PROJECT REPORT

ON
MONEY MARKET IN INDIA

SUBMITTED TO- SUBMITTED BY

PROF. ARUN CHANDARANA RAHUL SHARMA
ROLL NO. 106
PG -B
 OBJECTIVES

To understand the operational efficiency of Indian

Money Market.
Study the sub market under Money Market.
Study the function of the deferent instrument of
Money Market.
Study the recent development.
Why commercial banks are dominant player in this
market.
Regulator(RBI) role in Money Market.
 HYPOTHESIS

Developed Money Market is a sign of developed

economy.
Money Market is the dominated by commercial
banks.
 Organized Indian Financial System

Regulators Financial Financial Financial

Instruments Markets Intermediaries

Forex Capital Money Credit

Market Market Market Market

Primary Market

Secondary Market

Money Market Capital Market

Instrument Instrument
 Money Market

 A market for short-term lending and borrowing.

 Money market provides a platform for providers and user of short
term funds to fulfill their borrowing and investment requirements
at an efficient market clearing price.
 It recognizes cost of holding excessive cash even for short
duration.
 Money market instruments have the characteristics of liquidity,
minimum transaction cost.
 Money market performs the crucial role of providing an
equilibrating mechanism to even out short-term liquidity and in
the process, facilitating the conduct of monetary policy.
 Continued..

 Money market is a whole sale market.

 It is conducted over network of telephone and internet, followed
by written confirmation from both the borrower and lenders.
 Central bank( RBI) occupies a strategic position in the money
market
 The bank influences liquidity and interest rates by open market
operation, Repo transactions, changes in bank rate, cash reserve
requirements and by regulating access to its accommodation.
 The Players

• Reserve Bank of India

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

The system of Primary Dealers (PDs) in the Government Securities

Market was introduced by Reserve Bank of India in 1995 to strengthen the
market infrastructure of Government Securities
DFHI was set up by RBI in March 1988 to activate the Money Market.
It got the status of Primary Dealer in February 1996. Over a period of
time, RBI divested its stake and DFHI became a subsidiary of State Bank
of India (SBI).
 SBI had also set up a subsidiary in 1996 for doing PD business namely
SBI Gilts Limited.
Both these companies were merged in 2004 to become the largest
Primary Dealer in the country
Primary Dealers can also be referred to as Merchant Bankers to
Government of India as only they are allowed to underwrite primary
issues of government securities other than RBI
 Cont…

PDs are allowed the following activities as core activities:

1. Dealing and underwriting in Government securities.
2. Dealing in Interest Rate Derivatives.
3. Providing broking services in Government securities.
4. Dealing and underwriting in Corporate / PSU / FI
bonds/ debentures.
5. Lending in Call/ Notice/ Term/ Repo/ CBLO market.
6. Investment in Commercial Papers.
7. Investment in Certificates of Deposit.
8. Investment in debt mutual funds where entire corpus is
invested in debt securities.
 Benefits of an efficient money market

 It provides a stable source of fund to banks in addition to

deposits, allowing alternative financing structure.
 A liquid money market provides an effective source of long term
finance to borrower
 A liquid and vibrant money market is necessary for the
development of a capital market, foreign exchange market and
market in derivative instruments.
 Helps in pricing different floating interest products.
 Money market in pre-reform era

It was a highly regulated and segmented market.

Participants were very limited
Limited number of money market instrument
Interest are also not market determined
Lack of proper secondary market for the money market
instrument.
 Reforms in money market

 The RBI has given the highest priority to the development of a

vibrant money market in India since it is the vital link in the
implementation of monetary policy to ensure a broad based
growth of the countries economy, and initiated following
reform:
 Set up the Discount and Finance House of India Ltd in April
1988 as a money market institution to provide a secondary
market for money instruments and create liquidity in these
instrument.
 Completely withdrew interest rate ceiling for all operation in
call/notice money market and also rediscounting of
commercial bill in may 1989.
 Continued…

 In may 1990 ,allowed GIC,IDBI and NABARD to enter the call

money market as lenders.
 Allowed certain non-banking institutions to lend in call money
market through DFHI in 1991
 Issued Primary dealer (PD) license to DFHI and STCI(State Trading
Corporation of India) for orderly development of secondary market
by 1996.
 Clearing Corporation of India Limited(CCIL) was set up to
institutionalize the settlement mechanism in debt, forex and money
market
 A unique product CBLO(Collateralized Borrowing and Lending
Obligation)
 Money –Market instrument

