A PROJECT REPORT ON

MONEY MARKET IN INDIA

UNDER THE GUIDANCE OF:

Ms Susmita Chaturvedi

Presented by:

Neeraj Gupta
B.Com (Hons.) IIIrd Year Roll no. 09/87

Shri Ram College Of Commerce

UNIVERSITY OF DELHI

TABLE OF CONTENTS
Contents
Introduction to Money Market Main Players in the Money Market Money Market Instruments Treasury Bills- Introduction

T Bills- An Effective Cash Management Product

Description of the various T-Bills Issue of T-Bills in the market Primary Market Call Money Market- Introduction History Call rates Location Participants Term money- Introduction Development of Inter-bank Term money Market Certificate of Deposits Certificate of Deposits Features of Certificate of Deposits Issuing Matters Commercial Papers- Introduction Investors Pricing

Factors Affecting Pricing Salient Features Taxation Inter- Corporate Deposits- RBIs Norm on ICD Money Market Mutual Funds- Introduction Regulation of MMMFs Schemes The Portfolio Benefits Guidelines Present Trends References

DECLARATION

I hereby declare that the dissertation and titled money market has not previously formed basis for the award of any degree, diploma or other similar titles for recognition.

These works embodies the result of my original results and reflect on advancement in this area.

Neeraj Gupta

ACKNOWLEDGEMENT

With this acknowledgement, I would like to sincerely thank Ms. Susmita Chaturvedi for introducing me to a novel concept as well as giving me the much awaited opportunity to make this assignment of an in-depth analysis of the Money Market in India, a topic which was not only interesting, but also enabled me to appreciate the various theoretical concepts of finance and economy.

She was my mentor and guide in conceiving the idea behind this project work and also provided the necessary guidance whenever needed. I thank her for her constant guidance and active support throughout the preparation of the project.

Presented By:-

Neeraj Gupta

CERTIFICATE
TO WHOM SO EVER IT MAY CONCERN

This is to certify that Neeraj Gupta student of Shri Ram College Of Commerce has worked under my supervision and guidance for his project on MONEY MARKET. The matter embodied in this report is original and authentic and same recommended for evaluation.

I wish him all the best in all his future endeavor.

Ms. Susmita Chaturvedi

OBJECTIVE OF THE STUDY

To study the past, present and the future scenario of the Indian money market. To understand the difference between the capital market and money market.

 To understand the development of Inter-bank Term Money Market. To understand the features of the various instruments of the Indian money market. To understand the role and importance of the different players present in the market. To have a brief overview of how is the liquidity in the market affected by the activities of the Indian money market. To know how the different products are issued, priced and taxed and who are the participants for it.

Introduction to Money Market:

India has witnessed in the past two decades substantial changes in the money and capital markets. The Money Market scenario, which has emerged since 1980s, has witnessed new instruments, and new directions have been chalked out. It is to be noted here that, strictly speaking, the Money Market deals with short term flow of funds whereas the capital market deals with medium and long-term capital flows.

The Money Market is the financial market for short-term borrowing and lending, typically up to thirteen months. This contrasts with the capital market for longer-term funds. One of the important functions of a well developed Money Market is to channel savings into short-term productive investments like working capital. In the Money Markets, banks lend to and borrow from each other, short-term financial instruments such as certificates of deposit (CDs) or enter into agreements such as repurchase agreements (repos). It provides short to medium term liquidity in the global financial system. Compared to the risk associated with the stock market on the long term structure of the bond market, the Money Market is a relatively safe place for the investors to park their funds in the short term. While large institutional investors traditionally use the Money Market, small individual investors can also participate via the use of a number of different investment securities. It can be divided into two segments:
I. II.

Spot Market Here the transaction occurs within two days. Forward market Here the transaction occurs at a specified future date, usually not greater than six months.

Main Players in the Money Market

Though there are a few types of players in Money Market, the role and the level of participation by each type of player differs greatly.

is the biggest borrower in this market. Both, G-Secs and Treasury-Bills or T-Bills are securities issued by RBI on behalf of the Government of India to meet the latter are borrowing for financing fiscal deficit. Apart from functioning as a merchant banker to the Government, the central bank also dons upon itself the role of a

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Government - It is an active player in the Money Market as in most economies; it

regulator of the Money Market and issues guidelines to govern the Money Market operations.

