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CHAPTER-1INTRODUCTION
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INTRODUCTION
The money market is a subsection of the fixed incomemarket. We generally think of the
term fixed income as being synonymous tobonds. In reality, a bond is just one type of fixed
income security. The difference between the money market and the bond market is that the
money market specializes in very short-term debt securities (debt that maturesin less than one
year). Money market investments are also called cash investments because of their short
maturities.
Money market securities are essentially IOUs issued by governments, financial institutions and
large corporations. These instruments are veryliquid and considered extraordinarily safe.
Because they are extremely conservative, money market securities offer significantly lower
returns than most other securities.
One of the main differences between the money market and the stock market is that most
money market securities trade in very high denominations. This limits access for the individual
investor. Furthermore, the money market is adealer market, which means that firms buy and
sell securities in their own accounts, at their own risk. Compare this to the stock market where a
broker receives commission to acts as an agent, while the investor takes the risk of holding the
stock. Another characteristic of a dealer market is the lack of a central trading floor
orexchange. Deals are transacted over the phone or through electronic systems.
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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.
and other institutions and individuals are bid by borrowers agents comprising
institutions and individuals and also the government itself.
According to the Geoffrey, money market is the collective name given to the
various firms and institutions that deal in the various grades of the near money.
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OBJECTIVE OF THE STUDY
The following are the important objectives of a money market: To provide a parking place to employ short-term surplus funds.
To provide room for overcoming short-term deficits.
To enable the Central Bank to influence and regulate liquidity in the economy through its
intervention in this market.
To provide a reasonable access to users of Short-term funds to meet their requirements
quickly, adequately and at reasonable costs.
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SCOPE OF THE STUDY
It is a market dealing with short term funds or financial assets.
These financial assests have a maturity period of upto one year.
Financial assets can be easily converted into cash.
It consists of various sub markets like call money market, bill market etc.
Central Bank, Commercial Bank, Financial institution are main constituents of
money market.
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NEED &IMPORTANCE OF THE STUDY
SOURCE OF CAPITAL
Money market is an important source of financing for trade and industry. The Short-
term finances are made available through bills, commercial papers; etc.The happenings
in the money market influence the availability of finances Both for the national and
international trade. Besides trade and industry, Money market offers to the government
an important non-inflationary avenue
Of raising short-term funds through bills that are subscribed by commercial
Banks and the public.
IDEAL INVESTMENT
Money market offers an ideal source of investment for the commercial Banks. The market
helps them invest their short-term surplus funds so as to Meet statutory reserve requirements.
For instance, the requirements of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio
(SLR) vary every
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CHAPTER-2
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RESEARCH METHODOLOGY
The data to be used in the project can be collected through two collection methods
Primary collection methods
Secondary collection methods
PRIMARY COLLECTION METHODS:
Primary collection methods include the data collection from the
company.
Data collected from BSE Website
Data collected from the brokers and magazine annual reports.
SECONDARY COLLECTION METHODS:
Data provided by Reliance Securities Ltd as a part of the class undertaken
Data collection from the websites
www.bseindia.com
www.nseindia.com
Data collected from various newspapers, book issues of this study.
Tool & techniques:
Returns (bank stocks) = current price-previous price 100
Previous price
MEAN: X/NVARIANCE:(X-XBAR)2
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SD=
CHAPTER-3REVIEW OF LITERATURE
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REVIEW OF LITERATURE
If the money market is well developed and broad based in a country, it greatly helps in the
economic development of a country. The central bank can use its monetary policy effectively
and can bring desired changes in the economy for the industrial and commercial progress in the
country. The importance of money market is given, in brief, as under:
(i) Financing Industry
A well developed money market helps the industries to secure short term loans for meeting
their working capital requirements. It thus saves a number of industrial units from becoming
sick.
(ii) Financing trade
An outward and a well knit money market system play an important role in 2financing the
domestic as well as international trade. The traders can get short term finance from banks by
discounting bills of exchange. The acceptance houses and discount market help in financing
foreign trade.
Profitable investment
The money market helps the commercial banks to earn profit by investing their surplus funds in
the purchase of. Treasury bills and bills of exchange, these short term credit instruments are not
only safe but also highly liquid. The banks can easily convert them into cash at a short notice.
