Indian Money Market: Project Report On

PROJECT REPORT ON
INDIAN MONEY MARKET
BACHELOR OF COMMERCE
(BANKING & INSURANCE)
SEMESTER VI
T.Y.B.COM (BANKING & INSURANCE)
2018-2019
Submitted In partial fulfillment of the requirements for the Award of the Degree
of Bachelor of Commerce-Banking & Insurance
SUBMITTED BY
SANYOGEETA TAMBE
PROJECT GUIDE
PROF. KISHOR CHAUHAN
SMT. SUSHILADEVI DESHMUKH COLLEGE OF ARTS, SCIENCE& COMMERCE
SEC-4, AIROLI, NAVI MUMBAI-400708.

DECLARATION
I MISS. SANYOGEETA DHANAJI TAMBE. the student of B.COM
BANKING & INSURANCE SEMESTER–VI (2018-2019) hereby declares that
I have completed project on “THE STUDY ON INDIAN MONEY MARKET”.
The data/information have been taken from books Or other sources the same have
been mentioned in bibliography. The information submitted is true and original to
the best of my Knowledge.
Student’s Signature
Sanyogeeta tambe
ACKNOWLEDGEMENT
First of all I would like to extend my gratitude towards the MUMBAI

UNIVERSITY for giving me an opportunity to make this project, project
has broadened my horizon. I would like to thank SMT. SUSHILADEVI
DESHMUKH COLLEGE OF ARTS, SCIENCE & COMMERCE
for providing me opportunity to do so . My grateful thank to my project guide
Prof. Mr. Kishore Chauhan for his admirable support and guidance.
I would be grateful to all my teachers for guiding me throughout the

project and furnish me with valuable information in accomplishing this
project.
THE STUDY ON
INDIAN MONEY MARKET
THE STUDY ON INDIAN MONEY MARKET
EXECUTIVE SUMMARY
In India, the money market plays a vital role in the progress of economy.
But, it is not well developed when compared to American and London
money markets. In this market, short-term funds are borrowed and lent
among participants permitted by RBI.
Money Market ensures that institutions which have surplus funds earn
certain returns on the surplus. Otherwise these funds will be idle with the
institutions. Similarly, the money market ensures funds for the needy at
reasonable interest. This way liquidity position is assured by money
market operations.
Let us now discuss the various money market instruments in India. In

India the Money Market is regulated by RBI. Hence, the instruments
traded and the players in the market require to be approved by RBI.
Table of Content
Sr.no Particulars Pg.no
1. Introduction 1
1.1. Objectives of Money Market 3
1.2. Review of Literature 4
1.3. Methodology 6
1.4. Limitations of the Study 11
1.5. Objectives of the Study 11
2. Meaning of Money Market 12

2.1. Definition of Money Market 13
2.2. History of Indian Money Market 14
2.3. Types of Money Market Instruments 17
2.4. Structure of Indian Money Market 18
2.5. Primary Dealers 34
2.6. The Role of RBI 36
2.7. The Growth of Money Market in India 39
2.8. Scope of Indian Money Market 41
Table of Content
Sr.no Particulars Pg.no
3. Features /Characteristics of Indian Money Market 43

3.1. Participants in the Money Market 46
3.2. Importance of Indian Money Market 51
3.3. Benefits / Advantages of Money Market 55
3.4. Defects / Drawbacks of Indian Money Market 56
4. Findings & Suggestions 60

4.1. Findings 60
4.2. Suggestions 61
5. Conclusion 63
6. Webliography 64
7. Bibliography 65
1. Introduction
The seventh largest and second most populous country in the world, India has long
been considered a country of unrealized potential. A new
spirit of economic freedom is now stirring in the
country, bringing sweeping changes in its wake. A series
of ambitious economic reforms aimed at deregulating
the country and stimulating foreign investment has
moved India firmly into the front ranks of the rapidly
growing Asia Pacific region and unleashed the latent strengths of a complex and
rapidly changing nation.
India's process of economic reform is firmly rooted in

a political consensus that spans her diverse political
parties. India's democracy is a known and stable
factor, which has taken deep roots over nearly half a
century. Importantly, India has no fundamental
conflict between its political and economic systems.
Its political institutions have fostered an open society with strong collective and
individual rights and an environment supportive of free economic enterprise.
1
Long term investments.

These include a free and
vibrant India's time
tested institutions offer
foreign investors a
transparent environment
that guarantees the
security of their press, a
judiciary which can and
does overrule the
government, a
sophisticated legaland
accounting system and a user friendly intellectual infrastructure. India's dynamic
and highly competitive private sector has long been the backbone of its economic
activity. It accounts for over 75% of its Gross Domestic Product and offers
considerable scope for joint ventures and collaborations. Today, India is one of the
most exciting emerging money markets in the world. Skilled managerial and
technical manpower that match the best available in the world and a middle class
whose size exceeds the population of the USA or the European Union, provide
India with a distinct cutting edge in global competition. The average turnover of
the money market in India is over Rs. 40,000 crores daily. This is more than 3
percents of the total money supply in the Indian economy and 6 percent of the total
funds that commercial banks have let out to the system. This implies that 2 percent
of the annual GDP of India gets traded in the money market in just one day. Even
though the money market is many times larger than the capital market, it is not
even fraction of the daily trading developed markets.
2
1.1 Objectives of Money Market
3
Money market is an important part of the economy. It plays very significant

functions. As mentioned above it is basically a market for short term monetary
transactions. Thus it has to provide facility for adjusting liquidity to the banks,
business
corporati
ons, non-
banking
financial
institutio
ns
(NBFs)
and other
financial
institutio
ns along
with
investors.
4
A well
developed
money market
serves the
following
objectives:
 Providing an equilibrium mechanism for ironing out short-term surplus and

deficits.It means to keep a balance between the demand for and supply of
money for short term monetary transactions.
 Providing a focal point for central bank intervention for the influencing
liquidity in the economy.
 Providing access to users of short-term money to meet their requirements at
aReasonable price
 To promote economic growth. Money market can do this by making funds
available to various units in the economy such as agriculture, small scale
industries, etc.
5
 To provide help to Trade and Industry. Money market provides adequate

finance to trade and industry. Similarly it also provides facility of
discounting bills of exchange for trade and industry.
 To help in implementing Monetary Policy. It provides a mechanism for an
effective implementation of the monetary policy.
1.2 Review of Literature
6
Article: India call money ends near reverse repo rate, cash ample
Reuters,2/ 9/ 2009, Indian overnight money rates brought down to near the reverse
repo rate of 3.25% on Wednesday as this cash surplus in the system will help
banks meet their reserve needs comfortably. Cheaper money available at the
collateralized borrowing and lending obligation (CBLO) also eased pressure on the
inter-bank cash rates. At that day banks were guided to report their position to RBI
once in two weeks. This amendment crated an expectation on liquidity resistance.
Some analysts said the central bank may start rolling back the liquidity as early as
December 2009, as the already pressured consumer prices could pose significant
inflationary threat to the economy, amid easy cash conditions Overnight rates are
supported around the reverse repo rate because banks holding surplus funds could
also deploy the same with central bank at that rate in its daily liquidity adjustment
auctions.
Article: Money Market Integration in India: A Time Series Study
7
Rastogi Nikhil Says Indian financial markets have come a long way from the
highly controlled pre-liberalization era. He signifies that the main focus is on
achieving efficiency, which is the hallmark of any developed financial market.
This research paper tests the efficiency and extent of integration between financial
markets empirically at the short end of the market. The rates, mainly taken for the
purpose of this study, comprise the call market rate, CD (Certificate of Deposit)
rate, CP (Commercial Paper) rate, 91-day T-bill (Treasury bill) rate and 3-month
Forward premium. The results, though promising, are mixed. In his research he
concluded that although markets have achieved integration in some of its branches,
they have still to achieve full integration. This has absolute implications on the
monetary policy of the Reserve Bank of India. (RBI) since changes in one market
(gilt market) can be used to regulate the other market (forex market).
Article: Market efficiency and financial markets integration in India
PrustySadananda, June, 2007, the author explored the impact of economic reforms
on the integration of various segments of the financial market in India through the
time series tools during the period from March 2006 to March 2012. The major
findings were: (i) various segments of the financial market in India have achieved
market efficiency, (ii) the 91-day Treasury bill rate is the appropriate 'reference
rate' of the financial sector in India, (iii) the financial markets in India are largely
integrated at the short-end of the market, and (iv) the long- end of the market is
integrated with the short-end of the market. The above findings suggest that
monetary policy should rely more on interest rate and asset price channels to
control inflation.
8
1.3Methodology
(A) Primary Data: - (Questionnaire)
Questionnaire for Indian Money Market
Name:
9
Age: Gender:
Contact No. Profession:
1) What is your annual income?
□ below1 lakhs
□ between 1 lakhs- 3 lakhs
□ between 3 lakhs- 5 lakhs
□ above 5 lakhs
2) How do you invest your savings?
□ Deposits in Banks
□ Invest in Real Estate
□ Invest in Capital Market
□ Invest in Money Market Mutual Funds
3)Do you have any knowledge about Money Market Instruments?
□ Yes
□ No
10
□ Heard but not know
4)How long would you like to hold your Money Market Instruments?
□ Long term period
□ Short term period
5)How much risk would you be willing to take?
□ Low
□ Average
□ Medium
□ High
6) In your opinion, what is expected rate of return in a year?
□ Below 10 %
11
□ Between 10 % - 20%
□ between 20% - 30%
□ above 30%.
7) How would rate your experience with Indian Money Market?
□ Poor
□ Average
□ Good
□ Excellent
8) Is recession had affected your investment decision?
□ Yes
□ No
Sampling objective: To find out individual investors for the age group of 18 -
55 years.
Sampling area: Navi Mumbai
No of People Sampled: 40
12
Particulars No. of investors
Deposits in Banks 13
Investment in 07
Real Estate
Investment in 11
Capital Market
Investment in 09
Money Market
13
The above pie diagram show how the pattern of investment of saving by
individual investors in various field of investment
Risk Involvement No. of Investors
Low 03
Average 05
Medium 15
High 17
Risk Involvement
Low
Average
8%
High 13%
42%
Medium
37%
Low Average Medium High
14
1.4Limitations of the Study: -
 The study is based on a limited scope of area