Treasury Bills
Certificate of deposit
Commercial paper
Call/notice Money
Term money
Repo
CBLO
 Treasury bills

T-bills are short-term instrument issued by RBI on behalf of the govt. to tide
over short-term liquidity shortfalls. This instrument is issued by the govt. to
raise short –term funds to bridge seasonal or temporary gap between its
receipt(revenue & capital) and expenditure. T-bills are repaid at par on
maturity. The difference between the amount paid by the tenderer at the time
of purchases (which is less than the face value) and the amount received on
maturity represent the interest amount on T-bills and is known as the discount.
Feature of T-bills.
 They negotiable securities.
 They are highly liquid as they are of shorter tenure and there is a possibilities
of inter-bank repos in them.
 There is an absence of default risk.
 Continued…

 They have an assured yield ,low transaction cost and are eligible
for inclusion in the securities for SLR purposes
 They are not issued in scrip form. The purchases and sales are
effected through the subsidiary General Ledger (SGL) account
 At present ,there are 91-day ,182-day and 364-day T-bills in
vogue. The 91-day T-bills are auctioned by RBI every Friday
and 363- day T-bill every alternate Wednesday i.e. the
Wednesday preceding the reporting Friday
 T-bills are available for a minimum amount of Rs 25000 and in
multiples theirof.
 Sale of T-bills

The sale of T-bill is conducted through an auction.

Type of auction
 Multiple –price auction
 Uniform price auction
Bidding process:
 Competitive bid
Participants: primary dealers, banks, corporate, mutual fund etc.
 Non-competitive bid
Participants: state government provident fund, government provident fund,
pension fund
 Call/notice money market

 The call money market is a market for very short-term funds

repayable on demand and with maturity period varying between
one day to a fortnight. When money is lent for a day ,it is known
as call(overnight) money. Intervening holidays and /or Sundays
are excluded for this purpose. When money is is borrowed or lent
for more than a day and up to 14 days, It is known as notice
money.
 It is highly liquid market and extremely volatile .
 No collateral security is required to cover these transaction.
 Participants in call/notice money market

 The call money market is pre-dominantly an inter-bank till

1971 when UTI and LIC were allowed as to operate as lenders.
 In the 1990s the participation was gradually widened to include
DFHI,STCI,GIC,NABARD, IDBI, money market mutual fund,
corporate as lenders in this market.
 In 1996-97,the RBI permitted Primary Dealer to participate in
this market as both lenders and borrowers. Those entities that
could provide evidence of surplus fund were permitted to route
their lending through PD.
 The call money market is now a purely inter-bank money market
with effect from Aug 6,2005.
 Role of RBI in call money Market

The RBI intervenes in the call money indirectly in two ways-

 By providing lines of finance/additional funding to the DFHI
and other call money dealers
 By conducting repo auction
Additional funding is provided through REPO auctions which
increase liquidity in the market and bring down call money rates.
RBI’s reverse repo auction absorb excess liquidity in the
economy and push up the call rates.
 Link between the call money and other market

 There is inverse relation between call rates and short-term money market
instrument such as certificate of deposit and commercial paper.
 When call rates peak to high level ,bank raise more funds through CD.
 When call rates are lower ,many bank fund CP by borrowing from call money
and earn profits through arbitrage between money market segment.
 A large issue of Govt.securities also affect call money rates. when banks
subscribe to large issue of G-sec, liquidity is sucked out from banking system.
This increases the demand for fund in call money market which pushes up
call money rates.
 Increase in CRR also increases call money rates.
 Call money market and foreign exchange market are related. When call rates
rise , bank borrow dollars from their overseas branches, swap them for
rupees and lend them in the call money market.
 Continued..

At the same ,they buy dollars forward in anticipation of

their repayment liability. This pushes forward the
premium on the rupee-dollar exchange rate.
It happens many a times that bank fund foreign
currency positions by withdrawing from the call money
market, causing upsurge in call rate.
 Certificate of Deposit

 Certificate of deposit( CD) are unsecured, negotiable, short-term

instrument issued by commercial banks and development
financial institutions.
 CD are issued by banks during periods of tight liquidity ,at
relatively high interest rates.
 They represent a high cost liability.
 Bank resort to this source when the deposit growth is sluggish but
credit demand is high.
 Minimum amount of CD should be Rs 1lakh i.e. the minimum
deposit that could be accepted from a single subscriber should
not be less than Rs 1lakh and in the multiple of Rs 1lakh
thereafter.
 Guideline for CD

 Eligibility: CD can b issued by bank, select financial institution.

