aIter the securities
scam oI 1992, resorting to a tight monetary policy during the busy season credit policy oI 1995,
and deIending the rupee in the wake oI the South-east Asian crisis took a severe toll on the
money markets and the institutions that operate in it. Thus, at the end we can conclude that the
Indian money market is developing at a good speed.


W Bharati V. Pathak - The Indian Financial System Pearson.
W Dr. R.P.Rustagi - Financial Analysis and Financial Management Sultan Chand and
W M .Vohra- Indian Financial System- Anmol Publications.



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