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.
 It doesn’t actually deal in cash or money but
deals with substitute of cash like trade bills,
promissory notes & govt papers which can
converted into cash without any loss at low
transaction cost.

 It includes all individual, institution and

intermediaries.
 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.
 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).
 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.
o Development of trade & industry.
o Development of capital market.
o Smooth functioning of
commercial banks.
o Effective central bank control.
o Formulation of suitable
monetary policy.
o Non inflationary source of finance to
government.
Money Market consists of a number of sub-
markets which collectively constitute the
money market. They are,
 Call Money Market

 Commercial bills market or discount market

 Acceptance market

 Treasury bill market

A variety of instrument are available in a
developed money market. In India till 1986,
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.
 Commercial papers.
 Certificate of deposit.
 Banker's Acceptance
 Repurchase agreement
 Money Market mutual fund
• Treasury bills
• Money at call and short notice in the call

loan market.
• Commercial bills, promissory notes in the

bill market.
 Callmoney market is that part of the national
money market where the day to day surplus
funds, mostly of banks are traded in.
 They are highly liquid, their liquidity being
exceed only by cash.
 The loans made in this market are of the
short term nature.
Continued……..

 Banks borrow from other banks in order to

meet a sudden demand for funds, large
payments, large remittances, and to maintain
cash or liquidity with the RBI. Thus, to the
extent that call money is used in India for the
purpose of adjustment of reserves.
 Scheduled commercial banks
 Non-scheduled commercial banks

 Foreign banks

 State, district and urban, cooperative banks

 Discount and Finance House of India (DFHI)

 Securities Trading Corporation of India

(STCI).
The DFHI and STCI borrow as well as lend, like
banks and primary dealers, in the call
market.
 The rate of interest paid on call loans is
known as call rate.
 Call rate is highly variable from day to day,
often from hour to hour.
 It is very sensitive to changes in demand for
and supply of call loans.
 Eligible participants are free to decide on
interest rates in call/notice money market.
 Calculation of interest payable would be
based on FIMMDA’s (Fixed Income Money
Market and Derivatives Association of India).
 CALL RATE IN INDIA has reached as high a
level as 30% in December 1973.
 It is an alarming level for any short-term rate
of interest to reach, and as bank defaulted in
a major way in respect of cash and liquidity
requirements at that time due to the
prohibitively high cost of call money, it
became necessary to regulate call rates within
reasonable limits.
 Indian Banks’ Association (IBA) in 1973 fixed
a ceiling of 15% on the level of call rate.
Continued……

 The IBA lowered this ceiling of 15% to 12.5%

in March 1976, 10 % in June 1977, and 8.6%
in March 1978, and 10.0% in April 1980.
 And current call rate in India is 8%.

 There are now two call rates in India: one, the

interbank call rate, and the other, the lending
rate of DFHI.
 DEALING SESSION
Deals in the call/notice money market can be
done up to 5.00 pm on weekdays and 2.30
pm on Saturdays or as specified by RBI from
time to time.
 LOCATION OF CALL MONEY MARKET IN INDIA

Mumbai, Calcutta, Chennai, Delhi, and

Ahmadabad.
 Treasury bills (TBs), offer short-term
investment opportunities, generally up to one
year.
 They are thus useful in managing short-term
liquidity.
 Types of treasury bills through auctions

 91- Day, 182- day, 364- day, and 14- day

TBs
 Treasury bills are not self-liquidating in the
way genuine trade bills are, although the
degree of their liquidity is greater than that of
trade bills.
 If we were to arrange short-term financial
instruments according to their liquidity, the
descending order would be cash, call loans,
treasury bills and commercial bills.
 Treasury bills are highly liquid because there
cannot be a better guarantee of repayment
then the one given by the government and
because the central bank of country is always
willing to purchase or discount them.
 As unlike ordinary trade bills, treasury bills
are claims against the government, they do
not require any gardening or further
endorsement or “acceptance”
 The high liquidity
 Absence of risk of default