 Whole market cannot be studied.
1.5 OJECTIVES OF THE STUDY:-
The main objectives of this project are the following:
 To study about INDIAN MONEY MORKETAND its related aspects like its
types and instruments.
 To study about INDIAN MONEY MARKET its related aspect history,
organizational structure, participants.
 To find out the investors savings preferences.
15
2. Meaning of Money Market
Money market refers to the market where money and highly liquid 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.
The money market constitutes a very important segment of the Indian financial
system. The highly liquid marketable securities are also called as ‘ money market
instruments’ like treasury bills, government securities, commercial paper,
certificates of deposit, call money, repurchase agreements etc.
The major player in the money market are Reserve Bank of India (RBI), Discount
and Finance House of India (DFHI), banks, financial institutions, mutual funds,
government, big corporate houses. The basic aim of dealing in money market
instruments is to fill the gap of short-term liquidity problems or to deploy the
short-term surplus to gain income on that.
 The money market is a market for lending and borrowing of short-term

funds.
 Money market deals in funds and financial instrument having a maturity

period of one day to one year.
 The instruments in the money market

are close substitutes for money as they
are of short-term nature and highly
liquid.
16
2.1 Definition of Money Market
According to the McGraw Hill Dictionary of Modern Economics, “money market

is the term designed to include the financial institutions which handle the purchase,
sale, and transfers of short term credit instruments. The money market includes the
entire machinery for the channelizing of short-term funds. Concerned 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.”
Following definitions will help us to understand the concept of money market.
According to the Reserve Bank of India, “money market is the centre for dealing,
mainly of short term character, in money assets; it meets the short term
requirements of borrowings and provides liquidity or cash to the lenders. 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.”
According to Crowther, "The money market is a name given to the various firms
and institutions that deal in the various grades of near money."
These definitions help us to identify the basic characteristics of a money market. A

money market comprises of a well organized banking system. Various financial
instruments are used for transactions in a money market. There is perfect mobility
of funds in a money market. The transactions in a money market are of short term
nature.
17
2.2History 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 market an
important beginning in the annals of the Indian money market. The nationalization
of banks in 1969, setting up of various committees such as the Sukhmoy
Chakravarty Committee (1982), the Vaghul working group (1986), the setting up
of discount and finance house of India ltd. (1988), the securities trading
corporation of India (1994) and the commencement of liberalization and
globalization process in 1991 gave a further fillip for the integrated and efficient
development of India money market.
Recommendations of Three Committees

The issue of whether non-bank participants should constitute part of
call/notice/term money market could be traced first in the Report of the Committee
to Review the Working of the Monetary System (Chairman: S. Chakravarty) in
1985. Since then, the Report of the Working Group on the Money Market
(Chairman: N. Vaghul) in 1987 and the Report of the Committee on Banking
Sector Reforms (Chairman: M. Narasimham) in 1998 had also deliberated on this
issue. It needs to be appreciated that the particular set of recommendations from
these three Committees have to be assessed against the specific objectives for
which these Committees had been constituted as well as the differing initial
conditions reflecting the state of Indian financial market which were prevailing at
that particular point of time.
18
Sukhmoy Chakravarty Committee
The call money market for India was first recommended by the
SukhmoyChakravarty .Committee was set up in 1982 to review the working of the
monetary system. They felt that allowing additional non-bank participants into the
call market would not dilute the strength of monetary regulation by the RBI, 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 Chakravarty Committee recommended that additional nonbank
participants may be allowed to participate in call money market.
The Vaghul Committee
The Vaghul Committee (1990), 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. The other
participants could choose from the new money market instruments, for their short -
term requirements. One 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
marketdetermi
ned.
19
The Narasimham Committee
The Narasimham Committee II (1998) concurred with the Vaghul Committee as it

also observed that call/notice/term money market in India, like in most other
developed markets, should be strictly restricted to banks. It, however, felt that
exception should be made for Primary Dealers (PDs) who have been acting as
market makers in the call money market and are formally treated as banks for the
purpose of their inter-bank transactions and, therefore, they should remain as part
of call money market. With regard to non-banks, it expressed concern that these
participants "are not subjected to reserve requirements and the market is
characterized by chronic lenders and chronic borrowers and there are heavy
gyrations in the market". It felt that allowing non-bank participants in the call
market "has not led to the development of a stable market with liquidity and depth
and the time has come to undertake a basic restructuring of call money market".
Like the Vaghul Committee, it had also suggested that the non-bank participants
should be given full access to bill rediscounting, Commercial Paper (CP),
Certificates of Deposit (CDs), Treasury Bills (TBs) and Money Market Mutual
Funds (MMMFs) for deploying their short-term surpluses
20
2.3 Types of Money Market Instruments: -
Financial
market
Money Capital
market market
21
2.4Structure of Indian Money Market - Chart
The entire money market in India can be divided into two parts. They are
organized money market and the unorganized money market. The unorganized
money market can also be known as an unauthorized money market. Both of these
components comprise several constituents. The following chart will help you in
understanding the organizational structure of the Indian money market.
22
Structure
The Indian money market consists of two main sectors:
1) ORGANISED SECTOR:
 The RBI is the apex institution that controls and monitors all the
organizations in the organized sector.
 Also, the organized money market is composed of various

components/ instruments that are highly liquid in nature.
 The instruments
traded are call
money, treasury
bills, commercial
bills, certificate of
deposits,
commercial
papers, repos
etc.
 The organized money market is further diversified with the establishment of

the Discount and finance House of India, and Money market Mutual Funds.
The Instruments ofthe Organized Money Market Are:-
23
i) CALL MONEY AND NOTICE

MONEY MARKET:
 The call money market is the most important segment of the Indian money
market. It is also called as inter-bank call money market.
 Under call money market, funds are transacted on an over-night. Generally,

banks rely on call money market where they raise funds for a single day.
 The notice money market funds are transacted for a period of 2 to 14 days.
The loans are to be repaid at the option of either the lender or the borrower.
 The rate at which funds are borrowed / lent in this

market is called the call money rate.
 The main participants in the call money market are

commercial banks (excluding RRBs), co-operative
banks and primary dealers.
 The Discount and finance House of India and non-banking financial

institutions like LIC, GIC, UTI, NABARD, etc, also participate in the call
money market.
24
 Call money markets are generally concentrated in large commercial centre

like Mumbai, Delhi, Chennai, Kolkata and Ahmadabad.
 The RBI intervenes in the call money market because it is highly sensitive
and it is the indicator of liquidity position in the organized money market.
 The call money rate (that depends on depends on demand for and supply of
funds) is highly variable from day to day and from centre to centre.
ii) TREASURY BILLS MARKET:
 Treasury bills are short-term securities issued by the RBI on behalf of the
Government of India.
 Treasury bills are of three types: 91 day treasury bills, 182 days treasury
bills and 364 day treasury bills.
 Since these bills are issued through auctions, interest rates on all types of
treasury bills are determined by market forces.
 Treasury bills are highly liquid and are readily available.
25
 They give assured yields at a low transaction cost.
 Treasury Bills are eligible for inclusion in the SLR.
 Moreover, they have negligible capital depreciation.
 Treasury Bills are available for a minimum amount of Rs 25000 and in

multiples of RS 25000.
 Treasury Bills are traded in the secondary market. Commercial banks,

