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Mortgage-Backed Securities (MBS)


WHAT IT IS:
Mortgage-backed securities (MBS) are securities that represent an interest in a pool of
mortgage loans.

HOW IT WORKS (EXAMPLE):


To understand how MBS work, it's important to understand how they're created. Let's
assume you want to buy a house, so you get a mortgage from XYZ Bank. XYZ Bank transfers
money into your account, and you agree to repay the money according to a set schedule.
XYZ Bank may then choose to hold the mortgage in its portfolio (i.e., simply collect the
interest and principal payments over the next several years) or sell it.

[If you're ready to buy a home, use our Mortgage Calculator to see what your monthly
principal and interest payment will be.]

If XYZ Bank sells the mortgage, it gets cash to make other loans. So let's assume that XYZ
Bank sells your mortgage to ABC Company, which could be a governmental, quasi-
governmental, or private entity. ABC Company groups your mortgage with similar
mortgages it has already purchased (referred to as pooling the mortgages). The mortgages
in the pool have common characteristics (i.e., similar interest rates, maturities, etc.).

ABC Company then sells securities that represent an interest in the pool of mortgages, of
which your mortgage is a small part (called securitizing the pool). It sells these MBS to
investors in the open market. With the funds from the sale of the MBS, ABC Company can
purchase more mortgages and create more MBS.

When you make your monthly mortgage payment to XYZ Bank, they keep a fee or spread
and send the rest of the payment to ABC Company. ABC Company in turn takes a fee and
passes what's left of your principal and interest payment along to the investors who hold
the MBS.

There are two kinds of MBS. The first, called pass-throughs or participation certificates
(PCs), represent a direct claim on the pool of mortgage loans. The second kind, called
collateralized mortgage obligation mortgage obligations (CMOs) or real estate mortgage
investment conduits (REMICs) are more complicated. These securities essentially take the
interest and principal payments from several MBS and create additional securities with
varying maturities and coupons.
Capital Market Instruments in India
Posted By: adminon: March 12, 2013In: FinanceNo Comments
In this article we will tell you about Capital Market Instruments in India. Here’s the details.

Now we will discuss about the Capital Market and their Instruments, which are used by
various investors for getting better return. Before going into depth about capital market
instruments, we will briefly define the meaning of capital market. Let us have a look

Capital market refers to a type of financial market, where individuals and institutions are
trading in financial securities. Public and private institutions or organisations usually list
their securities for selling among investors and for raising their funds. This kind of a market
is made for both primary and secondary market. In this market, long term maturity
instruments are listed, which have a period of more than one year.

Investors are investing their money for long periods of time. Various financial institutions
provide the investing facility in capital markets, such as IDBI, UTI, ICICI, LIC, etc. These
agencies play a role of intermediaries or lenders. Capital market has various instruments for
investment.

Capital market is classified into two categories, first one is Primary market and second is
Secondary market. In primary market, the all new shares are traded in market and , on the
other hand, in the secondary market, the existing securities are traded. The institutions of
capital market facilitate foreign exchange loans, underwriting, consultancy, rupee loans, etc.
Capital market provides equity finance and long term debt to government or corporate.

Capital Market Instruments in IndiaWell, after discussing about capital market, here we will
discuss about various instruments of capital market, which are used by investors.

Shares
Shares are a unit of ownership in an organisation or corporation. It is a part of the
company’s capital. Those individuals who are getting shares from any company, are called
Shareholders. When a company wants to borrow and increase their capital, they issue their
shares in the stock market (exchange) for their investors.

However, companies also require to refund the amount from their Net Profit. Therefore,
shares play a significant role in the lives of companies and investors / shareholders.
Companies can issue two types of shares, which they offer to investors/shareholders. The
two types of shares are:
(a) Equity shares
(b) Preference shares

Bonds
Bonds are issued by the banks, organisations and financial institutions. They issue bonds for
getting an amount of money from public (as a loan) and commit them a refund with an
actual interest and within a maturity period. They issue their bonds for financing their
capital expenses and their various projects or activities.

This is one of the most frequently used methods for increasing their capital and profits.
When companies offer their bonds to public, they define a specified interest rate and
maturity period in an applicant form.
Bonds have various types( i.e risk free bonds, high interest bonds, etc.) and different
companies issued various types of bond to public

Debentures
Debenture is an instrument which is used by the Corporations and Government for getting a
loan from public and it is given under the company’s Stamp Act. Corporations and
Government can secure their debenture on company assets which it issues as long term
loans. In Debentures, companies are required to announce a fixed return at the time of
issuing.