Banking Industry - Another dominant player in the Money Market. Banks mobilize deposits and utilize the same for credit accommodation. However, banks are not allowed to use the entire amount for extending credit because in order to promote certain prudential norms for healthy banking practices, most of the developed economies require all banks to maintain minimum liquid and cash reserves. As such, banks are required to ensure that these reserve requirements are met before directing on their credit plans. If banks fall short of these statutory reserve requirements, they can raise the same from the Money Market since it is a short-term deficit.

Financial Institutions - They also undertake lending and borrowing of short-term funds. Due to the large volumes these FIs transact in, they do have a significant impact on the Money Market.

Corporates also transact in the Money Market mostly to raise short-term funds for Funds (MFS), Mutual Funds (FIIs) etc also transact in Money Market. However, the level of participation of these players varies largely depending on the regulations. For instance, the level of participation of the FIIs in the Indian Money Market is restricted to investment in Government securities only.

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meeting their working capital requirements. Other institutional players like Mutual

Money Market Instruments:

Money Market Instruments

Governme nt Securities

Banking Sector Securities

Private Sector Securities

T-Bills

Government Dated Securities

Inter Corporate Deposits Money Market Mutual Funds

Commercial Paper

Call & Notice Money Term Money

Certificate of Deposit

Treasury Bills
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Introduction:
Treasury bills are raised to meet the short-term funds required by the Government of INDIA. As the Governments revenue collections are bunched and expenses are dispersed, these bills enable it to manage the cash position in a better way. T-Bills also enable the RBI to perform Open Market Operations (OMO) which indirectly regulates

money supply in the economy. Investors prefer T-Bills because of high liquidity, assured returns, no default risk, no capital depreciation and eligibility for statutory requirements. The T-Bills are issued for a minimum amount of Rs.25,000/- and in multiples of Rs.25,000. T-Bills are issued at a discount and redeemed at par. Though the yield on treasury bills is less when compared to other Money Market instruments, the risk averse investors and banks prefer to invest in these securities. In India, till April, 1992, T-Bills of 182 days maturity were issued along with 91-day T-Bills. These have since been phased out in favor of 364-day T-Bills. In 1997, in order to enhance the depth of Money Market in India, the RBI decided to introduce 14day and 28-day bills. From May 14, 2001, RBI withdrew 14-days and 182-days T-Bills. They introduced the 182-day T-bill again from April 2005. At present Government of India issues two types of T-Bills viz., 91-day, 182-day and 364-day. They form a significant portion of total turnover in the sovereign paper market.

Treasury Bills - An Effective Cash Management Product

Treasury Bills are very useful instruments to deploy short-term surpluses depending upon the availability and requirement. Even funds which are kept in current accounts can be deployed in treasury bills to maximize returns Banks do not pay any interest on

fixed deposits of less than 15 days, or balances maintained in current accounts, whereas treasury bills can be purchased for any number of days depending on the requirements. This helps in deployment of idle funds for very short periods as well. Further, since every week there is a 91 days treasury bills maturing and every fortnight a 364 days treasury bills maturing, one can purchase treasury bills of different maturities as per requirements so as to match with the respective outflow of funds. At times when the liquidity in the economy is tight, the returns on treasury bills are much higher as compared to bank deposits even for longer term. Besides, better yields and availability for very short tenors, another important advantage of treasury bills over bank deposits is that the surplus cash can be invested depending upon the staggered requirements.

Description of the various T-Bills:

1.

364-days T-Bills As a part of overall development of varying maturities unto 364 days on auction basis. So the Government, with an intension to stabilize the Money Market in the country introduced the 364- days T-Bills on 28th Apr 1992. The RBI neither discounted these bills nor participated in the auction. 364- TBills are auctioned fortnightly, but the amount, however, is not

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Government security market, the GOI proposes to float T-Bills of

notified in advance. These T-Bills have become popular due to their higher yield coupled with liquidity and safety. The yield on 364 days T-Bills is used as a bench mark by the financial institutions such as IDBI, ICICI etc. for determining the interest on floating bonds/notes.

