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4
Money Markets in India
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Aher studying this·chapter, you should be able to understand: )(R ' ~C '7 I\
Know the money market and its feature. ~; b,..
Discuss the function of money market
Understand the structure of Indian money market ...~~-1'-.., ,
Explain the various money market instruments in details. / ~: _.:. -.--..._:. .
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Discuss the drawback of money market ~;. ; l..!df?A , Y~.::.
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Explain the role of central bank in money market J.
Know the importance of money market in the financial system of a country. ,;~--,.---'i;f
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I
J Introduction
Money Market is a market for short-term money and financial assets that are close substitutes of
1ney. India money market has seen exponential growth just after the globalization initiative in 1992.
has been observed that financial institutions do employ money market instruments for financing
term monetary requirement of various sector such as agriculture, finance and manufacturing.
performance of Indian money market has been outstanding in the past 20 yei:u-s. Money market
three constituents like any other market - (1) It has buyers and sellers in the form of lenders or
rers, (2) It has a commodity in the form of instruments like Treasury Bill and Commercial Paper
(3) It has a price in the form of rate of interest.
I
I
tenn •Money Market" refers to the various firms and institutions dealing with various types of "near 11 I
•Near money consists of assets which can be converted into cash without loss. One of the feature
II 'I,
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 51 \I lMMlft FilMUICial Systan: .Finandol Markets, Institutions and Money Markets in India II 53
Financial Services

of money muu t ii that it ii not one mamt but 7. Umited InstnUDeDtl : It is in fact a defect of the Indian
the collection of markets such as call and notice money money marke
muu t and bill mam t etc. All these markets have dose the supply of various instruments such as the Treasury Bills, Comm t. In our money market
inter-relationships. An ideal money market Is
DepOsits, Commercial Papers. etc. is very limited. In order ercial Bills, Certificate of
one where there are large number ol putidpants. Larger to meet the varied requirements of
ii the number of participants, greater is the
dq,th of the muut. Almost every major economic body \,()rroWerS and lenders, It is necessary to develo
like the corporate body, a Government body or p numerous instruments.
a 6nmd al institution like RBI, UC and Bank bu a regula
r problem ofUquidity management. It is only
the money mam t which dva this problem. If the proble
m is that of cash out flow in excess of cash 4.4 funmon of Money Market
receipts, thq go to the money mam t looking
for funds. If the problem is that of acess cash inflow, it
again to the money mam t that they run for tempo Is Money market Is concerned with the supply and the
demand for investible funds. Essentially, it is a
,\ which meets short-tam requimnents ofborrowul and
rary fund deployment. Thus it is the money market iacrvoi r of short-term. funds. Money market provides a
mechanism by which short-term funds are lent
I\ money market is a wholesale marut. 1he 'VOiume offunds,
provides profitable avenues to the lenders. The autand borrowed; it is through this market that a large part
representing money traded in the market, are of the financial tranSactions of a country arc
vuy large. There are skilled personnels to undertake the transac dmed. lt Is a place where a bid ls made for short-term investible
tions. Trading in the market ls conducted funds at the disposal of financial and
Oftr the telephone followed by writtm c6er lnstltutions by borrowers comprising institutions, individ
confirmation from both the borrowen and lenders. uals and the Government itself.
'lhua, money market covers money, and financial assets which
arc dose substitutes for money, The
money market is generally expected to perform following three
4.3 features or Characteristics of Indian Money Market broad functions:
(l) To provide an equilibrating mechanism to even out
Indian Money Mam.ct bu the following major features or demand for and supply of short term funds.
cbaracterlstics : (Ii) To provide a focal point for Central bank interve
1. DlcbotomicStructurc: ltis asignifiant aspect ofth~ ntion for influencing liquidity and general
Indian money market. It bas a simultaneous kvcl of interest rates in the economy.
aistcnce of both the organized money mam t as well (Iii) To provide reasonable access to provid
u unorganised money markets. The ers and users of short-term funds to fulfill their borrowing
organir.ed money market consists of RBI, all scheduled comm
ercial banks and other recognized and investment requirements at an efficient market clearin
financial institutions. HO'«Y tt, the unorganized part ofthe
money market comprises domestic g price.
money lenders, indigenous bankers, trader, etc. The organi
zed money market ls in full control Others functions of Indian Money market are:
of the RBL H ~ . unorganized money market mnain (i) It eaten to the short term financial needs of the econom
s outside the RBI control Thus both y.
