Money Market in India

MONEY MARKET INSTRUMENTS IN INDIA
CHAPTER 1 - Financial Market:

A financial market is a market in which financial assets are traded. In addition to
enabling exchange of previously issued financial assets. It is an organization
which activate in the form of simplified organization of saving investment
process. A financial market can be defined as the market which financial assets are
created or transferred. Financial assets represent a claim to the payment of a sum
of money sometime in the future and /or periodic payment in the form of interest
or dividend.
Financial market or financial system plays a vital role in mobilization and
collection of savings in the economy. Financial market also provides useful inputs
for formulation, implementation of policies and thus facilitates management of
liuidity which is consistent with the micro!economic policy ob"ective of any
nation. Financial transaction takes place in financial market.
Financial market is sometimes classified as primary and secondary markets. #ut,
more often financial market is classified as money market and capital market. $he
organization of financial market comprises of capital securities market and money
market. $he capital market segment of financial market represents long term fund
in institutional funds. $he structure of security market organizes in preliminary,
new issue, secondary and stock exchange. %oney market is the important
organization of financial system and source of short!term funds. Financial market
facilitates ad"ustment of liuidity among market participants.
Financial market deals in financial securities or financial documents and financial
services. Financial documents possess various types of investment features. $hese
features mainly include liuidity, risk, maturity, tax status, rate of return, etc.
financial market developing in the country accelerates economic development.
1
$&'A(I )&''*+* &F )&%%*,)*, %-%#AI
$herefore, symbolic relationship exists between economic development and
financial development.
Financial markets are the centers or arrangements which facilitates buying and
selling of financial claims, assets, services and securities. In this market important
function related to mobilization of savings and utilize them in most appropriate
productive purpose are performed. In India, financial market is the segment of
money market, government security market, capital market and foreign exchange
financial product in the organized stock exchange or outside of the market.
Financial market may be a specific place or location such as stock exchange or it
may be "ust an over!the!telephone market.
(ormally there is no specific location or place is fixed to indicate a financial
market. .henever any financial market transaction take place, it is deemed, the
same have taken place in the financial market. /ence, financial market considered
pervasive nature as financial transaction is itself very pervasive throughout the
economic system.
2
TOLANI COLLEGE OF COMMERCE, MUMBAI
0.0 CLASSIFICATION OF FINANCIAL MARKET1
$here are several bases on which financial market can be classified. $he important
classification of financial market as shown below1
A2 -norganized Financial %arket1
In India, we have an unorganized financial system which is not
amenable to control by the ,eserve #ank of India directly. In this system
there are number of money lenders, traders, landlords who lend money to
the public and indigenous banks who also accepts deposits from them.
$here are also private finance companies, chit funds and host of other
unincorporated bodies whose activities are not amendable to the financial
discipline of ,#I. #ut some activities like deposit!taking activities3 the ,#I
3
and +overnment control the maturity and interest rate on their deposits etc.
In this system, claims on money are traded, bills of exchange are
discounted, moneys lend, advances made and a host of other transaction
take place in money and near money assets. $he rate of interest may vary
from 456 to even 0556 depending upon the stringency in the market.
$here are links between the organised system and unroganised system in
the form of process. #oth commercial and co!operatives banks play an
important role as the links between these two segments of the financial
system.
A2 &rganised %arket1
$he functions performed by financial intermediaries in the organized
market are based on certain standardiaries rules and regulations and certain
financial transaction applies in such a market. $he organised market
regularized and controlled by ,eserve #ank of India or any other
constitutional agencies. $he organized market can further classified in to
two categories discussed below1
a2 )apital %arket
b2 %oney %arket
1.2 DIFFERENCE BETWEEEN CAPITAL MARKET & MONEY MARKET:
7r.
(o
8oints %oney %arket )apital %arket
4
0. %eaning %oney market refers to the
market where money and highly
liuid marketable securities are
bought and sold having a
maturity period of one or less
than one year.
$he capital market is designed to
finance the long!term investments.
$he transactions taking place in
this market will be for periods
over a year
4. 9uration It is market if short!term lonable
funds having maturity not more
than one year.
It is market of funds maturity
period more than one year.
:. Fulfillmen
ts of needs
%oney market provides finances
to fulfil needs of business
operations, working capital and
short term reuirement of the
+overnment.
)apital market provides funds
permanent capital reuirement of
the +overnment.
;. Instrument
s used
$he instruments used in money
market mainly include are #ill of
*xchange, $!bills, )8<s,
)ertificate of 9eposit, etc.,
In this market instruments traded
include share, 9ebentures and
+overnment #onds, etc.
=. >uantum
of Amount
$he amount of a single money
market instrument is uite large.
&ne $reasury bill valued
minimum ,s.0 lac or commercial
#ill valued ,s.4= lac.
*very single instrument deal with
capital market having small
amount. For *g. 8er share price is
,s.05/! or per debenture price
,s.055/!, etc.
?. Institution
*ngaged
$he main institutions of money
market are )entral #ank and
)ommercial #anks.
$he main institutions plays
leading role in capital market are
development banks and insurance
companies.
@. ,ole of
secondary
market
(ormally instruments traded in
money market have not
secondary market. It deals in
primary market.
Instrument traded in )apital
market have secondary market.
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A. 7ettlement
of
transaction
$he transaction mainly
performed in the money market
is normally settled down on
telephone. $here is no specific
place where transactions take
place.
$ransactions at )apital %arket
take place at specific place i.e on
stock exchange.
B. $ransactio
n
8erformed
$ransaction in %oney market is
performed without any middle
men broker.
In capital market transactions are
performed through authorizes
dealers
05. Intermedia
ries
$he intermediaries< functions in
the money market are banks,
discount houses, acceptance
houses C seldom the brokers.
$he intermediaries of capital
market mainly include are
exchanges, stock brokers, etc.
00. 'ink %oney market performs the
functions of link between lenders
and borrowers for short term
funds.
)apital market provides a link
between investors and borrowers
for long term purpose.
04. -se of
funds
$he funds raised in %oney
market are use to ease short!term
need or liuidity of banks or
meet the seasonal demand for
extra working capital.
$he funds raised by capital market
are used to finance long!term
needs of business or +overnment.
CHAPTER 2 - Money Mare!:
2.1 Mean"n# o$ Money Mare!:
%oney market refers to the market where money and highly liuid 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.
$he money market constitutes a very important segment of the Indian financial
system.
6
$he highly liuid marketable securities are also called as D money market
instruments< like treasury bills, government securities, commercial paper,
certificates of deposit, call money, repurchase agreements etc.
$he ma"or player in the money market are ,eserve #ank of India E,#I2, 9iscount
and Finance /ouse of India E9F/I2, banks, financial institutions, mutual funds,
government, big corporate houses. $he basic aim of dealing in money market
instruments is to fill the gap of short!term liuidity problems or to deploy the
short!term surplus to gain income on that.
2.1De$"n"!"on o$ Money Mare!:
a% A&&or'"n# !o !(e M&)ra* +",, D"&!"onary o$ Mo'ern E&ono-"&./ Fmoney
market is the term designed to include the financial institutions which handle the
purchase, sale, and transfers of short term credit instruments. $he money market
includes the entire machinery for the channelizing of short!term funds. )oncerned
primarily with small business needs for working capital, individual<s borrowings,
and government short term obligations, it differs from the long term or capital
market which devotes its attention to dealings in bonds, corporate stock and
mortgage credit.G
0% A&&or'"n# !o !(e Re.er1e Ban o$ In'"a/ Fmoney market is the centre for
dealing, mainly of short term character, in money assets3 it meets the short term
reuirements of borrowings and provides liuidity or cash to the lendders. 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.G
&% A&&or'"n# !o !(e )eo$$rey/ Fmoney market is the collective name given to the
various firms and institutions that deal in the various grades of the near money.G
2.2 E1o,2!"on o$ In'"an Money Mare!:
7
In 0BA=, a committee under the )hairmanship of 7hri 7urrmoy )hakravorty was
set up to make recommendations for the development of the money market. After
this in 0BA@, ,#I set up a working group on %oney %arket under the
)hairmanship of 7hri ( Haghul, based on whose recommendations a number of
measure were taken in the eighties for the widening of money market. $hese
initiatives were1
9F/I i.e. 9iscount Finance /ouse &f India was set up to impart liuidity to
money market instruments and develop a secondary market for them. 9F/I
was a "oint venture of ,#I C 8ublic 7ector #anks and financial institutions.
'ater ,#I reduced its stake and it is now a minority shareholder.
)ommercial paper, )ertificate &f deposit and inter!bank participation
certificates were introduced in 0BAA!AB to increase the range of money
market instruments.
In 0BAA!AB operations of 9F/I in the call and notice money market were
freed from interest rate ceiling and in %ay 0BAB this interest rate ceiling
was rediscounting of commercial bills and inter!bank participation
certificates. 8resently money market interest rates are determined by market
forces.
2.3Nee' $or Money Mare!:
#usinesses need working capital for their day!to!day operations and ma"or
component of this working capital is cash. (either the shortage nor excess of cash
is beneficial for a firm. 'ack of adeuate cash or liuidity can lead to disruption in
daily activities of the business. #usinesses generally face short term mismatch of
funds as outflows may not be timed with the cash inflows. 7hort!term cash deficit
8
if not met, may not be able to meet the day!to!day cash obligations or carry out
productions and this will also add to the costs of the firm.
&n the other hand excess funds in short!term may lay idle and not yield any
interest. 7o firms should not maintain idle funds as they take away its profitability
and also add costs of holding them. 7o to prevent maintaince of idle funds a firm
should search for investment avenues. 7hort!term liuidity crises should be met
with the fund availability while surplus funds n short!term should be invested
prudently.
9uring the pre!0B=5 era the reuirement of short term funds was met by lenders,
pawnbrokers or indigenous banks. #ut later the need of the financial market grew
to an extent became unmanageable for such organized sector. $his led to the
evolution of money market as a formal financial market i.e.an organized market to
deal with short term fund management.