2.

91-day T-Bills Starting from July, 1965 91-day T-Bills were issued on tape basis with a discounting rate ranging from 2.5-4.6 % per annum. The extremely low yield on these bills is totally out of alignment with the other interest rates in the system. Moreover, the central bank readily rediscounted these bills due to which the yield remained more or less artificial.

The banks used these instruments to part their funds for a very-short period of 1-2 days. These resulted in violent fluctuation of volumes of outstanding bills. Although due to some measures taken by RBI it resulted in the decline of weekly fluctuation, the T-Bills market did not become the integral part of the Money Market. The weekly option of the 91-day T-Bills was started in Jan,1993, which in due course resulted in gradual decline of the T-Bills outstanding with the RBI. The notified amount in the 91-day T-Bills auctions has been increased to Rs.500 crores with effect from APR 2004.

Issue of treasury bills in the market

The T-Bills are issued either in the form of promissory note in physical form or by form. For every class, a standardized format is used.

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credit to Subsidiary General Ledger (SGL) account or Gilt account in dematerialized

PRIMARY MARKET:In the primary market, treasury bills are issued by auction technique. There are two types of auction for treasury bills:
1.

Multiple Price Based or French Auction: Under this method, all bids equal to or above the cut-off price are accepted. However, the bidder has to obtain the treasury bills at the price quoted by him. This method is followed in the case of 364days treasury bills and is valid only for competitive bidders.

2. Uniform Price Based or Dutch auction: Under this system, all the bids equal to or above the cut-off price are accepted at the cut- off level. However, unlike the Multiple Price based method, the bidder obtains the treasury bills at the cut-off price and not the price quoted by him. This method is applicable in the case of 91 days treasury bills only. The system of Dutch auction has been done away with by the RBI w.e.f 08.12.2002 for the 91-day treasury T-Bill.

Yield Calculation:
The yield of a Treasury Bill is calculated as per the following formula:

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(100-P)365100 Y = ---------------------PD

Wherein, Y = discounted yield; P= Price; D= Days to maturity

CALL MONEY MARKET

INTRODUCTION
This is a part of money market where the day to day surplus of funds of banks is traded. Call/Notice money is an amount borrowed or lent on demand for a very short period. If the period is more than one day and up to 14 days it is called 'Notice money'

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otherwise the amount is known as Call money'. Intervening holidays and/or Sundays are excluded for this purpose. No collateral security is required to cover these transactions. The call market enables the banks and institutions to even out their dayto-day deficits and surpluses of money. Commercial banks, Co-operative Banks and primary dealers are allowed to borrow and lend in this market for adjusting their cash reserve requirements with the RBI. Specified All-India Financial Institutions, Mutual Funds and certain specified entities are also allowed to access Call/Notice money only as lenders. It is a completely interbank market hence non-bank entities are not allowed access to this market. Interest rates in the call and notice money market is market determined. In view of the short tenure of such transactions, both the borrowers and the lenders are required to have current accounts with the Reserve Bank of India. It serves as an outlet for deploying funds on short-term basis to the lenders having steady inflow of funds.

HISTORY
The call/notice money market was predominantly an interbank operate as lenders since 1971. The Reserve Bank's policy relating to entry into the call/notice money market was gradually liberalized to widen and provide more liquidity, although Vaghul Committee had recommended that the call and notice money market should be restricted to banks. In the absence of adequate avenues for

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market until 1990, except for UTI and LIC, which were allowed to

deployment of short-term surpluses of non-bank institutions, easier norms were announced by the RBI for increasing the participants in the call and notice money market. Entities that could provide evidence of surplus funds have been permitted to route their lending through Primary Dealers (PDs). This was also meant to further help corporates, who had just moved to the term lending discipline from the earlier system of cash credit, with large balances to deploy their funds in the short-term and get some return. Thus, as of now, broadly speaking, banks and PDs are operating as both lenders and borrowers, while a large number of financial institutions and mutual funds are operating only as lenders. The behavior among banks in the call money market is not uniform. There are some banks, mainly foreign banks and new private sector banks, which are active borrowers and some public sector banks that are major lenders. The RBI has been a major player in the call/ notices money market and has been moderating liquidity and volatility in the market through repos and refinance operations and changes in the procedures for maintenance of cash reserve ratio.