Therefore, holders know that, how much amount they will get in future by issuer.
Debentures have various advantages for holders and issuers. It implies that holders know
that how much amount they will get in future, therefore they do not worry about their
payment and, in general, debentures are freely transferable by their holder to others.
Therefore, holders have a right to transfer their shares to anyone before their redemption.

Fixed Deposit
Fixed Deposit is that kind of bank account, where the amount of deposit is fixed for a
specified period of time. All Commercial banks are given these opportunities to their
customers for opening a fixed account in their bank. In a Fixed account, the amount of
deposit is fixed, which means we cannot withdraw an unlimited amount from this account,
therefore it is also called a Fixed Deposit.

If an account holder wants to withdraw a small amount of money from their account, then
he will require closing of the Fixed deposit account. The main purpose of account holders to
open this account, is to earn interest money from their actual money, which is given by the
banks during a specified period of time.

Foreign exchange market (Forex market)


Forex is one of the most biggest investment markets in the world and it is a huge platform
for investors for their investment. There are various forms of currencies included for trading
on international level. The investors invest their money on the value of currencies
fluctuation because of variation in the economic position of countries and entire world
economy.

In the Forex market, we are dealing with different currencies of countries. We are not
dealing with only one currency at one time, we have to deal with a couple of currencies at
one time, for example USD/INR. In the example, the left side currency is called a Base
currency and the right side currency is called a Quote/Counter currency.
A price of one currency expressed in terms of the currency of another country is called as
the exchange rate. For example, the ratio of both currencies is 53.9, which implies that one
unit of US Dollar can buy or equals 53.9 Rupees of India. In that case, the US Dollar is a base
currency and the Indian Rupee is quote currency.

Gold ETF
Gold ETF is one of the most popular funds as it does not get influenced due to stock
fluctuations or inflation. Gold ETF fund is a fiscal instrument which works as a mutual fund
and whose prices are depending upon the market price of gold. When the market price of
gold increases, gold ETF prices also increase.

The services of Gold ETF fund transfers is available in few stock exchanges, such as Mumbai,
Paris, Zurich and New York. Gold ETF fund provides a variety of advantages to their holders,
such as Low cost, Tax advantage, Gold purity, there is no need to worry about safety, Issue
of selling gold bars and also beneficial in short term investments.

OTCEI | Definition | Need | Features | Listing


requirements

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Finance
OTCEI | Definition | Need | Features | Listing requirements
Definition of OTCEI
Over The Counter Exchange of India (OTCEI) can be defined as a stock exchange without a
proper trading floor. All stock exchange have a specific place for trading their securities
through counters. But the OTCEI is connected through a computer network and the transactions
are taking place through computer operations. Thus, the development in information
technology has given scope for starting this type of stock exchange.

OTCEI is recognized under the Securities Contract (Regulation) Act and so all the stocks listed
in this exchange enjoy the same benefits as other listed securities enjoy.
(Image: OTCEI Meaning)
Need for starting OTCEI:
Many small companies in India are finding it difficult to raise adequate capital through Stock
Exchanges as the conditions stipulated by them could not be fulfilled. The companies must
have run for minimum three years and they must have earned profit and the minimum capital
requirement for listing is also quite high. Hence by promoting a new Stock exchange with
flexible conditions, the small and medium companies in India will be able to raise sufficient
capital. Once these companies enlarge their resources, they can list themselves in the regular
stock exchanges.

Promotion of OTCEI:
OTCEI has been incorporated under Section 25 of the Companies Act. As a result of which the
word ‘Limited’ need not be used since it is promoted for a common cause of promoting the
interest of small and medium companies. This privilege has been given to the company by the
Central Government.

This company was promoted by a group of financial institutions owned by the Government of
India, consisting of UTI, ICICI, IDBI, SBI Capital Market, IFCI, LIC, GIC; and Can Bank
Financial Services (which is a subsidiary of Canara Bank).