7o we can say that money market has come into existence because of the
fundamental need of working capital management where balance between
liuidity and profitability is paramount. $he market provides a platform for cash
surplus and deficient organizations to transact and reach an euilibrium regarding
the rate of interest charged on these funds.
#orrowing and lending money market is in high volume and is less risky short!
term. 9ue to short term nature of transactions, cost of transactions is high, due to
which volumes transacted are large. %ost of the transactions have a maturity
period overnight to one week.
2.4 O05e&!"1e. o$ Money Mare!:
A well developed money market serves the following ob"ectives1
8roviding an euilibrium mechanism for ironing out short!term surplus and
deficits.
8roviding a focal point for central bank intervention for the influencing
liuidity in the economy.
9
8roviding access to users of short!term money to meet their reuirements at
a reasonable price.
2.6 T(e Ro,e o$ !(e Re.er1e Ban o$ In'"a "n !(e Money Mare!:
$he ,eserve #ank of India is the most important constituent of the money market.
$he
market comes within the direct preview of the ,eserve #ank of India regulations.
T(e a"-. o$ !(e Re.er1e Ban7. o8era!"on. "n !(e -oney -are! are:
$o ensure that liuidity and short term interest rates are maintained at levels
consistent with the monetary policy ob"ectives of maintaining price
stability.
$o ensure an adeuate flow of credit to the productive sector of the
economy.
$o bring about order in the foreign exchange market.
$he ,eserve #ank of India influence liuidity and interest rates through a number
of
operating instruments ! cash reserve reuirement E),,2 of banks, conduct of open
market
operations E&%&s2, repos, change in bank rates and at times, foreign exchange
swap
operations.
2.9 PLAYERS IN MONEY MARKET1
$he players in money market include1
0. +overnment
4. )entral #ank
10
:. #anks
;. 9iscount and Acceptance houses
=. Financial and Investment Institutions
?. )orporate
@. %utual Funds
A. Harious 9ealers/ 7atellite 9ealers also participate as intermediaries in
the %oney %arket.
$able 01 $he role of all the above players can be summarized as below1
PLAYERS ROLE
+overnment Issuer/ #orrower
)entral #ank Intermediary
#anks Issuers/ #orrowers
9iscount /ouses %arket makers
Acceptance houses %arket %akers
Financial Institution Issuers/ #orrowers
%Fs Investors/ 'enders
FIIs Investors
)orporate /ouses Issuers
9ealers intermediaries
2.: RISKS IN MONEY MARKET1
%oney market is exposed to several risks as shown below,
)hart II
11
02 Mare! R".1
It occurs as prices and yields of all securities. It may rise and fall due to
broad outside influences affecting the market. $his rise and fall in price of
instruments may lead to capital loss/ gain. $his risk can be minimized by
increasing the liuidity of the instrument.
42 In!ere.! Ra!e R".1
It arises due to changes in interest rate of securities. $he investors
putting funds in them will have to reinvest the funds at a lower rate of interest
rate falls or the value of security held by them may fall, if interest rate rises.
:2 In$,a!"on r".1
Inflation leads to rise in prices of securities and reduces their purchasing
power. All the money market instruments are exposed to this risk but their
exposure to this risk is lower than capital market instruments, which are of
long!term nature.
;2 Po,"!"&a, R".1
8olitical risk implies the risk inherent in change of +overnment policies.
$his is because +overnment policies have an impact on money supply, interest
rate, etc. and thus the money market. +overnment<s policies may affect the role
of players present in the money market, thus having a direct or indirect on the
money market.

=2 Cre'"! r".1
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It arises due to inability of borrowers to payback because of their
bankruptcy. It is more in case of money market securities issued by corporate
than in case of those issued by the +overnment.
CHAPTER 3 ! %oney %arket Instruments
A variety of instruments are available in a developed money market. In India, till
0BA?, only a few instruments were available. $hey were1
)all %oney %arket
$reasury #ills
)ommercial #ill
+overnments 7ecurities
(ow, in addition to the above, the following new instruments are available1
)ommercial 8aper
)ertificate 9eposit
13
#ankers Acceptances
Interbank participation
%oney %arket %utual Fund E%%%F2
In this chapter we will study in detail about the money market instruments. $he
new and old instruments are discussed below1
3.1 Ca,, Money Mare!:
)all/notice %oney is an amount borrowed or lent on demand for very short
period. If the period is more than one day, it is called F(otice %oneyG otherwise
the amount is called F)all %oneyG. $he rate at which funds are borrowed in this
market is called F)all %oney ,ateG.
.hether the time period of the borrowing may be one day or 0; days or in
between, the borrower is intimated about repayment, which enables him to
arrange funds by the due date. In case money is lend for more than 0; days , is
called term money. /olidays/7undays are excluded due to their short!term nature.
$he call/notice money market is an important segment of the Indian %oney
%arket. $his is because, any change in demand and supply of short!term funds in
the financial system is uickly reflected in call money rates. $he ,#I makes use
of this market for conducting the open market operations effectively
In pursuance of the announcement made in the Annual 8olicy 7tatement of April
455?, an electronic screen!based negotiated uote!driven system for all dealings
in call/notice and term money market was operationalised with effect from
7eptember 0A, 455?. $his system has been developed by )learing )orporation of
India 'td. on behalf of the ,eserve #ank of India. $he (97 !)A'' system
provides an electronic dealing platform with features like 9irect one to one
14
negotiation, real time uote and trade information, preferred counterparty setup,
online exposure limit monitoring, online regulatory limit
monitoring, dealing in call, notice and term money, dealing facilitated for $I5
settlement type for )all %oney and dealing facilitated for $I5 and $I0 settlement
type for (otice and $erm %oney. 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. $he system has also helped to improve
the ease of transactions, increased operational efficiency and resolve problems
associated with asymmetry of information. /owever, participation on this
platform is optional and currently both the electronic platform and the telephonic
market are co!existing. After the introduction of (97!)A'', market participants
have increasingly started using this new system more so during times of high
volatility in call rates.
3.1.1 Fea!2re. o$ Ca,, -oney1
$he call markets enables the baks and institutions to even out their day!to!
day deficits and surpluses of money.
)ommercial #anks, )ooperative #anks and 8rimary 9ealers borrow and
lend in the market for ad"usting their cash reserve reuirement.
7pecified All India Financial Institutions, %utual funds and certain
specified entities are allowed to access )all/(otice %oney %arket only as
lenders.
It is also called inter!bank market as non!bank market as non!bank entities
are not allowed to access it.
)all rates are market are market determined.
9ue to short!term unsecured nature of market both the parties i.e. borrowers
and lenders need to have current account with ,#I.
15
It provides an avenue for deploying funds on short term basis to those who
want continuous inflow of funds.
$he market is highly liuid as money lent can be called back any time.
3.1. 2 S";e o$ Ca,, Money Mare!:
)all money market is for very short term funds, known as money on call. $he rate
at which funds are borrowed in this market is called J)all %oney rateK. $he size of
the market for these funds in India is between ,s ?5,555 million to ,s @5,555
million, of which public sector banks account for A56 of borrowings and foreign
banks/private sector banks account for the balance 456. (on!bank financial
institutions like I9#I, 'I), and +I) etc participate only as lenders in this market.
A56 of the reuirement of call money funds is met by the nonblank participants
and 456 from the banking system.
C+ART I: A<ERA)E DAILY <OL=MES IN T+E CALL MONEY
MARKET >RS.CR%
16
%oney market activity overall remained very buoyant in August, all
segments witnessing an increase in average daily volume. 9espite higher
volumes, rates in all segments edged up during the month. $he aggregate daily
volume transacted in )all, notice and term money market together with )#'&
and market repo, increasing sharply from ,s @?,5=A crore in Luly to ,s B?,40=
crore in August, represented a growth of about 4?.=6. August recorded a growth
of =.;:6 in daily average volume of call money transactions to ,s ?,?=? crore in
comparison to ,s ?,:0: crore in Luly. )all rates edged up and moved within a
range of :.0B!:.4;6 leaving aside a few instances. $he mean call rate was :.446
with daily average rates moving in a higher range of :.54!:.:=6 compared to
4.?:!:.4@6 in Luly. (otice money market saw an increase in daily average
volume by ;.:6 in August. $he volume reported was ,s 0,;=0 crore vis!M!vis ,s
0,:B0 crore in Luly. $he notice money rates also moved upwards with daily
average rate moving in the range of 4.4=!:.:;6 against 4.55!:.:56 in Luly. 9aily
average borrowings in term money market amounted to ,s 04? crore in August
vis!M!vis ,s 0B: crore in Luly.
In comparison to the previous month, )#'& and repo markets were
significantly more active. -pward trends in volumes have been exhibited in both
the markets. $he )#'& volume increased from ,s ;@,B:; crore to ,s ?4,:@5
crore and the market repo volume increased from ,s 45,44@ crore to ,s 4=,?04
crore. $he )#'& rate was in the range of 4.45 ! 4.A=6 in August vis!M!vis 4.40 N
4.4B6 in Luly. ,epo rates were in the range of 4.;: ! 4.B?6.,epo transactions
made outside ,#I witnessed a growth of 44.4?6 E$able 0 and )hart #2.
17
Ta0,e 3.1.1: Money Mare! A&!"1"!y ><o,2-e an' Ra!e.%
Aug!5B Lul!5B
Instruments 9aily
Average
Holume E,s
crore2
%onthly
.eighted
Average
,ate E62
,ange of
.eighted
Average
9aily
,ate E62
9aily
Average
Holume
E,s
crore2
%onthly
.eighted
Average
,ate E62
,ange of
.eighted
Average
9aily ,ate
E62
)all %oney ??=? :.44 :.54!:.:= ?:0: :.44 4.?:!:.4@
(otice
%oney
0;=0 :.44 4.4=!:.:; 0:B0 :.45 4.55!:.:5
$erm
%oney
04? ! ! 0B: ! !