 Ready availability

 Assured yield

 Low transaction cost

 Eligibility for inclusion in statutory

liquidity ratio (SLR)
 Negligible capital depreciation
 Ordinary TBs
 Ad hoc TBs

 The ordinary TBs are issued to the public and

the RBI for enabling the government to meet
the needs of supplementary short-term
finance.
 TBs, also known as ad hocs in short, has been
discontinued through the signing of two
agreements between the government and the
RBI.
 The instrument of ad hoc Treasury bill and
the system of issuing it were introduced in
India in 1937.
 Government shall maintain with the RBI a
cash balance of not less than Rs.50crore on
Fridays and Rs.4 crore on other days free of
obligation to pay interest.
 whenever the balance falls below these
minimums, the government account would be
replenished by the creation of ad hocs in
favour of the RBI.
 The government issued these bills to
replenish their cash balance. They also
provide a medium to the state governments,
semi-governments, and foreign central banks
to invest their temporary surpluses.
 With a view to widening the short-term
money market, and to providing more outlets
for temporary surplus fund, the authorities in
India had introduced, in November 1986, a
major innovation in the form of new money
market instrument- the 182-day Treasury
bill.
 It used to be sold in the market by the RBI in
auctions which were monthly in the
beginning; they were made fortnightly from
July 1988.
Continued……..
 It is important to note that no specific
amount of funds was sought to be raised
through the auctions of these bills.
 The amount raised in each auction suspended
upon the funds available with the market
participants, and the funds they desired to
invest in these bills. Thus, the new bill had
become a handy instrument for banks,
financial institution.
 The 182-day bills could be purchased by any
person resident in India, including
individuals, firms, companies, banks, and
financial institutions.
 The 182-day bill was quit liquid because of
the availability of refinance facility against it
and the existence of the secondary market in
it.
 Upon discounting the 182-day Treasury bill
the authorities introduced a new money
market instrument, namely 364-day TBs with
effect from April 1992.
 It is being auction regularly every fortnight.

 Its features are very similar to those which

the 182-day bill had.
 The RBI dose not purchase and rediscount
this bill.
With a view to further diversify the TBs market;
the authorities have introduced recently two
types of 14-day TBs:
 On April 1, 1997 which is known as
intermediate treasury bill (ITB)
 Second on may 20, 1997.

ITB has replaced the 91-day tap Treasury bill.

Continued……..
 It is sold only to state governments, foreign
central banks, and other specified bodies in
order to provide them with alternate
arrangements in place of 19-day tap TBs for
investment of their temporary cash surplus.
 It is issued in a book entry from i.e. by credit
to subsidiary general ledger account.
 It can be repaid/renewed at par on the
expiration of 14 days from the date of issue.
 The disadvantage of 14-day ITB is that it is
not tradable or transferable.
 Treasury bills are available for a minimum
amount of Rs.25,000 and in multiples of Rs.
25,000. Treasury bills are issued at a
discount and are redeemed at par. Treasury
bills are also issued under the Market
Stabilization Scheme (MSS).
 91-day T-bills are auctioned every week on
Wednesdays.
 182-day and 364-day T-bills are auctioned
every alternate week on Wednesdays.
 T-bills auctions are held on the
Dealing System
Negotiated and the
(NDS)
electronicallysubmit their members
system. bids onthe
 DEFECTS OF TREASURY BILLS

 Poor Yield

 Absence of Competitive Bids

 Absence of Active Trading

 Type of Day of Day of

T-bills Auction Payment*

91-day Wednesday Following Friday

182-day Wednesday of non- Following Friday

reporting week

364-day Wednesday of Following Friday

reporting week
 Funds for working capital required by
commerce and industry are mainly provided
by banks through cash credits, overdrafts,
and purchase/discontinuing of commercial
bills.
 BILL OF EXCHANGE