Special features of OTCEI:


1. Use of Modern technology: Unlike other stock market, OTCEI does not have any special
counters and it is an electronically operated stock exchange.
2. Restrictions for other stocks: Stocks and shares listed in other stock exchanges will not be
listed in the OTCEI and similarly, stocks listed in OTCEI will not be listed in other stock
exchanges.
3. Minimum issued capital requirements: Minimum issued equity capital should be Rs. 30
Lakhs, out of which minimum public offer should be Rs. 20 Lakhs.
4. Restrictions for large companies: No company with the issued equity share capital of more
than Rs. 25 Crores is permitted for listing.
5. Base Capital requirement for members: Members will be required to maintain a minimum
base capital of Rs. 4 Lakhs to trade on the permitted or on listed segment.
6. All India Network: The network of counters links OTCEI members, located in different
parts of the country.
7. Satellite facility: The satellite required for OTCEI for its operations is jointly held with
Press Trust of India (PTI) and hence, PTI-OTCEI scan displays the prices of OTCEI’s scripts.
8. Computerization of transactions: Computers at each counter enable to dealers to enter
various transactions or queries or quotes through a central OTCEI computer, using
telecommunications links.
Due to the above features, OTCEI has an edge over other stock exchanges in the country.

Constituents of OTCEI
OTCEI commenced its operations in 1992. In OTCEI, we have the following parties taking
part in various transactions. They are

 Companies
 Dealers
 Members
 Investors
 Custodian or Settlers
 Transfer agents
 OTCEI
 Government and
 SEBI.
How are transactions done in OTCEI?
The members of the OTCEI will invite companies to list on the exchange for raising capital.
There are dealers who perform the dual role of a broker and market maker. A broker acts on
behalf of buyer or seller, while a market maker has a responsibility to make available toe
particular share in the maker for transactions and to maintain reasonable price through supply
and demand forces.

Example: The market makers will prevent abnormal fluctuations in the price of securities by
regulating the supply and demand forces of securities in such a manner than acute scarcity or
abundant supply of any security will be avoided. If 1000 shares are demanded among different
categories so that the price will not fluctuate abnormally.

The custodian or a settler is one who validates the trading documents, stores the trading
documents and also arranges for the clearing of daily transaction. It is the settler who gives the
net monetary position of each member with regard to the market as a whole. The registrar and
transfer agents ensure share transfers and allotments of shares and also inform the
developments of various companies in the market.

What are the Listing requirements in OTCEI?


For any company to list its shares in OTCEI, it requires sponsorship by members of the OTCEI
and it must also have two market makers. The OTCEI has also laid down rules regarding listing
requirements.

 Once a company lists its securities in the market, it cannot delist its securities for a
minimum period of 3 years.
 There are certain norms to be fulfilled by companies for sale of equity shares or any other
securities under bought out deal (i.e., a company at its early stage may issue shares with
an understanding that it will buy back after 5 years at the market price from out of its
profits.)
 20% of the issued capital should be retained by the promoters for a period of not less
than 3 years.
 There should be two market makers as per the guidelines of OTCEI.

Unorganised segment of the Indian money market is composed of


unregulated non-bank financial intermediaries, indigenous bankers
and money lenders which exist even in the small towns and big
cities. Their lending activities are mostly restricted to small towns
and villages. The persons who normally borrow from this
unorganised sector include farmers, artisans small traders and
small scale producers who do not have any access to modern banks.

The following are some of the constituents of unorganised


money market in India.
(i) Indigenous Bankers:
Indigenous bankers include those individuals and private firms
which are engaged in receiving deposits and giving loans and
thereby acting like a mini bank. Their activities are not at all
regulated. During the ancient and medieval periods, these
indigenous bankers were very active. But with the growth of modern
banking, particularly after the advent of British, the business of the
indigenous bankers received a setback.

Moreover, with the growth of commercial banks and co-operative


banks the area of operations of indigenous bankers has again
contracted further. Even today, a few thousands of indigenous
bankers are still operating in the western and southern parts of the
country and engaging themselves in the traditional banking
business.

Indigenous bankers are classified into four main sub groups, i.e.,
Gujarati Shroffs, Multani-or Shikarpuri Shroffs, Chettiars and
Marwari, Kayast. Gujarati Shroffs are mostly operating in Mumbai,
Kolkata and in industrial and trading cities of Gujarat. The Multani
or Shikarpuri Shroffs are operating mainly in Mumbai and Chennai.
The Chettiars are mostly found in the South.

The Marwari Shroffs are mostly active in Mumbai, Kolkata, tea


gardens of Assam and also in different other parts of North-East
India. Among the four aforesaid groups, the Gujarati indigenous
bankers are considered as the most powerful groups in respect of its
volume of business.

