DATE: 1ST MARCH 2011

BUSINESS AND ECONOMIC ENVIRONMENT

SCHOOL OF MANAGEMENT STUDIES,NIT CALICUT

DEVELOPING THE MONEY MARKET IN

INDIA

PRESENTED TO: PRESENTED BY:

Dr. MUHAMMAD SHAFI SHEETANSHU SHEKHAR

ASSISTANT PROFESSOR PRADEEP KUMAR
NIT CALICUT ASWATHY M.
 CONTENTS
• What is money market?
• Features of Money Market
• Objective of Money Market
• Importance of Money Market
• Structure of Indian Money Market
• Composition of Money Market
• Instrument of Money Market
 CONTENTS
• Necessary Conditions for Developing The
Money Market
• Developing The Money Market
• Disadvantage of Money Market
• Summary
 What is Money Market?
As per RBI definitions “ A market for short terms
financial assets that are close substitute for money,
facilitates the exchange of money in primary and
secondary market”.

• The money market is a mechanism that deals with the

lending and borrowing of short term funds (less than
one year).

• A segment of the financial market in which financial

instruments with high liquidity and very short
maturities are traded.
 What is Money Market?

• It doesn’t actually deal in cash or money but deals

with substitute of cash like trade bills, promissory
notes & government papers which can converted into
cash without any loss at low transaction cost.

• It includes all individual, institution and

intermediaries.
 Features of Money Market
• It is a market purely for short-terms funds or financial
assets called near money.

• It deals with financial assets having a maturity period less

than one year only.

• In Money Market transaction can not take place formal

like stock exchange, only through oral communication,
relevant document and written communication
transaction can be done.
 Features of Money Market
• Transaction have to be conducted without the help of
brokers.

• It is not a single homogeneous market, it comprises of

several submarket like call money market, acceptance
& bill market.

• The component of Money Market are the commercial

banks, acceptance houses & NBFC (Non-banking
financial companies).
 Objective of Money Market
• To provide a parking place to employ short term
surplus funds.

• To provide room for overcoming short term deficits.

• To enable the central bank to influence and regulate

liquidity in the economy through its intervention in this
market.

• To provide a reasonable access to users of short-term

funds to meet their requirement quickly, adequately at
reasonable cost.
 Importance of Money Market
• Development of trade & industry.
• Development of capital market.
• Smooth functioning of commercial banks.
• Effective central bank control.
• Formulation of suitable monetary policy.
• Non inflationary source of finance to
government.
 Structure of Indian Money Market
ORGANISED STRUCTURE
1. Reserve bank of India.
2. DFHI (discount and finance house of India).
3. Commercial banks
i. Public sector banks:
SBI with 7 subsidiaries
Cooperative banks
20 nationalized banks
ii. Private banks:
Indian Banks
Foreign banks
4. Development bank
IDBI, IFCI, ICICI, NABARD, LIC, GIC, UTI etc.
Structure of Indian Money Market
UNORGANISED SECTOR
1. Indigenous banks
2. Money lenders
3. Chits

CO-OPERATIVE SECTOR
4. State cooperative
5. Central cooperative banks
6. Primary Agri credit societies
7. Primary urban banks
8. State Land development banks
9. Central land development banks
10. Primary land development banks
 Composition of Money Market
• Money Market consists of a number of sub-
markets which collectively constitute the
money market. They are:

1. Call Money Market

2. Commercial bills market or discount market
3. Acceptance market
4. Treasury bill market
 Call Money Market
Under call money market, funds are transacted on overnight basis and
under notice money market, funds are transacted for the period between 2
days and 14 days. 

Banks borrow in this money market for the following propose.:

1. To fill the gaps or temporary mismatches in funds.

2. To meet the CRR & SLR Mandatory requirements as stipulated by the
Central bank. 
3. To meet sudden demand for funds arising out of large outflows .

Thus call money usually serves the role of equilibrating the short-term
liquidity position of banks 
 Commercial bills market
• It is a market for Bills of Exchange arising out of
genuine trade transactions.
• In the case of credit sale, the seller draws a Bill of
Exchange on the buyer and once the buyer
accepts this bill, the seller can discount it with a
bank and receive cash.
• Discount and Finance House of India was
set up in 1988 to promote secondary
market in bills.
 Acceptance market
• Investment market based on short-term credit
instruments.
• An acceptance is a time draft or bill of exchange
that is accepted as payment for goods.
• A banker's acceptance, for example, is a time draft
drawn on and accepted by a bank, which is a
common method of financing short-term debts in
international trade including import-export
transactions.
 Instrument of Money Market
A variety of instrument are available in a developed
money market. In India till 1986, only a few
instrument were available.

They were
• Treasury bills
• Money at call and short notice in the call loan market.
• Commercial bills, promissory notes in the bill market.
 New Instruments
Now, in addition to the above the following new
instrument are available:

1. Commercial papers.
2. Certificate of deposit.
3. Inter-bank participation certificates.
4. Repo instrument
5. Banker's Acceptance
6. Repurchase agreement
7. Money Market mutual fund
 Treasury Bills (T-Bills)
• (T-bills) are the most marketable money market
security.
• They are issued with three-month, six-month
and one-year maturities.
• T-bills are purchased for a price that is less than their
par(face) value; when they mature, the government
pays the holder the full par value.
• T-Bills are so popular among money market
instruments because of affordability to the individual
investors.
Sample Treasury Bill(UK)
 Advantages of investing in T-Bills
• No Tax Deducted at Source (TDS)

• Zero default risk as these are the liabilities of GOI

• Liquid money Market Instrument

• Active secondary market thereby enabling holder to

meet immediate fund requirement.
 Commercial paper (CP)
• Commercial paper was introduced into the Indian money market
during the year 1990, on the recommendation of Vaghul Committee.
Now it has become a popular debt instrument of the corporate
world.