the organiud and unorganized money market aists simulta (Ii) It helps the RBI in effectiVe implementation of
neously. (Iii) It provides mechanism to achieve equilibrium monetary policy,
2. Seasonality: The demand for money in Indian money between demand and supply of short term funds.
marlcet is ofa seasonal nature. India being
an agriculture predominant economy, the demand for money (iv) It helps in allocation of short term funds through inter-b
is generated from the agricultural ank tranS&ctions and money market
operations. During the busy season Le. between October
and April more agricultunl activities ents.
takes place leading to a higher demand for money. (v) instrum
It also provid es funds in non-inflationary way to the government to meet
3. Multipllclty of Intaa t Rates: In Indian money Its deficit.
market, we have many levels of interest rates. (vi) It facilitates economic development.
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 rates differs. Thus there is an 4.5 Reforms in Indian l,\oney Market / Role of Central Bank in Indian Money Marke
existence of many rates of interest in the Indian money marke
t. ._,, Bonk of Indi• b tho bigg<'I ,...t•"" of tho In_..
t
4. Lack of Organized Bill Market: In the Indian money ......, _ 1, .,,,,.., i, tb• ,nooot &rf poli'l' of
market, the organized bill market is not lodJ,. tu om1rol u 1,owe ,« 11m1t<d to tho o,g,ni,,d
prevalent. Though the RBI tried to introduce the Bill Marke p,rtof _ _ .,.d tho.. ...,.i, <d"" °'wh kb
t Scheme (1952) and then New Bill bu•ol gnlli antl" """"b wgdy ...,..., i,ud. ..t&< qua>
Market Scheme in 1970, still there is no properly organized tlyln trod _,.o ny_" '_tho
bill market in India. lodun oa,nomywhl<h b In•-o f'°""" "fluu ndb a,ntinuou,fy"
5. Abtmce of Integration: lhls II a very important
feature of the Indian money market. At the "1vh>I·'Ibo _,.,. noy. ..,...
same time it II divided among several segments or section , - am< .tie, tbo _,.. ..,.. .-.. of S. o,u,,.
v,rtY c.,mn,ttt« ond N -eo ,nnu" ';j"'
s which arc loosely connected with ' "'th, =mm ond,t lon, of tb,.. twO c o - ond witb tho
each other. There is a lack of coordination among these
different components of the money Ibo wty ,...., tho ,.,,.., ......, bu ,.toptod . , . _ majo< ..ran,,, inilbt ID
market. RBI hu full control over the components 8 ,Jonn> In tho In-
in the organized segment but It cannot ,,_ _ m,jo< <hong" whkb bolpod unfold tb• i,,nkin
"°"""' ""°' ..-r.:;:;
control the components in the unorganized segment. g pot,ntiol oftnd b--:: -:;"'
°"' mf.,
6• High lmtirut1om to wodd duo ,t,nd, oh. • - _dn .,. of
Volatlllty ln Call Money Market : The call money
marke 2008
tbaod..ron, ,, whkb b P; ; . , , .
easily tide over the economic crisis which bad gripped tbe
money. Hm money Is demanded at the call rate. Buically t is a market for very short term wori In •1besc taesl rate
the demand for call money comes (l) Deregulation of Interest Rates: 1n recent pcrlod
from _the commm:W banks. Institutions such u the GIC,
UC. etc suffer huge fluctuations and bj~~:~ n:i: :ons 11 :nn. lbDlt
thus it bu mnained highly volatile. policy ofllberal nature. interest rates arc now su
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 54 \I .,.._ FinancW Systan:_ Rntutdtd M.tds. butiluffo,u ,wl Rlfllltdal Sowa Money Markets in India II 55
on them haft been ranaml by RBI aft.er 1989. 1he Important lntaat nta ln lnd1a are-Bank ('till) lldinance by RBI: 1hls is a potent tool by RBI to meet the any liquidity shortages and for credit
rate. Medium-term l&nding nzc. Prime u:ndtng rate. Bank Depodt rate. Call rate. Certificate of control to select aecton. lhe export credit refinance facility to banks is provided under Section
Dcpoait rare. Commadal paper rm de. 1hls dcregulatloo got• major pmh after the economic 17(3) of RBI Act 1934. It is available to all scheduled commercial banks who are authorised to
Ubcnllaaa:ion of 1991. Cbabuarty Cornmtn... wru a ltroag proponent of free and flaible deal in foreiglt exchange and have extended export credit. The SCBs are provided export credit
lntcrelt rata to promote .-ring,. 1matmart1. guwamnent financial system and stability. to the tune of S09' of the outstanding export credit. The concept of directed credit was also
'RBI l'CIDOftd the upper ceiling of 16.S" and lmtad med a minimum of 169' per annum. changed u the Narasimhan Committee recommended reduction of directed credit from 4-0 to
'lhe rata wue further relaD:d aft.er the Narulmban Cmnmittee report ln 1991. There was a l°"- It also suggested narrowing of priority sector and realigning focus to small farmers and
further deregulatkm of lnterat nta during the economk refunm. Currently interest rates are low income target groups. The refinance rate is linked to bank rate. I
ddamlned by the working of market forca euq,t for a f£w regulations.
