INTERNAL FACTORS Interest rate movement in the system: the fluctuations in value between currencies that can result

in losses to businesses that import and export goods and to investors, Interest rate risk represents the extent to which an asset or investments value could be influenced by movements in variable interest rates. Some investments carry greater direct exposure to interest rate risk than others; given their fixed rates of returns, bonds are more exposed to the impact of interest rate movements than equities, with the result than bond prices tend to move inversely relative to interest rates and inflation The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between two rates, in the shape of the yield curve or in any other interest rate relationship. Such changes usually affect securities inversely and can be reduced by diversifying (investing in fixed-income securities with different durations) or hedging (e.g. through an interest rate swap). Read more: http://www.investopedia.com/terms/i/interestraterisk.asp#ixzz24roWYvAO eg )Interest rate risk affects the value of bonds more directly than stocks, and it is a major risk to all bondholders. As interest rates rise, bond prices fall and vice versa. The rationale is that as interest rates increase, the opportunity cost of holding a bond decreases since investors are able to realize greater yields by switching to other investments that reflect the higher interest rate. For example, a 5% bond is worth more if interest rates decrease since the bondholder receives a fixed rate of return relative to the market, which is offering a lower rate of return as a result of the decrease in rates. RBI economic policies : The term monetary policy is also known as RBIs credit policy or money management policy. It is basically the central banks view on what should be the supply of money in the economy and also in what direction the interest rates should move in the banking system. Such and many other questions related to the demand and supply of money in the economy is explained by the monetary policy This Tuesday saw an upbeat in the Money Market resulting from the positive move from RBI monetary policy of reducing the CRR rate by 0.5%. The revised CRR now stand at 5.5% which was earlier 6% which would be effective from January 28th 2012. The CRR reduction was targeted to control the inflation .This news also saw the rupee strengthe The term monetary policy is also known as the 'credit policy' or called 'RBI'smoney management policy' in India. How much should be the supply of money in the economy? How much should be the ratio of interest? How much should be the viability of money? etc. Such questions are considered in the monetary policy. From the name itself it is understood that it is related to the demand and the supply of money.
Demand for money : he demand for money is the desired holding of financial assets in the

form of money: that is, cash or bank deposits. It can refer to the demand for money narrowly defined as M1(non-interest-bearing holdings), or for money in the broader sense of M2 or M3. Money in the sense of M1 is dominated as a store of value by interest-bearing assets. However, money is necessary to carry out transactions; in other words, it provides liquidity. This creates a trade-off between the liquidity advantage of holding money and the interest advantage of holding other assets. The demand for money is a result of this trade-off

regarding the form in which a person's wealth should be held. In macroeconomics motivations for holding one's wealth in the form of money can roughly be divided into thetransaction motive and the asset motive. These can be further subdivided into more microeconomically founded motivations for holding money. Generally, the nominal demand for money increases with the level of nominal output (price level times real output) and decreases with the nominal interest rate. The real demand for money is defined as the nominal amount of money demanded divided by the price level. For a given money supply the locus of income-interest rate pairs at which money demand equals money supply is known as the LM curve. The magnitude of the volatility of money demand has crucial implications for the optimal way in which a central bank should carry out monetary policy and its choice of a nominal anchor. Conditions under which the LM curve is flat, so that increases in the money supply have no stimulatory effect (a liquidity trap), play an important role in Keynesian theory. This situation occurs when the demand for money is infinitely elastic with respect to the interest rate. Government borrowings to tide over its fiscal deficit: the total amount of money that a country's central government has borrowed to fund its spending on public services and benefits. overnment debt (also known as public debt, national debt)[1][2] is the debt owed by a central government. (In the U.S. and otherfederal states, "government debt" may also refer to the debt of a state or provincial government, municipal or local government.) By contrast, the annual "government deficit" refers to the difference between government receipts and spending in a single year, that is, the increase of debt over a particular year. Government debt is a method of financing government operations, but it is not the only method. Governments can also create money tomonetize their debts, thereby removing the need to pay interest. But this practice, also known as quantitative easing simply reduces government interest costs rather than truly canceling government debt.[3] Governments usually borrow by issuing securities, government bonds and bills. Less creditworthy countries sometimes borrow directly from a supranational organization (e.g. the World Bank) or international financial institutions. As the government draws its income from much of the population, government debt is an indirect debt of the taxpayers. Government debt can be categorized as internal debt (owed to lenders within the country) and external debt (owed to foreign lenders). Sovereign debt usually refers to government debt that has been issued in a foreign currency. Another common division of government debt is by duration until repayment is due. Short term debt is generally considered to be for one year or less, long term is for more than ten years. Medium term debt falls between these two boundaries. A broader definition of government debt may consider all government liabilities, including future pension payments and payments for goods and services the government has contracted but not yet paid. Supply of money : n economics, the money supply or money stock, is the total amount of monetary assets available in an economy at a specific time.[1] There are several ways to