)#'& ?4:@5 4.=4 4.45!4.A= ;@B:; 4.@B 4.40!4.4B
%arket
,epo
4=?04 4.?; 4.;:!4.B? 4544@ 4.A4 4.5;!:.5A
So2r&e: ***.r0".or#."n. an' ***.&&","n'"a.&o-
3.1.3 PARTICIPANT IN T+E CALL MONEY MARKET:
8articipants in call/notice money market currently include banks Eexcluding
,,#s2 and 8rimary dealers both as borrowers and lenders. (on #ank institutions
are not permitted in the call/notice money market with effect from August ?, 455=.
$he regulator has prescribed limits on the banks and primary dealers operation in
the call/notice money market. 8articipants in call money market include the
following1
18
A. ,en'er. an' 0orro*er.:
#anks and institutions such as commercial banks, both Indian and foreign, 7tate
#ank of India, )ooperative #anks, 9iscount and Finance /ouse of India ltd.
E9F/'2 and 7ecurities $rading )orporation of India E7$)I2.
A. ,en'er.:
'ife Insurance )orporation of India E'I)2, -nit $rust of India E-$I2, +eneral
Insurance )orporation E+I)2, Industrial 9evelopment #ank of India EI9#I2,
(ational #ank for Agriculture and ,ural 9evelopment E(A#A,92, specified
institutions already operating in bills rediscounting market, and entities
corporate/mutual funds.
Ta0,e 3.1.1N2-0er o$ Par!"&"8an!. "n Ca,,?No!"&e Money Mare!
Ca!e#ory Ban PD FI MF Cor8ora!e To!a,
I. #orrower 0=; 0B ! ! ! 0@:
II. 'ender 0=; 0B 45 := =5 4@@
So2r&e: ,eport of the $echnical +roup on 8hasing &ut of (on!banks from
)all/(otice %oney %arket, %arch 455A.
#anks and 89s technically can operate on both sides of the call market, though in
reality, only the 8 9s borrow and lend in the call markets. $he bank participants
are divided into two categories1 banks which are pre! dominantly lenders Emostly
the public sector banks2 and banks which are pre! dominantly borrowers Eforeign
and private sector banks2. )urrently, the participants in the call/notice money
market currently include banks Eexcluding ,,#s2 and 8rimary 9ealers E89s2 both
as borrowers and lenders.
3.1.4 COMMITTEE RECOMMENDATION ON CALL MONEY MARKET:
$here are various committee suggested recommendation on )all %oney %arket
are as follow1
T(e S2(2-oy C(ara1ar!y Co--"!!ee:
$he call money market for India was first recommended by the 7ukhumoy
)hakravarty )ommittee, which was set up in 0BA4 to review the working of the
19
monetary system. $hey felt that allowing additional non!bank participants into the
call market would not dilute the strength of monetary regulation by the ,#I, 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 )hakravarty )ommittee recommended that additional nonbank
participants may be allowed to participate in call money market.
T(e <a#(2, Co--"!!ee Re8or!:
$he Haghul )ommittee E0BB52, 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. $he other
participants could choose from the new money market instruments, for their short
!term reuirements. &ne 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.
T(e Nara."-(a- Co--"!!ee II Re8or!:
$he (arasimham )ommittee II E0BBA2 also recommended that call money market
in India, like in most other developed markets, and should be strictly restricted to
banks and primary dealers. 7ince non! bank participants are not sub"ect to reserve
reuirements, the )ommittee felt that such participants should use the other
money market instruments, and move out of the call markets.
Following the recommendations of the ,eserve #anks Internal .orking +roup
E0BB@2 and the (arasimhan )ommittee E0BBA2, steps were taken to reform the call
money market by transforming it into a pure interbank market in a phased manner.
$he non!banks exit was implemented in four stages beginning %ay 4550 whereby
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limits on lending by nonbanks were progressively reduced along with the
operationalisation of (egotiated 9ealing 7ystem E(972 and )learing )orporation
of India 'imited E))I'2 until their complete withdrawal in August 455=. 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 )ollateralised #orrowing and 'ending &bligation E)#'&2.
Harious reform measures have imparted stability to the call money market. .ith
the transformation of the call money market into a pure inter!bank market, the
turnover in the call/notice money market has declined significantly. $he activity
has migrated to other overnight collateralized market segments such as market
repo and )#'&.
3.1.6 CALL MONEY RATES:
$he rate of interest on call funds is called money rate. )all money rates are
characteristics in that they are found to be having seasonal and daily variations
reuiring intervention by ,#I and other institutions. $he concentration in the
borrowing and lending side of the call markets impacts liuidity in the call
markets. $he presence or absence of important players is a significant influence
on uantity as well as price. $his 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. 7hort!term liuidity conditions impact the call rates the most. &n the
supply side the call rates are influenced by factors such as1 deposit mobilization of
banks, capital flows, and banks reserve reuirements3 and on the demand side, call
rates are influenced by tax outflows, government borrowing programme, seasonal
fluctuations in credit off take. $he 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.
21
9uring normal times, call rates hover in a range between the repo rate and the
reverse repo rate. $he repo rate represents an avenue for parking short !term
funds, and during periods of easy liuidity, call rates are only slightly above the
repo rates. 9uring periods of tight liuidity, call rates move towards the reverse
repo rate. $he behaviour of call rates has historically been influenced by liuidity
conditions in the market. )all rates touched a peak of about :=6 in %ay 0BB4,
reflecting tight liuidity on account of high levels of statutory pre!emptions and
withdrawal of all refinance facilities, barring export credit refinance. )all rates
again came under pressure in (ovember 0BB= when the rates were :=6 par.
C(ar! II: Da",y Ca,, Money Ra!e >Se8 2@@A !o De& 2@@A%
22
With economic growth of higher than nine per cent in 455?!5@ and also 455@!5A,
a "ustifiable fear was that the economy was overheating and, if not corrected,
inflationary expectations would take root. .hat was perhaps not noticed was that
the current inflationary rate as measured by the month on month inflation rate Eas
different from the year on year measure, commonly used to describe inflation2 had
already begun declining since Lune 455A and so there was not much danger of re!
igniting inflationary expectations. As it turned out, however, concretionary macro
policies combined with the global slowdown resulted in the +98 growth rate in
the first half of 455A!5B EApril to 7eptember2 coming down to @.?6 as compared
to about A.=6 during the first half of 455@!5A.
3.1.9 F=NCTIONS OF CALL MONEY MARKET
)all money market serves the following basis functions1
#anks may face some short!term mismatch of funds as sometimes the
withdrawals may exceed deposits. 9ue to this banks reuire immediate
money to meet their demand liabilities wchich they can borrow from call
money market.
23
#anks borrow money from call money market to maintain their )ash
,eserve ,atio E),,2 and 7tatutory 'iuidity ,atio E7',2.
%oney is also borrowed from )all %oney %arket for discounting
commercial bills which forms a small portion of transaction in India due to
underdeveloped bill market
7ome banks also lend and borrow in )all %oney %arket in order to earn
profit from the difference between borrowing and lending rates.
3.1.: MEC+ANISMS OF OPERATION OF CALL MONEY MARKET:
)all money market is a floorless market i.e. it lacks a central trading floor
or exchange. 'enders and borrowers contact each other over phone and arrive at a
deal specifying the amount of loan and interest rate. After the deal is struck
between the two parties the lender issues a cheues in favour of the borrower. $he
cheue is a bank<s pay order which is cleared by the special high value clearing
cell in the ,#I. $he borrower then issues a borrowing receipt and after repayment
the lender returns the same to the borrower.
$he same can also be done through 9iscount and finance /ouse of India.
#oth borrowers and lenders can deal with 9F/I and get or give funds in case they
are in deficit or surplus respectivelu. $he same procedures is followed for
submission of cheues and issue of call deposit receipt as is done in case of
borrowers and lenders dealing directly.
An extension on call laon can be made for a maximum period of 0; days
3.1.A PR=DENTIAL NORMS OF RBI:
$he prudential limits in respect of both outstanding borrowing and lending
transactions in call/notice money market for banks and 89s are as follows1!
24
Ta0,e 3.1.2: Pr2'en!"a, L"-"!. $or Tran.a&!"on. "n Ca,,?No!"&e Money Mare!
Sr.
No.
Par!"&"8an! Borro*"n# Len'"n#
0 7cheduled
)ommercial
#anks
&n a fortnightly average basis,
borrowing outstanding should not
exceed 055 per cent of capital funds
Ei.e., sum of $ier I and $ier II capital2 of
latest audited balance sheet. /owever,
banks are allowed to borrow a maximum
of 04= per cent of their capital funds
on any day, during a fortnight.
&n a fortnightly average basis,
lending outstanding should not
exceed 4= per cent of their capital
funds3 however, banks are
allowed to lend a maximum of =5
per cent of their capital funds on
any day, during a fortnight.
4 )o!operative
#anks
#orrowings outstanding by 7tate )o!
operative #anks/9istrict )entral )o!
operative #anks/ -rban )o!op. #anks in
call/notice money market on a daily
basis should not exceed 4.5 per cent of
their aggregate deposits as at end %arch
of the previous financial year.
(o 'imit.
: 8rimary 9ealers
E89s2
89s are allowed to borrow, on average
in a reporting fortnight, up to 455 per
cent of their net owned funds E(&F2 as
at end!%arch of the previous financial
year.
89s are allowed to lend in
call/notice money market, on
average in a reporting fortnight,
up to 4= per cent of their (&F.
E7ource1 www.rbi.org.in2
(on!bank institutions are not permitted in the call/notice money market with
effect from August ?, 455=.
3.1.B INTEREST RATE:
*ligible participants are free to decide on interest rates in call/notice money
market.
3.1.10 LOCATION OF CALL MONEY MARKET:
)all %oney market is located in main commercial center and industrial
centers like 9elhi, %umbai, Oolkatta, )hennai and Ahmedabad .
&ut of these the most significant contribution is by %umbai and Oolkatta.
3.1.11 )ROWT+ AND DE<ELOPMENT OF CALL MONEY MARKET:
25
3.2. Co--er&"a, Pa8er:
)ommercial paper was introduced into the Indian money market during the year
0BB5, on the recommendation of Haghul )ommittee. (ow it has become a popular
debt instrument of the corporate world. It is an unsecured money market
instrument issued in the form of a promissory note. It bears a fixed maturity.