The money market is useful for the commercial banks themselves. If the commercial banks are
at any time in need of funds, they can meet their requirements by recalling their old short term
loans from the money market.
Effective implementation of monetary policy
The well developed money market helps the central bank in shaping and controlling the flow of
money in the country. The central bank mops up excess short term liquidity through the sale of
treasury bills and injects liquidity by purchase of treasury bills.
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(vi) Encourages economic growth
If the money market is well organized, it safeguards the liquidity and safety of
financial asset This encourages the twin functions of economic growth, savings and
investments.
(vii) Help to government
The organized money market helps the government of a country to borrow funds
through the sale of Treasury bills at low rate of interest The government thus would
not go for deficit financing through the printing of notes and issuing of more money
which generally leads to rise in an increase in general prices.
(viii) Proper allocation of resources
In the money market, the demand for and supply of loan able funds are brought at
equilibrium The savings of the community are converted into investment which
leads to pro allocation of resources in the country.
STRUCTURE OF MONEY MARKET
The Indian money market is divided into two parts namely organized and
unorganized. The organized sector consist of The Reserve Bank of India, Foreign
Banks, Commercial Banks, Co-operative banks, Discount and Finance House of
India, Mutual funds and finance Companies.
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The Unorganized sector consists of indigenous bankers, money lenders, non-
banking financial intermediaries like chit funds, nidhis etc. this sector is a
hetrogenous sector. The organized sector of money market is well advanced. Its
principal centres are Mumbai, Kolkata, Delhi, Chennai, Ahmedabad, and
Bangalore. Of these centres the Mumbai centre is most active one
Organized Money Market
The RBI is the apex institution which controls and monitors all the
organizations in the organized sector. The commercial banks can operate as lenders
and operators. The FIs like IDBI, ICICI, and others operate as lenders. The
organized sector of Indian money market is fairly developed and organised, but it is
not comparable to the money markets of developed countries like USA, UK and
Japan.
Certificate of
deposit
Commercial
paper
T-
bills
Call & short
notice Market
Repos
MMMF s
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Main constituents of Organized Money Market
Reserve Bank of India
Reserve Bank of India is the regulator over the money market in India. As theCentral bank, it injects liquidity in the banking system, when it is deficient and
contracts the same in opposite situation.
Commercial Banks
Commercial Banks and the CO-operative banks are the major participants in the
Indian money market. They mobilize the savings of the people through acceptance
of deposits and lend it to business houses for their short term working capitalrequirements. While a portion of these deposits is invested in medium and long-
term Government securities and corporate shares and bonds, they provide short-
term funds to the Government by investing in the Treasury Bills. They employ the
short-term surpluses in various money market instruments.
Discount and Finance House of India Ltd. (DFHI)
DFHI deals both ways in the money market instruments. Hence, it has helped
in the growth of secondary market, as well as those of the money market
instruments.
Financial and Investment Institutions
These institutions (eg. LIC, UTI, GIC, Development Banks, etc.) have been allowed to
participate in the call money market as lenders only.
Corporates
Companies create demand for funds from the banking system. They raise short-term
funds directly from the money market by issuing commercial paper. Moreover, they
accept public deposits and also indulge in intercorporate deposits and investments.
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Mutual Funds
Mutual funds also invest their surplus funds in various~ money market instruments
for short periods. They are also permitted to participate in the Call Money Market.
Money Market Mutual Funds have been set up specifically for the purpose ofmobilization of short-term funds for investment in money market instruments.
UNORGANISED MONEY MARKET
The unorganized money market mostly finances short term financial needs of
farmers and small businessmen. The main constituents of unorganized Money
market are:
INDIGENOUS BANKERS (IBS)
The IBs are individuals or private firms who receive deposits and give loans and thereby they
operate as banks. Unlike moneylenders who only lend money, IBs accept deposits as well as lend
money. They operate mostly in urban areas, especially in western and southern regions of the
country. Over the years, IBs faced stiff competition from cooperative banks and commercial banks.
Borrowers are small manufacturers and traders, who may not be able to obtain funds from the
organized banking sector, may be due to lack of security or some other reason.
MONEY LENDERS (MLS)
MLs are important participants in unorganized money markets in India. There are
professional as well as non professional MLs. They lend money in rural areas as well as
urban areas. They normally charge an invariably high rate of interest ranging between 15%
p.a. to 50% p.a. and even more. The borrowers are mostly poor farmers, artisans, petty
traders, manual workers and others who require short term funds and do not get the same
from organised sector.