Call Rates
The borrowings are unsecured and the interest rates (call rate) are very volatile depending on the demand and supply of the short-term surplus/deficiency amongst the interbank players. The call rate is expected to freely reflect the day-to-day lack of funds. These rates vary from day-to-day and within the day, often from hour-to-hour. High rates indicate the

tightness of liquidity in the financial system while low rates indicate an easy liquidity position in the market. The extreme volatility of the call rates can be attributed to the following factors such as: 1. Banks borrow in call money market to meet CRR requirements, meet sudden demand for funds on certain dates. These rates usually go up during the first week to meet CRR requirements and subside in the second week once the CRR requirements are met. 2. The overextension of loans by banks, in excess of their own resources make the banks depend on the call market. They use the call market as a source of funds for meeting the structural disequilibria in their sources and uses of funds. 3. The withdrawal of the funds to meet the business requirements by institutional lenders and to pay advance tax by the corporate sector lead to steep increase in call money rates in the market. 4. The banks invest funds in government securities, units of UTI, public sector bonds in order to maximize the earnings from their funds management but with no buyers in the market, these instruments tend to become illiquid which accentuates the liquidity crisis in the market, pushing up the call rates significantly high. Thus, liquidity crisis or illiquidity in the money markets also contributes to the volatility in the market.

Funds lent in the notice money market do not have a specified repayment date when the deal is entered. The lender will simply issue a notice to the borrower 2-3 days before the funds are to be repaid. On receipt of this notice, the borrower will have to repay the funds within the given time.

Location
centers such as Mumbai, Chennai, Delhi, Kolkata and Ahmadabad. Mumbai plays a predominant role as far as volume of funds is concerned.

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Call money markets are mainly located in commercial centers and big industrial

Participants
Participants in this market are split into two categories. The first comprises those who can both borrow and lend in this market, such as RBI, its intermediaries like DFHI and STCI and commercial banks. The second category comprises of only lenders, like financial institutions and mutual funds. IDBI, NARARD, ICICI, IRBI, EXIM BANK, LIC MUTUAL FUND, SIDBI, SBI MUTUAL FUND, ETC are some of the local call money markets participants.

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TERM MONEY
The term money market in India until recently, has been somewhat dormant. Statutory preemption on inter-bank liabilities, regulated interest rate structure, cash credit system of financing, high degree of volatility in the call money rates, availability of sector specific refinance, inadequate asset-liability management (ALM) discipline among banks and scarcity of money market instruments of varying maturities were usually cited as factors that inhibited the development of term money market. The Reserve Bank has gradually removed most of these constraints over the years. While there has been some activity in the term money market in the recent period, after the above reforms, the volumes have not yet become significant. Interbank market for deposits of maturity beyond 14 days and up to three months is referred to as the term money market. Development of the term money market is inevitable due to the following reasons:

Declining spread in lending operations Volatility in the call money market Stringent guidelines by regulators/management of the institutions Banks access this term money route for the purpose of bringing greater stability to their short-term deficits

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Development of Inter-bank Term Money Market

It is widely accepted that the banking sector needs a deep and liquid term money market for managing its liquidity and asset liability mismatches. There is no clearly defined inter-bank term money yield structure in India beyond the overnight rates. A call money reference rate has emerged through the NSE and Reuters. Development of an inter-bank term money market is essential if credible reference rates across the yield curve have to emerge. There is a continuous demand that a pre-requisite for the development of a healthy and vibrant term money market in India is the removal of the minimum statutory reserve requirements on inter-bank borrowings. There is a pretty convincing view that the inhibiting factor is not merely the reserve requirements. Currently, inter-bank borrowings are exempt from CRR and SLR subject to maintenance of the statutory minimum on total net demand and time liabilities. The current structure of the call/term money market has resulted in participants taking a myopic view on the liquidity and interest rate conditions. In fact, at times, long-term investment decisions are based on the call money rates. Hence, as recommended by the Narasimham Committee, it is essential to place clearly defined prudential limits for banks' reliance on the call money market. With the introduction of good asset-liability guidelines already circulated to banks, prudential limits on exposure to the call market and online connectivity between major branches of public sector banks, the stage is expected to be set for the emergence of an inter bank term money market.