Primary Dealers, Mutual Funds, Corporate, and Financial Institutions,
Provident / Pension funds and Insurance companies participate in the
treasury Bills Market.
 However Treasury Bills Market in India is very narrow and undeveloped.
iii) COMMERCIAL BILLS:
A commercial bill is a short- term, negotiable, self–liquidating instrument drawn

by the seller on the buyer for the value of goods delivered by him.
 Such bills are called trade bills / bills of exchange and when they are
accepted by banks, they are called commercial bills.
 Generally the bill is payable at a future date (mostly, the maturity period is
up to 90 days).
 During this period, the seller may discount the bill with the banks. The
commercial banks may rediscount these bills with FIs like EXIM bank,
SIDBI,IDBI, etc.
26
 Thus, commercial bills are very important for providing short-term credit to
trade and commerce.
iv) CERTIFICATES OF DEPOSITS: (CDs)
 Certificates of Deposits are unsecured, negotiable promissory notes issued

by commercial banks and development financial institutions.
 CDs are marketable receipts of funds deposited in a bank for a fixed period
at a specified rate of interest.
 They are highly liquid and riskless money market instruments.
 CDs were originally introduced in India to enable commercial banks to raise

funds from the market.
27
The RBI has modified its original scheme for CDs. the following are the recent
guidelines for the issue of CDs:-
a. ELIGIBILITY: CDs can be issued by commercial banks (except RRBs and

Local Area Banks) and financial institutions that have been permitted to
raise short-term loans by RBI.
b. AMOUNT: while banks can issue CDs depending on the requirements,

financial institutions can issue CDs within the limit fixed by the RBI.
c. MINIMUM SIZE: the minimum size of an issue for a single investor is Rs
1 lakh and it can be increased in multiples of Rs 1 lakh.
28
d. DISCOUNT RATE: CDs are issued at a discount to face value. Bank /

Financial institutions are free to determine discount rates on floating rate
basis.
e. INVESTORS: CDs are issued to individuals, corporations, companies,

trusts, etc.
f. TRANSFERABILITY: CDs are freely transferable by endorsements /

delivery. However demitted CDs have to transfer as per specified
procedures. There is no lock-in period for CDs.
g. MATURITY: Commercial banks can issue CDs with a maturity period

between 7 days to 1year. Financial institutions can issue CDs with amaturity
period between 1 year to 3 years.
h. RESERVE REQUIREMENTS: CDs are subject to CRR and SLR since

banks have to report CDs to RBI.
i. LOANS / BUY-BACK: Commercial banks / FIs cannot give loans against

CDs. Similarly, they cannot buy-back their own CDs before maturity period.
j. FORMAT: Banks /FIs should issue CDs only in the dematerialized form.
However, investors have the option to seek CDs in physical form.
 Due to absence of a well-developed secondary market in CDs, the size of

CD market in India is quite small.
v) COMMERCIAL PAPERS:
29
 Commercial paper is an unsecured, highly liquid money market instrument

in the form of a promissory note / a dematerialized form through any of the
depositories registered with SEBI.
 It has fixed maturity whereby the purchaser is promised a fixed amount at a

future date.
 Commercial papers are issued by leading nationally reputed manufacturing

and finance companies (Public / private sector).
 They are issued on a discount to face value.
 Commercial papers are issued (by corporate / primary dealers / all India
financial institutions) on the following conditions:
a) The tangible net worth of the issuing

company should not be less than RS4 crores.
b) The working capital limit of the company

has been sanctioned by banks /financial
institution.
c) The borrowal a/c of the company is rated as

a standard asset by banks /financial institutions.
 All eligible participants should have a

minimum rating P2 from CRISIL.
 Commercial Papers have maturity period between 7days and 1year from the
date of issue.
30
 CPs are issued in
denominations of Rs 5 lakhs
(minimum) or multiples of
Rs5 lakhs.
 Individuals, banks, corporate

bodies, NRIs and FIIs can
invest in commercial papers.
 Every issuer must appoint an

IPA (Issuing and Paying
Agent) for issuance of
commercial papers. Only a
scheduled commercial bank can act as an IPA.
vi) REPOS AND REVERSE REPOS:
 The RBI achieves the function of maintaining liquidity in the money market
through REPOS / REVERSE REPOS.
 The repo / reverse repo is a very important money market instrument to

facilitate short-term liquidity adjustment among banks, financial institutions
and other money market players.
31
 A repo / reverse repo is a transaction in which two parties agree to sell and
repurchase the same security at a mutually decided future date and price.
 From the seller’s point of view, the transaction is called a repo; whereby the
seller gets immediate funds by selling the securities with an agreement to
repurchase the same at a future date.
 Similarly, from the buyer’s point of view, the transaction is called areverse
repo, whereby the purchaser buys the securities with an agreement toresell
the same at a future date.
 The RBI, commercial banks and primary Dealers deal in the repos
andreverse repo transactions.
 The financial institutions can deal only in the reverse repo transactionsi.e.
they are allowed only to lend money through reverse repos to the RBI, other
banks and Primary dealers.
 The maturity date varies from 1 day to 14 days.
 The two types of repos are:
a. Inter-bank repos (the transaction takes place between banks and DFHI).
b. RBI repos (The repos / reverse repos are undertaken between banks and
theRBI to stabilize and maintain liquidity in the market).
 Repos and Reverse Repos are used for following purposes:-
a. for injection / absorption of liquidity.
32
b. to create an equilibrium between the demand for and supply of short-

termfunds.
c. to borrow securities to meet SLR requirements.
d. to increase returns on funds.
e. to meet shortfall in cash positions.
vii) DISCOUNT AND FINANCE HOUSE OF

INDIA (DFHI)
 The Discount and Finance House of India is

jointly owned by the RBI, the public sector banks
and all India financial institutions.
 The DFHI helps in developing and stabilizing the

money market by stimulating activity in the
money market instruments and developing
secondary market in those instruments.
 The DFHI deals in treasury bills, commercial

bills certificates of deposits, commercial papers,
short term deposits, call money market and govt securities. It also
participates in repo operations.
33
 Thus, the DFHI has helped corporate entities, banks and financial
institutions to invest their short-term
surpluses in money market
instruments.
viii) MONEY MARKET MUTUAL

FUNDS: (MMMFs):
 The RBI introduced Money Market Mutual Funds to enable small investors
to participate in the money market. Thus, MMMFs mobilizes saving of
mutual funds and invest them in such money market instruments that mature
in less than one year.
34
 The following are the important features of MMMFs:-
a. MMMFs can be set by scheduled

commercial banks and public finance
institutions.
b. Individuals, corporates, etc. can

invest in MMMFs.
c. the lock-in period has been reduced to

15 days.
d. MMMFs are under the regulation of SEBI.
e. NRIs and Overseas Corporate Bodies can invest in MMMFs (on anon-
repatriation basis) floated by commercial banks / public sector financial
institutions / private sector financial institutions. However, they do not need
separate permission from the RBI.
f. MMMFs are ideal for investors seeking low-risk investment for short-term
surpluses.
2) UNORGANISED SECTOR:
 The unorganized Indian money market mainly comprises of indigenous

bankers, money lenders and unregulated non-banking financial
intermediaries.
 Though they may exist in urban centers, their activities are mainly
concentrated in rural areas. In fact, 36% of rural households depend on these
for their financial requirement.
 The main components of unorganized money market are:

35
i) INDIGENOUS BANKERS:
 These financial intermediaries operate as banks by receiving deposits, giving

loans and dealing in ‘hundis’ (The hundi is a short term indigenous bill of
exchange)
 The rate of interest varies from market to market / bank to bank.
 However they do not solely depend on deposits, they may use their own
funds.
 They are called by different names like