(Ix) Ilegalation of No11-B110Jriog ~lnandal Companies: RBI Act was amended in 1997 to bring
(ll) ILdanm ID Call and Term 111011Cf mamt: 1be reforms lD caD and term money market were the NBFCa under iu regulatory framework. A NBFC is a company registered under Companies
done to lnfwe more llquJdity into the 1J1U1D and enable price disconry. RBI undertook several A,;;t. 1956 and is involved In making loans and advances, acquisition of shares, stocks, bonds,
impcxtant lt.q,e to cbcck the consttalnts and l'CIDOft than systanatically. It was ln October securities issued by government etc. They are similar to banks but are different from the latter
1998. RBI a n ~ that non-banking fimndal lmtitutiom should not participate ln call/ u they cannot accept demand deposits and cannot issue cheques. They have to be registered
term money marbt opendom and il abouJd purely be an interbank operating segment and with RBI to operate within India. There are a host of regulations which NBFCs have to follow to
encoungcd otha partidpantl to migrate to collatcnlised segments to improve stability. Also, IDloothly operate within India like accept deposit for a minimum period, cannot accept interest
reporting of all call/noda IIIIODef market tramacttom through negotiated dealing system rite beyond the prescribed rate given by RBI.
within 15 mlnuta c-L concb•stm oftranartkm was madi! mandatory. The volume of operations (x) 'Ihe aeutng Corporation of India Llmlted (CCIL): CCIL was registered in 2001 under
in thJa aegmmt not lncreued much evm aft.er the refonns.
the Companla Act, 1956, with the State Bank of India u Chief Promoter, CCIL clears all
(ill) bdrodadiaa of acw 1110DCf mubt butrammta: RBI introduced many new market transactiom In government securities and repos reported on NDS (Negotiated Dealing System)
lmtnunam to diftDify the mub:t. 1hae were catljiCllla of deposit In 1989, conunerdal of RBI and also Rupee/US foreign exchange spot and forward deals.
,.,.,, in 1990 and intabank putidpation artificata with/without risk in 1988 and the (Ji) Debt llecovcry: RBI has set up special Recovery Tribunals which provide legal ~ c e ~o
muury billa of nriaaa duntlon wu also introduced In the Indian Money market.. banka for rcc:overy of dues. These are major reforms undertaken in the money market m India.
'i (l'Y) Scttlug 11P Ducoant and FlDance Home of India: Discount and Finance House of India Apart from these, the stamp duty reforms. floating rate bonds, etc. are some other prominent
wu let ap in 1988 to lmput IIXlft liquidity and also further develop the secondary market reforms in the money market In India.