define "money," but standard measures usually include currency in circulation and demand deposits (depositors' easily accessed assets on the books of financial institutions).[2][3] Money supply data are recorded and published, usually by the government or the central bank of the country. Public and private sector analysts have long monitored changes in money supply because of its possible effects on the price level, inflation, the exchange rate and thebusiness cycle.[4] That relation between money and prices is historically associated with the quantity theory of money. There is strong empirical evidence of a direct relation between long-term price inflation and money-supply growth, at least for rapid increases in the amount of money in the economy. That is, a country such as Zimbabwe which saw rapid increases in its money supply also saw rapid increases in prices (hyperinflation). This is one reason for the reliance on monetary policy as a means of controlling inflation. The entire stock of currency and other liquid instruments in a country's economy as of a particular time. The money supply can include cash, coins and balances held in checking and savings accounts. Economists analyze the money supply and develop policies revolving around it through controlling interest rates and increasing or decreasing the amount of money flowing in the economy. Money supply data is collected, recorded and published periodically, typically by the country's government or central bank. Public and private sector analysis is performed because of the money supply's possible impacts on price level, inflation and the business cycle. In the United States, the Federal Reserve policy is the most important deciding factor in the money supply. An increase in the supply of money typically lowers interest rates, which in turns generates more investment and puts more money in the hands of consumers, thereby stimulating spending. Businesses respond by ordering more raw materials and increasing production. The increased business activity raises the demand for labor. The opposite can occur if the money supply falls or when its growth rate declines.

Inflation rate: In economics, inflation is a rise in the general level of prices of goods and

services in an economy over a period of time.[1] When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in thepurchasing power of money a loss of real value in the internal medium of exchange and unit of account in the economy.[2][3] A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over time.[4] Inflation's effects on an economy are various and can be simultaneously positive and negative. Negative effects of inflation include a decrease in the real value of money and other monetary items over time, uncertainty over future inflation which may discourage investment and savings, and if inflation is rapid enough, shortages of goods as consumers begin hoarding out of concern that prices will increase in the future. Positive effects include ensuring that central banks can adjust nominal interest rates (intended to mitigaterecessions),[5] and encouraging investment in non-monetary capital projects. The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. Central banks attempt to stop severe inflation,

along with severe deflation, in an attempt to keep the excessive growth of prices to a minimum. As inflation rises, every dollar will buy a smaller percentage of a good. For example, if the inflation rate is 2%, then a $1 pack of gum will cost $1.02 in a year. Most countries' central banks will try to sustain an inflation rate of 2-3%. Credit quality of the issuer : One of the principal criteria for judging the investment quality of a bond or bond mutual fund. As the term implies, credit quality informs investors of a bond or bond portfolio's credit worthiness, or risk of default. An individual bond or bond mutual fund's credit quality is determined by private independent rating agencies such as Standard & Poor's, Moody's and Fitch. Their credit quality designations range from high ('AAA' to 'AA') to medium ('A' to 'BBB') to low ('BB', 'B', 'CCC', 'CC' to 'C'). Investors interested in the safety of their bond investments should stick to investment grade bonds ('AAA', 'AA', 'A', and 'BBB'), while other investors willing and able to accept a higher level of risk could consider lower credit-quality bonds. World Economy and its impact Foreign Exchange Crude Oil prices 7. BENEFITS OF INVESTING IN A DEBT MARKET Safety: The Zero Default Risk is the greatest attraction for investments in Government securities. It enjoys the greatest amount of security possible, as the Government of India issues it. Hence they are also known as Gilt-Edged Securities or Gilts. Fixed Income: During the term of the security there is likely to be fluctuations in the Government security prices and thus there exists a price risk associated with investment in government security. However, the return on the holding of investments is fixed if the security is held till maturity and the effective yield at the time of purchase is known and certain. In other words the investment becomes a fixed investment if the buyer holds the security till maturity. Convenience: Government securities do not attract deduction of tax at source (TDS) and hence the investor having a non-taxable gross income need not file a return only to obtain a TDS refund. Simplicity: To buy and sell government securities all an individual has to do is call his/her Broker and place an order. If an individual does not trade in the Equity markets, he/she has to open a demat account and then can commence trading through any broker. Liquidity: Government security when actively traded on exchanges will be highly liquid, since a national trading platform is available to the investors. Diversification: Government Securities are available with a tenor of a few months up to 30 years. An investor then has a wide time horizon, thus providing greater diversification opportunities.