‘Kathawals’, ‘Saraf’, ‘Shroff’s’,’Chettis’, etc.
 They provide loans to trade and industry and

agriculture.
 The main advantages of indigenous bankers are

simple and flexible operations, informal
approach, personal contact, quick services and
availability of timely funds.
 However, they have their drawbacks like a very high rate of interest (18%to
36%), combining banking with trade, interest in non-banking activities like
general merchants, brokers, etc.
ii)MONEY LENDERS:
 Money lenders predominate in villages and they deal in the business of

lending money.
 Their interest rates are very high
 Loans are given to agricultural laborer’smarginal and small farmers, artisans,

factory workers, etc for unproductive purposes.
 Their services are prompt, informal and flexible.
36
iii)UNREGULATED NON_BANK
FINANCIAL INTERMEDIARIES
# Chit funds:
a. They are saving institutions

wherein members make regular
contribution to the fund.
b. The fund is given to some member

by bids / draws.
c. Chit funds are famous in Kerala and Tamil

Nadu.
#Nidhi’s:
a. They are mutual benefit funds as loans are

given to members (from the deposits made
by members themselves) at a reasonable rate
of interest.
b. The loans are generally given for purposes

like house construction /repairs.Nidhis are
prevalent in South India
# Loan companies:
a. Loan Companies (also called as finance companies) have capital in the form
of borrowings, deposits
or owned funds.
b. They attract deposits

by offering high rate of
interest and other
incentives.
c. Loans are also given at

a very high rate of
37
interest (36% t0 48% p.a).
d. Traders, small-scale industries and self-employed people are the main

participants.
iv) FINANCE BROKERS:
 They are found in all major urban markets, especially in cloth market,
commodity market and grain market.
 They are intermediaries between lenders and borrowers.
2.5Primary Dealers
 The system of Primary Dealers (PDs) in the Government Securities Market

was introduced by Reserve Bank of India in 1995 to strengthen the market
infrastructure of Government Securities.
 DFHI was set up by RBI in March 1988 to activate the Money Market.
 It got the status of Primary Dealer in February 1996. Over a period of time,
RBI divested its stake and DFHI became a subsidiary of State Bank of India
(SBI).
 SBI had also set up a subsidiary in 1996 for doing PD business namely SBI
Gilts Limited.
38
 Both these companies were merged in 2004 to become the largest Primary Dealer in the
country
 Primary Dealers can also be referred to as Merchant Bankers to Government of India as

only they are allowed to underwrite primary issues of government securities other
than RBI
PDs are allowed the following activities as core activities:
 1. Dealing and underwriting in Government securities.
 2. Dealing in Interest Rate Derivatives.
 3. Providing broking services in Government securities.
 4. Dealing and underwriting in Corporate

/ PSU / FI bonds/ debentures.
 5. Lending in Call/ Notice/ Term/ Repo/

CBLO market.
39
 6. Investment in Commercial Papers.
 7. Investment in Certificates of Deposit.
 8. Investment in debt mutual funds where entire corpus is invested in debt

securities.
2.6The Role of Reserve Bank of India
The Reserve Bank of India is the most important constituent of the money market.
40
The market comes within the direct preview of the Reserve Bank of India
regulations.
The RBI intervenes in the call money

indirectly in two ways-
 By providing lines of
finance/additional funding to the
DFHI and other call money dealers.
 By conducting repo auction Additional funding is provided through REPO

auctions which increase liquidity in the market and bring down call money
rates. RBI’s reverse repo auction absorbs excess liquidity in the economy
and push up the call rates.
The aims of the Reserve Bank’s operations in the money market are:
 To ensure that liquidity and short term interest rates are maintained at levels
41
Consistentwith the monetary policy objectives of maintaining price stability.
 To ensure an adequate flow of credit to the productive sector of the economy

andto bring about order in the foreign exchange market.
 The Reserve Bank of India influence liquidity and interest rates through a
number of operating instruments - cash reserve requirement (CRR) of banks,
conduct of open market operations (OMOs), repos, change in bank rates and
at times, foreign exchange swap operations.
Steps taken by RBI:
 Both the borrowers and the lenders are required to have current accounts
with the Reserve Bank of India.
 This will facilitate quick and timely debit and credit operations.
 The call market enables the banks and institutions to even out their
day to day deficits and surpluses of money.
 Banks especially access the call market to

borrow/lend money for
adjusting their cash reserve requirements
(CRR).
 The lenders having steady inflow of funds
42
(e.g. LIC, UTI) look at the

call market as an outlet for deploying funds on short term basis
Entry Barriers
 The entry into this field is restricted by RBI.
 Commercial Banks, Co-operative Banks and Primary Dealers are allowed to

borrow and lend in this market.
 Specified All-India Financial Institutions, Mutual Funds, and certain

specified entities are allowed to access to Call/Notice money market only as
lenders.
 Reserve Bank of India has recently taken steps to make the call/notice
money market completely inter-bank market.
 Hence the non-bank entities will not be allowed access to this market
beyond December 31, 2000.
2.7The Growth of Money Market in India
43
While the need for long term financing is met by the capital or financial
markets,money market is a mechanism which deals with lending and borrowing of
short term funds. Post reforms period in India has witnessed tremendous growth of
the Indian money markets. Banks and other financial institutions have been able to
meet the high expectations of short term funding of important sectors like the
industry, services and agriculture.
Functioning under the regulation and
control of the Reserve Bank of India
(RBI), the Indian money markets
have also exhibited the required
maturity and resilience over the past
about two decades. Decision of the
government to allow the private
sector banks to operate has provided
much needed healthy competition in
the money markets, resulting in fair
amount of improvement in their
functioning.
Quantum of liquidity in the banking system is of paramount importance, as it is an

important determinant of the inflation rate as well as the creation of credit by the
banks in the economy. Market forces generally indicate the need for borrowing
orliquidity and the money market adjusts itself to such calls. RBI facilitates such
adjustments with monetary policy tools available with it. Heavy call for funds
overnight indicates that the banks are in need of short term funds and in case of
liquidity crunch, the interest rates would go up.
44
Depending on the economic situation and available market trends, the RBI
intervenes in the money market through a host of interventions. In case of liquidity
crunch, the RBI has the option of either reducing the Cash Reserve Ratio (CRR) or
pumping in more money supply into the
system. Recently, to overcome the
liquidity crunch in the Indian money
market, the RBI has released more than
Rs 75,000 crore with two back-to-back
reductions in the CRR.
In addition to the lending by the banks

and the financial institutions, various
companies in the corporate sector also
issue fixed deposits to the public for
shorter duration and to that extent
become part of the money market
mechanism selectively. The maturities
of the instruments issued by the money market as a whole, range from one day to
one year. The money market is also closely linked with the Foreign Exchange
Market, through the process of covered interestarbitrage in which the forward
premium acts as a bridge between the domestic and foreign interest rates.
2.8Scope of Indian Money Market
45
The India money market is a monetary system that involves the lending and
borrowing of short-term funds. India money market has seen exponential growth
just after the globalization initiative in 1992. It has been observed that financial
institutions do employ money market instruments for financing short-term
monetary requirements of various sectors such as agriculture, finance and
manufacturing. The performance of the India money market has been outstanding
in the past twenty years.
Central bank of the country - the Reserve Bank of India (RBI) has always been
playing the major role in regulating and controlling the India money market. The
intervention of RBI is varied - curbing crisis situations by reducing the cash
reserve ratio (CRR) or infusing more money in the economy.
46
47
3.Features/Characteristics of Indian Money Market
Every money is unique in nature. The money market in developed and developing
countries differ markedly from each other in many senses. Indian money market is
not an exception for this. Though it is not a developed money market, it is a
leading money market among the developing countries.
Indian Money Market has the following major characteristics:-
 Dichotomic Structure: It is a significant aspect of the Indian money market.

It has a simultaneous existence of both the organized money market as well
as unorganized money markets. The organized money market consists of
RBI, all scheduled commercial banks and other recognized financial
institutions. However, the unorganized part of the money market comprises
domestic money lenders, indigenous bankers, trader, etc. The organized
money market is in full control of the RBI. However, unorganized money
market remains outside the RBI control. Thus both the organized and
unorganized money market exists simultaneously.
 Seasonality: The demand for money in Indian money market is of a seasonal
nature. India being an agriculture
predominant economy, the demand for
money is generated from the
agricultural operations. During the busy
season i.e. between October and April
more agricultural activities takes place
leading to a higher demand for money.
48
 Multiplicity of Interest Rates: In Indian money market, we have many levels

of interest rates. They differ from bank to bank from period to period and
even from borrower to borrower. Again in both organized and unorganized
segment the interest rate differs. Thus there is an existence of many rates of
interest in the Indian money market.
 Lack of Organized Bill Market: In the Indian money market, the organized
bill market is not prevalent. Though the RBI tried to introduce the Bill
Market Scheme (1952) and then New Bill Market Scheme in 1970, still there
is no properly organized bill market in India.
 Absence of Integration: This is a very important feature of the Indian money

market. At the same time it is divided among several segments or sections
hitch are loosely connected with each other. There is a lack of coordination
among these different components of the money market. RBI has full control
over the components in the organized segment but it cannot control the
components in the unorganized segment.
 High Volatility in Call Money Market: The call money market is a market
for very short term money. Here money is demanded at the call rate.
Basically the demand for call money comes from the commercial banks.
Institutions such as the GIC, LIC, etc suffer huge fluctuations and thus it has
remained highly volatile.
49
 Limited Instruments: It is in fact a defect of the Indian money market. In our