1
inltrummts. Hawn-a:, matu.ritiel of msting l.n.strummts lib CDs and CPs were gradually Cxll) lmtitotional Development: Fll's are allowed to operate In -:Uti!ted g = : t = t i e s . The
lhortmed to encouragie wider participation. IJhwiae ad hoc tretuury lnlh were abolished in policy for 1998-99 has allowed them to buy treasUry bills Wl
1997 to stop mtomatic monetiution of 6,al ddicit. app
(..-) hdrodadng L1'{lddlty Adfutmcnt Fadlity: RBI introduced a Liquidity Adjustment PociUtY 4.6 Recent Reforms in Money Market
in June 2000 which WU operated through med repo and revene repo rates. This hdped InIn tial ch cs in the past five years. The volumes and
Cltlblisb.ment of intereat rlde u an important monetary instrument and granted greater dia. money markets have gone through substan m:.!th changing monetary policy stance and
8aibility to RBI to respond to m.uket needa and suitably adjust liquidity In the marlcet. Repo the money market segments have broadly ~d Jan 2016 to March 2021, there is the shifts
and Rnme Repo rates were introduced in 1992 and 1996 respectively. --.ug system liquidity conditions. During the penti ;:? inflation targeting regime. change in the
~ced In the money markets in view ofthe adop;ni:cllan banknote demonetisation. availability of
(Yi') llq,oe agn,aw): R.epoe wa-e introduced In 1992 to do away with short tenn :,-utYconditionsduringNovember2016following_ e li di management framework in February
fkJrnntiona in liquJdity ri money marb:t. In 1996, rnme repos wae introduced. RBI bas been PIJinent aystcma on a 24x7 basis, adoption of the revu: qui !'ntional monetary policy measures to
Uling. llepo rq,o operatima to influence the volume of liquidity and to stablise short 202o, and the different policy measures (including bye :c;.~ Banlt (since end February 2020) to
tam rate ri iDtaat er all rate. Rq,o rate was 6.7S" In March 2011 and reverse rate s.7596• l1ro9ide liquidity ln the financial system) undertaken
( 'i) MMMFI: --r-
lllitigue the stress induced by the Covtd- 19 pandemic. 1h umber of Mutual Fund 1nveston.
vu to pnmde~==fundnr'fflntrod~ in 1992. lheobjectiveoftheschCJJl;;;; ,___ als witnessed a surge. e n ______.,, 1be
the acheme to allow tam llftDue to the indtvidua1 lnveaton. In 1995, RBI mo ..__ :'..Clt!?lent In Mutual Fund schemes O d was 2.03 crore and 2.23 aore n:aF-_:~;-1\lndl
'-..cQon.,-• p March31 of2020 an 2021 d .-mentofMuwaa
been Id ap one each~Baectorl,
Ullorpniaatlon to set up MMMFa so far. Three MMMfs ba\lC -uque '.ANs, as on 2022 'lhe total assets un er m&ll-o- M,rch 31 2021 co
.,, and one in private aector. 111,..__-~daat3.12aorcasonJanUUf ~ 31 , 2020 to INR31.4 lakh aoreon •
- ~ from INR 22.3 lakh aorc as on
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56 \\ lndlM FIMlldcd Sysmn: Financial Maricds, Institutions and Financial Services ~oney Markets in India II 57
lNll. 31 lakh crore on January 31, 2022. lnvmor confidence returned to mutual funds after last financial
,at wu lmpacUd by Covid-19 outbreak and Franklin Templeton debt fund crisis.
4.8 Structure/ Components of Indian Money Market
1be monthly contribution coming lnto the mutual fund industry through systematic investment Depending on supply of funds, Indian Money Market is divided into two markets: (a) lhe organized
plana (SIPI) roched new of tll.329 acre. At the end of the financial year, the total number money market, (b) The unorganized money market
of SIP ICCOUDtJ stood at S.3 acres. It wu a strong year for equity schemes in terms of investor flows 1he participants in the organized money market are the Reserve Bank of India (RBI), Commercial
despite stock marut 'rolatility due to Russia-Ukraine aisb and rising crude oil prices in later part of the Banks, Co-operative Banks, Unit Trust ofIndia (UTI), Life Insurance Corporation ofIndia (LIC), General
financial,ar. Imurance Company (GIC). Discount and Finance House ofIndia (DFHI), Industrial Development Bank
1hcre wae sevual new fund offers (NFOs) during FY22. lhe industry launched funds that would of India (IDBI), National Bank of Agriculture and Rural Development (NABARD), Industrial Credit
gift invaton aposure to investmenta that so far were not available. NFOs collected record flows ofover Investment Corporation ofIndia (ICICI), Corporate bodies. The RBI has dose links with money market
,1 lakh acre during the year 2021-22. and it can justly be regarded as an important constituent of money market as it plays the vital role of
amtrolling the flow of currency and credit in the market
4.7 Drawbacks of Indian Money Market 'Ihe unorganized 1ector consists of indigenous bankers who pursue the banking business on
traditional lines. These indigenous bankers follow their own rules ofbanking and finance. Attempts have
Though the lndian money muut is considered u the advanced money market among developing been made by RBI to bring them under the organized market But indigenous bankers as a whole have
countries, lt ltlll suffm &om many drawbacks or ddects. lheae defects limit the efficiency of our market not accepted the conditions prescribed by RBI. lhe instruments in the money market are call money,
One of the important defects or drawbacks of Indian money market are : Trmury Bills, Commercial Bills, Commercial Paper, Certificate of Deposits, Interbank Participation. A
1. Abaena of lntepation: The Indian money market is broadly divided into the Organized and ffl)' striking characteristic of Indian Money Market has been the seasonal monetary stringency and high
Unorganized Seeton. The former comprises the legal financial institutions backed by the RBI. Interest rate lending during the busy season.