Chit Funds and Nidhis
They collect funds from the members for the purpose of lending to members (who are in
need of funds) for personal or other purposes. The chit funds lend money to its members by
draw of chits or lots, whereas Nidhis lend money to its members and others.
Finance BrokersThey act as middlemen between lenders and borrowers. They charge commission for their
services. They are found mostly in urban markets, especially in cloth markets and
commodity markets.
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Finance Companies
They operate throughout the country. They borrow or accept deposits and lend them to
others. They provide funds to small traders and others. They operate like indigenous
bankers.
SUB MARKET (INSTRUMENTS):
INSTRUMENTS
Traditionally when a borrower takes a loan from a lender, he enters into an
agreement with the lender specifying when he would repay the loan and what return
(interest) he would provide the lender for providing the loan. This entire structure
can be converted into a form wherein the loan can be made tradable by converting itinto smaller units with pro rata allocation of interest and principal. This tradable
form of the loan is termed as a debt instrument. Therefore, debt instruments are
basically obligations undertaken by the issuer of the instrument as regards certain
future cash flows representing interest and principal, which the issuer would
pay to the legal owner of the instrument. Debt instruments are of various
types. The key terms that distinguish one debt instrument from another are as
follows:
Issuer of the instrument
Face value of the instrument
Interest rate
Repayment terms (and therefore maturity period/tenor)
Security or collateral provided by the issuer
MONEY MARKET INSTRUMENTS
By convention, the term "money market" refers to the market for short-term
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requirement and deployment of funds. Money market instruments are those
instruments, which have a maturity period of less than one year. The most active part
of the money market is the market for overnight and term money between banks and
institutions (called call money) and the market for repo transactions. The former is in
the form of loans and the latter are sale and bu back agreements - both are
obviously not traded. The main traded instruments are commercial papers
(CPs), certificates of deposit (CDs) and treasury bills (T-Bills). All of these are
discounted instruments ie they are issued at a discount to their maturity value and the
difference between the issuing price and the maturity/face value is the implicit
interest. These are also completely unsecured instruments. One of the important
features of money market instruments is their high liquidity and tradability. A
key reason for this is that these instruments are transferred by endorsement and
delivery and there is no stamp duty or any other transfer fee levied when the
instrument changes hands. Another important feature is that there is no tax deducted
at source from the interest component. A brief description of these instruments is as
follows:
Certificate of Deposit
Commercial Papers,
Treasury Bills,
Ready Forward Contracts (Repos)
Call and Short Notice Market
Money Market Mutual Funds (MMFS)
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CERTIFICATE OF DEPOSIT
The certificates of deposit are basically time deposits that are issued by the commercial banks
with maturity periods ranging from 3 months to five years. The return on the certificate of
deposit is higher than the Treasury Bills because it assumes Certificates of deposits process the
following distinguishing characteristics:
Negotiable instruments
CDs are negotiable term-deposit certificates Issuedby commercial bank/financial institutions at
discount to face institutions. value at market rates. The Negotiable Instruments Act governs CDs.
MaturityThe maturity period of CDs ranges from 15 days to one year.
Nature
CDs are in the form of usance promissory notes and hence easily negotiable by endorsement
and delivery.
Ideal source
CDs constitute a judicious source of investments as these
Certificates are the liabilities of commercial
PROFILE
A distinguishing profile of Certificate of Deposit as operating in India ispresented below:
THE TAMBE WORKING GROUP
The Tambe working Group set up in 1982 in India, reported that banks and financial institutions
were not willing to support the launch of money market instruments such as CDs, and therefore
advised against the introduction of these instruments. The Group cited many reasons for the non-
popularity of these instruments including the absence of secondary market, administeredinterest
rate structure on bank deposits and the danger of CDs giving rise to a large number of fictitious
transactions.
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THE VAGHUL WORKING GROUP
The Vaghul Working Group set up in 1987, again reviewed the issue and expressed itself against
the launch of the instrument by the RBI. The Group reported that the introduction of CDs as a
money market instrument would be meaningful only where the short-term deposit rates were
aligned with other rates in the financial system.The Group instead recommended, as a prelude,
the setting up of a discount house and the alignment of short-term deposit
rates.
