The Indian money market refers to the market for short-term highly liquid debt instruments with maturities of less than one year. Key instruments traded in the money market include treasury bills (issued by the RBI), commercial paper, certificates of deposit, and call money. The Reserve Bank of India plays an important role in regulating liquidity and interest rates in the money market through tools like open market operations, cash reserve ratio requirements and repo rates. Treasury bills are the most important money market instrument issued in maturities of 91 days, 182 days and 364 days through regular auctions.

1. INDIAN MONEY MARKET
SUMMARY:
The seventh largest and second most populous country in the world, India has long been
considered a country of unrealized potential. A new spirit of economic freedom is now
stirring in the country, bringing sweeping changes in its wake. A series of ambitious
economic reforms aimed at deregulating the country and stimulating foreign investment has
moved India firmly into the front ranks of the rapidly growing Asia Pacific region and
unleashed the latent strengths of a complex and rapidly changing nation.
India's process of economic reform is firmly rooted in a political consensus that spans her
diverse political parties. India's democracy is a known and stable factor, which has taken deep
roots over nearly half a century. Importantly, India has no fundamental conflict between its
political and economic systems. Its political institutions have fostered an open society with
strong collective and individual rights and an environment supportive of free economic
enterprise.
India's time tested institutions offer foreign investors a transparent environment that
guarantees the security of their long term investments. These include a free and vibrant press,
a judiciary which can and does overrule the government, a sophisticated legal and accounting
system and a user friendly intellectual infrastructure. India's dynamic and highly competitive
private sector has long been the backbone of its economic activity. It accounts for over 75%
of its Gross Domestic Product and offers considerable scope for joint ventures and
collaborations.
Today, India is one of the most exciting emerging money markets in the world. Skilled
managerial and technical manpower that match the best available in the world and a middle
class whose size exceeds the population of the USA or the European Union, provide India
with a distinct cutting edge in global competition.
The average turnover of the money market in India is over Rs. 40,000 crores daily. This is
more than 3 percents of the total money supply in the Indian economy and 6 percent of the
total funds that commercial banks have let out to the system. This implies that 2 percent of
the annual GDP of India gets traded in the money market in just one day. Even though the
money market is many times larger than the capital market, it is not even fraction of the daily
trading in developed markets.
6

2. INDIAN MONEY MARKET
1) Meaning of Money Market:
Money market refers to the market where money and highly liquid marketable
securities are bought and sold having a maturity period of one or less than one year. It is not a
place like the stock market but an activity conducted by telephone. The money market
constitutes a very important segment of the Indian financial system.
The highly liquid marketable securities are also called as ‘ money market instruments’
like treasury bills, government securities, commercial paper, certificates of deposit, call
money, repurchase agreements etc.
The major player in the money market are Reserve Bank of India (RBI), Discount
and Finance House of India (DFHI), banks, financial institutions, mutual funds, government,
big corporate houses. The basic aim of dealing in money market instruments is to fill the gap
of short-term liquidity problems or to deploy the short-term surplus to gain income on that.
2) Definition of Money Market:
According to the McGraw Hill Dictionary of Modern Economics, “money market
is the term designed to include the financial institutions which handle the purchase, sale, and
transfers of short term credit instruments. The money market includes the entire machinery
for the channelizing of short-term funds. Concerned primarily with small business needs for
working capital, individual’s borrowings, and government short term obligations, it differs
from the long term or capital market which devotes its attention to dealings in bonds,
corporate stock and mortgage credit.”
According to the Reserve Bank of India, “money market is the centre for dealing,
mainly of short term character, in money assets; it meets the short term requirements of
borrowings 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’ agents comprising institutions and individuals and also the government
itself.”
According to the Geoffrey, “money market is the collective name given to the
various firms and institutions that deal in the various grades of the near money.”
6

3. INDIAN MONEY MARKET
3) Objectives of Money Market:
A well developed money market serves the following objectives:
 Providing an equilibrium mechanism for ironing out short-term surplus and deficits.
 Providing a focal point for central bank intervention for the influencing liquidity in
the economy.
 Providing access to users of short-term money to meet their requirements at a
reasonable price.
6

4. INDIAN MONEY MARKET
4) General Characteristics of Money Market:
The general characteristics of money market are outlined below:
 Short-term funds are borrowed and lent.
 No fixed place for conduct of operations, the transactions being conducted even over
the phone and therefore, there is an essential need for the presence of well developed
communications system.
 Dealings may be conducted with or without the help the brokers.
 The short-term financial assets that are dealt in are close substitutes for money,
financial assets being converted into money with ease, speed, without loss and with
minimum transaction cost.
 Funds are traded for a maximum period of one year.
 Presence of a large number of submarkets such as inter-bank call money, bill
rediscounting, and treasury bills, etc.
6

5. INDIAN MONEY MARKET
4) History of Indian Money Market:
Till 1935, when the RBI was set up the Indian money market remained highly
disintegrated, unorganized, narrow, shallow and therefore, very backward. The planned
economic development that commenced in the year 1951 market an important beginning in
the annals of the Indian money market. The nationalization of banks in 1969, setting up of
various committees such as the Sukhmoy Chakraborty Committee (1982), the Vaghul
working group (1986), the setting up of discount and finance house of India ltd. (1988), the
securities trading corporation of India (1994) and the commencement of liberalization and
globalization process in 1991 gave a further fillip for the integrated and efficient development
of India money market.
5) The Role of the Reserve Bank of India in the Money Market:
The Reserve Bank of India is the most important constituent of the money market. The
market comes within the direct preview of the Reserve Bank of India regulations.
The aims of 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 of maintaining price stability.
 To ensure an adequate flow of credit to the productive sector of the economy and
 To bring about order in the foreign exchange market.
The Reserve Bank of India influence liquidity and interest rates through a number of
operating instruments - cash reserve requirement (CRR) of banks, conduct of open market
operations (OMOs), repos, change in bank rates and at times, foreign exchange swap
operations.
6

6. INDIAN MONEY MARKET
Treasury Bills:
Treasury bills are short-term instruments issued by the Reserve Bank on behalf of the
government to tide over short-term liquidity shortfalls. This instrument is used by the
government to raise short-term funds to bridge seasonal or temporary gaps between its receipt
(revenue and capital) and expenditure. They form the most important segment of the money
market not only in India but all over the world as well.
In other words, T-Bills are short term (up to one year) borrowing instruments of the
Government of India which enable investors to park their short term surplus funds while
reducing their market risk
T-bills are repaid at par on maturity. The difference between the amount paid by the
tenderer at the time of purchase (which is less than the face 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.
Features of T-bills are:
 They are negotiable securities.
 They are highly liquid as they are of shorter tenure and there is a possibility of an
interbank repos on them.
 There is absence of default risk.
 They have an assured yield, low transaction cost, and are eligible for inclusion in the
securities for SLR purpose.
 They are not issued in scrip form. The purchases and sales are affected through the
subsidiary general ledger (SGL) account. T-Bills are issued in the form of SGL entries
in the books of Reserve Bank of India to hold the securities on behalf of the holder.
The SGL holdings can be transferred by issuing a SGL transfer form
 Recently T-Bills are also being issued frequently under the Market Stabilization
Scheme (MSS).
6

7. INDIAN MONEY MARKET
Types of Treasury Bills:
Treasury bills (T-bills) offer short-term investment opportunities, generally up to one year.
They are thus useful in managing short-term liquidity. At present, RBI issues T-Bills for three
different maturities : 91 days, 182 days and 364 days. The 91 day T-Bills are issued on
weekly auction basis while 182 day T-Bill auction is held on Wednesday preceding non-
reporting Friday and 364 day T-Bill auction on Wednesday preceding the reporting Friday.
There are no treasury bills issued by State Governments.
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.
Amount:
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). They are available in both Primary and
Secondary market.
Auctions of Treasury Bills:
While 91-day T-bills are auctioned every week on Wednesdays, 182 days and 364-day T-bills
are auctioned every alternate week on Wednesdays. The Reserve Bank of India issues a
quarterly calendar of T-bill auctions which is shown below (table 1.1). It also announces the
6

8. INDIAN MONEY MARKET
exact dates of auction, the amount to be auctioned and payment dates by issuing press
releases prior to every auction.
Participants in the T-bills market:
The Reserve Bank of India, mutual funds, financial institutions, primary dealers, satellite
dealers, provident funds, corporates, foreign banks, and foreign institutional investors are all
participants in the treasury bill market. The sale government can invest their surplus funds as
non-competitive bidders in T-bills of all maturities.
Treasury bills are pre-dominantly held by banks. In the recent years, there has been a growth
in the number of non-competitive bids, resulting in significant holding of T- bills by
provident funds, trusts and mutual funds.
The table 1.2 presents holding pattern of outstanding T-bills.
Investors At the end of march (Rs.in Cr.)
2008 2007 2006 2005
RBI - - - -
Banks 43,800 51,770 49,187 61,724
State Government 91,988 88,822 60,184 15,874
Others 41,195 27,991 8,146 11,628
Total t-bills outstanding 1,76,983 1,68,583 1,17,517 89,226
Source: RBI, Weekly Statistical Supplement, Various Issues.
Issuance Process of T-Bills:
6

