By, Anu Dua

The Money Market is a market for financial assets that are

close substitutes for money. These market have a maturity period of one or more than one year. It constitutes a very important segment of Indian Financial System. For Ex. Reserve Bank of India The instruments which deal in these markets are Money Market Instruments. For Ex. Treasury Bills.

 It is not a single market but a collections of markets for several

Instruments.
It is a wholesale market of short term debt Instruments. Its principal feature is honor where the creditworthiness of the

participants is important.
It is a need based market wherein the demand and supply of

money shape the market.

 Provide a balancing mechanism to even out the demand for

and supply of short term funds.

Provide a focal point for central bank intervention for

influencing liquidity and general level of interest rates in the economy.

Provide reasonable access to suppliers and users of short term

funds to fulfill their borrowings and investment requirements at an efficient market clearing price.

 The main players of money market are :-

Reserve Bank of India( RBI), the Discount and Finance House of India (DFHI), mutual funds, corporate investors, Non Banking Finance Companies (NBFCs), state governments, provident funds, primary dealers , the Securities Trading Corporation of India (STCI) <public sector undertakings (PSUs),and non-resident Indians.
There are money market centers in India at Mumbai , Delhi ,

and Kolkata. Mumbai is the only active active Money market center in India with money flowing in from all parts of the country getting transacted there.

 Treasury Bills Commercial Papers Commercial Bills Certificate of Deposit Call/Notice money Market Money Market Intermediaries

 Treasury Bills are short term instruments issued by the

Reserve Bank on behalf of the government to tide over shortterm liquidity shortfalls. It is also known as T-Bills. T-bills are repaid at par on maturity. Treasury Bills is a Discount Securities. The periodicity of T-bills is 14 days,28 days , 91 days, 182 days and 364 days. Tax Deducted at Source (TDS) is not on applicable on T-bills.

 They are negotiable securities. They are highly liquid as they are of shorter tenure and there is

possibility of inter bank repos in them. There is an absence of default risk. They have an assured yield, low transaction cost, and are eligible for inclusions in the securities for SLR purposes. They are not issued in scrip form. There are 91-day, 182 day and 364 day t-bills in vogue. The 91-day T-bill is auctioned by the RBI every Friday and the 364-day T-bills every alternate Wednesday ,i.e., the Wednesday preceding the reporting Friday. Treasury bills are available for a minimum amount of Rs. 25,000 and in multiples there of.

 Unlike bond that pay coupon interest , Treasury bills are

quoted on a bank discount basis, not on a price basis . The yield on a bank discount basis is computed as follows:YD = D/F X
360/t

Where:YD = yield on a bank discount basis (expressed as a decimal ) D = dollar discount , which is equal to the difference between the face value and the price F = face value T = number of days remaining to maturity.

 On Tap Bills :-

They can be bought from the reserve bank at any time at an interest yield of 4.66 percent. Ad hoc Bills :These bills were introduced in 1955. There was a condition decided between Reserve Bank and Government of India that govt. could maintain a cash balance of not less than Rs. 5 crore on Fridays and Rs. 4 crores on other days, free of obligation to pay interest there on and whenever the balance fell below minimum it would be replenished in favour of ad hoc bills by Reserve Bank.

 Auctioned T-bills :-

It is the most active money market instrument , were first introduced in April 1992. At present Reserve Bank issues T-bills of three maturities i.e. 91 days, 182 days, 364 days.

 Is the heart and growth of the money market. Plays a vital role in cash management of government. Being risk free , there yields a greater maturities which serves

as a short term benchmarks and helps in pricing different floating rates products in the market. It is considered as a central bank tool for market intervention to influence liquidity and short term interest rates. Is a pre condition for effective open market operations.

 Commercial paper is an unsecured short term promissory note

issued at a discount by credit worthy corporates , primary dealers and all Indian financial institutions. The Reserve bank issued commercial paper in January 1990 on the recommendation of Vaghul Committee. It has become a popular debt instrument. It is also known as finance paper , industrial paper and corporate paper. It has a fixed maturity period. The cp market is dominated by corporates having tangible net worth of Rs. 50 crores and above.

obtained credit rating

Obtained working capital limit

Net worth not less than 4 crores

Issuer company
Redeem CP on maturity of face value issue of cp at discount

Investor Bank/ company

 Commercial paper is a short term money market instrument

comprising usance promissory note with a fixed maturity value. It is a certificate evidencing an unsecured corporate debt of short term maturity. The issuer promises to pay the buyer some fixed amount on some future period but pledges no assets, only his liquidity and established earning power, to guarantee that promises. Commercial paper can be issued directly by a company to investors or through banks / merchant bankers

 Its simplicity. It involves hardly any documentation between

the issuer and the investor. The issuer can issue commercial paper with the maturities tailored to match the cash flow of the company. A well rated company can diversify its sources of finance from banks to short term money markets at somewhat cheaper cost. It is an inbuilt incentive for company to remain financially strong. Provide good returns than they could get from banking system.

 It usage is limited to only blue chip companies. Issuance of CP bring down the bank credit limits. A high degree of control is exercised on issue of CP. Stand by credit may become necessary.