)orporates need short!term
funds in order to finance their working capital reuirement. For this they raise
funds thorough various means and one of them is )ommercial 8aper.
It is generally issued at a discount by the leading creditworthy and highly rated
)orporates. 9epending upon the issuing company, a commercial paper is also
known as
FFinancial paper, industrial paper or corporate paperG. )ommercial 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.
)ommercial papers can now be issued by primary dealers, satellite dealers, and
all!India financial institutions, apart from corporatist, to access short!term funds.
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. $he discount varies with the credit rating of the issuer
company and the demand and the supply position in the money market.
3.2.1 FEAT=RES OF COMMERCIAL PAPER:
It is an unsecured, short term loan issued by a corporation.
26
It helps in financing the accounts receivables and inventories of a
corporation.
It is usually issued at a discount, reflecting current market rates of interest.
It is very safe investment instrument because the financial situation of a
company can be easily predicated over a few months.
$ypically only companies with high credit ratings and credit worthiness
issue commercial paper.
%ostly, large established corporates sell commercial paper.
It does not carry and backing assets so it is of a unsecured nature.
3.2.2 AD<ANTA)ES OF COMMERCIAL PAPER:
S"-8,"&"!y1
$he advantages of commercial paper lay its simplicity. It involves hardly
any documentation between the issuer and investor.
F,eC"0","!y:
$he issuer can issue commercial paper with the maturities tailored to match
the cash flow of the company.
D"1er."$"&a!"on:
A well rated compay can diversify its source of finance from banks to short
term money markets at somerwhat cheaper cost.
Ea.y !o ra".e ,on# !er- &a8"!a,1
$he companies which are able to raise funds through commercial paper
become better known in the financial world and are thereby placed in a more
favourable position for raising such long term capital as they may, from time to
27
time, reuire. $hus, there is an inbuilt incentive for companies to remain
financially strong.
+"#( re!2rn.1
$he commercial paper provides investors with higher returnes than thet
could get from banking system.
Mo1e-en! o$ $2n'.1
)ommercial paper facilitates securitisation of loans resulting in creation of
a secondary market for the paper and efficient movement of funds providing cash
surplus to cash deficit entities.
3.2.3 DISAD<ANTA)ES OF COMMERCIAL PAPER:
Its usage is limited to only blue chip companies.
Issuances of )ommercial 8aper bring down the bank credit limits.
A high degree of control is exercised on issue of )ommercial 8aper.
7tand!by!credit may become necessary.
3.2.4 ISS=ERS OF COMMERCIAL PAPER:
)orporates, primary dealers E89s2 and satellite dealers E79s2, and the all!
India
financial institutions EFIs2 that have been permitted to raise short!term
resources under the umbrella limit fixed by ,eserve #ank of India are
eligible to issue )8.
A corporate would be eligible to issue )8 provided N
28
(a) $he tangible net worth of the company, as per the latest audited balance
sheet
is not less than ,s. ; crore3
Eb2 )ompany has been sanctioned working capital limit by bank/s or all!
India
financial institution/s3 and Ec2 the borrow account of the company is
classified
as a 7tandard Asset by the financing bank/s/ institution/s.
$he company should have minimum credit rating from an agency approved
by ,#I. $he issuer shall ensure ate the time of issuance of commercial
paper that the rating obtained is current and have not fallen due for review.
An FI can issue commercial paper within the overall limit fixed by ,#I i.e
issue of commercial paper together with other instruments like term
deposits, term money borrowings, certificates of deposit and inter!corporate
deposits should not exceed 0556 of its net owned funds, as per the latest
audited balance sheet.
)ommercial 8aper has been de!linked from the working capital and can be issued
as a stand alone product.
3.2.6 RATIN) RED=IREMENT:
All eligible participants shall obtain the credit rating for issuance of )ommercial
8aper from either the )redit ,ating Information 7ervices of India 'td. E),I7I'2
or the Investment Information and )redit ,ating Agency of India 'td. EI),A2 or
the )redit Analysis and ,esearch 'td. E)A,*2 or the FI$)/ ,atings India 8vt.
'td. or such other credit rating agency E),A2 as may be specified by the ,eserve
#ank of India from time to time, for the purpose. $he minimum credit rating shall
be 8!4 of ),I7I' or such euivalent rating by other agencies. $he issuers shall
29
ensure at the time of issuance of )8 that the rating so obtained is current and has
not fallen due for review.
3.2.9 IN<ESTORS IN COMMERCIAL MARKET:
)ommercial 8aper may be bought by individuals, banking companies, other
corporate bodies registered or incorporated bodies, non!resident Indians
E(,I2 and foreign institutional investors.
/owever involvements by FIIs would be within the limits set for their
investments by 7ecurities C *xchange #oard of India E7*#I2.
.hen (,Is subscribe to commercial paper issue, the conditions regarding
non!repatriability ans non!endorsability are indicated on the )ommecial
8aper.
Investors have the advantage of getting good returns on their short term
surplus funds by investing in commercial paper.
30
C(ar! III: Co--er&"a, Pa8er I..2e Me&(an".-
3.2.: PROCED=RE OF ISS=IN) COMMERCIAL PAPER:
&nce a company decides to issue )ommercial paper for a specific amount a
resolution is reuired to be passed by the #oard of 9irectors approving the
issue of and authorizing the officials to execute the relevant documents, as
per ,#I norms.
$he commercial paper issued is reuired to be rated by an approved rating
agency.
$he company selects an Issuing and paying Agent, which must be a
scheduled bank.
$he company selects arranges for dealers for placement of )ommercial
8aper.
$he issue has to be completed within two weeks of openings.
31
*very )ommercial 8aper issue needs to be reported to ,#I through and
issuing and paying agent. )ommercial 8aper is issued at a discount to the
face value.
Deno-"na!"on.! )ommercial 8aper can be issued in denominations ,s. =
lakh or multiples thereof.
)ommercial paper can be issued for maturities between a minimum of 0=
days and maximum of up to one year from the date of issue. If the maturity
date is a holiday, the company would be liable to make payment on the
immediate preceding working day.
&n maturity of )ommercial 8aper, the holder of )ommercial 8aper will
have to get if redeemed through the depository and receive payment from
the Issuing and 8aying Agent.
$he issuance of )8 has been generally observed to be related inversely to
the money market rates.
3.2.A RBI )=IDELINES ON ISS=E OF COMMERCIAL PAPER:
$he summary of ,#I guidelines for issue of )ommercial paper is given below1
)orporate, primary dealers, satellite dealers and all India financial
institutions are permitted to raise short term finance through issue of
commercial paper, which should be within the umbrella limit fixed by ,#I.
A corporate can issue )ommercial 8aper if1
0. Its tangible net worth is not less than ,s.= crores as per latest balance
sheet.
4. .orking capital limit is obtained from banks/ all India financial
institutions, and
:. Its borrowal account is classified as standard asset by banks/ all India
financial institutions.
)redit rating should be obtained by all eligible participants in cp issue from
the specified credit rating agencies like ),I7I', I),A, )A,*, and FI$)/.
$he minimum rating shall be euivalent to 8!4 of ),I7I'.
)ommercial paper can be issued for maturities between a minimum of 0=
days and a maximum of upto one year from the date of issue.
32
$he 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 ,s. = lakhs or in multiples thereof.
Amount invested by a single investor should not be less than ,s. = lakhs
Eface value2.
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.
#anks 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.
$he 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.
)ommercial 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.
*very commercial paper should be reported to ,#I through issuing and
paying agent EI8A2.
&nly a scheduled bank can act as an I8A.
)ommercial paper can be subscribed by individuals, banking companies,
corporate, (,Is 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.
3.2.B COST IN<OL<ED FOR ISS=IN) COMMERCIAL PAPER:
)8 is issued at a discount to the face value. $he following costs are involved
in the issue of )81
0. 7tamp duty 5.46 ! If placed through banks
0.56 ! If placed through merchant bankers
33
4. ,ating feesP 5.056 Esub"ect to a minimum of ,s.055,5552
Efor a rating from )A,*2
:. Issuing and paying agent
fee
5.06
EAll charges are on per annum basis and are sub"ect to changes from time to time2
)A,* charges a rating fee of 5.056 of the amount of issue sub"ect to a
minimum of ,s.055,555 and a maximum of ,s.:5,55,555. For issues above
,s.=55 crore, the maximum fee would be ,s.;5 lakh
3.2.10 ROLE & RESPONSBILITIES:
$he role and responsibilities of issuer, I8A and ),A are set out below1
I..2er: .ith the simplification in the procedures for )8 issuance, issuers
would now have more flexibility. Issuers would, however, have to ensure
that the guidelines and procedures laid down for )8 issuance are strictly
adhered to.
I..2"n# an' Pay"n# A#en! >IPA%:
Ei2 I8A would ensure that issuer has the minimum credit rating as
stipulated by the ,#I and amount mobilised through issuance of )8
is within the uantum indicated by ),A for the specified rating.
Eii2 I8A has to verify all the documents submitted by the issuer viz., copy
of board resolution, signatures of authorised executants Ewhen )8 in
physical form2 and issue a certificate that documents are in order. It
should also certify that it has a valid agreement with the issuer
E7chedule III2.
Eiii2 &riginal documents verified by the I8A should be held in the custody
of I8A.
Cre'"! Ra!"n# A#en&y >CRA%
Ei2 )ode of )onduct prescribed by the 7*#I for ),As for undertaking
rating of capital market instruments shall be applicable to them
E),As2 for rating )8.
34
Eii2 Further, the credit rating agency would henceforth have the discretion
to determine the validity period of the rating depending upon its
perception about the strength of the issuer. Accordingly, ),A shall at
the time of rating, clearly indicate the date when the rating is due for
review.
Eiii2 .hile the ),As can decide the validity period of credit rating, ),As
would have to closely monitor the rating assigned to issuers vis!a!vis
their track record at regular intervals and would be reuired to make
its revision in the ratings public through its publications and website.