9. INDIAN MONEY MARKET
Treasury bills (T-bills) are short -term debt instruments issued by the Central government.
Three types of T-bills are issued: 91-day, 182-day and 364-day.
T- bills are sold through an auction process announced by the RBI at a discount to its face
value. RBI issues a calendar of T-bill auctions (Table 1.2) .It also announces the exact dates
of auction, the amount to be auctioned and payment dates. T-bills are available for a
minimum amount of Rs. 25,000 and in multiples of Rs. 25,000. Banks and PDs are major
bidders in the T- bill market. Both discriminatory and uniform price auction methods are used
in issuance of T-bills. Currently, the auctions of all T-bills are multiple/discriminatory price
auctions, where the successful bidders have to pay the prices they have actually bid for. Non-
competitive bids, where bidders need not quote the rate of yield at which they desire to buy
these T-bills, are also allowed from provident funds and other investors. RBI allots bids to the
non-competitive bidders at the weighted average yield arrived at on the basis of the yields
quoted by accepted competitive bids at the auction. Allocations to non-competitive bidders
are outside the amount notified for sale. Non-competitive bidders therefore do not face any
uncertainty in purchasing the desired amount of T-bills from the auctions.
Pursuant to the enactment of FRBM Act with effect from April 1, 2006, RBI is prohibited
from participating in the primary market and hence devolvement on RBI is not allowed.
Auction of all the Treasury Bills are based on multiple price auction method at present. The
notified amounts of the auction is decided every year at the beginning of financial year
(Rs.500 crore each for 91-day and 182-day Treasury Bills and Rs.1,000 crore for 364-day
Treasury Bills for the year 2008-09) in consultation with GOI. RBI issues a Press Release
detailing the notified amount and indicative calendar in the beginning of the financial year.
The auction for MSS amount varies depending on prevailing market condition. Based on the
requirement of GOI and prevailing market condition, the RBI has discretion to change the
notified amount. Also, it is discretion of the RBI to accept, reject or partially accept the
notified amount depending on prevailing market condition.
Table 1.1 Treasury Bills- Auction Calendar
6

10. INDIAN MONEY MARKET
Type of Day of Day of
T-bills Auction Payment*
91-day Wednesday Following Friday
182-day Wednesday of non-reporting week Following Friday
364-day Wednesday of reporting week Following Friday
*
If the day of payment falls on a holiday, the payment is made on the day after the holiday.
The calendar for the regular auction of TBs for 2008-09 was announced on March 24, 2008.
The notified amounts were kept unchanged at Rs.500 crore for 91-day and 182- day TBs and
Rs.1,000 crore for 364-day TBs. However, the notified amount (excluding MSS) of 91-day
and 182 TBs and Rs.1,000 crore for 364 day TBs. However, the notified amount (excluding
MSS) of 91-day TBs was increased by Rs.2,500 crore each on ten occasions and by Rs.1,500
crore each on ten occasions and by Rs.1,500 crore on one occasion and that of 182 day TBs
was increased by Rs.500 crore on two occasions during 2008-09 (upto August 14, 2008).
Thus, an additional amount of Rs.27,500 crore (Rs.17,500 crore, net) was raised over and
above the notified amount in the calendar to finance the expected temporary cash mismatch
arising from the expenditure on farmers’ debt waiver scheme.
The summary of T- bill auctions conducted during the year 2007- 08 is in Table 1.3
6

11. INDIAN MONEY MARKET
Table 1.3: T-bill Auctions 2007- 08 - A Summary
91-days 182-days 364-days
No. of issues 54 27 26
Number of bids received (competitive & 4,844 1,991 2,569
non-competitive)
Amount of competitive bids (Rs. cr.) 301,904 115,531 170,499
Amount of non-competitive bids (Rs. cr.) 101,024 7,321 3,205
Number of bids accepted (competitive & non- 1935 811 849
competitive bids)
Amount of competitive bids accepted (Rs.Cr.) 109,341 39,605 54,000
Devolvement on PDs (Rs. cr.) - - -
Total Issue (Rs. cr) 210,365 46,926 57,205
Cut-off price - minimum (Rs.) 98.06 96.17 92.78
Cut-off price - maximum (Rs.) 98.90 97.18 93.84
Implicit yield at cut -off price - minimum (%) 4.4612 5.82 6.5824
Implicit yield at cut -off price - maximum (%)
Outstanding amount (end of the year) 39,957.06 16,785.00 57,205.30
(Rs.cr.)
Source: RBI Bulletin, Various Issues.
CUT-OFF YIELDS:
T- bills are issued at a discount and are redeemed at par. The implicit yield in the T-
bill is the rate at which the issue price (which is the cut-off price in the auction) has to be
compounded, for the number of days to maturity, to equal the maturity value. Yield, given
price, is computed using the formula:
6

12. INDIAN MONEY MARKET
= ((100-Price)*365)/ (Price * No of days to maturity)
Similarly, price can be computed, given yield, using the formula:
= 100/(1+(yield% * (No of days to maturity/365))
For example, a 182-day T-bill, auctioned on January 18, at a price of Rs. 95.510 would have
an implicit yield of 9.4280% computed as follows:
= ((100-95.510)*365)/(95.510*182)
9.428% is the rate at which Rs. 95.510 will grow over 182 days, to yield Rs. 100 on maturity.
Treasury bill cut-off yields in the auction represent the default -free money market rates in the
economy, and are important benchmark rates.
Types of auctions of T-bills:
There are two types of auctions:
 Multiple-price auction
 Uniform-price auction
6

13. INDIAN MONEY MARKET
Multiple-price auction:
The Reserve Bank invites bids by price, that is, the bidders have to quote the price ( per
Rs.100 face value) of the stock at which they desire to purchase. The bank then decides the
cut-off price at which the issue would be exhausted. Bids above the cut-off price are allotted
securities. In other words, each winning bidder pays the price it bid.
The main advantage of this method is that the Reserve Bank obtains the maximum price each
participant is willing to pay. It can encourage competitive bidding because each bidder is
aware that it will have to pay the price it bid, not just the minimum accepted price. If the
bidders who paid higher prices could face large capital losses if the trading in these securities
starts below the marginal price set at the auction. In order to eliminate the problem, the
Reserve Bank introduced uniform price auction in case of 91-days T-bills.
Uniform-price auction:
In this method, the Reserve Bank invites the bids in descending order and accepts those that
fully absorb the issue amount. Each winning bidders pays the same (uniform) price decided
by the Reserve Bank. The advantages of the uniform price auction are that they tend to
minimize uncertainty and encourage broader participation.
Most countries follow the multiple-price auction. However, now the trend is a shift towards
the uniform-price auction. It was introduced on an experimental basis on November 6, 1998,
in case of 91-days T-bills. Since 1999-2000, 91-day T-bills auctions are regularly conducted
on a uniform price basis.
Commercial Paper:
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.
6

14. INDIAN MONEY MARKET
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.
It is generally issued at a discount by the leading creditworthy and highly rated
corporates. Depending upon the issuing company, a commercial paper is also known as
“Financial paper, industrial paper or corporate paper”. Commercial paper was initially meant
to be used by the corporates borrowers having good ranking in the market as established by a
credit rating agency to diversify their sources of short term borrowings at a rate which was
usually lower than the bank’s working capital lending rate.
Commercial papers can now be issued by primary dealers, satellite dealers, and all-
India financial institutions, apart from corporatist, to access short-term funds. Effective from
6th September 1996 and 17th June 1998, primary dealers and satellite dealers were also
permitted to issue commercial paper to access greater volume of funds to help increase their
activities in the secondary market. It can be issued to individuals, banks, companies and other
registered Indian corporate bodies and unincorporated bodies. It is issued at a discount
determined by the issuer company. The discount varies with the credit rating of the issuer
company and the demand and the supply position in the money market. In India, the
emergence of commercial paper has added a new dimension to the money market.
Diagram 2.3 Commercial Paper Issue Mechanism
6

15. INDIAN MONEY MARKET
Obtained Obtained Net worth
credit rating working capital not less than
limit 4 crores
Issuer
Company
Redeem CP Issue CP at discount
on maturity
Investor
Bank/Company
Commercial Paper Issue Mechanism
Advantage of commercial paper:
 High credit ratings fetch a lower cost of capital.
 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.
 Issuances of Commercial Paper bring down the bank credit limits.
 A high degree of control is exercised on issue of Commercial Paper.
 Stand-by-credit may become necessary.
6