The unorganiud statrrnmt of lt includes various institutions such as indigenous bankers, village Money market has two strata: (a) the primary market and (b) the secondary market Where the
) money lenders. traders, etc. There is l.adt of proper integration between these two segments. lenders and borrowers directly deal with money or through brokers it is known as primary market. To ,
2. Multiple rate of lntaat : In the Indian money market, especially the banks, there exists too make the instruments more liquid, the secondary market has been built up. Discount and Finance House f
many rata of interata. These rata vary for lending. borrowing, government activities, etc. of India Ltd has been set up by the Reserve Bank of India to provide an active secondary market for
Many ratea of interests create confusion among the investors. money market .,.,
3. lnmffident Panda or Rao1ll'UI: The Indian economywith its seasonal structure faces frequent In order to enable the small investors to get access to the money market so as to benefit from ltl
shortage of financial recourse. Lower income, lower savings. and lack ofbanking habits among Jidda, the Reserve Bank of India has issued broad guidelines to allow banks and the subsidiaries to ICt
people are some of the reasow for it up Money Market Mutual Funds (MMMF) similar to mutual funds for stock market MMMFs pool the
4. Shortage of lmatment lmtnunenta : In the Indian money market. various investment lnveston funds through MMMF Unit/deposit account and invest this fund in mooeymarketinstrumentl..
instruments such u Treasury Bills, Commercial Bills, Certificate of Deposits, Commercial The following chart will help in understanding the organisational structure ofthe Indian money
Papers. etc. are med. But taking into account the size of the population and market these Structu,. of Money Market
instruments are inadequate. Money Market
S. Shortage of Commcrdal Bill : In India, u many banb keep large funds for liquidity purpose. Money mmtat
the we ofthe commercial bill, is very limited Similarly since a large number oftransactions are Organized Money market
preferred in the cub form the scope for commercial bill, arc limited. lndlgenoUI Benbra
Ranrw Bank of India Domestic Money
Scheduled Commercial
6. Lack of Orpnized Ban.king S71tan : In India even through we have a big network of Landa,- Nldhll&dllflaldl
cotnmerdal banks, still the banking system suffers from major weaknesses such as the NPA, Devalopment Banka Tradlra and Fltlndl
huge 1oua. poor efficiency. The absence ofthe organized banking system is major problem for Brokan&Dlllllra
Indian money market Raglonal Rural Banka
7 Fontlgn Banka
• Laa number of Dealen : There are poor number of dealers In the short-term assets who can State Corporation, etc. M-..._._
DFHI Sub ....... .
:: between the govmiment and the banking system. The less number of dealers .L I ,1. + .J
alow contact between the end lender and end borrowers.
: 3Mdayb11Maitala
= j o r drawbaw of the Indian money market; many of these are also tbe Can money market
~:::;r l
l
Commercial TrNNYH•
 58 ,,.._ R - - ' S,-- Rntmdtll Mllrlcm, Institutions tl1ld FiNmcial Sffvices Money Maruts in India \\ 59
~ S u b ~ o f Indian Mon-,Marbt '25 Wilis. However the minimum subscription should at least be , 1 a. The maturity period
Alla IIDdJinl abaft orpoiptinnal ,-hart al the lodiao money market It ii oecessary to understand for the CP is minimum of 3 months and maximum 6 months. This wu introduced by the
~. nr sub IDUUIS within it. 'Ihq are aplained below: government In 1990.