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CERTIFICATE OF DEPOSIT
Introduction
The introduction of CDs in 1989 and CPs in 1990 in India is a follow-up of the recommendations by Vaghul Working Group (Working Group on Money Market) Report published in 1987 (RBI, 1987). The group was in favor of introduction of CDs if short-term interest rates were aligned with other interest rates in the system. Primary objective behind introduction of CDs was to widen the range of money market instruments and to give investors greater flexibility for deployment of their short-term funds.

Definition Certificate of Deposit (CD) is a marketable receipt in registered or bearer form of funds deposited in a bank for a specified period at specified rate of interest. Certificate of Deposits (CDs) are issued by banks in the form of usance promissory notes. Due to their negotiable nature, these are also known as negotiable certificate of Deposits (NCDs).

Features of Certificate of Deposits

They are of secured nature or virtually risk fewer instruments as the default risk is almost nil and investors are sure of receiving the invested amount with interest. Freely transferable by endorsement and delivery immediately after the date of issue; can be traded in secondary market from the date of issue, unlike conventional deposits. They are issued at a discount to face value of the instruments. The discount rate is freely determined by the issuing bank considering the prevailing call money rates, treasury bills rate, maturity of the CD and its relation with the customer, etc. There is no TDS

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The minimum size for the issue of CDs is Rs. 5 lakhs (face Value) and thereafter in multiples of Rs. 1 lakh. It should be taken into consideration that there is no ceiling on the maximum amount that can be raised by them. Banks can issue CDs for a minimum period of 15 days to a maximum of one year whereas a financial institution can issue CDs for a minimum of 1 year and a maximum of 3 years.

Issuing Matters
CDs are issued by scheduled commercial banks and six selected financial institutions IFCI, IDBI, ICICI, EXIM Bank, IIB, and SIDBI etc. are permitted by RBI to issue CDs for raising short-term resources. Regional Rural Banks and Local Area Banks are excluded from issuing CDs. While banks have freedom to issue CDs as per their requirement, FIs are allowed to issue CDs within the overall umbrella limit fixed by the RBI from time to time. As per the RBI guidelines the issued CDs with other money market instruments should not exceed 100 percent of its Net Owned Fund (NOF). The NOF is considered as per the latest Balance Sheet. CDs can be issued to individuals, corporations, companies, funds, etc. NRIs can also subscribe to CDs, but on non-repatriable basis, that should be clearly stated on the certificate and cannot be endorsed to another NRI in the secondary market.

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COMMERCIAL PAPERS
Introduction:
Based on the recommendations of Working Group on Money Market, the RBI introduced Commercial Papers (CP) in 1990 enabling highly rated corporate borrowers, to diversify best sources of short term borrowings & to provide an additional instrument to investors. CP refers to short-term, unsecured, negotiable usance promissory notes with a fixed maturity, issued by rated companies at a discount to face value.

Investors
Eligible investors in CPs are individuals, corporates, unincorporated bodies, insurance companies and banks. Non resident Indians can invest in CPs on a non repatriable, non transferable basis. Banks and Indian companies are the most common investors. Initial placement is invariably done with banks due to a difference in stamp duty structure. Issue of commercial paper is subject to payment of stamp duty. The stamp duty on a primary issue of CP is 0.25% for all other investors, with a concessional rate of 0.05% for banks. Secondary market transactions (CPs are actively traded in the secondary market) do not attract any stamp duty.

Pricing:
CPs are issued at a discount to face value and are redeemable at par on maturity. The discount actually is the effective interest rate:

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Face Value ------------------------------------1+[(Discount rate No. of Days)/365]

Interest is calculated on an Actual/365-day year basis. Typically CPs are issued for periods of 30/ 45/ 60/ 90/ 120/ 270/ 360 days.