Based on the recommendations of the Group, the RBI constituted the Discount and
Finance House of India Ltd. (DFHI) in the year 1988. In the same manner, RBI
rationalized the interest rate structure in March 1989 by abolishing fixed deposits of
shortest terms with maturity of 15 to 45 days.
THE LAUNCH
The RBI launched the scheme of CDs with effect from March 27, 1989. Following
guidelines were laid down in this regard.
ELIGIBLE ISSUERS
The institutions that are eligible to issue CDs are scheduled commercial banks
(excluding RRBs) and specified all-India financial institutions, namely, IDBI,
IFCI, ICICI, SIDBI, IRBI, and EXIM bank.
ELIGIBLE SUBSCRIBERS
The parties who are eligible to buy CDs are individuals, associations,
companies, corporations, trust funds, etc. NRI an also subscribe to the CDs.
How ere, this is possible only on a non-repatriation basis. It is not possible
for an NRI to endorse CDs to another NRI in the secondary market.
NEGOTIATION
CDs are freely transferable by endorsement and delivery after the initial lock
in period of 15 days. The instrument can be purchased by any of the above
subscribers and DFHI in the secondary market.
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MATURITY
The maturity period of CDs issued by banks ranges from 3 days to 12 monthsand that issued by specified financial institutions can have a maturity period
up to 3 years. With the announcement of credit policy on April27, 2000 the
maturity period was reduced from 3 month to 15 days.
DISCOUNT
CDs are to be issued at a discount to face value, with the maturity period not having
any grace period.
LIMITS OF ISSUE
The maximum amount of issue by a bank, which was originally fixed at 1 percent of
its fortnightly aggregate average deposits, was raised to 10 percent in 1992. This was
subsequently abolished totally. The minimum size of issue to a single investor,
which was originally fixed at Rs.10 lakhs, was reduced to Rs. 5lakhs with effect
from October 21, 1997. Issue of CDs above Rs.5 lakhs can now be made in multiples
of Rs.1 lakhs. CDs can now be CRR on
issue price of CDs for which there is no ceiling.
STAMP DUTY
Stamp duty is payable on CDs as applicable to any other negotiable
instrument.
SECURITY PAPER
CDs are transferable by endorsement and delivery, and shall therefore be issued on a
good quality security paper.
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OTHER REQUIREMENTS
1. No loans can be granted by banks against CDs.
2. Banks cannot have any buyback arrangement of their own CDs before maturity.3. Banks are to submit fortnightly report on their CDs to the RBI under section 42 of the
RBI Act, 1935.
4. Banks are to show CDs under the head liabilities in the balance sheet.
YIELD
CDs are offered at interest rates higher than the time deposits of banks. However,
the rate of interest is dependent upon many factors such as urgency of requirement
for funds, alterative opportunities for investment of funds mobilized, etc. The rate
of discount being deregulated is now determined by the demand and supply of CDs.
CDs are issued at a discount to their face
value and redeemed at par. CDs are issued at a front-end discount and in such a case;
the effective rate of interest is higher than the quoted discount rate. Effective rate of
interest may be calculated as follows.
ERRR= [(1+QDR/100*N/M) N/M-1]*100
Where,
ERR = Effective rate of interest
QDR = Quoted discount rate
N = Total period in a year. Say 12 months or 365 days etc
M = Maturity period in months or days as the case may be
ROLE OF DFHI
The Discount and Finance House of India Ltd. Functions as a market maker in CDs
market. It offers bid rate, the rate of discount at which it is prepared to buy CDs, and
offer rate at which it would be willing to sell the CDs. The DFHI acts as an ideal
conduit for disinvestments of CD holdings, which is done through their banker in
Mumbai. DFHI also engages in buying CDs
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from the bank at its bid discount rate. Settlements are effected through RBI cheque.