money market the supply of various instruments such as the Treasury Bills,
Commercial Bills, Certificate of Deposits, Commercial Papers, etc. is very
limited. In order to meet the varied requirements of borrowers and lenders, It
is necessary to develop numerous instruments.
50
3.1Participants inthe Money Market
The transactions in the money market are of high volume involving large amount.
So, money market is dominated by a small number of large players.
Some of the important players in the

money market are:
 Reserve Bank of India.
 Discount and finance House of

India.
 Financial Institution.
 Non-banking finance companies.
 Securities Trading Corporation of India.
 Public sector undertakings (PSU).
The role of important players in the money market is discussed below:
*RESERVE BANK OF INDIA:
 The reserve Bank of India is the most important player in the Indian Money
Market.
 The Organized money market comes under the direct regulation of theRBI.
51
 The RBI operates in the money market is to ensure that the levels ofliquidity
and short-term interest rates are maintained at an optimum level soas to
facilitate economic growth and price stability.
 RBI also plays the role of a merchant banker to the government. It

issuesTreasury Bills and other Government Securities to raise funds for
thegovernment.
 The RBI thus plays the role of an intermediary and regulator of the money
market.
*GOVERNMENT:
 The Government is the most active player and the largest borrower in the
money market.
 It raises funds to make up the budget deficit.
 The funds may be raised through the issue of Treasury Bills (with maturity
period of 91day/182day/364 days) and
government securities.
*CORPORATE FIRMS:
52
 Corporate firms operate in the money market to raise short-term funds to

meet their working capital requirements.
 They issue commercial papers with a maturity period of 7 days to 1 year.

These papers are issued at a discount and redeemed at face value on
maturity.
 These corporate firms use both organized and unorganized sectors of money
market.
*BANKS:
 Commercial Banks play an important role

in the money market.
 They undertake lending and borrowing of

short term funds.
 The collective operations of the banks on

a day to day basis are very predominant
and hence have a major impact and
influence on the interest rate structure and the liquidity position.
53
*FINANCIAL INSTITUTIONS:
 Financial institutions also deal in the money market.
 They undertake lending and borrowing of short-term funds.
 They also lend money to banks by rediscounting Bills of Exchange.
 Since, they transact in large volumes, they have a significant impact on the
money market.
*INSTITUTIONAL PLAYERS:
 They Consist of Mutual Funds, Foreign Institutional Players, Insurance

Firms, etc.
 Their level of Participation depends on the

regulations.
 For instance the level of participation of the FIIs in the Indian money market
is
re
str
54
icted to investment in Government Securities.
*DISCOUNT HOUSES AND PRIMARY DEALERS:
 They are the intermediaries in the money market.
 Discount Houses discount and rediscount commercial bill and Treasury

Bills.
 Primary Dealers were introduced by RBI for developing an active secondary

market for Government securities.
 They also underwrite Government Securities.
55
3.2Importance of Indian money market
Wide-ranging reforms have been undertakento develop the money market and
strengthen its rolein the transmission mechanism of monetary policy.Three major
considerations that have guidedrationalization of the structure in the money market
are: (i) ensuring balanced development of various constituents of the money
market, especially thegrowth of the collateralized market Vis-à-vis
56
theuncollateralized market; (ii) preserving integrity andtransparency of the money

market by ensuring better disclosure of information; and (iii) rationalizing various
classes of participants across different market segments in order to strengthen the
efficacy of theLAF of the Reserve Bank. It provides a stable source of fund to
banks in addition to deposits, allowing alternative financing structure.
As a result of various reformmeasures, the money market in India has

undergonesignificant transformation in terms of volume, numberof instruments and
participants, and adoption of riskmanagement practices.
Market Development
Greater Flexibility for Participants in the Call MoneyMarket
In view of the transformation of the call moneymarket into a pure inter-bank

market, there is a needto consider greater flexibility to banks and PDs toborrow or
lend in this market, provided they have putin place appropriate risk management
systems whichwould address the asset-liability mismatches in theirbalance sheets.
In this context, banks have alreadystarted operating in an environment that
requiresgreater harmonization between sources anddeployment of funds for asset-
liability management (ALM) purposes. Direct regulation in the form ofprudential
limits on borrowing and lending eventuallywould need to graduate to a system,
where such limitsare taken care of by banks’ own internal systems ofALM
framework.This would correct large mismatchesbetween sources and uses of funds
by banks andthereby help the Reserve Bank in the properassessment of market
conditions for the conduct ofits liquidity management operations. There is also,
atthe same time, a greater need for closely monitoringthe movements of call money
rates.
57
Extension of the Repo Market
It has been the endeavor of the Reserve Bank to develop the repo market not only
for easing pressure from the uncollateralized call money market but also to
facilitate the emergence of a short-term rupee yield curve for pricing fixed income
securities. At present, only Central and State Governments securities are eligible
for market repo. However, State Government securities do not have wider
acceptability as there are hardly any repo operations based on them. As the fixed
income money market has been overwhelmingly dependent upon Central
Government securities, there is a need to consider broad-basing the pool of eligible
securities. In future, the growth of market repo will be driven by the “short selling”
activity in the government securities market as a reposedsecurity can now be
delivered up to five days in view of the recent changes in the regulations governing
short sales
Development of a Vibrant Term Money Market
The term money market has not developed for several reasons. One of the major
reasons for this is that market participants have been unable to take a long-term
view of interest rates despite availability of Treasury Bills of varying maturities
and a reasonably developed swap market. In order to enable market participants to
take a long-term view on interest rates, it is imperative that theALM framework is
strengthened and greater flexibility is allowed to the personnel managing treasury
58
operations in banks. The skewness in liquidity in the money market in terms of

chronic lenders and borrowers would get corrected as banks develop better ALM
systems. The development of the term money market is vital for strengthening
proper linkages between the foreign exchange market and the domestic currency
market, which, in turn, would provide an impetus to the derivative segment.
Relook at Inter-Bank Participation Certificates
Inter-Bank Participation Certificates, which can be used for evening out short-term
liquiditymismatches by banks, were introduced in October1988 in order to infuse
greater degree of flexibility intheir credit portfolios. In view of rapid credit growth
inrecent years, interest in IBPCs has again arisen. Inthis context, since considerable
time has elapsedsince the guidelines on the scheme of IBPCs wereissued, the IBPC
scheme with respect to duration,quantum in terms of the proportion to the loan
amount, eligible participants and transferability of IBPCs needsa thorough review.
Depending on the results of sucha review, extending the use of this instrument
couldalso facilitate the asset liability management by banks,
improve day-to-day liquidity management and helpdevelop a market for credit risk
transfer instrumentsbetween banks.
Futures on Policy Linked Interest Rates
Going forward, an Indian variant of the FederalFunds Futures on interest rates

linked to the ReserveBank’s key policy rates may emerge. Trading in thefutures
market would reveal important informationabout market expectation on the future
course ofmonetary policy. For instance, the trading of theFederal Funds Futures
provides key information tothe Federal Open Market Committee (FOMC) in theUS
in formulating its monetary policy.
59
Promoting Financial Stability
Default risk in the money market has thepotential to create a contagion in the
financial marketsand, therefore, needs to be mitigated. In this regard,experiences of
developed economies show thatgenerally the self-regulatory organizations (SROs)
regulate activities of participants in the money marketin terms of their capital
adequacy and conduct ofbusiness. Also, default resolution in most of thesemarkets
is undertaken through the Contract Law andthe Bankruptcy Law. In view of
international experience, there may be a case for empowering asuitable self-
regulatory organization appropriately toact as a catalyst for the development of
market microstructure.
One of the fundamental forces that couldcontribute to more organic integration
across varioussegments of the financial market is the technologicalup gradation of
the payment and settlement system.The accomplishment of virtual Public Debt
Office (PDO) and Deposit Accounts Department (DAD) atthe Reserve Bank,
coupled with the operationalizationof the centralized funds management system
(CFMS).
3.3Benefits / Advantages of Money Market
A liquid money market provides an effective source of long term finance to

borrower
A liquid and vibrant money market is necessary for the development of a capital
market, foreign exchange market and market in derivative instruments.
60
Helps in pricing different floating interest products
It helps in:
 Development of trade & industry.
 Development of capital market.
 Smooth functioning of commercial banks.
 Effective central bank control.
 Formulation of suitable monetary policy.
3.4. Defects or Drawbacks of Money Market
Though the Indian money market is considered as the advanced money market
among developing countries, it still suffers from many drawbacks or defects. These
defects limit the efficiency of our market.
61
Some of the important drawbacks of Indian Money Market are:-
1. MULTIPLE RATE OF INTEREST: In the Indian money market, especially