Factors affecting the Pricing

CP being a short term instrument, its primary and secondary market determination of the interest rate, i.e. the discount rate, depends upon conditions in short term money market. The following are the principal factors in pricing of the CPs:

Inter-bank call rates - Since, call rates affect all the other short term rates, and

banks are the most important investors in CPs, its pricing is affected very much by call rates. Also, as the lenders in the CP market are predominantly banks, call markets affect CP market rate; lower call rates mean cash surplus banks will view CPs as an alternative investment route.

Competing Money Market Investment Products - Interest rates on CPs are

determined by the demand and supply factors in the money markets and the interest rate on the other competing money market instruments such as Certificates of Deposit, Commercial Bills, Short Term Forward Premias and Treasury bills. The investments in CPs give comparably higher yields than those obtained in bank deposits of similar maturities.

Liquidity - Pricing and availability of funds under CPs are determined by the

liquidity amongst banks and mutual funds, which are the principal investors.

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Credit Rating - Most of the secondary market investments in CPs are done only

in P1+ (highest CRISIL rating for short term credit instruments). However, two P1+ companies may not attract the same rate, due to relative credit perception amongst different companies, and also, till an extent, the companys long term credit ratings.

Salient Features:
The CP market has the advantage of giving highly rated corporate borrowers cheaper funds that they could obtain from banks while still providing institutional investors with higher interest earning than they could obtain from the banking system. CP can be issued by corporates provided

i. Company has been sanctioned working capital limit by banks or all India financial institutions ii. Its tangible net worth of the company is not less than Rs.4 crore as per the latest audited balance sheet. iii. The borrowed account of the company is classified as a standard asset by the financing banks/ institutions. iv. It can also be issued by primary dealers (PDs), and the all India financial institutions (FIs) that have been permitted to raise short term resources under the umbrella limit fixed by the RBI. CPs are issued in denominations of Rs.5 lakhs or multiples thereof. All eligible participants have to obtain the credit rating from either the CRISIL or ICRA or CARE or FITCH Rating India Private Limited or any other as prescribed by RBI.

The total amount of CP to be issued should be raised within a period of two weeks from the date on which the user opens the issue for subscription.

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Every issuer must appoint an issuing and paying agent (IPA). Only a scheduled bank as per the Ranking Regulations Guidelines can act as an IPA for issuance of CPs.

Both issuer & subscriber to issue/ hold CP in the materialized or physical form, however with effect from June, 2001 banks, FIs and PDs are required to issue and hold CP in dematerialized form only. With effect from July, 2005 Cp can also be issued in dematerialized form through any of the depositories approved by and registered with SEBI.

Taxation
For the Corporate: The discount is treated as an interest expense, deductible for tax purpose. For the Investor: Profit/loss on sale of investment; Income is taxed under the head Profits and Losses from Business and Profession. Losses are allowed as business losses. This is for banks and investment companies. For, corporates that invest in other companys CPs, this would be Other Income / Interest Income.

INTER CORPORATE DEPOSITS

Apart from CPs, corporates also have access to another market called the intercorporate deposits (ICD) market. An ICD is an unsecured loan extended by one

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corporate to another. Existing mainly as a refuge for low rated corporates, this market allows funds surplus corporates to lend to other corporates. Also the better-rated corporates can borrow from the banking system and lend in this market. As the cost of funds for a corporate in much higher than a bank, the rates in this market are higher than those in the other markets. ICDs are unsecured, and hence the risk inherent in high. The ICD market is not well organized with very little information available publicly about transaction details.

RBIs Norm on ICD

The RBI has said that inter-corporate deposits through PDs should be for a minimum period of one week. Also, the aggregate limit on ICD borrowings should not exceed 50 percent of the net-owned funds of the PD. PDs have also been prohibited from placing ICDs with other counter parties and ICDs accepted from the parent, promoters and group companies or any other related party, should be on an "arms length basis'' and disclosed in the financial statements as "related party transactions.''

MONEY MARKET MUTUAL FUNDS

Introduction:
MMMFs are mutual funds that invest primarily in Money Market instruments of very high quality and of very short maturities. In other words these are mutual funds that invest in short-term debt instruments. Money Market Mutual Funds (MMMFs) were introduced in India in April 1991 to provide an additional short-term avenue to investors and to bring money market instruments within the reach of individuals. A Task Force was constituted to examine the broad framework outlined in April 1991 as also the implications of the Scheme. Based on the recommendations of Task Force constituted for the purpose, detailed scheme of MMMFs was announced by the Reserve Bank in April 1992.