16. INDIAN MONEY MARKET
Issuance Process of Commercial Paper:
In the developed economies, a substantial portion of working capital requirement
especially those that are short-term, is promptly met through flotation of commercial paper.
Directly accessing market by issuing short-term promissory notes, backed by stand-by or
underwriting facilities, enables the corporate to leverage its rating to save on interest costs.
Typically commercial paper is sold at a discount to its face value and is redeemed at face
value. Hence, the implict interest rate is function of the size of discount and the period of
maturity.
Scheduled commercial banks are major investors in commercial paper and their
investment is determined by bank liquidity conditions. Banks prefer commercial paper as an
investment avenue rather than sanctioning bank loan. These loans involve high transaction
costs and money is locked for a longer time period whereas a commercial paper is an
attractive short-term instrument for banks to park funds during times of high liquidity. Some
banks fund commercial papers by borrowing from the call money market. Usually, the call
money market rates are lower than the commercial paper rates. Hence, banks book profits
through arbitraged between the two money markets. Moreover, the issuance of commercial
papers has been generally observed to be invested related to the money market rates.
6

17. INDIAN MONEY MARKET
Illustration 1.
X co.ltd issued commercial paper as per following details:
Date of issue 17th January, 2009 no. of days 90 days
Date of maturity 17th April, 2009 interest rate 11.25% p.a.
What was the net amount received by the company on issue of commercial paper?
Let us assume that the company has issued commercial paper worth Rs.10 crores?
No of days = 90 days
Interest rate = 11.25 % p.a.
Interest for 90 days = 11.25% p.a. X 90 days/ 365 days = 2.774%
= 10 crores X 2.774 / 100+2.774 = Rs. 26, 99,126 crores
= or 0.27 crores
Therefore, net amount received at the time of issue = 10 crores – 0.27 crores
= Rs. 9.73 crores
6

18. INDIAN MONEY MARKET
RBI Guidelines on Issue of Commercial Paper:
The summary of RBI guidelines for issue of Commercial paper is given below:
 Corporate, primary dealers, satellite dealers and all India financial institutions are
permitted to raise short term finance through issue of commercial paper, which should
be within the umbrella limit fixed by RBI.
 A corporate can issue Commercial Paper if:
1. Its tangible net worth is not less than Rs.5 crores as per latest balance sheet.
2. Working capital limit is obtained from banks/ all India financial institutions,
and
3. Its borrowal account is classified as standard asset by banks/ all India financial
institutions.
 Credit rating should be obtained by all eligible participants in cp issue from the
specified credit rating agencies like CRISIL, ICRA, CARE, and FITCH. The
minimum rating shall be equivalent to P-2 of CRISIL.
 Commercial paper can be issued for maturities between a minimum of 15 days and a
maximum of upto one year from the date of issue.
 The maturity date of commercial paper should not exceed the date beyond the date
upto which credit rating is valid.
 It can be issued in denomination of Rs. 5 lakhs or in multiples thereof.
 Amount invested by a single investor should not be less than Rs. 5 lakhs (face value).
 A company can issue commercial paper to an aggregate amount within the limit
approved by board of directors or limit specified by credit rating agency, whichever is
lower.
 Banks and financial institutions have the flexibility to fix working capital limits duly
taking into account the resource pattern of company’s financing including commercial
papers.
 The total amount of commercial paper proposed to be issued should be raised within a
period of two weeks from the date on which the issuer opens the issue for
subscription.
6

19. INDIAN MONEY MARKET
 Commercial paper may be issued on a single date or in parts on different dated
provided that in the latter case, each commercial paper shall have the same maturity
date.
 Every commercial paper should be reported to RBI through issuing and paying agent
(IPA).
 Only a scheduled bank can act as an IPA.
 Commercial paper can be subscribed by individuals, banking companies, corporate,
NRIs and FIIs.
 It can be issued either in the form of a promissory note or in a dematerialised form.
 It will be issued at a discount to face value as may be determined by the issuer.
 Issue of commercial paper should not be underwritten or co-accepted.
 The initial investor in commercial paper shall pay the discounted value of the
commercial paper by means of a crossed account payee cheque to the account of the
issuer through IPA.
 On maturity, if commercial paper is held in physical form, the holder of commercial
paper shall present the investment for payment to the issuer through IPA.
 When the commercial paper is held in demat form, the holder of commercial paper
will have to get it redeemed through depository and received payment from the IPA.
 Commercial paper is issued as a ‘stand alone’ product. It would not be obligatory for
banks and financial institutions to provide stand-by facility to issuers of commercial
paper.
 Every issue of commercial paper, including renewal, should be treated as a fresh
issue.
6

20. INDIAN MONEY MARKET
Growth in the Commercial Paper Market:
Commercial paper was introduced in India in January 1990, in pursuance of the Vaghul
Committee’s recommendations, in order to enable highly rated non-bank corporate borrowers
to diversify their sources of short term borrowings and also provide an additional instrument
to investors. commercial paper could carry on an interest rate coupon but is generally sold at
a discount. Since commercial paper is freely transferable, banks, financial institutions,
insurance companies and others are able to invest their short-term surplus funds in a highly
liquid instrument at attractive rates of return.
A major reform to impart a measure of independence to the commercial paper market
took place when the ‘stand by’ facility* of the restoration of the cash credit limit and
guaranteeing funds to the issuer on maturity of the paper was withdrawn in October 1994. As
the reduction in cash credit portion of the MPBF impeded the development of the commercial
paper market, the issuance of commercial paper was delinked from the cash credit limit in
October 1997. It was converted into a stand alone product from October 2000 so as to enable
the issuers of the service sector to meet short-term working capital requirements.
Banks are allowed to fix working capital limits after taking into account the resource
pattern of the companies finances, including commercial papers. Corporates, PDs and all-
India financial institutions (FIs) under specified stipulations have permitted to raise short-
term resources by the Reserve Bank through the issue of commercial papers. There is no lock
in period for commercial papers. Furthermore, guidelines were issued permitting investments
in commercial papers which has enabled a reduction in transaction cost.
In order to rationalize the and standardize wherever possible, various aspects of
processing, settlement and documentation of commercial paper issuance, several measures
were undertaken with a view to achieving the settlement on T+1 basis. For further deepening
the market, the Reserve Bank of India issued draft guidelines on securitisation of standard
assets on April 4, 2005.
6

21. INDIAN MONEY MARKET
Accordingly the reporting of commercial papers issuance by issuing and paying agents (IPAs)
on NDS platform commenced effective on April 16, 2005. Activity in the commercial paper
market reflects the state of market liquidity as its issuances tend to rise amidst ample liquidity
conditions when companies can raise funds through commercial papers at an effective rate of
discount lower than the lending rate of bonds. Banks also prefer investing in commercial
papers during credit downswing as the commercial paper rate works out higher than the call
rate. Table 2.2 shows the trends in commercial papers rates and amounts outstanding.
Table 2.2 – Commercial Papers - Trends in Volumes and
Discount Rates.
Year Amount Outstanding at Minimum Maximum
the end of March (Rs. cr.) Discount Rate Discount Rate (%
(% p.a.) p.a.)
1993-1994 3,264 9.01 16.25
1994-1995 604 10.00 15.50
1995-1996 76 13.75 20.15
1996-1997 646 11.25 20.90
1997-1998 1,500 7.65 15.75
1998-1999 4,770 8.50 15.25
1999-2000 5,663 9.00 13.00
2000-2001 5,846 8.20 12.80
2001-2002 7,224 7.10 13.00
2002-2003 5,749 5.50 11.10
2003-2004 9,131 4.60 9.88
2004-2005 14,235 4.47 7.69
2005-2006 12,718 5.25 9.25
2006-2007 17,838 6.25 13.35
Sources: RBI, Handbook of Statistics on Indian Economy, 2006-2007
Stamp Duty:
The dominant investors in CPs are banks, though CPs are also held by financial institutions
and corporates. The structure of stamp duties for banks and non-banks is presented in
Table 2.3
6

22. INDIAN MONEY MARKET
Table 2.3 Stamp Duty For Banks And Non-Banks
Period Banks Non-Banks
Past Present Past Present
I. Upto 3 months 0.05 0.012 0.125 0.06
II. Above 3 months upto 6 months 0.10 0.024 0.250 0.12
III. Above 6 months upto 9 months 0.15 0.036 0.375 0.18
IV. Above 9 months upto 12 months 0.20 0.05 0.500 0.25
V. Above 12 months 0.40 0.10 1.00 0.5
Source: RBI, Report of the Group to review guidelines relating to CPs, March 2004.
Certificate of Deposits:
Certicate of deposit are unsecured, negotiable, short-term instruments in bearer form,
issued by commercial banks and development financial institutions.
6