3.2.11 Re&en! Tren'.:
#ased on the latest available information, the outstanding commercial paper E)82
issues by companies witnessed an increase from ,s ?A,@40 crore on :5 Lune to ,s
@B,=A4 crore on :0 Luly, 455B. $he interest rates on these instruments varied in the
range of :.5;!A.B56 in Luly partly reflecting maturity differences. $he outstanding
certificates of deposit E)9s2 amounted to ,s 4, :=,@0= crore in Luly and the
interest rates were in the range of :.:;!A.556. $he interest rates in )8 and )9
markets in Luly showed some softening. $he commercial paper market has
ballooned from ,s ;;,555 crore in %arch to ,s ?@,555 crore by Lune!end and ,s
A5,555 crore by mid!August as interest rates in the debt market fell
Ta0,e 3.2.1 E Co--er&"a, Pa8er. - Tren'. "n <o,2-e. an' D".&o2n! Ra!e..
35
7ources1 ,#I, /andbook of 7tatistics on Indian *conomy, 455?!455@
3.3 Cer!"$"&a!e o$ De8o."!:
)ertificate of deposit is unsecured, negotiable, short!term instruments in bearer
form, issued by commercial banks and development financial institutions. $he
scheme of certificates of 9eposits E)9s2 was introduced by ,#I as a step towards
9eregulation in 0BAB, of interest rates on deposits. -nder this scheme, any
scheduled commercial banks, co!operative banks excluding land development
banks, can issue certificate of deposits for a period of not less than three months
and up to a period of not more than one year. $he financial institutions specifically
authorized by the ,#I can issue certificate of deposits for a period not below one
year and not above : years duration. )ertificate of deposits, can be issued within
the period prescribed for any maturity. )ertificates of 9eposits E)9s2 are short!
term borrowings by banks. )ertificates 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. )ertificate of deposits rates are usually
36
higher than the term deposit rates, due to the low transactions costs. #anks use the
certificates of deposits for borrowing during a credit pick!up, to the extent of
shortage in incremental deposits. %ost certificates of deposits are held until
maturity, and there is limited secondary market activity. )ertificates of 9eposit
E)9s2 is a negotiable money market instrument and issued in dematerialized form
or as a -sance 8romissory (ote, for funds deposited at a bank or other eligible
financial institution for a specified time period. +uidelines for issue of certificate
of deposits are presently governed by various directives issued by the ,eserve
#ank of India.
3.3.1 FEAT=RES OF CERTIFICATE OF DEPOSIT:
$he main features of the scheme are as follows1
)ertificate of 9eposits can be issued by 7cheduled )ommercial #anks
Eexcluding ,egional ,ural #anks2 and the specified All!India Financial
Institutions like Industrial, Money Mare!/"n ,n'"aF Ban"n# Sy.!e- an'
9evelopment #ank of India EI9#I2, Industrial Finance Money Mare!
)orporation of lndia EIF)I2, Industrial )redit and Investment )orporation
of lndia EI)I)I2, 7mall Industries 9evelopment #ank of India E7I9#I2,
Industrial Investment #ank of India EI9#I2, and the *xport Import #ank of
India E*xim #ank22.
)ertificates of 9eposits can be issued to Individuals, Associations,
)ompanies and $rust Funds.
)ertificates of 9eposits are freely transferable by endorsement and delivery
after an initial lock!in period of 0= days after which they may be sold to any
of the above participants or to the 9iscount and Finance /ouse of India
E9F/I2.
$he maturity period of )ertificate of 9eposits issued by #anks may range
from 3 months to 04 months while those issued by specified Financial
Institutions may range from 0 to 3 years.
37
)ertificate of 9eposits are to be issued at a discount to the face value.
8resently there is no limit on the amount which a #ank may raise through
)ertificate of 9eposits. Initially, though, there waa a limit linked ts the
fortnightly
aggregate average deposits of the bank.
$he minimum amount for which they may be issued is now pegged at ,s. =
'acs. E,educed from R.. 4= 'acs2.
$he minimum size of issue of )ertificate of 9eposits to a single investor is
,s. = 'acs, theieafter they can be issued in multiples of ,s. 0 'ac, Ewith
effect from &ctober 0BB@2.
#anks and Financial Institutions are reuired to issue )9 only in
dematerialized with effect from Lune :5, 4554. T,,& existing )9s are to be
converted into demat forms by &ctober 4554.
3.3.2 A))RE)ATE AMO=NT OF CD ALLOWED FOR ISS=E1
#anks have the freedom to issue )9s depending on their reuirement
i.e. no limit is fixed for them.
An financial institution may issue )9s within the overall umbrella
limit fixed by ,#I, i.e. issue of )9 together with other instrument
like term money, term deposit, commercial papers, and inter!
corporate deposits should not exceed 0556 of its net!owned funds, as
per the latest audited balance sheet.
3.3.3 SYSTEM OF ISS=E1
In1e.!or. & Mare!.:
38
%a"or investors in )9s are public and private sector companies and
provident funds, high net worth individuals invest in )9s issued by
banks.
(,Is are allowed to invest in )9s on non!transferable and non!
repatriable basis. FIIs are not permitted to invest in )9s.
Tra'"n# "n CD.:
)9s are not listed as trading, is over the counter only. %arket
participants uote levels on a yield basis specifies to two decimal
places. $ransaction sizes vary and trades between ,s.05 lakhs and
,s.=5 )rores have taken places. $wo way uotes are not offered on
)9s. #rokers charge a commission of 5.5=6!5.4=6 for international
secondary market deals. 9eals between direct parties do not affect by
banks transaction costs. )9s issued by 9fIs do not attract any stamp
duty but primary issuance of )9s by banks attract a stamp duty at
rate, which depends upon the period for which the )9 has been
issued )9s do not bear any withholding taxes.
C,ear"n# & .e!!,e-en! o$ CD.:
)9s are sub"ect to clearance by endorsement and delivery. 9eals are
settled on trade date or on the following business day.
Deno-"na!"on For Cer!"$"&a!e O$ De8o."!.:
%inimum amount of a certificate of deposits should be ,s.0 lakh,
i.e., the minimum deposit that could be accepted from a single
subscriber should not be less than ,s. 0 lakh and in the multiples of
,s. 0 lakh thereafter. )ertificate of deposits can be issued to
individuals, corporations, companies, trusts, funds, associations, etc.
(on!,esident Indians E(,Is2 may also subscribe to certificate of
deposits, but only on non!repatriable basis which should be clearly
stated on the )ertificate. 7uch certificate of deposits cannot be
endorsed to another (,I in the secondary market.
39
S20.&r"0er.:
)9s can be subscribed by individuals, corporations, companies,
trusts, funds, associations etc. (,Is may also subscribe to )9s but
only on non! repatriate basis and this has to be clearly stated on the
certificate. $hey are also nor!transferable in case of (,Is.
D".&o2n! on I..2e o$ Cer!"$"&a!e O$ De8o."!.:
)ertificate of deposits may be issued at a discount on face value.
#anks/FIs are also allowed to issue certificate of deposits on floating
rate basis provided the methodology of compiling the floating rate is
ob"ective, transparent and market !based. $he issuing bank/FI is free
to determine the discount/coupon rate. $he 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.
Ma!2r"!y1
$he maturity period of certificate of deposit<s issued by banks should
be not less than 0= days and not more than one year. $he FIs can
issue certificate of deposits for a period not less than 0 year and not
exceeding : years from the date of issue.
Tran.$era0","!y:
*xcept for (,Is, )9s are freely transferable by endorsement and
delivery. $here is no lock period for )9s. )9s in 9*%A$ form can
be transferred "ust like other 9*%A$ securities.
B2y-0a&? ,oan on CD.:
$here is no buy!back of )9s, nor can any loan be granted against
them.
D".&o2n! ra!e on CD.?Y"e,'1
40
9iscount ,ateQ F.H
I I EInt. x (/055 x :?=2
.hereas, F.HQ Face Halue
Int. Q Interest rate per annum
( Q (o. of years of issue.
Re.er1e reG2"re-en!1
#anks have to maintain the appropriate reserve reuirement i.e. ),,
E)ash ,eserve ,atio2 C 7', E7tatutory ,eserve ,atio2 for the issue
of )9s.
For-a! o$ CD.1
)9s are issued in dematerlized form. $he investors can however opt
for physical form of certificate also. In case of repayment of )9 by
banks/FIs, no grace period is allowed. $he payment is made on a
preceding day if the date of maturity happens to be a holiday.
3.3.4 +OW CERTIFICATE OF DEPOSIT WORKS:
$he 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 consumerKs periodic bank
statements3 that is, there is usually no RcertificateR 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.
$his reduces total yield because there is no compounding. 7ome institutions allow
the customer to select this option only at the time the certificate of deposits is
opened.
41
)ommonly, institutions mail a notice to the certificate of deposits holder shortly
before the certificate of deposits matures reuesting directions. $he notice usually
offers the
choice of withdrawing the principal and accumulated interest or Rrolling it overR
Edepositing it into a new certificate of deposits2. +enerally, a RwindowR 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 Rroll overR the certificate of deposits automatically, once again tying
up the money for a period of time Ethough 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 over2.
3.3.6 RBI )=IDELINES ON ISSS=E OF CERTIFICATE OF DEPOSIT:
$he silent features of scheme devised by ,#I in issue of certificates of deposit
E)9s2 by banks are as follows1
)ertificate of deposits can be issued only by scheduled commercial banks.
,egional rural banks are not eligible for issue of certificate of deposits.
$he minimum deposit that cab be accepted from a single subscriber should
be ,s. = lakhs. Above that, it should be in multiples of ,s. 0 lakhs.
)ertificate of deposits can be issued to individuals, corporations,
companies, trusts, funds, associations etc. (,Is can subscribe to certificate
of deposits only on non!repatriable basis.
$he minimum maturity period of certificate of deposit is 0= days.
)ertificate of deposit should be issued at a discount on face value. $he
issuing bank is free to determine the discount rate.
As the certificates of deposit are usance promissory notes, stamp duty
would be attracted as per provisions if Indian 7tamp Act.