The indigenous bankers are mostly engaged in both banking and


non-banking business which they do not want to separate. Their
lending operations remain mostly unregulated and unsupervised.
They charge high rate of interest and they are not influenced by
bank rate policy of the Reserve Bank of India.

(ii) Unregulated Non-Bank Financial Intermediaries:


ADVERTISEMENTS:

There are different types of unregulated non-bank financial


intermediaries in India. They are mostly constituted by loan or
finance companies, chit funds and ‘nidhis’. A good number of
finance companies in India are engaged in collecting substantial
amount of funds in the form of deposits, borrowings and other
receipts.

They normally give loans to wholesale traders, relailers, artisans,


and different self-employed persons at a high rate of interest
ranging between 36 to 48 per cent.

There are various types of chit funds in India. They are doing
business in almost all the states but the major portion of their
business is concentrated in Tamil Nadu and Kerala. Moreover, there
are ‘nidhis’ operating in South India which are a kind of mutual
benefit funds restricted to its members.

(iii) Moneylenders:
Moneylenders are advancing loans to small borrowers like marginal
and small farmers, agricultural labourers, artisans, factory and
mine workers, low paid staffs, small traders etc. at very high rates of
interest and also adopt various malpractices for manipulating loan
records of these poor borrowers.

There are broadly three types of moneylenders:


(i) Professional moneylenders dealing solely with money lending;

(ii) Itinerant moneylenders such as Kabulis and Pathans and


(iii) Non-professional moneylenders.

The area of operation of the moneylenders is very much localised


and their methods of operation is also not uniform. The money
lending operation of the moneylenders is totally unregulated and
unsupervised which leads to worst exploitation of the small
borrowers.

Moneylenders have become a necessary evil in the absence of


sufficient institutional sources of credit to the poorer sections of
society. Although various measures have been introduced to control
the activities of moneylenders but due to lack of political will, these
are not enforced, leading to a exploitation of small borrowers.

Organised Sector of Indian Money Market:


The organised segments of the Indian money market is composed of
the Reserve Bank of India (RBI), the State Bank of India,
Commercial banks, Co-operative banks, foreign banks, finance
corporations and the Discount or Finance House of India Limited.
The segment of Indian money market is quite integrated and well
organised.

Mumbai, Kolkata, Chennai, Delhi, Bangalore and Ahmedabad are


the leading centres of the organised sectors of the Indian money
market. The Mumbai money market is a well organised, having
head offices of the RBI and different commercial banks, two leading
well developed stock exchanges, the bullion exchange and fairly
organised market for Government securities. All these have placed
the Mumbai money market at par with New York money market of
USA and London money market of England.

The main constituents of the organised sector of Indian


money market include:
(i) The Call Money Market,

(ii) The Treasury Bill Market,

(iii) The Commercial Bill Market,

(iv) The Certificates of Deposits Market,


(v) Money Market for Mutual Funds and

(vi) The Commercial Paper Market.

(i) Call Money Market:


The call money market is a most common form of developed money
market. It is a most sensitive segment of the financial system which
reflects clearly any change in it. The call money market in India is
very much centred at Mumbai, Chennai and Kolkata and out of
which the Mumbai is the most important one. In such market,
lending and borrowing operations are carried out for one day.

The call money market in also termed as inter-bank call money


market. Normally, scheduled commercial banks, Cooperative banks
and the Discount and Finance House of India (DFHI) operate in
this market and in a special situation; the LIC, UTI, the GIC, the
IDBI and the NABARD are permitted to operate as lenders in this
call money market. In this market, brokers usually play an
important role.

(ii) Treasury Bill Market:


Treasury bill markets are markets for treasury bills. In India such
treasury bills are short term liability of the Central Government
which are of 91 day and 364 day duration. Normally, the treasury
bills should be issued so as to meet temporary revenue deficit over
expenditure of a Government at some point of time. But, in India,
the treasury bills are, nowadays, considered as a permanent source
of funds for the Central Government.

In India, the RBI is the major holder of the treasury bills, which is
around 90 per cent of the total. In India, ad-hoc treasury bills have
now been replaced by ways and means Advances since April 1, 1997,
so as to finance temporary deficits of the Central Government.