23. INDIAN MONEY MARKET
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 upto a period of not more than one year. The
financial institutions specifically authorised by the RBI can issue certificate of deposits for a
period not below one year and not above 3 years duration. Certificate of deposits, can be
issued within the period prescribed for any maturity.
Certificates of Deposits (CDs) are short-term borrowings by banks. Certificates of
deposits differ from term deposit because they involve the creation of paper, and hence have
the facility for transfer and multiple ownerships before maturity. Certificate of deposits rates
are usually higher than the term deposit rates, due to the low transactions costs. Banks use the
certificates of deposits for borrowing during a credit pick-up, to the extent of shortage in
incremental deposits. Most certificates of deposits are held until maturity, and there is limited
secondary market activity.
Certificates of Deposit (CDs) is a negotiable money market instrument and issued in
dematerialised form or as a Usance Promissory Note, for funds deposited at a bank or other
eligible financial institution for a specified time period. Guidelines for issue of certificate of
deposits are presently governed by various directives issued by the Reserve Bank of India.
Eligibility for Issue of Certificate of Deposits:
Certificate of deposits can be issued by (i) scheduled commercial banks excluding
Regional Rural Banks (RRBs) and Local Area Banks (LABs); and (ii) 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 certificate of deposits depending on their
requirements. An FI may issue certificate of deposits within the overall umbrella limit fixed
by RBI, i.e., issue of certificate of deposits 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.
6

24. INDIAN MONEY MARKET
Denomination For Certificate Of Deposits:
Minimum amount of a certificate of deposits 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. Certificate of deposits can be issued to
individuals, corporations, companies, trusts, funds, associations, etc. Non-Resident Indians
(NRIs) may also subscribe to certificate of deposits, but only on non-repatriable basis which
should be clearly stated on the Certificate. Such certificate of deposits cannot be endorsed to
another NRI in the secondary market.
Maturity:
The maturity period of certificate of deposit’s issued by banks should be not less than
7 days and not more than one year. The FIs can issue certificate of deposits for a period not
less than 1 year and not exceeding 3 years from the date of issue.
Discount on Issue of Certificate Of Deposits:
Certificate of deposits may be issued at a discount on face value. Banks/FIs are also
allowed to issue certificate of deposits on floating rate basis provided the methodology of
compiling the floating rate is objective, transparent and market -based. The issuing bank/FI
is free to determine the discount/coupon rate. The interest rate on floating rate certificate of
deposits would have to be reset periodically in accordance with a pre -determined formula
that indicates the spread over a transparent benchmark.
Reserve Requirement and Transferability:
Banks have to maintain the appropriate reserve requirements, i.e., cash reserve ratio
(CRR) and statutory liquidity ratio (SLR), on the issue price of the certificate of deposits.
Physical certificate of deposits are freely transferable by endorsement and delivery.
6

25. INDIAN MONEY MARKET
Dematted certificate of deposits can be transferred as per the procedure applicable to other
demat securities. There is no lock-in period for the certificate of deposits. Banks/FIs cannot
grant loans against certificate of deposits. Furthermore, they cannot buy- back their own
certificate of deposits before maturity
How Certificate Of Deposits Work:
The consumer who opens a certificate of deposits may receive a passbook or paper
certificate, but it now is common for a certificate of deposits to consist simply of a book entry
and an item shown in the consumer's periodic bank statements; that is, there is usually no
"certificate" as such.
At most institutions, the certificate of deposits purchaser can arrange to have the
interest periodically mailed as a check or transferred into a checking or savings account. This
reduces total yield because there is no compounding. Some institutions allow the customer to
select this option only at the time the certificate of deposits is opened.
Commonly, institutions mail a notice to the certificate of deposits holder shortly
before the certificate of deposits matures requesting directions. The notice usually offers the
choice of withdrawing the principal and accumulated interest or "rolling it over" (depositing
it into a new certificate of deposits). Generally, a "window" is allowed after maturity where
the certificate of deposits holder can cash in the certificate of deposits without penalty. In the
absence of such directions, it is common for the institution to "roll over" the certificate of
deposits automatically, once again tying up the money for a period of time (though the
certificate of deposits holder may be able to specify at the time the certificate of deposits is
opened that it is not to be automatically rolled over).
RBI Guidelines on issue of Certificate of Deposits:
The salient features of scheme devised by RBI in issue of certificates of deposit (CDs) by
banks are as follows:
6

26. INDIAN MONEY MARKET
 Certificate of deposits can be issued only by scheduled commercial banks. Regional
rural banks are not eligible for issue of certificate of deposits.
 The minimum deposit that cab be accepted from a single subscriber should be Rs. 5
lakhs. Above that, it should be in multiples of Rs. 1 lakhs.
 Certificate of deposits can be issued to individuals, corporations, companies, trusts,
funds, associations etc. NRIs can subscribe to certificate of deposits only on non-
repatriable basis.
 The minimum maturity period of certificate of depositss is 15 days.
 Certificate of depositss should be issued at a discount on face value. The issuing bank
is free to determine the discount rate.
 As the certificates of depositss are usance promissory notes, stamp duty would be
attracted as per provisions if Indian Stamp Act.
 The issuing banks have to maintain CRR and SLR on the issue price of certificate of
deposits.
 certificate of deposits are freely transferable by endorsement and delivery.
 Banks cannot grant loan against security of certificate of deposits.
 Banks cannot buyback their own certificate of deposits before maturity.
 certificate of deposits should be issued only in demat form.
 Rating of the certificate of deposit is not mandatory/ compulsory.
Certificate Of Deposits – Volume And Rates:
6

27. INDIAN MONEY MARKET
Table 3.1 shows the trends in rates and volume outstanding of certificate of deposits.
Banks and financial institutions are the largest issuers of certificate of deposits, and are also
subscribers to the certificate of deposits of one another. There are limited other investors
such as mutual funds, in the certificate of deposit markets. Scheduled commercial banks rely
on certificate of deposits to supplement their deposit resources to fund the credit demand.
The flexibility of timing and return that can be offered for attracting bulk deposits has made
certificate of deposits the preferred route for mobilizing resources by some banks.
Table 3.1 certificate of deposits – Volume and Rates
Year Amount Outstanding at the end Minimum Maximum rate (%
of March (Rs. cr.) rate (% p.a.) p.a.)
1993-1994 5,571 7.00 18.00
1994-1995 8,017 7.00 15.00
1995-1996 16,316 9.00 23.00
1996-1997 12,134 7.00 21.00
1997-1998 14,296 5.00 37.00
1998-1999 3,717 6.00 26.00
1999-2000 1,227 6.25 14.20
2000-2001 771 5.00 14.60
2001-2002 1,576 5.00 11.50
2002-2003 908 3.00 10.88
2003-2004 4,461 3.57 7.40
2004-2005 12,078 1.09 7.00
2005-2006 43,568 4.10 8.94
2006-2007 93,272 4.35 11.90
Source: Handbook of Statistics on the Indian Economy 2002-03, RBI & RBI Bulletin.
Call Money Market:
Call and notice money market refers to the market for short -term funds ranging from
overnight funds to funds for a maximum tenor of 14 days. Under Call money market, funds
are transacted on overnight basis and under notice money market, funds are transacted for
the period of 2 days to 14 days.
6

28. INDIAN MONEY MARKET
The call/notice money market is an important segment of the Indian Money Market.
This is because, any change in demand and supply of short-term funds in the financial
system is quickly reflected in call money rates. The RBI makes use of this market for
conducting the open market operations effectively.
Participants in call/notice money market currently include banks (excluding RRBs)
and Primary dealers both as borrowers and lenders. Non Bank institutions are not permitted
in the call/notice money market with effect from August 6, 2005. The regulator has
prescribed limits on the banks and primary dealers operation in the call/notice money
market.
Call money market is for very short term funds, known as money on call. The rate at
which funds are borrowed in this market is called `Call Money rate'. The size of the market
for these funds in India is between Rs 60,000 million to Rs 70,000 million, of which public
sector banks account for 80% of borrowings and foreign banks/private sector banks account
for the balance 20%. Non-bank financial institutions like IDBI, LIC, and GIC etc participate
only as lenders in this market. 80% of the requirement of call money funds is met by the non-
bank participants and 20% from the banking system.
In pursuance of the announcement made in the Annual Policy Statement of April
2006, an electronic screen-based negotiated quote-driven system for all dealings in
call/notice and term money market was operationalised with effect from September 18,
2006. This system has been developed by Clearing Corporation of India Ltd. on behalf of the
Reserve Bank of India. The NDS -CALL system provides an electronic dealing platform
with features like Direct one to one negotiation, real time quote and trade information,
preferred counterparty setup, online exposure limit monitoring, online regulatory limit
monitoring, dealing in call, notice and term money, dealing facilitated for T+0 settlement
type for Call Money and dealing facilitated for T+0 and T+1 settlement type for Notice and
Term Money. Information on previous dealt rates, ongoing bids/offers on re al time basis
imparts greater transparency and facilitates better rate discovery in the call money market.
The system has also helped to improve the ease of transactions, increased operational
efficiency and resolve problems associated with asymmetry of information. However,
participation on this platform is optional and currently both the electronic platform and the
telephonic market are co-existing. After the introduction of NDS-CALL, market participants
6