$he issuing banks have to maintain ),, and 7', on the issue price of
certificate of deposits.
42
)ertificate of deposits are freely transferable by endorsement and delivery.
#anks cannot grant loan against security of certificate of deposits.
#anks cannot buy!back their own certificate of deposits before maturity.
)ertificate of deposits should be issued only in demat form.
,ating of the certificate of deposit is not mandatory/ compulsory.
3.3.9 RECENT TREND:
$he certificates of deposit E)9s2 issued by 7)#s, which picked up
momentum in >; of 455A!5B, increased in >0 of 455B!05, reflecting the general
improvement in liuidity with the investors such as mutual funds and financial
institutions. $he outstanding amount of )9s as on Lune 0B, 455B accounted for
@.; per cent of total aggregate deposits of the issuing banks. $he overall weighted
average discount rate E.A9,2 of )9s moderated by about 4?5 basis points
between %arch and Lune 455B in line with the other money market rates.
Ta0,e 3.3.1 Cer!"$"&a!e o$ De8o."!. E <o,2-e an' Ra!e.
$able :.:.0 shows the trends in rates and volume outstanding of certificate of
deposits. #anks and financial institutions are the largest issuers of certificate of
deposits, and are also subscribers to the certificate of deposits of one another.
43
$here are limited other investors such as mutual funds, in the certificate of deposit
markets. 7cheduled commercial banks rely on certificate of deposits to
supplement their deposit resources to fund the credit demand. $he 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.
3.4 Trea.2ry B",,:
$reasury bills are short!term instruments issued by the ,eserve #ank on
behalf of the government to tide over short!term liuidity shortfalls. $his
instrument is used by the +overnment to raise short!term funds to bridge seasonal
or temporary gaps between its receipt Erevenue and capital2 and expenditure. $hey
form the most important segment of the money market not only in India but all
over the world as well. In other words, $!#ills are short term Eup to one year2
borrowing instruments of the +overnment of India which enables investors to
park their short term surplus funds while reducing their market risk.
$!bills are repaid at par on maturity. $he difference between the amount paid by
the tenderer at the time of purchase Ewhich is less than the face value2 and the
amount received on maturity represents the interest amount on $!bills and is
known as the discount. $ax deducted at source E$972 is not applicable on $!bills.
Lust like commercial bills which represent commercial debt, treasury bill represent
short!term borrowings of the government. $reasury bill market refers to the
market where treasury bills are bought and sold. $reasury bill is popular and en"oy
very a higher degree of liuidity since they are issued by the +overnment. It does
not reuire and Dgrading< or Dendorsement< or Dacceptance< since it is a claim
against the +overnment.
$reasury bills are issued only by the ,#I on behalf of the +overnment. $reasury
bills are is issued for meeting temporary +overnment deficits. $he treasury bill
rate or the rate of discount is fixed by the ,#I from time to time. It is the lowest
44
one in the entire structure of interest rates in the country because of short!term
maturity and high degree of liuidity and security.
3.4.1 FEAT=RES OF TREAS=RY BILL1
$hey are negotiable securities.
$hey are highly liuid as they are of shorter tenure and there is a
possibility of interbank repos on them.
$here is absence of default risk.
$hey have an assured yield3 low transactions cost, and are eligible for
inclusion in the securities for 7', purpose.
$hey are not issued in scrip form. $he purchases and sales are
affected through the subsidiary general ledger E7+'2 account. $!#ills
are issued in the form of 7+' entries in the books of ,eserve #ank of
India to hold the securities on behalf of the holder. $he 7+' holdings
can be transferred by issuing a 7+' transfer form
,ecently $!#ills are also being issued freuently under the %arket
7tabilization 7cheme E%772.
3.4.2 AD<ANTA)ES? SI)NIFICANCE OF TREAS=RY BILL:
Sa$e!y:
Investments in $#s are highly safe since the payment of interest and
repayment of principal are assured by the +overnment. $hey carry
zero default risk since they are issued by the ,#I for and on behalf of
the )entral +overnment.
L"G2"'"!y:
Investments in the $#s are also highly liuid because they can be
converted into cash at any time at the option of the investors. $he
9F/I announces daily buying and selling rate for $#s. they can be
45
discounted with the ,#I and further refinance facility is available for
the ,#I against $#s. hence there is ready market for $#s.
I'ea, .(or!-!er- "n1e.!-en!:
Ideal cash can be profitable invested for a very short Speriod in $#s.
$#s are available on tap throughout the week at specified rates
Financial Insitutions can employ their surplus funds on any day.
I'ea, F2n' Mana#e-en!:
$#s are available on tap as well as through periodical auctios. $hey
are also available in the secondary market. Fund managers of
financial institution build up a portfolio of $#s in such way that the
dates of payment maturities of $#s may be matched with the date of
payment of their liabilities lie deposits of short!term maturities.
S!a!2!ory L"G2"'"!y Ra!"o:
As per the ,#I directives, commercial banks have to maintain 7',
and for measuring this ratio investments in $#s are taken into
account. $#s are eligible securities for 7', purposes. %oreover, to
maintain ),,. $#s are very helpful. $hey are readily converted into
cash and thereby ),, can be maintained.
So2r&e o$ S(or!-!er- $2n'.:
$he +overnment can raise short term funds for meeting its temporary
budget deficits through the issue of $#s. It is a source of cheap
finance to the +overnment since the discount rates are very low.
+e'#"n# Fa&","!y:
$#s can be used as a hedge against heavy interest rate fluctuations I
the call loan market. .hen call rate are very high, money can be
raised uickly against $#s and invested in the call money market and
vice versa.
46
3.4.3 DISAD<ANTA)ES OF TREAS=RY BILL:
Poor Y"e,':
$he yield from $#s is the lowest. 'ong term +overnment securities
fetch more interest and hence subscriptions for $#s are in the decline
in recent times.
A0.en&e o$ &o-8e!"!"1e 0"'.:
$hough $#s are sold through auction in order to ensure marker rates
for the investors, in actual practice, competitive bids are
conspicuously absent. $he ,#I in compelled to accept these non!
competitive bids./ence, adeuate returns are very low.
A0.en&e o$ A&!"1e Tra'"n#:
+enerally, the investors hold $#s till maturity and they do not come
for circulation. /ence, active trading in $#s is adversely affected.
3. 4.4 TYPES OF TREAS=RY BILLS:
$reasury bills E$!bills2 offer short!term investment opportunities, generally up to
one year. $hey are thus useful in managing short!term liuidity. At present, ,#I
issues $!#ills for three different maturities 1 B0 days, 0A4 days and :?; days. $he
B0 day $!#ills are issued on weekly auction basis while 0A4 day $!#ill auction is
held on .ednesday preceding non reporting Friday and :?; day $!#ill auction on
.ednesday preceding the reporting Friday. $here are no treasury bills issued by
7tate +overnments.
3.4.6 IN<ESTORS IN TREAS=RY BILL:
47
#anks are the ma"or investors in $!bills and they invest in these so as to maintain
their 7tatutory 'iuidity ,atio E7',2 as prescribed by ,#I. &ther than banks
Financial Insitutions, %utual Funds, (on!#anking Finance )ompanies, 8rovident
funds, 7tate +overnments, Insurance )ompanies act as investors in the $!bill
market.
T(e Ta0,e 4.1 Pre.en!. (o,'"n# 8a!!ern o$ o2!.!an'"n# T-0",,..
3.4.9 SIHE
&
AMO=NT OF T-BILLS:
$reasury bills are available for a minimum amount of ,s.4=,555 and in multiples
of ,s.
4=,555. $reasury bills are issued at a discount and are redeemed at par. $reasury
bills are also issued under the %arket 7tabilization 7cheme E%772. $hey are
available in both 8rimary and 7econdary market.

3.4.: ISS=ANCE PROCESS OF T-BILLS:
$reasury bills E$!bills2 are short !term debt instruments issued by the )entral
government. $hree types of $!bills are issued1 B0!day, 0A4!day and :?;!day.
$! bills are sold through an auction process announced by the ,#I at a discount to
its face value. ,#I issues a calendar of $!bill auctions E$able 0.42 .It also
announces the exact dates of auction, the amount to be auctioned and payment
48
dates. $!bills are available for a minimum amount of ,s. 4=,555 and in multiples
of ,s. 4=,555. #anks and 89s are ma"or bidders in the $! bill market. #oth
discriminatory and uniform price auction methods are used in issuance of $!bills.
)urrently, the auctions of all $!bills are multiple/discriminatory price auctions,
where the successful bidders have to pay the prices they have actually bid for.
(oncompetitive bids, where bidders need not uote the rate of yield at which they
desire to buy these $!bills, are also allowed from provident funds and other
investors. ,#I allots bids to the non!competitive bidders at the weighted average
yield arrived at on the basis of the yields uoted by accepted competitive bids at
the auction. Allocations to non!competitive bidders are outside the amount
notified for sale. (on!competitive bidders therefore do not face any uncertainty in
purchasing the desired amount of $!bills from the auctions. 8ursuant to the
enactment of F,#% Act with effect from April 0, 455?, ,#I is prohibited from
participating in the primary market and hence devolvement on ,#I is not allowed.
Auction of all the $reasury #ills are based on multiple price auction method at
present. $he notified amounts of the auction is decided every year at the beginning
of financial year E,s.=55 crore each for B0!day and 0A4!day $reasury #ills and
,s.0,555 crore for :?;!day $reasury #ills for the year 455A!5B2 in consultation
with +&I. ,#I issues a 8ress ,elease detailing the notified amount and indicative
calendar in the beginning of the financial year.
$he auction for %77 amount varies depending on prevailing market condition.
#ased on the reuirement of +&I and prevailing market condition, the ,#I has
discretion to change the notified amount. Also, it is discretion of the ,#I to
accept, re"ect or partially accept the notified amount depending on prevailing
market condition.