 Commercial bills are negotiable instruments drawn by the

seller on the buyer which are in turn, accepted and dicounted by commercial banks. It can be rediscounted by financial institutions such as LIC , UTI, GIC , ICICI and IRBI. The maturity period of these bills varies depends upon the credit limit i.e. 30 days, 60 days or 90 days.

 Demand bill Usance bill Clean bill Documentary bill Inland bill Foreign bill Hundi Derivative usance promissory note.

 These bills can be rediscounted by banks at the time of need

of funds and can get ready money. Commercial bills ensure improved quality of lending, liquidity, and efficiency in money management. It is fully secured for investment since it is transferrable by endorsement and delivery and it has a high degree of liquidity. It can be rediscounted by commercial banks amount to less than Rs. 1000 crores.

 Certificate of deposits are short term tradable time deposits

issued by commercial banks and financial institutions. It was introduced in June 1989. Certificate of deposits are similar to fixed deposits. NRIs can subscribe to the deposits on a non repatriable basis.

 CDs can be subscribed by an institution as well as by an

individual. CDs are money market instruments in the form of usance promissory notes issued at a discount and are negotiable in character. There is a lock-in-period of 15 days, after which they can be sold. The minimum size of the deposit is Rs. 5 lakhs and there after in multiples of Rs. 5 lakhs . The rate of interest is determined freely by the parties to the transaction. The instrument is to be stamped according to the rates prescribed by the Indian Stamp Act. Premature closure of CDs is not permitted and buy back of the CDs is prohibited.

 The CDs should fall due for payment on a working day . In case

the due dates falls on holidays, the payment is to be made on the previous working day. No advance can be taken against the security of the CDs. There is no limit for investment in CDs by the banks. Due to the negotiable character of the CD , the same could be sold after the lock-in-period , thus enabling the investment for creating liquidity. This instrument is useful for the corporate for parking their surplus short term bonds.

100 x R x No. of days to maturity I = _________________________________ 365 x 100 where , I = rate of interest R = discounted value Therefore , Issue price of CD = Face value x Discounted value

 The call money market accounts for a major part of the total

turnover of the money markets. It is a key segment of the Indian money market. Since its inception in 1955-56 , the call money market has registered tremendous growth in volume of its activity. The call money market is a market for short term funds repayable on demand and with a maturity period varying between one day to a fortnight. Money is borrowed or lent for more than a day and upto 14 days , it is known as notice money. It is a highly liquid market , with the liquidity being exceeded only by cash . It is highly risky as well as extremely volatile.

 The DFHI was set up in April 1988 by the Reserve Bank with

the objective of deepening and activating the money market. It commenced its operations from July 28, 1988 . It is a joint stock company with a paid up capital of Rs. 200 crores in the proportion of 5:3:2. The role of DFHI is to function as a specialized money market intermediary for stimulating activity in money market instruments and develop secondary markets in these instruments. DFHI was categorized as an eligible institution under the relevant provisions of the RBI Act, 1934 in November 1989 . The DFHI is an accredited primary dealer since November 13, 1995.

 The cumulative turnover of the DFHI in all financial

transactions increased four fold in a span of nine years. The Reserve bank divested its shareholders in favour of the existing shareholders in March 2003. DFHI became a subsidiary of SBI from March 31, 2003. In April2004, SBI Gilts ltd., a subsidiary of SBI , was merged with DFHI Ltd. And the name merged entity was changed to SBI DFHI Ltd.

 The monetary policy in India is an adjunct of the economic

policy. Three major objective of economic policy in India have been growth, price stability and social justice. The objective of monetary policy are pursued by ensuring credit availability with stability in the external value of the rupees as well as an overall financial stability. Interest rate channel is the key channel of transmissions. The Reserve banks seeks to influence monetary conditions through management of liquidity by operating in varied instruments.

 These instruments can be categorized as direct and indirect

based instruments. Direct based Instruments

Reserve requirements Limits on refinance Administered interest rates Qualitative and Quantitative restrictions on credit

Indirect Based Instruments

Open market operations Repos

 Market based instruments help in minimizing volatility in the

money market. Monetary policy emerged as an independent instrument of economic policy.

 The development of a money market is a prerequisite for

improving the operational effectiveness of the monetary policy. The objectives of reforms in the money market was to remove structural liquidities and inefficiencies so as to increase participation and strengthen inter linkages between the money market segments and other financial markets. A review of money marker development and current efforts for further development show that a base has been created with a variety of products introduced in the market. The Reserves bank objective has been to develop a short term rupee yield curve.

 The money market cannot be liquid and deep without the

necessary instruments to hedge the risk . The derivative market cannot flourish without a deep and liquid money market. This calls for following measures :-

Development of a transparent benchmark Development of term money market which will help in the development of

benchmark inter-bank term money market rate which is vital for integrating money and foreign exchange markets. Development of policies that provide that provide incentives for banks and financial institutions to manage risk and maximize profit. Increasing secondary markets activity in CPs and CDs Rationalization of stamp duty structure . Multiple prescription of stamp duty leads to an increase in the administrative costs and administrative hassles.

 Change in the regulatory mindset of the Reserve bank by shifting the focus

of control from quantity of liquidity to price which can lead to an orderly development of money market. Good debt and cash management on the part of the government which will not only be complimentary to the monetary policy but give greater freedom to the Reserve bank in setting its operating procedures.