ROLE OF BANKS
Scheduled commercial banks are the active players in the realm of CDs marketsegment. CDs are used as an important money market instrument. CDs provide an
ideal avenue of investment money market instrument. CDs provide ideal avenue of
investment for bankers. CDs are considered safe, liquid, and attractive in returns for
both scheduled commercial bank and
investors. It is not necessary for banks to encash CDs before maturity under the RBI
Act. Banks are under obligation to maintain usual reserve requirements (SLR and
CRR) on issue price of CDs. CDs offer the opportunity for banks for the bulk
mobilization of resources as part of effective fund management. Besides, offering an
attractive yield help bankers utilize them eligible assets for determination of Net
Demand and Time Liabilities (NDTL). According to the RBI guidelines, it will not
be possible for banks to enter into buyback arrangement with the subscriber of CDs.
Similarly, they cannot grant loans against CDs issued by them. It is possible for
investors to sell CDs in secondary market before their maturity. This offers
investors the advantage of liquidity through ready marketability. However, the
tendency on the part of holders of CDs to hold the instruments till maturity date has
not made possible for the creation of an effective secondary market for them,
although the primary market for CDs has shown a considerable improvement.
COMMERCIAL PAPER
Debt instrument that are issued by corporate houses for raising short-term financial
resources from the money market are called Commercial Papers (CPs).
FEATURES
Following are the features of commercial papers:
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NATURE
These are unsecured debts of corporate. They are issued in the form of promissory
notes. These are redeemable at par to the holder at maturity. The issuing company
should have a minimum tangible net worth to the extent of Rs.4 crores. Moreover,
the working capital (fund-based) limit of the company should not be less
than Rs. 4 crores and this allows corporate to issue CPs up to 100 per cent of their
fund based working capital limits. CPs are issued at a discount to face value in
multiples of Rs.5 Lakhs. CPs attracts stamp duty. No prior approval of RBI is
needed to issue CPs and no underwriting is mandatory. The issuing company has
to bear all expense (Such as dealers fees, rating agency fee and charges for
provision of stand-
by facilities) relating to the issue of CP. The issue of CPs serves the purpose of
releasing the pressure on bank funds for small and medium sized
borrowers, besides allowing highly rated companies to borrow directly from the
market.-
MARKET
The market for the Cps comprises of issues made by public sector and private sector
enterprises CPs issued by top rated corporate are considered as sound investments.
Conditions attached to the issue are less stringent than those applicable for raising
CPs. Beginning from September 1996, Primary Dealers(PDs) were also permitted
by RBI to issue CPs for augmenting their resources. This is one of the steps
initiated by the RBI to make the CPs market popular.
RATING
As per the guidelines of the RBI, CPs are required to be graded by the organization
issuing them. Accordingly, a rated CP is considered to be a quality and soundinstrument. With the liberalization of interest rate structure, the rate of
interest is market-determined. This causes wide variation in the prevailing rates
of interest.
INTEREST RATES
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The rate of interest applicable to CPs varies greatly. This variation is
influenced by a large number of factors such as credit rating of the
instrument, economic phase, the prevailing rate of interest in CPs market, call rates,
the position in foreign exchange market, etc. It is however to be noted that there is
no benchmark for the interest rate.
MARKETABILITY
The marketability of the CPs is influenced by the rates prevailing in the call money
market and the foreign exchange market. Accordingly where attractive
interest rates prevail in these markets, the demand for Cps will be affected. This is
because; investors will divert their investment into these markets.
CPS IN LIEU OF WC
The nature of credit policy announced by the RBI to allows highly rated corporate to
have the advantage of banks offering an automatic restoration of working capital
limits on the repayment of CP. Accordingly, short-term working capital loans
were substituted with cheaper CPs. This was done by the RBI to hasten the growth
of the CP market.
SATELLITE DEALERS (SDs)
Dealers who are enlisted with the RBI to deal in the Government securities market,
are called Satellite Dealers. With effect from June 17, 1998, they are allowed to
issue CPs, with prior approval from RBI. The purpose was to enable them to have
access to short-term borrowings through CP route. Following are the conditions to
be satisfied in this regard:
RATING
In order that the satellite dealers are permitted to trade in CPs, it is essential that the
issuing corporate obtain the minimum specified credit rating from a credit rating
agency. Such a rating must have been approved by the months.
MATURITY
The CPs shall be issued for a maturity period ranging from 15 days to one year from
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the dated is issue.
TARGET MARKET
The issue of CPs may be targeted to such persons as individuals, banks,
companies, other corporate bodies registered or incorporated in India and
unincorporated bodies and non-resident Indian (NRI) on non-repatriation
basis subject to the condition that it shall be transferable.