49
3.4.A TREAS=RY BILLS- A=CTION CALENDER:
Ta0,e 3.4.1 Trea.2ry B",,.- A2&!"on Ca,en'ar
If the day of payment falls on a holiday, the payment is made on the day after the
holiday. $he calendar for the regular auction of $#s for 455A!5B was announced
on %arch 4;, 455A. $he notified amounts were kept unchanged at ,s.=55 crore
for B0!day and 0A4! day $#s and ,s.0,555 crore for :?;!day $#s. /owever, the
notified amount Eexcluding %772 of B0!day and 0A4 $#s and ,s.0,555 crore for
:?; day $#s. /owever, the notified amount Eexcluding %772 of B0!day $#s was
increased by ,s.4,=55 crore each on ten occasions and by ,s.0,=55 crore each on
ten occasions and by ,s.0,=55 crore on one occasion and that of 0A4 day $#s was
increased by ,s.=55 crore on two occasions during 455A!5B Eupto August 0;,
455A2. $hus, an additional amount of ,s.4@,=55 crore E,s.0@,=55 crore, net2 was
raised over and above the notified amount in the calendar to finance the expected
temporary cash mismatch arising from the expenditure on farmers< debt waiver
50
scheme.$he summary of $! bill auctions conducted during the year 455@! 5A is in
$able :.;.4
Ta0,e 3.4.2: T-0",, A2&!"on. 2@@:- @A - A S2--ary
51
3.4.B TYPES OF AC=TION S OF T-BILLS:
$here are two types of auctions1
a2 %ultiple!price auction
b2 -niform!price auction
a% M2,!"8,e-8r"&e a2&!"on:
$he ,eserve #ank invites bids by price, that is, the bidders have to uote the price
E per ,s.055 face value2 of the stock at which they desire to purchase. $he bank
then decides the cut!off price at which the issue would be exhausted. #ids above
the cut!off price are allotted securities. In other words, each winning bidder pays
the price it bid.
$he main advantage of this method is that the ,eserve #ank 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 "ust the
minimum accepted price. In order to eliminate the problem, the ,eserve #ank
introduced uniform price auction in case of B0!days $!bills.
0% =n"$or--8r"&e a2&!"on:
In this method, the ,eserve #ank invites the bids in descending order and accepts
those that fully absorb the issue amount. *ach winning bidders pays the same
Euniform2 price decided by the ,eserve #ank.
$he advantages of the uniform price auction are that they tend to minimize
uncertainty and encourage broader participation. %ost countries follow the
multiple!price auction.
3.4.1@ CLEARIN) & SETTLEMENT:
)learing and settlement for $!#ills is through 9elivering vs 8ayment E9H82
system, that reuires the parties to an submit 7+' note to the 8ublic 9ebt &ffice
52
dealing in the transactions. $he ,#I will then make entries in the 7+' account
and current account of the parties concerned. Interbank usually settle on the same
business day, whereas trades with the non!bank counter parties settle either on the
same day or one business day after trade day.
3.6 )",! E'#e' Se&2r"!"e. Mare!:
&ne of the important sources of borrowing funds is the government securities
market E+7%2. $he government raises short term and long term funds by issuing
securities. $hese securities do not carry risk and are as good as gold as the
government guarantees the payment of interest and the repayment of principal.
$hey are, therefore, referred to as gilt!edged securities.
$he government securities market is the largest market in any economic system
and therefore, is the benchmark for other markets. $he +overnment securities
market consists of securities issued by the 7tate +overnment and the )entral
+overnment. +overnment securities include )entral +overnment securities,
$reasury bills and 7tate 9evelopment 'oans. $hey are issued in order to finance
the fiscal deficit and managing the temporary cash mismatches of the
+overnment.
All entities registered in India like banks, financial institutions, 8rimary 9ealers,
firms,companies, corporate bodies, partnership firms, institutions, mutual funds,
Foreign Institutional Investors, 7tate +overnments, 8rovident Funds, trusts,
research organisations,
(epal ,ashtra bank and even individuals are eligible to purchase +overnment
7ecurities. $hey are generally by banks and institutions with the ,eserve #ank of
India in 7ubsidiary +eneral 'edger accounts. $hey can be held in special accounts
known as )onstituent 7ubsidiary +eneral 'edger E)7+'2 accounts which can be
53
opened with banks and 8rimary 9ealers or in dematerialized form in demat
accounts maintained with the 9epository 8articipants of (79'.
$he securities are issued at par value E,s 0552 and have a coupon rate which is
decided at the time of issue by auction techniue. $hese securities pay interest at
the coupon rate on a half yearly basis and are redeemed at par value on maturity.
$hese are called dated securities because these are identified by their date of
maturity and the coupon, e.g., @.BB6 +&I 450@ is a )entral +overnment security
maturing in 450@, which carries a coupon of @.BB6 payable half yearly.
3.5.1 IMPORTANCE OF )O<ERNMENT SEC=RITIES:
+7% constitutes the principal segment of the debt market. It not only
provides resources to the government for meeting its short term and
long term needs but also acts as a benchmark for pricing corporate
papers of varying maturities.
$he government securities issues are helpful in implements the fiscal
policy of the government.
It is critical in bringing about an effective and reliable transmission
channels for the use of indirect instruments of monetary control.
+overnment securities provide the highest type of collateral for
borrowing against their pledge.
$hey have the highest degree of security of capital and the return on
each security depends on the coupon rate and period of maturity.
$hey are traded for both long and short term periods depending on
the investment and liuidity preference of the investors.
7witches between the short dated and long dated securities take place
on the basis of difference in redemption yields.
3.6.2 PERIOD OF ISS=E:
54
$hese securities are issued with various maturities ranging from 4 to :0 years.
9ates securities presently have a maturity period up to 45 years. 7uch securities
whose maturity period is above 05 years are called Dlong dated securities< while
those having tenure between =!05 and less than = years called Dmedium and short
term securities< respectively. $he securities are issued in denomination of
,s.05, 555/! and multiplies thereof.
3.6.3 PARTICIPANTS IN )O<ERNMENT SEC=RITIES:
I..2er.:
0. )entral +overnment
4. ,eserve #ank of India
:. 8rimary dealers appointed by ,#I
;. 7tate +overnment
=. 8ublic 7ector
In1e.!or.:
0. #anks
4. Insurance )ompanies
:. %utual Funds
;. 9FIs
=. 8rovident C pension funds
?. )haritable trust, Institutions
7ince Lanuary 4554, retail investors have also been permitted to submit non!
competitive at primary auction through any bank or primary dealer. $hey can
submit bids amounting ,s.05,555 or multiplies thereof sub"ect to a maximum
limit of ,s.0 crore.
55
3.6.4 PROCESS OF ISS=E:
In the primary market +overnment securities are issued through auctions
Eyield based or price based auctions2 which are conducted by the ,eserve #ank of
India. +overnment securities are issued through an auction process3 ,#I through a
press notification announces the auction and invites bids for the same. $here are
two types of treasury auctions1!
9iscriminatory price auction also called French auction
In this case the bidder who uotes the maximum price is the successful
bidder. All the successful bidders pay the uniform price which they uoted
for.
-niform price auction or 9utch auction
In this case, all successful bidders pay a uniform price which is the cut!off
price Eyield2.
$he prices and yield of +overnment securities is decided by Fixed Income %oney
%arket and 9erivative Association of India EFI%%9A2 on the basis of a yield of
curve calculated by FI%%9A for the purpose of valuation.
3.6.6 SETTLEMENT OF TRADERS IN )O<ERNMENT SEC=RITIES:
All traders in +overnment securities are reported to ,#I!7+' account settlement.
$hese securities are held in dematerlized form in the 7+' account. $he settlement
of transactions through the current account of seller/buyer maintained with ,#I.
7ecurities are transferred through credits/debits in the 7+' account.
3.9 REPO >REP=RC+ASE A)REEMENT%:
,*8& is contract between two parties to buy/sell securities with the agreement
that the transaction reverse after a predetermined period of time a pre!determined
56
price. ,epo is a money market instrument, which enables collateralized short term
borrowing and lending through sale/purchase operations in debt instruments.
A ,epo is a combination of on outright purchase and an outright sale. $he
transaction is called ,epo when viewed from the prospective of seller of the
securities and reverse repo when described from the point of view of supplier of
funds. $he purchase C the sale prices are determined by the ,epo rate. A repo in
other words is collateralized borrowing.
$he ma"or function of the money market is to provide liuidity. $o achieve this
function and to even out liuidity changes, the ,eserve #ank uses repos. ,epo is a
useful money market instrument enabling the smooth ad"ustment of short!term
liuidity among varied market participants such as banks, financial institutions
and so on.
3.9.1 RE<ERSE REPOS:
A reverse repo is the mirror image of a repo. For, in a reverse repo, securities are
acuired with a simultaneous commitment to resell. /ence whether a transaction
is a repo or a reverse repo is determined only in terms of who initiated the first leg
of the transaction. .hen the reverse repurchase transaction matures, the counter!
party returns the security to the entity concerned and receives its cash along with a
profit spread. &ne factor which encourages an organization to enter into reverse
repo is that it earns some extra income on its otherwise idle cash. $he difference
between the price at which the securities are bought and sold is the lender<s profit
or interest earned for lending the money. $he transaction combines elements of
both a securities purchased/sale operation and also a money market
borrowing/lending operation.
3.9.2 IMPORTANCE OF REPOS:
In!ere.! Ra!e: being collateralized loans, repos help reduce counter!party
risk and therefore, fetch a low interest rate especially in a volatile market.
57
Sa$e!y: repo is an almost risk!free instrument used to even!out liuidity
changes in the system. ,epos offer safe short!term outlet for temporary
excess cash at close to market interest rates.
=.e.: 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.
In India, repo transactions are basically fund management/statutory liuidity
reserve E7',2 management devices used by banks.
Ca.( Mana#e-en! Too,: 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. $his helps the banks to meet temporary cash
reuirements. $his also makes the repos a pure money lending operation.
&n maturity of repos, the security is purchased back by the seller of the
securities.
L"G2"'"!y Con!ro,: $he ,#I uses repos as a tool of liuidity control for
absorbing surplus liuidity from the banking system in a flexible way and
there preventing interest rate arbitraging. All repo transactions are to be
affected at %umbai only and the deals are to be necessarily put through the
subsidiary general ledger E7+'2 account with the ,eserve #ank of India.