Regulation of MMMFs:
MMMFs can be set up by commercial banks, RBI and public financial institutions either directly or through their existing mutual fund subsidiaries. The guidelines with respect to mobilization of funds by MMMFs provide that only individuals are allowed to invest in such funds. Earlier, these funds were regulated by the RBI. But the RBI withdrew its guidelines, with effect from March 7, 2000 and now they are governed by SEBI.

Schemes:
The schemes offered by MMMFs can be of two types: Open-ended schemes - In this case, the units are available for purchase on a continuous basis and the MMMF would be willing to repurchase the units. Closed-ended schemes - In this case, the units are available for subscription for a limited period and are redeemed at maturity.

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The Portfolio:
The portfolio of MMMFs consists of short-term money market instruments. Investments in such funds provide an opportunity to investors to obtain a yield close to short-term money market rates coupled with adequate liquidity. The Reserve Bank has been making several modifications to the scheme to make it more flexible and attractive to banks and financial institutions. For instance, the ceiling for raising resources and stipulation regarding minimum size of MMMFs were done away with and the prescription on limits for investments in individual instruments was withdrawn except in respect of CP. Recently, in October 1997, MMMFs were permitted to invest in rated corporate bonds and debentures with a residual maturity of up to one year, within the ceiling existing for CP. The minimum lock in period was also reduced gradually to 15 days, making the scheme more attractive to investors.

Benefits:
The guidelines with respect to mobilization of funds by MMMFs provide that only individuals are allowed to invest in such funds. They provide the benefit of pooled investments, as investors can participate in a more diverse and high-quality portfolio than they otherwise could individually. And like other mutual funds, each investor who invests in a money fund is considered a shareholder of the investment pool, a part-owner of the fund.

Guidelines:
They specify a minimum lock-in period of 15 days during which the investor can not redeem his investment. They also stipulate that the minimum size of the MMMFs to be Rs.50 crores and this should not exceed 2% of the aggregate deposits of the latest accounting year in the case of banks and 2% of the long-term domestic borrowings in the case of public financial institutions.

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PRESENT TRENDS

India market news is the topic of discussion for every investor nationwide. The global economic downturn since the last quarter of 2008 has been gaining grounds until the Satyam scam. The fourth-biggest software firm - Satyam Computers, ever since its drastic crash and financial wrongdoing revelations, has been in India news and global news headlines affecting the India money market. India has many foreign investors and the economy not being very highly affected despite the global recession, more foreign investors are looking towards India as a safe and secured investment destination. But as India market news make plain, the Satyam scandal may prove to be a huge loss to India, prompting foreign investors to leave India.

Strengthening of the Indian rupee and loss of dollar over the last week of December 2008 and first week of January brought in a ray of hope amongst investors, thus raising the importance of India money market. Data released by the India news recorded buying of local shares by overseas funds. India market news further brought to light that with the Satyam scam, stock market indices witnessed a 7% slump. Despite the two weeks' rise of the rupee, it again slumped down due to the Satyam effect.

India money market is flooded with news like 'NSE removing Satyam from Nifty', 'Satyam losing Rs 10, 000 crore in market cap', etc which is affected by domestic shocks as well as global investor confidence. Overall, the situation is because of the corrective measures taken by the RBI as well as the government. With the lending rate cut by 350 basis points by the RBI as well as the 200 billion rupee ($4 billion) stimulus package announced by the government will help materialize the 7% growth target. Duties cut on manufactured products further add to the boost. expected to improve and India money market is again going to witness a rise

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Currently the Nov 2009 inflation was 4.10% year-on-year as compared to figures around 1% year ago. This figure is expected to rise as a result of the base effect. The RBI will now increase the interest rate to control liquidity & restrict inflation to reasonable levels.

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References:
www.rbi.com www.financeministry.com www.thehindu.com www.wikipedia.com www.investopedia.com

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