1. CaD MoM-f Markd: Jt ao importaot mb market of the Iodiao money market. It is also known 7. Short Term Loan Market: It ls a market where the short term loan requixements of corporates
a DMJDCT at aD md mc,oq atJbort ootia. It ii also alled inter bank loan market. In this market arc met by the Commercial banks. Banks provide short term loans to corporates in the form
IIIClDl:T II demanded b atremdy short period such u OW!might call money and notice money. of cash credit or in the form of overdraft. Cash credit Is given to Industrialists and overdraft is
1bc dmmon al 1UCb transactions ii from kw hours to 14 days. It is basically located In the
given to businessmen.
iDdustrial aod commadal loatiom such u Mumbai. Delhl. Calcutta, etc. These transactions 8. Mooey Market Mutual Punch: This instrument was Introduced in April 1992 to provide
bdp ICDdt brokas aod deaJ.ers to fulfill their finmcial requirements. The rate at which money Is additional short-term revenue to the lndMdual investors.
made anilaNe ii called u a all rate. Thus rate is fiud by the market forces such as the demand
b md supp!yol.mooey. 4.9 Money Market Instruments
2. CommadaJ .Ill .Mubt: n II a market fur the short term, self liquidating and negotiable Some ofthe important money market instruments are briefly discussed below:
lDDDl:'f market lmtrument. Commercial bills are used to finance the movement and storage of
-,ricuJture aod lodustrw goods in domestic and foreign markets. The commercial bill market 1. Call/Notice Money
in India is still underdneloped. 2. Treasury Bills
J. 1numy Bill .Mubt: This is a market for sale and purchase of short tenn government 3. Tenn Money
securida.. These a«uritia are called u Treasury Bills which are promissory notes or financial 4. Certificate of Deposit
bin. wucd by the RBI oo behalf cl the Government of IndJa. There are two types of treasury 5. Commercial Papers
biUs. (J) Ordinary or Regular Treasury Bills and (ii) Ad Hoc Treuury Bills. Ad hoc treasury 6. Banker's Acceptance
bi1Js are ,old to the ltate goRmment.s and foreign central banks and, therefore, these are not
7. Repurchase Agreements
rna.ruuble. Jugular treasury bills are sold to the banb and to the public, and, therefore. are
8. Collateralised Borrowing and Lending Obligation Market (CBLO)
fredy marutable. The maturity period of these securities range from as low as 14 days to u
high a .364 days. They ban become very popular recently due to high level of safety involved 1. Call/ Notice-Money Market: Call/ Notice money is the money bom>wecl or lent on
in them. for a very short period. When money is borrowed or lent fur a day, lt II lmown.,
At pramt the fullcnring typa of treumy bill are In me (Overnight) Money. Intervening holidays and/or Sunday ue w:lwled fm tbla -
(f) 14-day int.mnediate trea.rury bills.
money, borrowed on a day and repaid on the next working day, (hmpecth:t of
of intervening holidays) is •Call Mon~ When money Is borrowed or \mt fm:
(il) 91-dq treuury bi.11.t,
day and up to 14 days, it is "Notice Money". No collatenl KCUrlty Is ffllUlnd
(ill) l~dq treasury bills. transaction&. This is typically used by banks when they do not haft m:eu
(iY) J6.l..dq tnuury bills. LAP from RBI. These rates tend to be extremely volatile on occulon. tourhlttj
4. Mubt for CcrtUicate of Depoat, (CD1): It is again an important segment of the Indian during 2008 aisis.
money market. The cmmcate of depoliu is .l.uued by the commercial banks. They are worth 2. Inter-Bank Term Money: Inter-bank market for deposltl ofmaturity--, .._,g·
the nlue of f2S lakh and in multiple of f25 JaJch. The minimum subscription of CD should be to u the term money market The entry restrlctlOOI are the mne u thoae s.J
1"lrth fl Crore. The maturity period ofCD is as low u 3 months and as hJgh u 1 year. These are except that, u per extatlng regulatioDI, the specified entitla are not
.. the tnmfcnbk l.avatmmt .inltrwnmt in a money market The government initiated a market
f 14days.
ofCDs in order to widen the range of.inltrwnent.s in the money market and to provide a higher
tJalbilitr to inftaton for Investing their abort term money. 3, Treuury Bllh: Treasury Billi are short term (up to one year) boiu,ft
union government. It ls an IOU of the GoffllllneDt. lt II• promlle bfi
5• Repo Marbt: Repo ·• moneymarut instrwnent-help1 in collateralised short-term borrowinS
• stated awn after explry of the stated period &om the elate of IIIQ! ,
and knding through purdwe-sale operations in debt instruments. leas than one year}. Presently 91 days and 364 days ueuurJ ~1
6. Mukd for Commadal Papen (CP1): It is the marut where the commercial papers are traded. 111 discount to the face value. and on maturity ,.,,_;
Comm.aml papa (CP) is an invatmmt instrument which can be wued by a listed compan~ of dbcount and the corrapondlng lssUe price are ~ . ,t
hmng working capital more than or equal to f 5 a. The CP, can be Issued in multiples 0
 .......