3.9.3 REPO RATE:
,epo rate is nothing but the annualized interest rate for the funds transferred by
the lender to the borrower. +enerally, the rate at which it is possible to borrow
through a repo is lower than the same offered on unsecured Eor clean2 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. &ther factors affecting
58
the repo rate include the credit worthiness of the borrower, liuidity of the
collateral and comparable rates of other money market instruments. $he repo rate
is negotiated by the counter parties independent of the coupon rate or rates of the
underlying securities and is influenced by the overall money market conditions.
7ince 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. $hus, 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. &n the other hand, if the market value of
collateral rises substantially, the lender may be reuired to return the excess
collateral to the borrower.
3.9.4 SECONDARY MARKET TRANSACTION IN REPOS:
7econdary market repo transactions are settled through the ,#I 7+' accounts,
and weekly data is available from the ,#I on volumes, rates and number of days.
$hough the (7* .9% also has the facility for reporting repo trades, there were
no repo transactions recorded during 455=! 5?, 455?!5@ and 455@!5A.
3.9.6 PARTICIPANTS IN REPO:
,#I, all schedules commercial banks, primary dealers, satellite dealers, financial
institutions and mutual funds are allowed to participate in the ,epo market. A
subsidiary +eneral 'edger E7+'2 as well as current account with ,#I is a pre!
reuisite to be a party to ,epo transaction in government securities.
0. -ses of ,epos for participants1
0. /elp in collateralized borrowing for meeting liuidity reuirements.
4. $he money received in the first part Ei.e. sale2 may be used for meeting
short term liuidity reuirements.
3.9.9 TIME PERIOD IN REPOS:
59
,*8& may be done done for period of : months but mostly they are reversed
within a fortenight or less. %aximum period permitted is not restricted, which
maximum is one of day.
3.9.: SIHE OF REPO:
$he average volume transacted in ,*8& is ,s. 0555 crores per fortnight.
3.: OT+ER MONEY MARKET INSTR=METS:
0. Baner. A&&e8!an&e1
#ank uses banker<s acceptance to finance import and export with firms
in foreign countries. An importer<s bank backs the importer by paying
the foreign party on importers behalf. $he importer is then obliged to
pay the bank within period of :!? months. If the banks so desires, it can
call the contract before it is repaid so as to replenish its cash, which
makes #A highly liuid. If the importer defaults, banks becomes liable
for payment on the importer behalf. Lo&a,"!y o$ BA.: 7an Francisco,
(ew Tork and )hicago originate most #As. &nly the largest banks
engage in this market
4. Co--er&"a, B",,.1
)ommercial bill is a short term, negotiable, and self!liuidating
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
(egotiable Instruments Act, 0AA0, 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. #ills of exchange are negotiable
60
instruments drawn by the seller Edrawer2 on the buyer Edrawee2 or the
value of the goods delivered to him. 7uch bills are called trade bills.
.hen trade bills are accepted by commercial banks, they are called
commercial bills. $he bank discount this bill by keeping a certain margin
and credits the proceeds. #anks, when in need of money, can also get
such bills rediscounted by financial institutions such as 'I), -$I, +I),
I)I)I and I,#I. $he maturity period of the bills varies from :5 days, ?5
days or B5 days, depending on the credit extended in the industry.
3. Money Mare! -2!2a, $2n' >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. %utual funds have a fund manager who invests the money
on behalf of the investors by buying / selling stocks, bonds etc. %oney
market mutual funds E%%%Fs2 were introduced in April 0BB0 to
provide an additional short!term avenue for investment and bring
money market investment within the reach of individuals. $hese mutual
funds would invest exclusively in money market instruments. %oney
market mutual funds bridge the gap between small investors and the
money market. It mobilizes saving from small investors and invests
them in short!term debt instruments or money market instruments.
$here 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. $here 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. $his
diversification helps in reducing the overall risk of the portfolio. It is
61
also less expensive to invest in a mutual fund since the minimum
investment amount in mutual fund units is fairly low E,s. =55 or so2.
.ith ,s. =55 an investor may be able to buy only a few stocks and not
get the desired diversification. $hese are some of the reasons why
mutual funds have gained in popularity over the years
An O1er1"e* - Money Mare! M2!2a, F2n'.1
)urrently, the worldwide value of all mutual funds totals more than
U-7 4? trillion. $he -nited 7tates leads with the number of mutual
fund schemes. $here are more than A555 mutual fund schemes in the
-.7.A. )omparatively, India has around 0555 mutual fund schemes, but
this number has grown exponentially in the last few years. $he $otal
Assets under %anagement in India of all %utual funds put together
touched a peak of ,s. =, ;;,=:= crs. at the end of August 455A. . As of
today there are ;0 %utual Funds in the country. $ogether they offer
over 0555 schemes to the investor. %any 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 ,s. = lakh which Indian %utual Funds are managing,
then it is no mean an achievement. A country traditionally putting
money in safe, risk!free investments like #ank F9s, 8ost &ffice and
'ife Insurance, has started to invest in stocks, bonds and shares N
thanks to the mutual fund industry.
4. In!er-Cor8ora!e De8o."!. >ICD%:
An Inter!)orporate 9eposit EI)92 is an unsecured borrowing by
corporates and FIs from other corporate entities registered under the
)ompanies Act 0B=?. $he corporate having surplus funds would lend to
another corporate in need of funds. $his lending would be an
uncollateralized basis and hence a higher rate of interest would be
62
demanded by the lender. $he short term credit rating of the corporate
would determine the rate at which the corporate would be able to borrow
funds. Further the credit spreads demanded even for the top rated
corporates would be higher than similar rated banks and the rates on
I)9s would higher than those in the )ertificate of 9eposit E)92 market.
$he tenor of I)9 may range from 0 day to 0 year, but the most common
tenor of borrowing is for B5 days.
8rimary 9ealers are only permitted to borrow in the I)9 market. $he
borrowing under I)9 is restricted to =56 of the (et &wned Funds and the
minimum tenor of borrowing is for @ days.
D2e.!"onna"re For Money Mare! In.!r2-en!.
1% W(a! ". yo2r ann2a, "n&o-eI
V below 0 lakhs
V between 0 lakhs! : lakhs
V between : lakhs! = lakhs
V above = lakhs
2% +o* 'o yo2 "n1e.! yo2r .a1"n#.I
V 9eposits in #anks
V Invest in ,eal *state
V Invest in )apital %arket
V Invest in %oney %arket %utual Funds
3% Do yo2 (a1e any no*,e'#e a0o2! Money Mare! In.!r2-en!.I
63
V Tes
V (o
V /eard but not know
4% +o* ,on# *o2,' yo2 ,"e !o (o,' yo2r Money Mare! In.!r2-en!.I
V 'ong term period
V 7hort term period
6% +o* -2&( r". *o2,' yo2 0e *",,"n# !o !aeI
V 'ow
V Average
V %edium
V /igh
9% In yo2r o8"n"on/ *(a! ". eC8e&!e' ra!e o$ re!2rn "n a yearI
V below 05 6
V between 05 6 ! 456
V between 456 ! :56
V above :56.
:% +o* *o2,' ra!e yo2r eC8er"en&e *"!( In'"an Money Mare!I
V 8oor
V Average
V +ood
V *xcellent
A% I. re&e.."on (a' a$$e&!e' yo2r "n1e.!-en! 'e&"."onI
V Tes
V (o
B2 .hich instrument you preferred most among the money market instrumentsW
Sa-8,"n# o05e&!"1e: !o $"n' o2! "n'"1"'2a, "n1e.!or. $or !(e a#e #ro28 o$ 1A
-66 year..
64
Sa-8,"n# area: M2-0a"
CONCL=SION:
$he money market instruments specializes in debt securities that mature in less
than one year. %oney market securities are very liuid, and are considered
very safe. As a result, they offer a lower return than other securities. $he
easiest way for individuals to gain access to the money market is through a
money market mutual fund. $!bills are short!term government securities that
mature in one year or less from their issue date. $!bills are considered to be
one of the safest investments ! they donKt provide a great return. A certificate of
deposit E)92 is a time deposit with a bank. Annual percentage
yield EA8T2 takes into account compound interest, annual percentage rate
EA8,2 does not. )9s are safe, but the returns arenKt great, and your money is
tied up for the length of the )9. )ommercial paper is an unsecured, short!term
loan issued by a corporation. ,eturns are higher than $!bills because of the
higher default risk. #ankers acceptances E#A2are negotiable time draft for
financing transactions in goods. #As are used freuently in international trade
and are generally only available to individuals through money market funds.
$he only way for individuals to invest in this market is indirectly through a
money market fund. ,epurchase agreements Erepos2 are a form of overnight
borrowing backed by government securities.
65
BIBLIO)RAP+Y:
Boo Re$eren&e.
Sr. No Boo Na-e A2!(or Na-e
Year o$
E'"!"on
1. Ca8"!a, Mare! "n In'"a E. )or'on 2@@A
2.
F"nan&"a, Mare!./
In.!"!2!"on. & Ser1"&e.
N.K. )28!a
Mon"a C(o8ra
2@@A
3.
F"nan&"a, Mare!. &
In.!"!2!"on.
Ree!a Ma!(2r 2@@A
4. F"nan&"a, Mare! & Ser1"&e. E. )or'on 2@@A
6.
Dyna-"&. o$ In'"an F"nan&"a,
Sy.!e-
Pree!y S"n#( 2@@:
We0 Re$eren&e.
***.r0".or#."n?*ee,y .!a!".!"&a, .288,e-en!?1ar"o2. "..2e..&o."n
***."n1e.!o8e'"a.&o-.
***.0.e"n'"a.&o-
***.n.e"n'"a.&o-
66
***.e&ono-"&.."n'"a!"-e..&o-
ACKNOWLED)EMENT
67

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MONEY MARKET INSTRUMENTS IN INDIA

CHAPTER 1 - Financial Market:

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