(iii) Commercial Bill Market:


The Commercial bill market is a kind of sub-market which normally
deals with trade bills or the commercial bills. It is a kind of bill
which is normally drawn by one merchant firm on the other and
they arise out of commercial transactions.
The purpose for issuing a commercial bill is simply to reimburse the
seller as and when the buyer delays payment. But, in India, the
commercial bill market is not so developed. This is mainly due to
popularity of the cash credit system in bank lending and the
unwillingness on the part of large buyer to bind himself to payment
schedule related to the commercial bill and also the lack of uniform
approach in drawing bills.

Commercial bills are an instrument of credit which is very much


useful to business firms and banks. In India, the outstanding
amount of commercial bills rediscounted by the banks with
different financial institutions at the end of March, 1996 was to the
extent of only Rs 374 crore.

(iv) Certificate of Deposit (CD) Market:


The certificate of Deposit (CD) was introduced in India by the RBI
in March 1989 with the sole objective of widening the range of
money market instruments and also to attain higher flexibility in
the development of short term surplus funds for the investors.
Initially the CDs are issued by scheduled commercial banks in
multiples of Rs 25 lakh and also to the extent of a minimum of Rs 1
crore.

Maturity period of CDs varied between three months and one year.
In India, six financial institutions, viz., IDBI, ICICI, IFCI, IRBI,
SIDBI and Export and Import Bank of India were permitted in 1993
to issue CDs for period varying between 1 to 3 years.

Banks normally pay high rates of interest on CDs. In 1995-96, the


stringent conditions in the money market induced the bankers to
mobilise a good amount of resources through CDs. Accordingly in
recent years, the outstanding amount of CDs issued by the
commercial banks has almost been doubled from Rs 8,017 crore in
March, 1995 to Rs 16,316 crore as on 29th March, 1996.

(v) Commercial Paper Market:


In India, the Commercial Paper (CP) was introduced in the money
market in January 1990. A listed company having working capital
not less than Rs 5 crore can issue CP. Again the CP can be issued in
multiples of Rs 25 lakhs subject to a minimum of Rs 1 crore for a
maturity period varying between three to six months. CPs would be
again freely transferable by endorsement and delivery.

(vi) Money Market Mutual Funds:


In India, the RBI has introduced a scheme of Money Market Mutual
Funds (MMMFs) in April 1992. The main objective of this scheme
was to arrange an additional short term avenue for the individual
investors. This scheme has failed to receive much response as the
initial guidelines were not attractive. Thus, in November, 1995, the
RBI introduced some relaxations in order to make the scheme more
attractive and flexible.

As per the existing guidelines, the banks, public financial


institutions and the private financial institutions are allowed to set
up MMMFs. In the mean time, the limits of investment in
individual instruments by MMMF have already been deregulated.
Since April 1996, the RBI has allowed MMMFs to issue units to
corporate enterprises and others at par with the mutual funds
introduced earlier.

As per the latest data available from Association of Mutual Funds,


overall, the combined Assets Under Management (AUM) of all the
mutual fund houses in country stood at Rs 5,06,692.6 crore. The
top five mutual funds of the country include—Reliance MF, ICICI
Prudential MF, UTI-MF, HDFC MF and Franklin Templeton MF.
Reliance MF continued to be the most valued fund house in the
country with assets under management (AUM) of Rs 90,937.94
crore at the end of March 31, 2008.

The industry body Assocham Chamber recently conducted a survey


on “MF Growth Patterns” and accordingly observed that the Mutual
Fund industry has growth 25 per cent between 1999 and 2007 to
stand at Rs 4,67,000 crore and the trend would improve as MFs are
becoming a preferred choice for both rural and urban retail
investors.

The mutual fund sector would grow at compound annual rate of 30


per cent in next three years to become Rs 9,50,000 crore industry
as predicted by the survey. The share of privately managed MF
players in the total MF industry is expected to fall to 70 per cent
from the current estimation of 82 per cent. The reduction would
result from the alliance of the private players with overseas
partners.

2. Essay on the Characteristics and Defects of Indian Money


Market:
The Indian money market has many distinctive characteristics but it
also suffers from various defects.

Following are some and defects:


(i) Lack of Adequate Integration:
There is lack of adequate integration in the Indian money market.
The organised and the unorganised sector of Indian money market
are totally separate from each other and they have independent
financial operations of their own. Therefore, activities of one sector
have no impact on the activities of the other sector. It is very
difficult to establish a national money market under such a
background.

