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The Fundamentals of Money

Market in India

Ashok Kataria
Sathya Murthy
Ganesh Naik
Paresh Natekar
Ranjan Varma
Overview of Financial Markets
The Six Horses: Why, What, Who,
Which, How and Where ?

• Why: The Need.

• What: The Definition.
• Who: The Players.
• Which & How: The Products &
• Where: The Resources
The Need

• Need for short term funds by Banks.

• Outlet for deploying funds on short term
• Need to keep the SLR as prescribed
• Need to keep the CRR as prescribed
• Optimize the yield on temporary surplus
• Regulate the liquidity and interest rates in
the conduct of monetary policy to achieve
the broad objective of price stability,
efficient allocation of credit and a stable
foreign exchange market
The Definition

• Money Market is "the centre for dealings,

mainly short-term character, in money
• It meets the short-term requirements of
borrower and provides liquidity or cash to
the lenders.
• It is the place where short-term surplus
investible funds at the disposal of financial
and other institutions and individuals are bid
by borrowers, again comprising Institutions,
individuals and also the Government itself"
The Definition (Cont’d)

• Money market refers to the market for short

term assets that are close substitutes of
money, usually with maturities of less than a
• A well functioning money market provides a
relatively safe and steady income-yielding
• Allows the investor institutions to optimize
the yield on temporary surplus funds.
• Instrument of Liquidity adjustment by
Central Bank.
The Players

• Reserve Bank of India

• SBI DFHI Ltd (Amalgamation of Discount & Finance
House in India and SBI Gilts in 2004)
• Commercial Banks, Co-operative Banks and Primary
Dealers are allowed to borrow and lend.
• Specified All-India Financial Institutions, Mutual
Funds, and certain specified entities are allowed to
access to Call/Notice money market only as lenders
• Individuals, firms, companies, corporate bodies,
trusts and institutions can purchase the treasury
bills, CPs and CDs.
The Products & Process

• Certificate of Deposit (CD)

• Commercial Paper (C.P)
• Inter Bank Participation Certificates
• Inter Bank term Money
• Treasury Bills
• Call Money
Certificate of Deposit

• CDs are short-term borrowings in the form

of Usance Promissory Notes having a
maturity of not less than 15 days up to a
maximum of one year.
• CD is subject to payment of Stamp Duty
under Indian Stamp Act, 1899 (Central Act)
• They are like bank term deposits accounts.
Unlike traditional time deposits these are
freely negotiable instruments and are often
referred to as Negotiable Certificate of
Features of CD

• CDs can be issued by all scheduled

commercial banks except RRBs
• Minimum period 15 days
• Maximum period 1 year
• Minimum Amount Rs 1 lac and in multiples
of Rs. 1 lac
• CDs are transferable by endorsement
• CRR & SLR are to be maintained
• CDs are to be stamped
Commercial Paper

• Commercial Paper (CP) is an

unsecured money market instrument
issued in the form of a promissory
• Who can issue Commercial Paper
Highly rated corporate borrowers,
primary dealers (PDs) and satellite
dealers (SDs) and all-India financial
institutions (FIs)
Eligibility for issue of CP

 the tangible net worth of the company, as per the latest

audited balance sheet, is not less than Rs. 4 crore;
 (b) the working capital (fund-based) limit of the
company from the banking system is not less than Rs.4
 and the borrowal account of the company is classified
as a Standard Asset by the financing bank/s.
Rating Requirement

• All eligible participants should obtain the

credit rating for issuance of Commercial
• Credit Rating Information Services of India
• Investment Information and Credit Rating
Agency of India Ltd. (ICRA)
• Credit Analysis and Research Ltd. (CARE)
• Duff & Phelps Credit Rating India Pvt. Ltd.
(DCR India)
• The minimum credit rating shall be P-2 of
CRISIL or such equivalent rating by other

• CP can be issued for maturities

between a minimum of 15 days and a
maximum upto one year from the date
of issue.
• If the maturity date is a holiday, the
company would be liable to make
payment on the immediate preceding
working day.
To whom issued

CP is issued to and held by individuals,

banking companies, other corporate
bodies registered or incorporated in
India and unincorporated bodies, Non-
Resident Indians (NRIs) and Foreign
Institutional Investors (FIIs).
• Uses of Repo
It helps banks to invest surplus cash
It helps investor achieve money market
returns with sovereign risk.
It helps borrower to raise funds at better
An SLR surplus and CRR deficit bank can use
the Repo deals as a convenient way of
adjusting SLR/CRR positions simultaneously.
RBI uses Repo and Reverse repo as
instruments for liquidity adjustment in the
Meaning of Repo

• It is a transaction in which two parties agree

to sell and repurchase the same security.
Under such an agreement the seller sells
specified securities with an agreement to
repurchase the same at a mutually decided
future date and a price
• The Repo/Reverse Repo transaction can only
be done at Mumbai between parties
approved by RBI and in securities as
approved by RBI (Treasury Bills,
Central/State Govt securities).
Call Money Market

The call money market is an integral part of

the Indian Money Market, where the day-to-
day surplus funds (mostly of banks) are
traded. The loans are of short-term duration
varying from 1 to 14 days.
The money that is lent for one day in this
market is known as "Call Money", and if it
exceeds one day (but less than 15 days) it is
referred to as "Notice Money".
Call Money Market

Banks borrow in this market for the

following purpose
• To fill the gaps or temporary
mismatches in funds
• To meet the CRR & SLR mandatory
requirements as stipulated by the
Central bank
• To meet sudden demand for funds
arising out of large outflows.
Gilt edged securities

The term government securities encompass

all Bonds & T-bills issued by the Central
Government, and state governments. These
securities are normally referred to, as "gilt-
edged" as repayments of principal as well as
interest are totally secured by sovereign
Treasury Bills

Treasury bills, commonly referred to as T-

Bills are issued by Government of India
against their short term borrowing
requirements with maturities ranging
between 14 to 364 days.
All these are issued at a discount-to-face
value. For example a Treasury bill of Rs.
100.00 face value issued for Rs. 91.50 gets
redeemed at the end of it's tenure at Rs.
Who can invest in T-Bill

Banks, Primary Dealers, State

Governments, Provident Funds,
Financial Institutions, Insurance
Companies, NBFCs, FIIs (as per
prescribed norms), NRIs & OCBs can
invest in T-Bills.
The Resources

• RBI’s site

• SBI DFHI’s site
• Website of R Kannan
• Indian Institute of banking & Finance