the banks, there exist too many rates of interests. These rates vary for lending,
borrowing, government activities, etc. Many rates of interests create confusion
among the investors.
2. DICHOTOMY:Dichotomy i.e.
existence of two markets (organized
62
money market and unorganized money market) is a major defect of the Indian
Money Market. The unorganized money market comprises of indigenous
bankers, moneylenders, chit funds, nidhis, loan companies and finance brokers
that do not come under the control and supervision of the RBI. This
unorganized sector is mainly concentrated in the rural areas and it does not
differentiate between short term and long term finance and between the
purposes of finance. This puts a limit on the RBI’s control over the money
market.
3. LACK OF INTEGRATION:The RBI finds it difficult to integrate the

organized and the unorganized money market. While the RBI can control and
supervise the working of the organized sector effectively, the heterogeneous
unorganized sector is out of RBI’s control. There is no uniformity in the
practices and operations of the unorganized money market. Moreover, the
interest rates in both the markets are also different. Thus there is lack of
integration in the Indian money market.
4. MULTIPLICITY IN INTEREST RATES:There is diversity in rates of

interest in the Indian money market. This multiplicity in the interest rates is due
to lack of mobility of funds from one section of the money market to another.
The rates differ from institution to institution even for funds of the same
duration. Although the wide differences are being narrowed down, the existing
differences do hamper the efficiency of the money market.
63
5. ABSENCE OF ORGANISED BILL MARKET: The existence of a well-

organized bill market is essential for effective linking up various credit
agencies. It refers to a mechanism where bills of exchange are purchased and
discounted by commercial banks / financial institutions. The bill market is not
yet developed in India due to the following reasons:
 Banks keeping large amount of cash.
 Preference for borrowing rather than discounting bills.
 Overdependence on cash / cheque transactions.
 High stamp duty on usance bill, etc.
6. SHORTAGE OF FUNDS: The Indian money market is characterized by

shortage of funds. Various factors like inadequate banking facilities, low
savings, lack of banking habits, existence of parallel economy, etc lead to
shortage offends. Thus, demand for short-term funds far exceeds the supply.
This results in high interest rate. However now banks are flush with funds
especially in urban area as people prefer to invest their money with banks rather
than keeping them as deposits in the unorganized sector.
7. SEASONAL STRINGENCY OF MONEY: Since agriculture continues to

play a major role in the Indian economy, farm operations do influence the
demand for and supply of money. Thus seasonal stringency of money and high
interest rate during the busy season (November to June) is a striking feature of
the Indian money market. Also, there a wide fluctuations in the interest rates
from one reason to another. However, the RBI makes attempt to reduce the
64
fluctuations by adding money into the money market during the busy season
and withdrawing the funds during the slack season.
8. INADEQUATE CREDIT INSTRUMENTS: The Indian money market

lacked adequate short-term paper instruments till1985-86. Only call money
market and bill market existed. Also there were no specialized dealers / brokers
in the money market. After 1985-86 the RBI Introduced new credit instruments
in the market like CDs, CPs, MMMF, etc, but they are not yet fully developed
in India.
9. ABSENCE OF a WELL-ORGANISED BANKING SECTOR IN

RURALAREA:There is poor banking system in the rural area due to the
problems of overheads and maintenance of branches. The commercial bank
branches in rural area are only 40% of the total bank branches.This also
hampers the development of money market in India.
10.INEFFICIENT AND CORRUPT MANAGEMENT:Faulty selection, lack of

training, poor performance appraisal and faulty promotions result in
inefficiency and corruption in the banking sector. This adversely affects the
success and performance of money market.These are some of the major
drawbacks of the Indian money market; many of these are also the features of
our money market.
65
Articles on Money market

SEC Can't Agree on a Fix For Money-Market Funds
Updated August 23, 2012, 10:51 a.m. ET
66
Nothing the government can do will prevent every future financial crisis; they have
been with us since the advent of money and financial markets. But the government is
even having trouble fixing things that made the last crisis so devastating.
Financial crises can't be prevented, but can the government make changes to make
their impact less devastating? David Wessel reports on The News Hub. Photo:
Bloomberg.
Outnumbered 3-2, Securities and Exchange Commission Chairman Mary Schapiro on

Wednesday abandoned her effort to propose rule changes for money-market mutual
funds, the $1-a-share funds that currently hold $2.6 trillion from individuals and
institutions.Backed by the Treasury secretary and Federal Reserve chairman, Ms.
Schapiro had argued changes were needed to prevent a repeat of the destabilizing
September 2008 run on the funds. The industry is resisting strenuously, arguing the
changes would render the funds less desirable, if not unusable.
67
But Ms. Schapiro had only one other vote. The swing voter was Luis Aguilar, a former
general counsel of Invesco, which has a money-market fund. He said Wednesday he
would oppose the Schapiro proposal; she called off a vote that had been tentatively
set for next week.
Money-market funds pool investors' money and put it in short-term government and
corporate debt. They generally offer investors (here's the rub) $1 back for every $1
they invest, a feature unique among mutual funds. Customers often view them like
banks and can write checks on their accounts—but, unlike banks, the funds aren't
backed by government deposit insurance and don't have cushions to cover any losses
on their holdings.
In September 2008, the original money fund, Reserve Primary Fund, had so much of
its money—1.2% of its $63 billion—in Lehman Brothers that when Lehman went
down it "broke the buck." Reserve ended up with 97 cents for every $1 its remaining
customers had invested. That contributed to a run on prime money-market funds,
the ones that invest in securities other than U.S. Treasurys. In one week, $310 billion,
or 15%, fled.
That endangered the big companies hooked on borrowing from the funds, and led
the Treasury to extend an extraordinary taxpayer guarantee to those with money in
the funds.
No one wants to go through that again. So in 2010, the SEC, with industry backing,
required funds to have more ready cash (essentially, securities that are about to
mature or are issued by the government) in case a lot of investors suddenly want to
pull money out.
The industry says that solved the problem, a view that Mr. Aguilar says the SEC hasn't
thoroughly studied. Ms. Schapiro says it solved only one—liquidity—but didn't solve
another: the risk the funds take that some company to which they have lent money
defaults (excluding, of course, funds that limit holdings to U.S. Treasurys).
68
As Eric Rosengren, president of the Federal Reserve Bank of Boston, puts it: Prime
money-market funds are trying to do three things—to promise to return $1 for every
$1 invested, to invest in securities with some credit risk and to hold no capital
cushion to absorb losses. The three are incompatible.
The industry notes that only two funds have ever broken the buck—and argues this is
much ado about nothing.Yet that doesn't mean other funds didn't come close. A
Boston Fed study—unchallenged by the industry—found "frequent and significant"
cases in which companies that sponsor money funds had to bail them out. At least
$4.4 billion was provided between 2007 and 2011 to at least 78 funds.That's good for
shareholders, but will sponsors always be there? "If sponsor support were explicitly
required and planned for, and all sponsors had the consistent ability to provide
support, such a business model might not be viewed as problematic," the Fed
economists said. "But the current model…reinforces investor confidence in the
stability of the product without the ability of all sponsors to consistently deliver." The
industry also argues the 2010 rule changes were sufficient.
Agence France-Presse/Getty Images
SEC Chairman Mary Schapiro during testimony before a House committee hearing in
June.
Yet the Treasury's Office of Financial Research found that in April 2012—after those
SEC changes had been implemented—there were 105 money-market funds with
combined assets of more than $1 trillion that were at risk of breaking the buck if any
of the top 20 outfits in which they invested defaulted. Of those, 14 were at risk of
breaking the buck if any of the top 30 outfits in which they invested did so.
In ordinary times, that may be OK. In a crisis, it spells trouble, particularly since the
funds tend to invest in the same securities.
69
Ms. Schapiro offered two options. One, forbid money-market funds from fixing share
prices at $1 and, instead, let them fluctuate with the market value of their holdings.
The industry hates this, and so do many of those who put money in the funds. Or,
two, require the funds to set aside some capital to absorb losses. The industry
doesn't much like this either because it's expensive. Mr. Aguilar said either would
have sent big bucks into unregulated money funds, and that would have made the
system riskier.The next move is up to the Financial Stability Oversight Council,
created after the crisis to look over the shoulders of the SEC and other regulators.
Ms. Schapiro late Wednesday called for FSOC's help. "The issue is too important to
investors, to our economy and to taxpayers to put our head in the sand and wish it
away," she said.
Scrutiny of money market funds continues
The failure of SEC chair's plan to tighten rules underscores an ongoing

investor risk.
By Andrew Tangel, Los Angeles Times August 24, 2012
An unsuccessful effort to tighten rules for money-market mutual funds raises an

unpleasant issue for the millions of investors who rely on the funds.
Should investors keep billions of dollars in a low-yielding investment that could be far
riskier than it seems?
The head of the Securities and Exchange Commission was forced to scrap a plan to
revamp the structure and inner workings of money-market mutual funds after failing
to garner enough support for the plan.
SEC Chairwoman Mary L. Schapiro had argued that money-market funds are
vulnerable to losses during financial panics, which could cause investors to lose
money.
The risk is that funds could "break the buck," or push their value below a dollar a
share, as happened with one high-profile fund during the financial crisis in late 2008.
70
Unexpected losses in money-market funds would be a blow to the millions of