However, the Mumbai money market has been emerging as a strong


money market in recent times. Moreover, various constituents of
the Indian money market viz., commercial banks, Co-operative
banks and foreign banks are competing among themselves and
particularly, the competition is much in the countryside. Even the
commercial banks are competing among themselves. Again, the
monetary policy of the RBI is also not effective to maintain
adequate integration among various constituents of Indian money
market.

(ii) Shortage of Funds:


Another important feature of Indian money market is the shortage
of funds. Therefore, the demand for loanable funds in the money
market is much higher than that of its supply.

This shortage of fund is mostly resulted from:


(i) Small capacity to save arising out of low per capita income;
(ii) Inadequate banking network and poor banking habit of the
people, in general;

(iii) Absence of adequate and diversified investment opportunities


and finally, the emergence of strong parallel economy having a huge
magnitude of black money.

In recent years, the development of rural banking structure, with


the opening rural branches of commercial banks and with the
expansion of Co-operative banks, has improved the fund position of
the Indian money market, to some extent.

(iii) Lack of Adequate Banking Facilities:


Indian money market is also characterised by lack of adequate
banking facilities. Rural banking network in the country is still
inadequate. Population per bank office in India was 12,000 persons
in 1993 as compared to that of only 1,400 persons in USA. In the
rural areas, a substantial number of population, having small saving
potential, have no access to facilities.

Under such a system, a huge amount of small savings are not


mobilised which needs to be mobilised for its productive uses
through the expansion of banking network.

(iv) Lack of Rational Interest Rate Structure:


There is lack of rational interest structure which is mostly resulted
from lack of co-ordination among different banking institutions.
Recently, there is some improvement in this regard, particularly
after the introduction of standardisation of interest rates by the RBI
for its rationalisation.

However, the present system of administered interest


rates is suffering from the defects like:
(i) Too many concessional rates of interest;

(ii) Comparatively low yield on government securities, and

(iii) Improper lending and deposit rates fixed by the commercial


banks.
(v) Absence of Organised Bill Market:
There is absence of organised bill market in India although the
commercial banks purchase and discount both inland and foreign
bills to a limited extent. Although, the RBI has introduced its
limited bill market under its scheme of 1952 and 1970, but the same
scheme has failed to popularize the bill finance in India.

The popularity of the cash credit system and lack of uniformity in


commercial bills are mostly responsible for the poor development of
bill market in the country. Even after the introduction of Bill Market
Scheme, 1970, the bill finance has declined and its extent been
declined from 20.3 per cent in 1971 to a mere 11.0 per cent in 1995-
96.

(vi) Existence of Unorganised Money Market:


Another important feature of Indian money market is the existence
of its unorganised character, where one of its segments is
constituted by the indigenous bankers and moneylenders. This
unorganised segment in completely separated from the organised
segment of the money market.

Although the RBI has tried to bring the indigenous bankers under
its direct control yet all the attempts have failed. Thus, as the
indigenous bankers remained outside the organised money market,
therefore, RBI’s control over the money market is quite limited.

(vii) Seasonal Stringency of Money and Fluctuations in Interest


Rates:
Another important feature of Indian money market is seasonal
stringency of money and the volatile fluctuation of interest rates.
India, being an agricultural country has to face huge demand for
funds during the period of October to June every year so as to meet
its requirement for farm operations and also for trading in
agricultural produce.

But the money market is not having sufficient elasticity thus it


creates seasonal stringency of funds leading to a rise in the rate of
interest. But in the rainy and slack season the demand for fund
slumps down leading to a automatic fall in the rate of interest. Such
regular fluctuations in interest rates are not at all conducive to
developmental activities of the country.

3. Essay on the Under-Development of Indian Money Market:


Considering various defects of Indian money market it can be
observed that the money market in India is relatively
underdeveloped. Moreover, in respect of resources, organisation
stability and elasticity, the said market cannot be compared with the
developed money markets of London and New York. But among the
third world countries India has been maintaining the most
developed banking system. Even then the organisation of the money
market is still underdeveloped.

The underdevelopment nature of Indian money market is


mostly determined by the following shortcomings:
Firstly, Indian money market fails to possess an adequate and
continuous supply of short term assets such as treasury bills, bills of
exchange, short term Government bonds etc.

Secondly, this market is lacking the highly organised banking


system, so important for the successful working of a money market.

Thirdly, the sub-markets like acceptance market and the


commercial bill market are non-existent in Indian money market.