 The financial instrument which is traded in

the bill market of exchange. It is used for
financing a transaction in goods that takes
some time to complete.
It shows the liquidity to make the payment on
a fixed date when goods are bought on
credit.
 Accordingly to the Indian Negotiable
Instruments Act, 1881, it is a written
instrument containing as unconditional order,
signed by the maker, directing a certain
person to pay a certain sum of money only to,
or to the order of, a certain person, or to the
bearer of the instrument.
 INLAND BILLS
 Be drawn or made in India, and must be
payable in India
 Be drawn upon any person resident in India
 FOREIGN BILLS
 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 resident
in India
 Drawn in India and made payable outside
India.
 A related classification of bills is export bills
and import bills
 Commercial bills may be used for financing
the movement and storage of goods between
countries, before export (pre-export credit),
and also within the country.
 In India the use of bill of exchange appears to
be in vogue for financing agricultural
operations, cottage and small scale
industries, and other commercial and trade
transactions.
 Apart from the genuine bill of exchange, i.e.
bills which evidence sale and /or dispatch of
goods, there are other bills which are known
to the money market. They are
accommodation bills and supply bills.
 As “accommodation bill” is defined as one in
which a person, called as accommodation
party, puts his name (accept it) to
accommodate another person without
receiving and consideration. Such bill is
sometimes called, a kite or wind bill.
 A banker's acceptance is a short-term
investment plan created by a company or firm
with a guarantee from a bank.
 It is a guarantee from the bank that a buyer
will pay the seller at a future date. A good
credit rating is required by the company or
firm drawing the bill.
 This is especially useful when the credit
worthiness of a foreign trade partner is
unknown.
 The terms for these instruments are usually
90 days, but this period can vary between 30
and 180 days. Companies use the acceptance
as a time draft for financing imports, exports
and trade.
 In India, there are neither specialised
acceptance agencies for providing this service
on a commission basis nor is it provided to
any significant extent by commercial banks.
 Under the bill market schemes introduced by
RBI in 1952, banks are required to select the
borrowers after careful examination of their
means, respectability, and dealings for
conversion of their advances in to bills.
Banks maintain opinion registers on different
drawers of bills and they get reports from
time to time on these drawers of bills.
 BA acts as a negotiable time draft for
financing imports, exports or other
transactions in goods.
 Acceptances are traded at discounts from
face value in the secondary market.
 BA’s are guaranteed by a bank to make
payment.
 DISCOUNTING SERVICE
 The central banks help banks in their liquidity
management by providing them discounting
and refinancing facilities.
 The RBI are in abundance liquidity (funds) to
banks on occasions when liquidity shortages
threaten economic stability.
 The central bank performs his function
through its discount window or discounting
mechanism.
 Bank borrow funds temporarily at the
discount window of the central bank.
 They are permitted to borrow or are given the
privilege of doing so from the central bank
against certain types of eligible paper, such
as the commercial bill or treasury bill, which
the central bank stands ready to discount for
the purpose of financial accommodation to
banks.
 The question of setting up of discount house
in India was considered by the banking
commission in the early 1970s.
 DISCOUNT HOUSE FUNCTION