• A commercial paper is an unsecured short-term instrument issued by

the large banks and corporations in the form of promissory note,
negotiable and transferable by endorsement and delivery with a
fixed maturity period to meet the short-term financial requirement.

• There are four basic kinds of commercial paper: promissory notes,

drafts, checks, and certificates of deposit.
Issue Mechanism: CP
Volumes and Discount Rates
 Advantages & Disadvantages
Advantage of commercial paper:
• Wide range of maturity provide more flexibility.
• It does not create any lien on asset of the company.
• Tradability of Commercial Paper provides
investors with exit options.
Disadvantages of commercial paper:
• Its usage is limited to only blue chip companies.
• A high degree of control is exercised on issue of
Commercial Paper.
 Certificate of deposit (CD)
• Certificate of deposit are unsecured, negotiable,
short-term instruments in bearer form, issued by
commercial banks and development financial
institutions.

• Like most time deposit, funds can not withdrawn

before maturity without paying a penalty.

• CD’s have specific maturity date, interest rate and it

can be issued in any denomination.
 Certificate of deposit (CD)
• The scheme of certificates of Deposits (CDs) was
introduced by RBI as a step towards deregulation of
interest rates on deposits.
• Under this scheme, any scheduled commercial banks,
co-operative banks excluding land development banks,
can issue certificate of deposits for a period of not less
than three months and up-to a period of not more than
one year.
• Certificate of deposits rates are usually higher than the
term deposit rates, due to the low transactions costs.
Sample Certificate of Deposit
Volume and Rates
 Repurchase agreement (Repos)
• The major function of the money market is to provide
liquidity. To achieve this function and to even out liquidity
changes, the Reserve Bank uses repos.

• Repo is a money market instrument, which enables

collateralized short term borrowing and lending through
sale/purchase operations in debt instruments.

• Under a repo transaction, a holder of securities sells them to

an investor with an agreement to repurchase at a
predetermined date and rate.
 Repurchase agreement (Repos)
• Though there is no restriction on the maximum period for which
repos can be undertaken, generally, repos are done for a period not
exceeding 14 days.

• Different instruments can be considered as collateral security for

undertaking the ready forward deals and they include Government
dated securities, treasury bills.

• The lender of securities (who is also the borrower of cash) is said to

be doing the repo; the same transaction is a reverse repo in the
books of lender of cash (who is also the borrower of securities).
 Developing The Money Market:
Necessary Conditions
• Banks and other financial institutions should be commercially
motivated to respond to incentives to actively manage risk
and maximize profit.

• Sound banks and other financial institutions.

• Shift from direct to indirect monetary policy instruments.

• Sound government cash management and co-ordination with

the RBI.
 Developing The Money Market
• Stability oriented monetary policy.

• Liquidity management of central bank.

• RBI operating procedures

– Affect the stability of money market
– Affects the incentives to use the money market to manage
risk.
• Standing facilities
– Penalty rates should provide incentive for interbank
activity.
– Wide enough corridor should encourage trading.
 Developing The Money Market
• Open Market Operations
– Fosters the development of secondary markets.
– Fosters collateralized money markets
– Need for co-ordination

• Reserve Requirements
Trading in overnight market will be determined by:
– Length of reserve maintenance period.
– Averaging provisions for meeting reserve requirements.
– Penalties for accessing RBI’s lending and deposit facilities.
 Developing The Money Market
Importance of accurate liquidity forecast

– Liquidity management decisions are based on liquidity

forecasts.

– Help reduce volatility

– Items of “autonomous supply component” that are

most difficult to predict are government receipts and
payments.
 Developing The Money Market
• Co-ordination between monetary operations and
government cash management.

• Need for sound management of government cash

balances.

• Effective information sharing and co-ordination

between RBI, Ministry of finance & debt
managers is critical.
 Developing The Money Market
• Ways of co-ordination
– RBI acts as fiscal agent – information of debt
calendar is available.
– Government shares cash flow projections with
RBI on a daily basis and promptly informs about
new information(liquidity forecasting committee
can be useful).
– Uncertainty is reduced when overdraft is limited or
prohibited and government deposits are not held
with RBI.
 Disadvantage of Money Market
• Purchasing power of your money goes down,
in case of up in inflation.
• Absence of integration.
• Absence of Bill market.
• No contact with foreign Money markets.
• Limited instruments.
• Limited secondary market.
• Limited participants.
 Summary
• The money market specializes in debt securities that
mature in less than one year.
• Money market securities are very liquid, and are
considered very safe. As a result, they offer a lower
return than other securities.
• The easiest way for individuals to gain access to the
money market is through a money market mutual
fund.
• T-bills are short-term government securities that
mature in one year or less from their issue date.
• T-bills are considered to be one of the safest
investments.
 Summary
• Factors for money market development

– Profit oriented and sound banks.

– Monetary operations through market based
instruments.
– Incentive structure for interbank trading provided
through RBI’s operating procedure.
– Co-ordination between government cash
management and monetary operations.
THANK
YOU