Fourthly, Indian money market has totally failed to develop market


for short term assets and accordingly there are no dealers of short
term assets who act as intermediaries between the Government and
the entire banking system.

Fifthly, Indian money market in suffering from lack of co-


ordination between its different constituents.

Sixthly, Indian money market again fails to attract any foreign


funds.

Finally, Indian money market cannot be termed as a developed one


considering its supply of fund and the liquidity position.
4. Essay on the Measures to Reform and Strengthen Indian
Money Market:
In recent years, serious efforts have been made by the Government
and the RBI to remove the shortcomings of Indian money market.
RBI, in the mean time has reduced considerably the differences
between the various constituents of money market. Differences in
the interest rates have also been reduced by the RBI and the
monetary stringency has also been reduced by the RBI through
open market operations and bill market scheme.

Even then, Indian money market is still very much dependent on


the call money market which is again characterised by high
volatility. In the mean time, the RBI has introduced various
measures to reform the money market as per recommendations of
the Sukhamoy Chakraborty Committee on the “Review of the
working of the Monetary system” and the Narasimham Committee
report on the working of the Financial System in India.

Following are some of the important reform measures


introduced to strengthen the Indian money market:
(i) Remission of Stamp Duty:
In order to remove the major administrative constraint in the use of
bill system, the Government has remitted the stamp duty in August
1989. However, the experts feel that unless the cash credit system is
discouraged this government decision to remit the stump duty is
not going to favour the prevailing bill system.

(ii) Deregulation of Interest Rates:


Another important step to strengthen the money market was to
deregulate the money market interest rates since May, 1989. This
will bring interest rate flexibility and transparency in money market
transactions.

Again in November, 1991.as per the recommendations of the


Narasimham Committee, the interest rates have been further
deregulated and the banks and other financial institutions have
been advised to determine and adopt market related rates of
interest as far as practicable.

(iii) Introduction of New Instruments:


The RBI has introduced certain money market instruments for
strengthening the market conditions. These instruments are—182
days treasury bills, longer maturity treasury bills, Certificates of
Deposits (CDs), Commercial Paper (CP) and dated Government
securities.

Discount and Finance House of India (DFHI) promoted the 182-day


treasury bills systematically and these bills were the first security
sold by auction for financing the fiscal deficit of the Central
Government. Again, the DFHI has also developed a secondary
market in these bills and they become popular with the commercial
banks.

Again in 1992-93, the Government decided to introduce 364 day


treasury bills and discontinued the 164-day treasury bills. The 364
day treasury bills can be held by commercial banks for meeting its
statutory liquidity ratio. CDs received a considerable market during
1995-96.

The volume of outstanding CDs gradually rose from Rs 6,385 crore


in January 1995 to Rs 20,815 crore on July 5, 1996. CPs are another
instrument which made considerable progress in 1992-93 and 1993-
94. Outstanding amount of CPs increased from Rs 64.70 crore in
June 1991 to Rs 3,264 crore in March 1994. Again the activity of CP
market declined sharply in 1995-96 and thereby the outstanding
CPs as on April 30. 1996 was only Rs 71.3 crore.

(iv) DFHI:
The Discount and Finance House of India (DFHI) was set up on
April 25, 1988 as a part of the reform package for strengthening
money market. The main function of DFHI is to bring the entire
financial system consisting of the scheduled commercial banks, co-
operative banks, foreign banks and all- India financial institutions,
both in the public and private sector, within the fold of the Indian
money market.
This House will normally buy bills and short term papers from
different banks and financial institutions in order to invest all of
their idle funds for short periods. DFHI has also started to buy and
sell government securities from April 1992 in limited quantity with
the necessary refinance support from the RBI.

(v) Money Market Mutual Funds (MMMFs):


The Government announced the establishment of Money Market
Mutual Funds (MMMFs) in April 1992 with the sole objective to
bring money market instruments within the reach of individuals.
The MMMFs have been set up by different scheduled commercial
banks and public financial institutions.

The shares or units of MMMFs have been issued only to individuals.


Thus the aforesaid measures to reform Indian money market have
helped it to become more advanced, solvent and vibrant. With the
introduction of new instruments, the secondary market has also
developed considerably.

Moreover, with the setting up of DFHI and MMMFs, the lot of


Indian money market has achieved considerable progress in recent
rimes and is also expected to achieve further progress in the years to
come.

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