29. INDIAN MONEY MARKET
have increasingly started using this new system more so during times of high volatility in
call rates.
Volumes in the Call Money Market:
Call markets represent the most active segment of the money markets. Though the
demand for funds in the call market is mainly governed by the banks' need for resources to
meet their statutory reserve requirements, it also offers to some participants a regular
funding source for building up short -term assets. However, the demand for funds for
reserve requirements dominates any other demand in the market.. Figure 4.1 displays the
average daily volumes in the call markets.
Figure 4.2: Average Daily Volumes in the Call Market (Rs. cr.)
Committee Recommendation on Call Money Market:
There are various committee suggested recommendation on Call Money Market are as
follow:
The Sukhumoy Chakravarty Committee:
6

30. INDIAN MONEY MARKET
The call money market for India was first recommended by the Sukhumoy Chakravarty
Committee, which was set up in 1982 to review the working of the monetary system. They
felt that allowing additional non-bank participants into the call market would not dilute the
strength of monetary regulation by the RBI, as resources from non-bank participants do not
represent any additional resource for the system as a whole, and their participation in call
money market would only imply a redistribution of existing resources from one participant
to another. In view of this, the Chakravarty Committee recommended that additional non-
bank participants may be allowed to participate in call money market.
The Vaghul Committee Report:
The Vaghul Committee (1990), while recommending the introduction of a number of money
market instruments to broaden and deepen the money market, recommended that the call
markets should be restricted to banks. The other participants could choose from the new
money market instruments, for their short -term requirements. One of the reasons the
committee ascribed to keeping the call markets as pure inter-bank markets was the
distortions that would arise in an environment where deposit rates were regulated, while call
rates were market determined.
The Narasimham Committee II Report:
The Narasimham Committee II (1998) also recommended that call money market in India,
like in most other developed markets, should be strictly restricted to banks and primary
dealers. Since non- bank participants are not subject to reserve requirements, the Committee
felt that such participants should use the other money market instruments, and move out of
the call markets.
Following the recommendations of the Reserve Banks Internal Working Group
(1997) and the Narasimhan Committee (1998), steps were taken to reform the call money
market by transforming it into a pure inter bank market in a phased manner. The non-banks
exit was implemented in four stages beginning May 2001 whereby limits on lending by non-
banks were progressively reduced along with the operationalisation of negotiated dealing
system (NDS) and CCIL until their complete withdrawal in August 2005. In order to create
avenues for deployment of funds by non-banks following their phased exit from the call
money market, several new instruments were created such as market repos and CBLO.
6

31. INDIAN MONEY MARKET
Various reform measures have imparted stability to the call money market. With the
transformation of the call money market into a pure inter-bank market, the turnover in the
call/notice money market has declined significantly. The activity has migrated to other
overnight collateralized market segments such as market repo and CBLO.
Participants in the Call Money Market:
Participants in call money market include the following:
 As lenders and borrowers: Banks and institutions such as commercial banks, both
Indian and foreign, State Bank of India, Cooperative Banks, Discount and Finance
House of India ltd. (DFHL) and Securities Trading Corporation of India (STCI).
 As lenders: Life Insurance Corporation of India (LIC), Unit Trust of India (UTI),
General Insurance Corporation (GIC), Industrial Development Bank of India (IDBI),
National Bank for Agriculture and Rural Development (NABARD), specified
institutions already operating in bills rediscounting market, and
entities/corporates/mutual funds.
The participants in the call markets increased in the 1990s, with a gradual opening up
of the call markets to non-bank entities. Initially DFHI was the only PD eligible to
participate in the call market, with other PDs having to route their transactions through
DFHI, and subsequently STCI. In 1996, PDs apart from DFHI and STCI were allowed to
lend and borrow directly in the call markets. Presently there are 18 primary dealers
participating in the call markets. Then from 1991 onwards, corporates were allowed to lend
in the call markets, initially through the DFHI, and later through any of the PDs. In order to
be able to lend, corporates had to provide proof of bulk lendable resources to the RBI and
were not suppose to have any outstanding borrowings with the banking system. The
minimum amount corporates had to lend was reduced from Rs. 20 crore, in a phased manner
to Rs. 3 crore in 1998. There were 50 corporates eligible to lend in the call markets,
through the primary dealers. The corporates which were allowed to route their transactions
through PDs, were phased out by end June 2001.
6

32. INDIAN MONEY MARKET
Table 4.2: Number of Participants in Call/Notice Money Market
Category Bank PD FI MF Corporate Total
I. Borrower 154 19 - - - 173
II. Lender 154 19 20 35 50 277
Source: Report of the Technical Group on Phasing Out of Non-banks from Call/Notice
Money Market, March 2001.
Banks and PDs technically can operate on both sides of the call market, though in
reality, only the P Ds borrow and lend in the call markets. The bank participants are divided
into two categories: banks which are pre- dominantly lenders (mostly the public sector
banks) and banks which are pre- dominantly borrowers (foreign and private sector banks).
Currently, the participants in the call/notice money market currently include banks
(excluding RRBs) and Primary Dealers (PDs) both as borrowers and lenders.
Call Money Rates:
The rate of interest on call funds is called money rate. Call money rates are
characteristics in that they are found to be having seasonal and daily variations requiring
intervention by RBI and other institutions.
The concentration in the borrowing and lending side of the call markets impacts
liquidity in the call markets. The presence or absence of important players is a significant
influence on quantity as well as price. This leads to a lack of depth and high levels of
volatility in call rates, when the participant structure on the lending or borrowing side alters.
Short-term liquidity conditions impact the call rates the most. On the supply side the
call rates are influenced by factors such as: deposit mobilization of banks, capital flows,
and banks reserve requirements; and on the demand side, call rates are influenced by tax
outflows, government borrowing programme, seasonal fluctuations in credit off take. The
external situation and the behaviour of exchange rates also have an influence on call rates,
as most players in this market run integrated treasuries that hold short term positions in both
rupee and forex markets, deploying and borrowing funds through call markets.
Table 4.3: Call Money Rates
6

33. INDIAN MONEY MARKET
year Maximum Minimum Average Bank rate (End
Year (% p.a.) (% p.a.) (% p.a.) March) (% p.a.)
1996 - 97 14.6 1.05 7.8 12.0
1997 - 98 52.2 0.2 8.7 10.5
1998 - 99 20.2 3.6 7.8 8.0
1999 - 00 35.0 0.1 8.9 8.0
2000 - 01 35.0 0.2 9.2 7.0
2001 - 02 22.0 3.6 7.2 6.5
2002 - 03 20.00 0.50 5.89 6.25
2003 -04 12.00 1.00 4.62 6.00
2004 - 05 10.95 0.6 4.65 6.00
Source: Handbook of Statistics on Indian Economy, 2006-07, RBI
During normal times, call rates hover in a range between the repo rate and the
reverse repo rate. The repo rate represents an avenue for parking short -term funds, and
during periods of easy liquidity, call rates are only slightly above the repo rates. During
periods of tight liquidity, call rates move towards the reverse repo rate. Table 4.3 provides
data on the behaviour of call rates. Figure 4.3displays the trend of average monthly call
rates.
The behaviour of call rates has historically been influenced by liquidity conditions in
the market. Call rates touched a peak of about 35% in May 1992, reflecting tight liquidity on
account of high levels of statutory pre-emptions and withdrawal of all refinance facilities,
barring export credit refinance. Call rates again came under pressure in November 1995
when the rates were 35% par.
Repurchase Agreement (Repo):
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 useful
money market instrument enabling the smooth adjustment of short-term liquidity among
varied market participants such as banks, financial institutions and so on.
Repo is a money market instrument, which enables collateralized short term
borrowing and lending through sale/purchase operations in debt instruments. Under a repo
6