60 \I lnduut Fbuutdal System: FiruuaciJJl Maricets, lnstituHons and Financia!_~ervices Money Markets in India II 61
are largely held by banb. Provided funds, trusts, and mutual funds have also in recent years Repurchase agr~ents are sold by sellers with a promise of purchasing them back at a given
become important investors in treasury bills. Most buyers of treasury bills hold them till price and on a given date in future. On the flip side, the buyer will also purchase the securities
\ maturity and hence the secondary market activity is quite limited Toe government also issues and other instruments with a promise of selling them back to the seller.
Cash Management Bills (similar to T-Bills) on ad hoc buis to meet any short te~ liquidity Salient Feature of Repo Transactions are:
requirements. These are also discounted instruments with less then one year maturity. (I) Generally done for a period not exceeding 14 days, though there is no restriction on the
4. Certificate ofDq,oaitl: Certificates oIDeposit (CDs) is a negotiable money market instrument maximum period for which a repo can be done.
f.j and issued in dematerialised form or u a Usance Promissory Note, for funds deposited at a (ii) G-secs, T-bills and sdect PSU and institutional bonds are the instruments used as collateral
bank or other eligible financial institution for a specified time period Guidelines for issue security for repo transactiom.
of CDa are presently governed by various directives issued by the Reserve Bank of India. u
(iii) While banks and primary dealers can do repos u well u reverse repos, other participants
amended from time to time. CDs can be issued by (i) scheduled commercial banks excluding
such as institutions and corporates can only lend final in repo market.
Regional Rural Banks (RRBs) and Local Area Banks (LABs); and (ii) select all-India Financial
Institutions that have been permitted by RBI to raise short-term resources within the umbrella (iv) Repos are settled on DVP basis on the same day.
limit fixed by RBI. Banks have the freedom to issue CDs depending on their requirements. An (v) Repos are reported in the negotiated trade segments of the WDM segment of the NSE.
Financial Institution may issue CDs within the overall umbrella limit fixed by RBI, i.e., issue 8. Collateralised Borrowing and Lencllng Obligation Market (CBLO): CBLO is a secured
of CD together with other instruments viz., tam money. term deposits, commercial papers Borrowing and lending money market tool used for short term purpose. It is secured u
and intercorporate deposits should not exceed 100 per cent of its net owned funds, as per the settlement is guaranteed by CCIL Mutual funds insurance companies, and corporate, are the
latest audited balance sheet. primary lenders in this segments. CCIL Provides an online trading platform (similar to NDS)~.
5. Commercial Paper (CP): CP is a note in evidence of the debt obligation of the issuer. On A collateral needs to be placed with CClL against which Borrowing and lending la
issuing commm:ial paper the debt obligation is transformed into an instrument. CP is thus Toe counterparty is unknown.
an unsecured promissory note privately placed with investors at a discount rate to face value
determined by market forces. CP is freely negotiable by endorsement and delivery. A company 4.10 Importance of Money Market
shall be eligible to issue CP provided-
developed money market plays an important role in the financial system of a
(a) the tangible net worth of the company, u per the latest audited balance sheet, is not less
than t'4 aorc; of rt-term funds adequately and quickly to trade and industry. Toe money mubt la
country's economy. Therefore, a developed money market is highly i n ~
(b) the working capital (fund-based) limit of the company from the banking system is not less elopment of the economy. A developed money market hdps the smooth func;tloDlng,
than t'4 aore and
system in any economy in the following ways:
(c) the borrowal account of the company is classified u a Standard Asset by the financing (1) Development of Trade and Money market is an importmuource of
banlc/s. Toe minimum maturity period of CP is 7 days. The minimum credit rating shall and industry. Toe money market. through discounting operatiom and COi
be P-2 of CRISIL or such equivalent rating by other agendes. finances the short-term working capital requirement, of trade md industry 1
6. Banker', Acceptance: Banker's Acceptance is like a short term investment plan created by devdopment of industry and trade both - national and tnternational.
