DEVELOPMENTS IN THE INDIAN MONEY MARKET.

DEFINITION OF MONEY MARKET.

Money markets may be defined asA segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. The money market is used by participants as a means for borrowing and lending in the short term, from several days to just under a year.

ORIGIN OF INDIAN MONEY MARKET.

Till 1935, when the RBI was set up the Indian money market remained highly disintegrated, unorganized, narrow, shallow and therefore, very backward. The planned economic development that commenced in the year 1951. The nationalization of banks in 1969, Setting up of various committees such as -the Sukhmoy Chakraborty Committee (1985) -the Vaghul working group (1987) Setting up of Discount and Finance House of India ltd. (1988) Commencement of liberalization and globalization process in 1991.

MONEY MARKET INSTRUMENTS

1)TREASURY BILLS:
- Short term borrowing instruments of the Central Government of the Country issued through The Central Bank (RBI in India). - They are zero risk instruments. At present, the Government of India issues three types of treasury bills through auctions, namely, 91-day, 182-day and 364-day.

2)COMMERCIAL PAPER: It is a short term unsecured promissory note issued by corporate and financial institutions at a discounted value on face value. They are usually issued with fixed maturity between one to 270 days and for financing of accounts receivables, inventories and meeting short term liabilities.

3)CERTIFICATE OF DEPOSIT: It is a promissory note issued by a bank in form of a certificate entitling the bearer to receive interest. Its term generally ranges from three months to five years and restricts the holders to withdraw funds on demand. However, on payment of certain penalty the money can be withdrawn on demand also.

4)REPURCHASE AGEEMENTS: Repurchase transactions are agreement involving the sale of securities by one party to another with a promise to repurchase the securities at a specified price,on a specified date in the future. They are usually used for overnight borrowing. Repo/Reverse Repo transactions can be done only between the parties approved by RBI and in RBI approved securities.

4)MONEY MARKET MUTUAL FUNDS (MMMFs): -A money market mutual fund is a mutual fund that invests solely in money market instruments. - Money market funds are generally the safest and most secure of mutual fund investments. The goal of a money-market fund is to preserve principal while yielding a modest return by investing in safe and stable instruments issued by governments, banks and corporations etc.

5)CALL MONEY MARKET:

-The call money market deals in short term finance repayable on demand, with a maturity period varying from one day to 14 days. -Commercial banks, both Indian and foreign, co-operative banks, Discount and Finance House of India Ltd.(DFHI), Securities trading corporation of India (STCI) participate as both lenders and borrowers. - Life Insurance Corporation of India (LIC),Unit Trust of India(UTI), National Bank for Agriculture and Rural Development (NABARD)can participate only as lenders.

DEVELOPMENTS IN THE INDIAN MONEY MARKET.

1. 2. 3. Abolition of ad hoc treasury bills in April 1997. Full fledged Liquidity Adjustment Facility in June 2000. CBLO(Collateralised Borrowing and Lending Obligation)for corporate and non-bank participants introduced in 2003 . Minimum maturity of CPs shortened by October 2004. Maturity of CDs gradually shortened by April 2005.

4. 5.

6) Prudential limits on exposure banks and PDs to call/notice market in April 2005. 7) Transformation of call money market into a pure inter-bank market by August 2005. 8) Widening of collateral base by making state government securities eligible for LAF operations since April 2007. 9)Operationalisation of a screen-based negotiated system (NDSCALL) for all dealings in the call/notice and the term money markets in September 2006. The reporting of all such transactions made compulsory through NDS-CALL in November 2012.

10) Repo in corporate bonds allowed in March 2010. 11) Operationalisation of a reporting platform for secondary market transactions in CPs and CDs in July 2010.

SOURCES :
-google.co.in -slideshare.co.in

-wikipedia.org

-rbi.org.in

-investopedia.com

Table 2: Interest Rates in the Money Market (Percent per annum: Annual Averages)

Repo Rate

Call Rate

CBLO Rate

Market Repo Rate

91 day T-Bills

364-day T Bills

CP Rate

CD Rate

1 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2013-14 (so far)

2 11.2 8.5 7.7 7.0 6.0 6.2 7.0 7.8 7.4 4.8 5.9 8.0 8.0

3 9.1 7.2 5.9 4.6 4.7 5.6 7.2 6.1 7.1 3.2 5.7 8.1 8.1

4 5.3 6.2 5.2 6.1 2.7 5.4 7.8 7.9

5 5.4 6.3 5.5 6.5 2.8 5.5 7.9 8.0

8 9.0 7.0 5.8 4.6 4.9 5.7 6.6 7.1 7.1 3.6 6.2 8.4 8.2

9 9.8 7.3 5.9 4.7 5.2 6.0 7.0 7.5 7.2 4.4 6.6 8.4 8.1

6 10.8 9.2 7.7 6.1 5.8 6.7 8.5 9.3 10.7 5.3 8.7 10.1 9.3

7 9.6 8.0 6.6 5.3 5.0 6.1 7.9 9.1 9.2 5.4 7.7 9.6 9.0