34. INDIAN MONEY MARKET
transaction, a holder of securities sells them to an investor with an agreement to repurchase
at a predetermined date and rate. It is a temporary sale of debt involving full transfer of
ownership of the securities, that is, the assignment of voting and financial rights.
Repo is also referred to as a ready forward transaction as it is a means of funding by
selling a security held on a spot basis and repurchasing the same on a forward basis. 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.
In a typical repo transaction, the counter-parties agree to exchange securities and
cash, with a simultaneous agreement to reverse the transactions after a given period. To the
lender of cash, the securities lent by the borrower serves as the collateral; to the lender of
securities, the cash borrowed by the lender serves as the collateral. Repo thus represents a
collateralized short term lending. 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).
Reserve Repos:
A reverse repo is the mirror image of a repo. For, in a reverse repo, securities are
acquired with a simultaneous commitment to resell. Hence whether a transaction is a repo or
a reverse repo is determined only in terms of who initiated the first leg of the transaction.
When the reverse repurchase transaction matures, the counter- party returns the security to
the entity concerned and receives its cash along with a profit spread. One factor which
encourages an organization to enter into reverse repo is that it earns some extra income on
its otherwise idle cash.
The difference between the price at which the securities are bought and sold is the
lender’s profit or interest earned for lending the money. The transaction combines elements of
both a securities purchased/sale operation and also a money market borrowing/lending
operation.
6

35. INDIAN MONEY MARKET
Importance of Repos:
 Interest Rate: being collateralized loans, repos help reduce counter-party risk and
therefore, fetch a low interest rate especially in a volatile market.
 Safety: repo is an almost risk-free instrument used to even-out liquidity changes in
the system. Repos offer safe short-term outlet for temporary excess cash at close to
market interest rates.
 Uses: As low-risk and flexible short-term instruments, repos are used to finance
securities held in trading and investment account of security dealers, to establish short
positions, to implement arbitrage activities besides meeting specific customer needs.
They offer low-cost investment opportunities with combination of yield and liquidity.
In India, repo transactions are basically fund management/statutory liquidity reserve
(SLR) management devices used by banks.
 Cash Management Tool: the repo arrangement essentially serves as a short-term
cash management tool as the bank receives cash from the buyer in return for the
securities. This helps the banks to meet temporary cash requirements. This also makes
the repos a pure money lending operation. On maturity of repos, the security is
purchased back by the seller of the securities.
 Liquidity Control: The RBI uses repos as a tool of liquidity control for absorbing
surplus liquidity from the banking system in a flexible way and there preventing
interest rate arbitraging. All repo transactions are to be affected at Mumbai only and
the deals are to be necessarily put through the subsidiary general ledger (SGL)
account with the Reserve Bank of India.
Repo Rate:
Repo rate is nothing but the annualised interest rate for the funds transferred by the
lender to the borrower. Generally, the rate at which it is possible to borrow through a repo is
lower than the same offered on unsecured (or clean) inter-bank loan for the reason that it is a
collateralized transaction and the credit worthiness of the issuer of the security is often
higher than the seller. Other factors affecting the repo rate include the credit worthiness of
the borrower, liquidity of the collateral and comparable rates of other money market
instruments.
6

36. INDIAN MONEY MARKET
In a repo transaction, there are two legs of transactions viz. selling of the security and
repurchasing of the same. In the first leg of the transaction which is for a nearer date, sale
price is usually based on the prevailing market price for outright deals. In the second leg,
which is for a future date, the price is structured based on the funds flow of interest and tax
elements of funds exchanged. This is on account of two factors. First, as the ownership of
securities passes on from seller to buyer for the repo period, legally the coupon interest
accrued for the period has to be passed on to the buyer. Thus, at the sale leg, while the buyer
of security is required to pay the accrued coupon interest for the broken period, at the
repurchase leg, the initial seller is required to pay the accrued interest for the broken period
to the initial buyer.
Generally, norms are laid down for accounting of repos and valuation of collateral
are concerned. While there are standard accounting norms, generally the securities used as
collateral in repo transactions are valued at current market price plus accrued interest (on
coupon bearing securities) calculated to the maturity date of the agreement less "margin" or
"haircut". The haircut is to take care of market risk and it protects either the borrower or
lender depending upon how the transaction is priced. The size of the haircut will depend on
the repo period, risky ness of the securities involved and the coupon rate of the underlying
securities.
Since fluctuations in market prices of securities would be a concern for both the
lender as well as the borrower it is a common practice to reflect the changes in market price
by resorting to marking to market. Thus, if the market value of the repo securities decline
beyond a point the borrower may be asked to provide additional collateral to cover the loan.
On the other hand, if the market value of collateral rises substantially, the lender may be
required to return the excess collateral to the borrower.
CALCULATING SETTLEMENT AMOUNTS IN REPO TRANSACTIONS:
Repo transactions involve 2 legs: the first one when the repo amount is received by the
borrower, and the second, which involves repayment of the borrowing. The settlement
amount for the first leg consists of:
a. Value of securities at the transaction price
6

37. INDIAN MONEY MARKET
b. Accrued interest from the previous coupon date to the date on which the first leg is settled.
The settlement amount for the second leg consists of:
a. Repo interest at the agreed rate, for the period of the repo transaction
b. Return of principal amount borrowed.
CALCULATING SETTLEMENT AMOUNTS IN REPO TRANSACTIONS:
Security offered under Repo 11.43% 2015
Coupon payment dates 7 August and 7 February
Market Price of the security offered Rs.113.00 (1)
under Repo (i.e. price of the
security in the first leg)
Date of the Repo 19 January, 2003
Repo interest rate 7.75%
Tenor of the repo 3 days
6

38. INDIAN MONEY MARKET
Broken period interest for the first 11.43%x162/360x100=5.1435 (2)
leg*
Cash consideration for the first leg (1) + (2) = 118.1435 (3)
Repo interest** 118.1435x3/365x7.75%=0.0753 (4)
Broken period interest for the 11.43% x 165/360x100=5.2388 (5)
second leg
Price for the second leg (3) + (4)-(5) = 118.1435 + 0.0753 - 5.2388 (6)
= 112.98
Cash consideration for the second (5) + (6) = 112.98 + 5.2388 = 118.2188 (7)
leg
Repo Market in India: Some Recent Issues:
Repos being short term money market instruments are necessarily being used for
smoothening volatility in money market rates by central banks through injection of short
term liquidity into the market as well as absorbing excess liquidity fro m the system.
Regulation of the repo market thus becomes a direct responsibility of RBI. Accordingly, RBI
has been concerned with use of repo as an instrument by banks or non-bank entities and
issues relating to type of eligible instruments for undertaking repo, eligibility of participants
to undertake such transactions etc. and it has been issuing instructions in this regard in
consultation with the Central Government. After evidence of abuse in the repo market
during the period leading to the securities scam of 1992, RBI had banned repos from the
markets. It is only in the recent past that these restrictions have been removed, and after the
6

39. INDIAN MONEY MARKET
acceptance of the report of the technical sub-group’s recommendations, RBI has initiated
efforts for creating an active market for repos. It was decided to adopt the international
usage of the term ‘Repo’ and ‘Reverse Repo’ under LAF operations. Thus, when RBI
absorbs liquidity it is termed as Reverse Repo and the RBI injecting liquidity is the repo
operation. Since forward trading in securities was generally prohibited in India, repos were
permitted under regulated conditions in terms of participants and instruments. Reforms in
this market has encompassed both institutions and instruments. Both banks and non-banks
were allowed in the market. All government securities and PSU bonds were eligible for
repos till April 1988. Between April 1988 and mid June 1992, only inter- bank repos were
allowed in all government securities. Double ready forward transactions were part of the
repos market throughout the period. Subsequent to the irregularities in securities transactions
that surfaced in April 1992, repos were banned in all securities, except Treasury Bills, while
double ready forward transactions were prohibited altogether.
Repos were permitted only among banks and PDs. In order to reactivate the repos
market, the Reserve Bank gradually extended repos facility to all Central Government dated
securities, Treasury Bills and State Government securities. It is mandatory to actually hold
the securities in the portfolio before undertaking repo operations. In order to activate the
repo market and promote transparency , the Reserve Bank introduced regulatory safeguards
such as delivery versus payment system during 1995-96. The Reserve Bank allowed all non-
bank entities maintaining subsidiary general ledger (SGL) account to participate in this
money market segment. Furthermore, NBFCs, mutual funds, housing finance companies and
insurance companies not holding SGL accounts were allowed by the Reserve Bank to
undertake repo transactions from March 2003 through their ‘gilt accounts’ maintained with
custodians. With the increasing use of repos in the wake of phased exit of non-banks from
the call money market, the Reserve Bank issued comprehensive uniform accounting
guidelines as well as documentation policy in March 2003. Moreover, the DVP III mode of
settlement in government securities (which involves settlement of securities and funds on a
net basis) in April 2004 facilitated the introduction of rollover of repo transactions in
government securities and provided flexibility to market participants in managing their
collaterals.
Secondary Market Transaction in Repos:
6