non-financial firm, backed by a guarantee from the bank. It's like a bill of exchange stating a (Ii) Development of Capital Market: Toe short-term of lnterat and
buyer', promise to pay to the seller a certain specified amount at a certain date. And, the bank prevail in the money market influence the long-term interat aawell u the
guarantees that the buyer will pay the seller at a future date. Firm with strong credit rating can in capital market. Hence, the devdopment of capital market depcndl
draw ruch bill These securities come with the maturities between 30 and 180 days and the m 0st devdoped money market.
common term for these instruments is 90 days. Companies use these negotiable time drafts to (Ill) Smooth Functioning of Commercial Banb: 'Ibe money market
finance lmports,exports and other trade. banks with facilities for temporarily employing tbelr surpl11.1 fundl
7 The banks can get back the fund, quickly, in times of need. b y ~
• llepmdwe Agreement, (Rq,o): Repurchase Agreements which are also called as Repo or
Reverse Repo are short term loans that buyers and sellers agree upon for selling and repurchasing. The commerdal banka gain lmJnemelY by economillnB on their,
Repo or Reverse Repo transactiom can be done only between the parties approved by RBI and at the same time meeting the demand for large withdrawal of their
~;.ved only between RBI-approved securities such as state and central government securitieJ, commercial banks to meet their reqwrementl of ~ :
- ill,, PSU bonds and corporate bonds. They are usually used for overnight borrowinS· Statutory Liquidity Ratio (SLR) by utillslnB the money marbt
 ' ......
61 \\ Indian Financial Systm,:_ Finandal Markns, Institutions and Financial Services
(iv) JIJ&cthe Cmtnl Bank Control: A developed money market helps the effective functioning of
a central bank. It facilitates effective implementation of the monetary policy of a central bank.
The central bank. through the money market. pumps new money into the economy in slump
and siphons it off in boom. The central bank. thus, regulates the fl.ow of money so as to promote
economic growth with stability.
(v) Pormalation of Suitable Monetary Polley: Conditions prevailing in a money market serve
u a true indicator of the monetary state of an economy. Hence. it serves as a guide to the
government in formulating and revising the monetary policy then and there depending upon
the monetary conditions prevailing in ~e market.
(vi) Non-1.nflationary aource of Flnance to Government: A developed money market helps the
government to raise short-term funds through the treasury bills floated in the market. In the
--~..:,cc,--
absence of a developed money market. the government would be forced to print and issue more
money or borrow from the central bank. Both wa.ys would lead to an increase in prices and the
(~]
consequent inflationary trend in the economy. lndian Capital Market
'..___ _ _ _ _,_ _ Review Questions~_:. : '· :·. :.:, , _·: •• . :~ ]
l. What do you mean by money market? What are the main features of money market? learning Outcomes A~..,_ _ _ _ ____.,,,;._ _ _ _ _ _-,:r:..-- --,
2. Explain the function of money market.
3. Discuss the role of central bank in money market. lhlr studying this chapter, you should be able to und,rstand:
4. Explain the structure/component of Indian money market. Understand capital market and its important feature.
5. Discuss in details the importance of Indian money market. Describe the structure of Indian capital market.
6. Discuss the following money market instrument. Treasury bills, Commercial paper, Certificate of Discuss the role of SEBI in capital market development.
deposit and Repo. Explain the role/significance and function of capital market.
7. What are the limitations of the India money market?
Know the organization of the Indian Capital Market.
8. Explain the role of RBI as regulator of money market. Discuss the various reforms taken for the development of the Indian Capital
9. Explain the importance of money market in the financial system of the country. Know about the various instruments traded in capital market
5•1 Introduction
...........
Capti.i market ""th• mukm wb= ,.curlti" ,ud," , . _ .......,,.. .......
Cap· cing. and where the securities are traded.
..,,:~ Marl<.t b •"' of tho ,1gnifiant ...,a ol-, - - H<D<i
oflong ier:;ect meaning. Broadly speaking the capital market ls a market for
.... _ °' moliwn term fund< ,moog th•.- ,nd ....,,_ c,pltol-
........ bbav, • long o, inddinlte moturltJ• U - - - -
,.._.. "°""""""""
'°' """•"'°""""' __ c,plbl_.........
~-..,,,.,,,,,...,. &m,nd ,..,upp1y.,"" """'"""'apll> L n ~ :
"""'~du,,d,pOOto,yin,t!tudoO, (l,u,b, _ , . . . . - - . . . . . . -
ugh a variety of finandal inStfWUeDts (bonds, noteS. sbareS) caBecl
,._
I