Americans who have long relied on the funds as the virtual equivalent of bank savings
accounts.
Investors may not be worried about the funds' safety, but they have noticed their
extremely low yields.
Investors have shifted $1.3 trillion into bank savings accounts since the crisis, leaving
$2.6 trillion in money-market funds, according to Peter Crane, president of Crane
Data, a research firm in Westboro, Mass.
"They're much more concerned about the low yields than they are the remote risk of
at some point losing a penny on the dollar," Crane said.
Money-market funds historically have paid investors 1% to 2% more than bank

savings rates. But since the financial crisis, interest rates have been at historic lows,
bringing the fund yields closer in line with — if not slightly below — savings accounts
rates, which are insured by the Federal Deposit Insurance Corp.
The average money-market fund yields 0.06%, whereas the average bank savings rate
is about 0.1%, analysts said.
Schapiro on Wednesday canceled a vote on her proposed money-market fund rules

after being unable to get three needed votes from the commission.
Schapiro and other federal regulators say the funds remain a weak link in the
financial system four years after the collapse of Lehman Bros. sent financial markets
— and the economy — into a free fall.
Prior to the trouble of the Primary Reserve Fund in 2008, only one other money-
market fund had broken the buck from 1983 to 2008, according to the SEC. It was a
small fund and had no widespread impact. The Primary Reserve Fund and other
funds faced widespread investor panic, forcing the U.S. Treasury to guarantee
accounts.
As with other types of mutual funds, Schapiro wanted money-market funds to have
floating values. Instead of $1 a share, a fund could drop to, say, 98 cents if its
71
underlying investments had lost money. Schapiro also wanted the companies
managing money funds to post more capital to cover investor losses.
The proposal also would have prevented investors from withdrawing their entire
accounts at once to prevent runs.
"The issue is too important to investors, to our economy and to taxpayers to put our
head in the sand and wish it away," Schapiro said in a statement. "Money market
funds' susceptibility to runs needs to be addressed."
The U.S. Treasury said Thursday that it would press further to revamp regulations.
"Treasury is in the process of consulting with the Federal Reserve Board, the
Securities and Exchange Commission and other regulatory agencies to consider the
appropriate next steps to reduce risks to financial stability from money market
funds," spokeswoman Suzanne Elio said in a statement.
Money-market funds play an important role in finance. They invest in short-term

assets, including U.S. government bonds and commercial paper that companies use
to finance immediate cash needs.
Some analysts said the SEC's regulations could have unintended consequences that
could potentially harm investors and companies' sources of short-term capital.
"It would diminish the appeal to individual investors greatly," said Greg McBride,
senior financial analyst at Bankrate.com. "And it would also make it a lot more
difficult for money market fund providers to make a profit."
Are Money Market Funds a Safe Investment ?
Posted in Money Market by DailyDeals on Monday, December 20th, 2010 at 10:39 pm
Although historical stock market gains hover around 8 %, steep declining beark
markets, such as the one we are experiencing in 2008, can result in extreme negative
earnings for equities. Due to the recent credit crisis, stock market indices have
experienced declines of up to 40 % year-over-year. Fortunately, during these tough
economic times, there are financial instruments that actually yield a positive gain -
the intruments that provide such gain are known as money market instruments.
These instruments act as a capital preservation vehicle during bear markets, and also
72
provide a great source of liquidity, since these instruments permit redemption in a

couple of business days.
Money markets are debt securities of the shor-term variety (one year maturity or
less), and are very liquid instruments, which can be cashed out of at any time. Their
reputation is one of safety, and they typically issued by government, large
corporations, or financial banking institutions. These funds are usually procured
through bank accounts or through mutual funds.
Over the years, the rates of money market funds have moved up and down
consistent with the interest rates of the times. Of late, interest rates for these funds
have been at historical lows, since interest rates have been quite low the last couple
of years. The value of a money market fund is always maintained at $ 1/share by
default, with appropriate interest earned on it, based on the prevailing rate.
Although historically most government-based and corporate-based money market

funds have not been guaranteed, bank-issued money market rates are almost always
FDIC-insured. However, since the great credit crisis of 2008 has been bestowed up on
us, the government has decided to pony up and insure all money market funds for at
least a year, with a dedicated emergency pool of money that has been made
available. Recently, a well-established multual fund, the Reserve Primary Fund,
"broke-the-buck", when they couldn't meet the redemption requirements of the
fund, after a mass exodus of investors took place. This breaking-of-the buck resulted
from the fund holding debt that was exposed to Lehman Brothers, an institutional
brokerage that went belly-up. Hence, the government decided to step in quell the
storm, by insuring all money market funds, for a period of at least a year.
Since all money market funds are effectively insured now, it is a prudent time to park
excess cash (or cash that you wish to preserve during the market downturn) in these
funds. Moreover, it is your best bet to invest in bank-issued money market funds,
which are FDIC-insured up to $ 500,000 (for joint accounts). These are rock-solid
investments that will cater to capital preservation, and provide a very liquid stream
of assets.
Money Market Reforms Seen Harming an Alternative to Banks
73
Big businesses' miss givings about large banks show through when the conversation
turns to regulation.
Two trade groups for corporate treasurers have sounded the alarm about proposed
reforms of money market funds, warning that proposed regulations could reduce
large companies' financing options — and add to their dependence on megabanks.
"We are mindful of the need for a healthy banking system, but we're also mindful of
needs for healthy alternatives to the banking system," says Thomas C. Deas, Jr., the
treasurer of chemical company FMC Corp. (FMC) and the chairman of the National
Association of Corporate Treasurers.
The Securities and Exchange Commission has proposed rules that would revamp the
$2.6 trillion U.S. money market fund industry, arguing it remains a risk to the financial
system. Last month, Deas testified before a House subcommittee that the reforms —
such as floating the funds' net asset value or imposing new capital requirements —
would "have a significant negative impact on the ongoing viability of these funds, and
also adversely affect the corporate commercial paper market."
"The cumulative effect of the proposed changes will drive money market fund
investors to bank deposits, concentrating risk in a sector where over the past 40
years there have been 2,800 failures, costing taxpayers $188 billion," he said in
testimony before the House Financial Services' subcommittee on capital markets.
Jeff A. Glenzer, who oversees public policy for the Association for Financial
Professionals, raised similar concerns. Though the AFP doesn't "have a position" on
whether big banks should be broken up, "for people who are worried about 'too big
to fail,' that [money-market fund reform] would exacerbate it," he says.
More than 50% of corporate cash is already held in bank deposits, according to the
association.
Deas also points out how little visibility corporate treasurers sometimes have into the
health of their bank partners.
74
"A money market fund's public financial statements, giving what their investments
are and duration and credit quality, are very straightforward to read," Deas said in an
interview. Banks' financials can be hard to read, he says, invoking the massive trading
losses that dragged JPMorgan Chase into public scrutiny this spring and helped re-
ignite public discussion about separating banks' commercial and investment
functions.
"Obviously even [JPMorgan Chief Executive] Jamie Dimon, with all of his access not
only to public financial statements but to internal reports and daily value-at-risk
analyses that he receives, was unable to perceive the trouble in their London trading
operation," Deas says. "That's why it's important to us to have money market funds
as an alternative, both for investments and for their ability in some respects to
disintermediate the banks."
Money market fund reform stalls