40. INDIAN MONEY MARKET
Secondary market repo transactions are settled through the RBI SGL accounts, and
weekly data is available from the RBI on volumes, rates and number of days. Though the
NSE WDM also has the facility for reporting repo trades, there were no repo transactions
recorded during 2005- 06, 2006-07 and 2007-08.
Commercial bill market:
Commercial bill is a short term, negotiable, and self-liquidating instrument with low
risk. It enhances he liability to make payment in a fixed date when goods are bought on
credit. According to the Indian Negotiable Instruments Act, 1881, bill or exchange is a
written instrument containing an unconditional order, signed by the maker, directing to pay a
certain amount of money only to a particular person, or to the bearer of the instrument. Bills
of exchange are negotiable instruments drawn by the seller (drawer) on the buyer (drawee) or
the value of 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 discount this bill
by keeping a certain margin and credits the proceeds. Banks, when in need of money, can also
get such bills rediscounted by financial institutions such as LIC, UTI, GIC, ICICI and IRBI.
6

41. INDIAN MONEY MARKET
The maturity period of the bills varies from 30 days, 60 days or 90 days, depending on the
credit extended in the industry.
Types of Commercial Bills:
Commercial bill is an important tool finance credit sales. It may be a demand bill or a
usance bill. A demand bill is payable on demand, that is immediately at sight or on
presentation by the drawee. A usance bill is payable after a specified time. If the seller wishes
to give sometime for payment, the bill would be payable at a future date. These bills can
either be clean bills or documentary bills. In a clean bill, documents are enclosed and
delivered against acceptance by drawee, after which it becomes clear. In the case of a
documentary bill, documents are delivered against payment accepted by the drawee and
documents of bill are filed by bankers till the bill is paid.
Commercial bills can be inland bills or foreign bills. Inland bills must (1) be drawn
or made in India and must be payable in India: or (2) drawn upon any person resident in
India. Foreign bills, on the other hand, are (1) drawn outside India and may be payable and by
a party outside India, or may be payable in India or drawn on a party in India or (2) it may be
drawn in India and made payable outside India. A related classification of 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.
The indigenous variety of bill of exchange for financing the movement of agricultural
produce, called a ‘hundi’ has a long tradition of use in India. It is vogue among indigenous
bankers for raising money or remitting funds or to finance inland trade. A hundi is an
important instrument in India; so indigenous bankers dominate the bill market. However,
with reforms in the financial system and lack of availability of funds from private sources, the
role of indigenous bankers is declining.
With a view to eliminating movement of papers and facilitating multiple
rediscounting, RBI introduced an innovation instruments known as ‘Derivative Usance
Promissory Notes,’ backed by such eligible commercial bills for required amounts and usance
period (up to 90 days). Government has exempted stamp duty on derivative usance
promissory notes. This has simplified and streamlined bill rediscounting by institutions and
made the commercial bill an active instrument in the secondary money market. This
6

42. INDIAN MONEY MARKET
instrument, being a negotiable instrument issued by banks, is a sound investment for
rediscounting institutions. Moreover rediscounting institutions can further discount the bills
anytime prior to the date of maturity. Since some banks were using the facility of
rediscounting commercial bills and derivative usance promissory notes of as short a period as
one day, the Reserve Bank restricted such rediscounting to a minimum period of 15 days. The
eligibility criteria prescribed by the Reserve Bank for rediscounting commercial bills are that
the bill should arise out of a genuine commercial transaction showing evidence of sale of
goods and the maturity date of the bill should to exceed 90 days from the date of
rediscounting.
Commercial bills can be traded by offering the bills for rediscounting. Banks provide
credit to their customers by discounting commercial bills. This credit is repayable on maturity
of the bill. In case of need for funds, and can rediscount the bills in the money market and get
ready money. Commercial bills ensure improved quality of lending, liquidity and efficiency
in money management. It is fully secured for investment since it is transferable by
endorsement and delivery and it has high degree of liquidity.
The bills market is highly developed in industrial countries but it is very limited in
India. Commercial bills rediscounted by commercial banks with financial institutions amount
to less than Rs 1,000 crore. In India, the bill market did not develop due to (1) the cash credit
system of credit delivery where the onus of cash management rest with banks and (2) an
absence of an active secondary market.
Measures to Develop the Bills Market:
One of the objectives of the Reserve Bank in setting up the Discount and finance
House of India was to develop commercial bills market. The bank sanctioned a refinance
limit for the DFHI against collateral of treasury bills and against the holdings of eligible
commercial bills.
With a view to developing the bills market, the interest rate ceiling of 12.5 per cent on
rediscounting of commercial bills was withdrawn from May 1, 1989.
To develop the bills market, the Securities and Exchange Board of India (SEBI) allowed, in
1995-96, 14 mutual funds to participate as lenders in the bills rediscounting market. During
6

43. INDIAN MONEY MARKET
1996-97, seven more mutual funds were permitted to participate in this market as lenders
while another four 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 percent of inland credit purchases of borrowers be through bills.
Size of the Commercial Bills Market:
The size of the commercial market is reflected in the outstanding amount of
commercial bills discounted by banks with various financial institutions.
The share of bill finance in the total bank credit increased from 1993-94 to 1995-96
but declined subsequently. This reflects the underdevelopment state of the bills market. The
reasons for the underdevelopment are as follows:
The Reserve Bank made an attempt to promote the development of the bill market by
rediscounting facilities with it self till 1974. Then, in the beginning of the 1980s, the
availability of funds from the Reserve Bank under the bill rediscounting scheme was put on a
discretionary basis. It was altogether stopped in 1981. The popularity of the bill of exchange
as a credit instrument depends upon the availability of acceptance sources of the central bank
as it is the ultimate source of cash in times of a shortage of funds. However, it is not so in
India. The Reserve Bank set up the DFHI to deal in this instrument and extends refinance
facility to it. Even then, the business in commercial bills has declined drastically as DFHI
concentrates more on other money market instruments such as call money and treasury bills.
It is mostly foreign trade that is financed through the bills market. The size of this market is
small because the share of foreign trade in national income is small. Moreover, export and
import bills are still drawn in foreign currency which has restricted their scope of negotiation.
A large part of the bills discounted by banks are not genuine. They are bills created by
converting the cash-credit/overdraft accounts of their customers.
The system of cash-credit and overdraft from banks is cheaper and more convenient than bill
financing as the procedures for discounting and rediscounting are complex and time
consuming.
6

44. INDIAN MONEY MARKET
This market was highly misused in the early 1990s by banks and finance companies which
refinanced it at times when it could to be refinanced. This led to channeling of money into
undesirable uses.
The development of bills discounting as a financial service depends upon the
existence of a full fledged bill market. The Reserve Bank of India (RBI) has constantly
endeavored to develop the commercial bills market. Several committees set up to examine the
system of bank financing, and the money market had strongly recommended a gradual shift
to bills finance and phase out of the cash credit system. The most notable of these were: (1)
Dehejia Committee, 1969, (2) Tandon Committee, 1974, (3) Chore Committee, 1980 and (4)
Vaghul Committee, 1985.This section briefly outlines the efforts made by the RBI in the
direction of the development of a full fledged bill market.
Bill Market Scheme, 1952 :
The salient features of the scheme were as follows:
(1) The schemes was announced under section 17(4)(c) of RBI Act enables it to make
advances to scheduled banks against the security of issuance of promissory notes or bills
drawn on and payable in India and arising out of bonafide commercial or trade transaction
bearing two or more good signatures one of which should be that of scheduled bank and
maturing within 90 days from the date of advances.
(2) The scheduled banks were required to convert a portion of the demand promissory notes
obtained by them, from their constituents in respect of loans/overdrafts and cash credits
granted to them into usance promissory notes maturing within 90 days, to be able to avail of
refinance under the scheme;
(3) The existing loan, cash credit or overdraft accounts were, therefore, required to be split up
into two parts viz.,
(A) one part was to remain covered by the demand promissory notes, in this account further
6