 It should be the sole depository of the

surplus liquid funds of the banking system as
well as the non-banking financial
institutions.
 It should use surplus funds to even out the
imbalance in liquidity in the banking system
subject to the RBI guidelines.
 It should create ready market for commercial
bills, treasury bills, and government
guaranteed securities by being ready to
purchase from and sell to the banking system
such securities.
 Commercial Paper (CP) is an unsecured
money market instrument issued in the form
of a promissory note.
 It was introduced in India in 1990 with a view
to enabling highly rated corporate borrowers/
to diversify their sources of short-term
borrowings and to provide an additional
instrument to investors.
 Only company with high credit rating issues
CP’s
 Subsequently, primary dealers and satellite
dealers were also permitted to issue CP to
enable them to meet their short-term funding
requirements for their operations.
 Primary dealers (PDs) and the All-India
Financial Institutions (FIs) are eligible to issue
CP.
 CP is very safe investment because the
financial situation of a company can easily be
predicted over a few months.
 CP can be issued for maturities between a
minimum of 15 days and a maximum up to
one year from the date of issue.
 The aggregate amount of CP from an issuer
shall be within the limit as approved by its
Board of Directors or the quantum indicated
by the Credit Rating Agency for the specified
rating, whichever is lower.
 As regards FIs, they can issue CP within the
overall umbrella limit fixed by the RBI i.e.,
issue of CP together with other instruments
viz., term money borrowings, term deposits,
certificates of deposit and inter-corporate
deposits should not exceed 100 per cent of
its net owned funds, as per the latest audited
balance sheet.
 Only a scheduled bank can act as an IPA for
issuance of CP.
 Individuals, banking companies, other
corporate bodies registered or incorporated
in India and unincorporated bodies, Non-
Resident Indians (NRIs) and Foreign
Institutional Investors (FIIs) etc. can invest in
CPs.
 Amount invested by single investor should
not be less than Rs.5 lakh (face value).
 However, investment by FIIs would be within
the limits set for their investments by
Securities and Exchange Board of India
 CP will be issued at a discount to face value
as may be determined by the issuer.
 The investor in CP is required to pay only the
discounted value of the CP by means of a
crossed account payee cheque to the account
of the issuer through IPA.
 With a view to further widening the range of
money market instruments and give investors
greater flexibility in deployment of their short-
term surplus funds, Certificates of Deposit (CDs)
were introduced in India in 1989.
 Certificate of Deposit (CD) is a negotiable money
market instrument and issued in dematerialised
form or as a Usance Promissory Note against
funds deposited at a bank or other eligible
financial institution for a specified time period
 Scheduled commercial banks excluding
Regional Rural Banks (RRBs) and Local Area
Banks (LABs)
 Select all-India Financial Institutions that have
been permitted by RBI to raise short-term
resources within the umbrella limit fixed by
RBI.
 Banks have the freedom to issue CDs
depending on their requirements.
 An FI may issue CDs within the overall
umbrella limit fixed by RBI, i.e., issue of CD
together with other instruments, viz., term
money, term deposits, commercial papers
and inter-corporate deposits should not
exceed 100 per cent of its net owned funds,
as per the latest audited balance sheet.
 Minimum amount of a CD should be Rs.1 lakh,
i.e., the minimum deposit that could be accepted
from a single subscriber should not be less than
Rs.1 lakh and in the multiples of Rs. 1 lakh
thereafter.
 INVESTORS
CDs can be issued to individuals, corporations,
companies, trusts, funds, associations, etc. Non-
Resident Indians (NRIs) may also subscribe to
CDs, but only on non-repatriable basis, which
should be clearly stated on the Certificate. Such
CDs cannot be endorsed to another NRI in the
secondary market.
 The maturity period of CDs issued by banks
should be not less than 7 days and not more
than one year.
 The FIs can issue CDs for a period not less
than 1 year and not exceeding 3 years from
the date of issue.
 CDs may be issued at a discount on face value.
 Banks / FIs are also allowed to issue CDs on
floating rate basis provided the methodology of
compiling the floating rate is objective,
transparent and market-based.
 Banks have to maintain appropriate reserve
requirements, i.e., cash reserve ratio (CRR) and
statutory liquidity ratio (SLR), on the issue price
of the CDs.
 CDs in physical form are freely transferable by
endorsement and delivery.
I :- 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 nationalised banks
ii. Private banks
Indian Banks
Foreign banks
4. Development bank
IDBI, IFCI, ICICI,
NABARD, LIC, GIC, UTI
etc.
II. UNORGANISED SECTOR
1. Indigenous banks
2 Money lenders
3. Chits
4. Nidhis
III. CO-OPERATIVE SECTOR
1. State cooperative
i. central cooperative banks
Primary Agri credit societies
urban banks Land
development banks
central land development banks
Primary land development banks