By Chris Isidore @CNNMoneyInvest August 23, 2012: 11:01 AM ET
The SEC has dropped plans for new regulations on money market accounts after a majority of
commission members announced they would vote against the proposal.
NEW YORK (CNNMoney) -- In a setback for advocates of Wall Street reform, a proposal to regulate
money-market mutual funds has been tabled by the Securities and Exchange Commission because there
weren't enough votes to approve it.
SEC chairman Mary Schapiro expressed regret for the proposal's withdrawal. In a statement Wednesday
night, she said the 2008 financial crisis highlighted the need for the reform proposal, which was two
years in the making.
"I consider the structural reform of money markets one of the pieces of unfinished business from the
financial crisis," she said. She urged other policymakers to take up the effort.
Money-market mutual funds, which invest in Treasuries and other debt securities, played a big role in
the 2008 crisis. Shortly after Lehman Bros. filed for bankruptcy in September of that year, one key fund
75
announced its clients could get back only 97 cents of every dollar they had put in the fund -- a move
known as "breaking the buck." That triggered a $300 billion run on other money market funds that led
to a virtual freeze in financial markets.
The SEC staff had proposed alternatives to try to reduce the threat of runs on the funds and the need for
more federal intervention in the future.
One would have required money funds to disclose their share prices like other mutual funds, making it
clearer that the funds were investment accounts, not banking accounts with an implied guarantee.
The other proposal would have required the firms to hold more capital to protect against losses. And
customers who wanted to close out their accounts would have had to wait 30 days to get a portion of
their cash back, which was seen as reducing the risk of a run on the accounts.
Investment firms that offer money-market accounts fought the proposals. The Investment Company
Institute, an industry trade group, said it was pleased the SEC would no longer try to implement the
rules, saying they would have had "adverse consequences...for investors, [debt] issuers and the
economy."
Jaret Seiberg, a financial services analyst with Guggenheim Washington Research Group, said there is
about $1.6 trillion in the money market accounts most directly affected by the proposed rules. He said
while the accounts are popular with individual investors, they're not likely to respond one way or the
other to rule changes.
The debate is what would happen to hundreds of billions of corporate cash that is also in the funds.
"The industry believes this would have been devastating, that money would have flowed out of money
market funds and gone to unregulated investments overseas," Seiberg said. But he said such moves
would pose their own risks for investors, so it's not clear the funds would have been hurt by the rules.
Seiberg said the push to regulate the funds is not over. He said Schapiro could start the process again, or
it could move to the Financial Stability Oversight Council, which was created by the Dodd-Frank financial
reform act.
"We're in round three. There's a lot more of this fight to go," Seiberg said.
Schapiro's statement did not identify which three members of the five-member commission opposed
the reforms. Besides the two Republican members long seen as opponents, Luis Aguilar, a Democratic
member, was quoted by The Wall Street Journal and The New York Times as believing the SEC staff had
not adequately studied the issue.
Before being appointed by President George W. Bush in 2008 and reappointed by President Obama,
Aguilar served as general counsel, executive vice president and corporate secretary of the investment
firmInvesco (IVZ). Among investment firms that trade shares, Federated Investors (FII)rose 5.3% in early
trading Among investment firms that trade shares, Federated Investors (FII)rose 5.3% in early trading.
76
4. Findings& Suggestions
77
4.1. FINDINGS
According to the findings INVESTORS IN MUTUAL FUNDS:
Mutual funds in India are open to investment by following investors:
1. Residents including:
a) Resident Indian Individual
b) Indian Companies
c) Indian trust/charitable trusts
d) Banks
e) Non –Banking Finance companies
f) Insurance companies
g) Provident funds
2. Non Residents Including:

a) Non residents Indians
b) Overseas corporate bodies
3. Foreign entities:
a) Foreign Institutional Investors registered with SEBI.
Foreign citizens/entities are however now allowed to invest in India.
4.2 SUGGESTIONS
78
Few suggestions relevant to the development of money market in India are

enumerated below:
(i) There should be a mechanism to make the call range bound which
may reduce uncertainty and provide confidence to the bankers for
lending/borrowing. In the context, it is emphasized that Repos and
Reverse Repos conducted by RBI has the potential to set the floor
and ceiling in the call money market.
(ii) Besides, Repo mechanism, call money market, needs to be

supplemented by Open Market Operation (OMO). OMO can
influence interest rate as well as volumes in the market.
(iii) Non-bank segment should be brought under the same regulation on

par with the banks early as possible so that level playing field is
created.
(iv) Transparency should be ensured in money market transaction. There

should be screen based trading with two way quotes for each money
market instruments.
79
(v) The lock-in period of CDs and CPs should be completely removed
in a phase manner.
(vi) Retailing of government papers should be encouraged. The primary

dealers can play a role in this context.
(vii) Currently FIIs are allowed in government dated securities in primary

as well as secondary market. More FII participation could be
encouraged.
(viii) Money Market Mutual Funds should be set up by various banks and
institutions. This would increase the retail participation in the
market.
80
5. CONCLUSION
The money market is a vibrant market, affecting our everyday lives. As the short-
term market for money, money changes hands in a short time frame and the players
in the market have to be alert to changes, up to date with news and innovative with
strategies and products. The withdrawal of non-bank entities from the inter-bank
call-money market is linked to the improvement of settlement systems. Any time-
bound plan for the evolution of a pure inter-bank call/notice money market would
be ineffective till the basic issue of settlements is addressed.
In brief, various policy initiatives by the Reserve Bank have facilitated

development of a wider range of instruments such as market repo, interest rate
swaps, CDs and CPs. This approach has avoided market segmentation while
meeting demand for various products. These developments in money markets have
enabled better liquidity management by the Reserve Bank
81
6. Webliography
 www.google.com
 http://business.mapsofindia.com/india-market/money.html
 RBIs site --- http://rbi.org.in
 SBI DFHI’s site--- http://sbidfhi.com/
 Indian Institute of Banking & Finance --- http://www.iibf.org.in
 http://kalyan-city.blogspot.com/
 http://en.wikipedia.org
 www.rbi.org.in/weekly statistical supplement/ various issues.co.in
 www.investopedia.com
 www.bseindia.com
 www.nseindia.com
 www.economics.indiatimes.com
 www.gktoday.in
82
7.BIBLIOGRAPHY
SOURCE AUTHOR
1. Interest Rate Swaps Nasser Saber

2. Emerging Money Market R.S. Aggarwal
3. Indian Money Market Structure, operation and M.S. Gopalan
Development
4. Financial Management Prasanna Chandra
5. Security Analysis and Portfolio Management P.K. Bandgar
83

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PROJECT REPORT ON

INDIAN MONEY MARKET

T.Y.B.COM (BANKING & INSURANCE)

PROF. KISHOR CHAUHAN

SMT. SUSHILADEVI DESHMUKH COLLEGE OF ARTS, SCIENCE& COMMERCE

SEC-4, AIROLI, NAVI MUMBAI-400708.

I MISS. SANYOGEETA DHANAJI TAMBE. the student of B.COM

BANKING & INSURANCE SEMESTER–VI (2018-2019) hereby declares that

I have completed project on “THE STUDY ON INDIAN MONEY MARKET”.

been mentioned in bibliography. The information submitted is true and original to

the best of my Knowledge.

First of all I would like to extend my gratitude towards the MUMBAI

I would be grateful to all my teachers for guiding me throughout the

Let us now discuss the various money market instruments in India. In

Sr.no Particulars Pg.no

2. Meaning of Money Market 12

Sr.no Particulars Pg.no

3. Features /Characteristics of Indian Money Market 43

4. Findings & Suggestions 60

India's process of economic reform is firmly rooted in

Long term investments.

1.1 Objectives of Money Market

Money market is an important part of the economy. It plays very significant

 Providing an equilibrium mechanism for ironing out short-term surplus and

 To provide help to Trade and Industry. Money market provides adequate

1.2 Review of Literature

Article: Money Market Integration in India: A Time Series Study

Article: Market efficiency and financial markets integration in India

(A) Primary Data: - (Questionnaire)

Questionnaire for Indian Money Market

Contact No. Profession:

1) What is your annual income?

□ between 1 lakhs- 3 lakhs

□ between 3 lakhs- 5 lakhs

2) How do you invest your savings?

□ Invest in Real Estate

□ Invest in Capital Market

□ Invest in Money Market Mutual Funds

3)Do you have any knowledge about Money Market Instruments?

□ Heard but not know

□ Long term period

□ Short term period

5)How much risk would you be willing to take?

6) In your opinion, what is expected rate of return in a year?

□ between 20% - 30%

7) How would rate your experience with Indian Money Market?

8) Is recession had affected your investment decision?

Sampling area: Navi Mumbai

Particulars No. of investors

Risk Involvement No. of Investors

Low Average Medium High

1.4Limitations of the Study: -

 The study is based on a limited scope of area

1.5 OJECTIVES OF THE STUDY:-

The main objectives of this project are the following:

2. Meaning of Money Market

 The money market is a market for lending and borrowing of short-term

 Money market deals in funds and financial instrument having a maturity

 The instruments in the money market