45. INDIAN MONEY MARKET
withdrawals or repayments were as usual being permitted.
(B) the other part, which would represent the minimum requirement of the borrower during
the next three months would be converted into usance promissory notes maturing within
ninety days.
(4) This procedure did not bring any change in offering the same facilities as offered before
by the banks to their constituents. Banks could lodge the usance promissory notes with the
RBI for advances as eligible security for borrowing so as to replenish their loanable funds.
(5) The amount advanced by the RBI was not to exceed the amount lent by the scheduled
banks to the respective borrowers.
(6) The scheduled bank applying for accommodation had to certify that the paper presented
by it as collateral arose out of bona fide commercial transactions and that the party was
creditworthy.
Bill Market Scheme, 1970:
In pursuance of the recommendations of the Dehejia Committee, the RBI constituted
a working group to evolve a scheme to enlarge the use of bills. Based on the scheme
suggested by the study group, the RBI introduced, with effect from November 1, 1970 the
new bill market scheme in order to facilitate the re-discounting of eligible bills of exchange
by banks with it. To popularize the use of bills, the scope of the scheme was enlarged, the
number of participants was increased, and the procedure was simplified over the years.
The salient features of the scheme:
Eligible Institutions: All licensed scheduled banks and those which do not require a license
(i.e. the State Bank of India, its associate banks and nationalized banks) are eligible to offer
bills of exchange to the RBI for rediscount. There is no objection to a bill, accepted by such
banks, being purchased by others banks and financial institutions but the RBI rediscounts
only those bills as are offered to it by an eligible bank.
6

46. INDIAN MONEY MARKET
Eligibility of Bills: The eligibility of bills offered under the scheme to the RBI is determined
by the statutory provisions embodied in section 17(2)(a) of the Reserve Bank of India Act,
which authorize the purchase, sale and rediscount of bills of exchange and promissory notes,
drawn on and payable in India and arising out of bona fide commercial or trade transactions,
bearing two or more good signatures one of the which should be that of a scheduled bank or a
state cooperative bank ands maturing:
1) In the case of bills of exchange and promissory notes arising out of any such
transaction relating to the export of goods from India, within one hundred and eighty
days.
2) In any other case, within ninety days from the date of purchase or rediscount
exclusive of days of grace;
3) The scheme is confined to genuine trade bills arising out of genuine sale of goods.
The bill should normally have a maturity of not more than 90 days. A bill having a
maturity of 90 to 120 days is also eligible for rediscount, provided at the time of
offering to the RBI for rediscount it has a usance not exceeding 90 days. The bills
presented for rediscount should bear at least two good signatures. The signature of a
licensed scheduled bank is treated as a good signature;
4) Bill of exchange arising out of the sale of commodities covered by the selective credit
control directives of the RBI has been excluded from the scope of the scheme, to
facilitate the selective credit controls and to keep a watch on the level of outstanding
credit against the affected commodities.
Procedure For Rediscounting of Commercial Bill:
Eligible banks are required to apply to the RBI in the prescribed form, giving their
estimated requirements for the 12 months ending October of each year, and limits are
sanctioned / renewed for a period of one year running from 1st November to 31st October of
the following year. The RBI presents for payment, bills of exchange rediscounted by it and
such bills have to taken delivery of by the rediscounting banks against payment, not less than
three working days before the dates of maturity of the bills concerned. In case the bills are
retired before the dates, pro-rata refund of discount is allowed by the RBI.
6

47. INDIAN MONEY MARKET
For rediscounting purposes, bills already rediscounted with the RBI may be lodged
with it. The unexpired period of the usance of the bills so offered should not be less than 30
days and the bills should to bear the endorsement of the discounting bank in favor of a party
other than the RBI.
Banks to hold Bills rediscount: In the first year of operation of the scheme, the banks
were required to lodge all eligible bills with the RBI for availing themselves of the
rediscounting facilities. In November 1971, actual lodgment of bills of the face value of Rs 2
lakh and below was dispensed with and the banks were authorized to hold such bills with
themselves. This limit was increased to Rs10 lakh in November 1973. The banks are required
to make declarations to the effect that they hold eligible bills of a particular aggregate value
on behalf of the RBI as its agents, and on this basis the RBI pays to them the discounted
value of such bills. The discounting banks are also required to endorse such bills in favor of
the RBI before including them in the declarations and also re-endorse the bills in their own
favor when they are retired. Since 1975, banks are permitted to rediscount bills with other
commercial banks as well as certain other approved financial institutions. Since June, 1977,
there is a ceiling on the rate of rediscount on such bills which has been varied by the banks
from time to time.
The bills rediscounting scheme over the years has been gradually restricted and at
present this facility is operated by the RBI on discretionary basis. During the year 1981-82
(July-June) no fresh bills rediscounting limits were sanctioned to the banks, and as such, there
were no outstanding under the scheme from October 23, 1981. The amount of bills
rediscounted each year has shown wide variations, but during each of the four years (1974-75
to 1977-78) (April-March), the volume had been well over Rs 1,000 crore; in subsequent
years, a comparative declining trend set in the utilization of the facility due to its being
available only on discretionary terms.
Revitalizing Bill Market:
6

48. INDIAN MONEY MARKET
In order to revitalize the bill market scheme, several committees made recommendations
in the light of the experience of the operation of the scheme. On the basis of these, several
measures were initiated by the RBI to promote bill financing. The important ones being:
1) A ceiling on the proportion of receivables (75 per cent) eligible for financing under
the cash credit systems.
2) Discretion to banks to sanction additional ad hoc limits for a period not exceeding 3
months, up to an amount equivalent to 10 per cent of the existing bill limit subject to a
ceiling of Rs. 1 crore.
3) Stipulation on ratio of bill acceptance to credit purchases (25 percent).
4) Setting up of the Discount and finance House of India (DFHI) tobuy/sell/discount
short term bills.
5) Reduction in the discount rate on usance bills.
6) Remission of stamp duty on bills drawn on/made by/ in favour ofbank / corporative
bank. The procedure requiring the bill to the endorsed and delivered to the re-
discounter at every time of rediscounting has been done away with. A derivative
usance promissory note is issued by the discounter on the strength of the underlying
bills which have tenor corresponding to, or less than, the tenor of the derivatives
usance promissory note and in any case not more than 90 days. The derivative
promissory note is expected from stamp duty.
Money Market mutual fund (MMMFS):
A mutual fund is a professionally managed type of collective investment scheme that
pools money from many investors and invests it in stocks, bonds, short- term money market
instruments and other securities. Mutual funds have a fund manager who invests the money
on behalf of the investors by buying / selling stocks, bonds etc.
Money market mutual funds (mmmfs) were introduced in April 1991 to provide an
additional short-term avenue for investment and bring money market investment within the
reach of individuals. These mutual funds would invest exclusively in money market
instruments. Money market mutual funds bridge the gap between small investors and the
6

49. INDIAN MONEY MARKET
money market. It mobilizes saving from small investors and invests them in short-term debt
instruments or money market instruments.
There are various investment avenues available to an investor such as real estate,
bank deposits, post office deposits, shares, debentures, bonds etc. A mutual fund is one more
type of Investment avenue available to investors. There are many reasons why investors
prefer mutual funds. An investor’s money is invested by the mutual fund in a variety of
shares, bonds and other securities thus diversifying the investors portfolio across different
companies and sectors. This diversification helps in reducing the overall risk of the
portfolio. It is also less expensive to invest in a mutual fund since the minimum investment
amount in mutual fund units is fairly low (Rs. 500 or so). With Rs. 500 an investor may be
able to buy only a few stocks and not get the desired diversification. These are some of the
reasons why mutual funds have gained in popularity over the years
An Overview - Money Market Mutual Funds:
Currently, the worldwide value of all mutual funds totals more than $US 26 trillion.
The United States leads with the number of mutual fund schemes. There are more than 8000
mutual fund schemes in the U.S.A. Comparatively, India has around 1000 mutual fund
schemes, but this number has grown exponentially in the last few years. The Total Assets
under Management in India of all Mutual funds put together touched a peak of Rs. 5, 44,535
crs. at the end of August 2008. . As of today there are 41 Mutual Funds in the country.
Together they offer over 1000 schemes to the investor. Many more mutual funds are
expected to enter India in the next few years.
Indians have been traditionally savers and invested money in traditional savings instruments
such as bank deposits. Against this background, if we look at approximately Rs. 5 lakh
crores which Indian Mutual Funds are managing, then it is no mean an achievement. A
country traditionally putting money in safe, risk-free investments like Bank FDs, Post Office
and Life Insurance, has started to invest in stocks, bonds and shares – thanks to the mutual
fund industry.
CHARACTERISTIC OF MUTUAL FUND
 The ownership is in the hands of the investors who have pooled in their funds.
6

50. INDIAN MONEY MARKET
 It is managed by a team of investment professionals and other service
providers.
 The pool of funds is invested in a portfolio of marketable investments.
 The investors share is denominated by ‘units’ whose value is called as Net
Asset Value (NAV) which changes every day and investors subscription is
accounted as unit capital.
 The investment portfolio is created according to the stated investment
objectives of the fund.
ADVANTAGES OF MUTUAL FUNDS TO INVESTORS:
1. Portfolio Diversification – purchasing units in a mutual fund instead of buying
individual stocks or bonds, the investors risk is spread out and minimized up to
6