 Maturity: 7day to 1year.
 Discount: CD can b issued by at a discount on face value. The
issuing bank is free to determine the discount /coupon rate.
 Transferability: It is freely transferable .
 Commercial Paper

 Commercial paper is an unsecured short-term promissory note ,negotiable

and transferable by endorsement and delivery with fixed maturity period.
 It is generally issued at a discount by leading creditworthy and highly rated
corporate to meet their working capital requirements
 A CP is usually privately placed ,either through merchant banker or banks. A
specified credit rating of P2 of CRISIL or its equivalent is to be obtained
from credit rating agency.
 CP is issued as an unsecured promissory note or in dematerialized form at a
discount .The discount rate is freely determined by market forces. The paper
is usually priced between the lending rate of scheduled commercial bank and a
representative money market rate.
 Corporates are allowed to issue CPs up to 100% of their fund- based
working capital limits.
 REPO

Repo is useful money market instrument enabling the smooth

adjustment of short-term liquidity among varied market
participant such as bank and financial institutions.
Repo refers to a transaction in which a participant acquires
immediate funds by selling securities and simultaneously agrees
to repurchase of the same or similar securities after a specified
time at a specified rate.
It is also referred as ready forward transaction
REVERSE REPO is exactly the opposite of Repo- a party buy a
security from another party with a commitment to sell it back to
latter at a specified time and price.
In other word ,while for one party the transaction is repo , for
another party it is reverse repo.
 CBLO

Collateralized Borrowing and Lending Obligation (CBLO)", a money market

instrument as approved by RBI, is a product developed by CCIL for the benefit of
the entities who have either been phased out from inter bank call money market or
have been given restricted participation in terms of ceiling on call borrowing and
lending transactions and who do not have access to the call money market. CBLO
is a discounted instrument available in electronic book entry form for the maturity
period ranging from one day to ninety Days (can be made available up to one year
as per RBI guidelines). In order to enable the market participants to borrow and
lend funds, CCIL provides the Dealing System through:
- Indian Financial Network (INFINET), a closed user group to the Members of
the Negotiated Dealing System (NDS) who maintain Current account with RBI.
- Internet gateway for other entities who do not maintain Current account with
RBI.
 Membership

Membership to CBLO segment is extended to entities who are

RBI- NDS members viz. Nationalized Banks, Private Banks,
Foreign Banks, Co-operative Banks, Financial Institutions,
Insurance Companies, Mutual Funds, Primary Dealers etc.

Associate Membership to CBLO segment is extended to entities

who are not members of RBI- NDS viz. Co-operative Banks,
Mutual Funds, Insurance companies, NBFC's, Corporate,
Provident/ Pension Funds etc.
Questionnaire
 Is Indian Money Market Developed?

A) No- 67%

B) Yes- 18%

C) Can’t say- 15%

 Do we have Efficient Money Market Instrument?

A) Yes- 25%

B) No- 75%
 Does RBI Plays a Vital Role?

A) Yes- 80%

B) No- 20%
 Which is More Important Short Term or Long Term Fund?

A) Short Term Fund- 20%

B) Long Term Fund- 30%

C) Both- 50%
 Is Developed MM Sign of Developed Economy?

A) Yes- 65%

B) No- 10%

C) Can’t Say- 25%

 Is it Risky in Terms of Interest Rates?

A) Yes- 85%

B) No- 15%
Is Unorganized Part Really Uncontrollable?

A) Yes- 55%

B) No- 45%
 Is Technology a Big Factor to Develop a MM?

A) Yes- 70%

B) No- 30%
 Conclusion

RBI plays a vital role.

Interest rates are volatility which results into less
participation.
Banks are major participant.
Money Market instruments have the characteristics
of liquidity, minimum transaction cost and no loss in
value.
 Recommendations

Need to organize at basic or lower level.

New reform is required.
More NBFCs should be allowed to participate as
primary dealer.