LIMITS OF ISSUE
Each issue of CPs (including renewal) shall be treated as a fresh issue. The CPs issue
may take place in multiples of Rs. 5 Lakhs. The investment by any single investor
shall be for a minimum amount of Rs. 25 Lakhs (face Value) and the secondary
market transactions may be dealt in for amounts of Rs. 5Lakhs or multiples thereof.
The RBI shall fix the total amount of issue. The issue amount shall be raised within a
period of 2 week from weeks from the date of approval by the Reserve Bank or ma
be issued on a single day or in parts on different days as the case may be.
NATURE
The CPs shall be in the form of usance promissory note. It shall be negotiable by
endorsement and delivery. It is issued at discount to face value, discount being
determined by the SD issuing the CPs. The SDs shall bear the expenses of the issue,
including dealers fee, rating agency fee, etc.
TREASURY BILL
TREASURY BILLS (TBs)
A kind of finance bills, which are in the nature of promissory notes, issued by the
government under discount for a fixed period, not exceeding one year, containing a
promise to pay the amount stated therein to the bearer of the instrument, are know as
treasury bills.
GENERAL FEATURES
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Treasury bills incorporate the following general features:
Issuer
TBs are issued by the government for raising short-term fundsfrom institutions or
the public for bridging temporary gaps between receipts (both revenue and capital)
and expenditure.
Finance bills
TBs are in the nature of finance bills because they do not arise due any genuine
commercial transaction in goods.
Liquidity
TBs are not self-liquidating like genuine trade bills, although they enjoy
higher degree of liquidity.
Vital source
Treasury bills are an important source of raising short- term funds by the
government.
Monetary management
TBs serve as an important tool of monetary used by the central bank of the county to
infuse liquidity in to the economy.
FEATURES OF INDIAN TBs
HISTORY
It was in the year 1877 that Treasury Bills (TBs) came to be issued for the first time
in the world. Later, it acquired wide popularity around the world both in developing
and developed countries. TBs were first issued in India in October1971. The issue
aimed at raising resources for financing the First World War efforts of the
government and for mopping liquidity in the economy due to heavy war
expenditure.TBs that were initially sold by the government had a maturity period of
3 months, 6 months, 9 months and 12 months. Later on, with the setting up of the
RBI in 1935, the issue profile of TBs underwent a lot of changes. Accordingly, RBI
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came to issue two type of TBs such as Tap Bills that were issued at all times and
Intermediate Bill that were sold between auctions, to nongoverment investors.
However, in the year 1965, a sale of TBs to public through auction was suspended
and issue took place on top basis at a discount. Thus commercial banks began to
invest in them.
ISSUE
TBs, which were first up to 1935 by the Government of India directly, came to be
issued by the RBI since its inception in 1935. Thereafter, TBs are issued at a
discount by the RBI on behalf of the Government of India.
TYPES
There are two types of treasury bills. They are ordinary treasury bills and ad hoc
treasury bills. The freely marketable treasury bills that are issued by the Government
of India to the public, banks and other institution for raising resources to meet the
short-term finance needs takes the form of ordinary TBs.
MATURITY PERIOD
A lot of changes taken place in the realm of the periodicity of treasury bills, changes
having being brought about by the policy announcements made by RBI from time to
time. A brief account of the changes in the period of maturity of TBs is outlined
below:
1. Maturity period of TBs at the close of the First World War was of 3, 6, 9, and 12
months duration.
2. Maturity periods of tap bills and Intermediate Bills introduces by RBI
immediately after its inception was 91 days which was continued up to November1986.
3. Maturity period of 182 days recommended by Chakraborty Committee was issued
up to April 1992.
4. Maturity period of 365 days beginning from April 1992.
5. Maturity period of 14 days introduced in May 1997 and of 28 days introduced on
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October21, 1997.
6. Maturity period of 182 days reintroduced with effect from May26, 1999.
PARTICIPANTS
The participants in the TBs market include the Reserve Bank of India, the State
Bank Of India, Commercial Banks, State Governments and othe approved
bodies, Discounts and Finance House of India as a market maker in TBs, the
Securities Trading Corporation of India (STCI), other financial institutions such
as, LIC, UTI, GIC, NABRAD, IDBI, IFCI, ICICI, etc
corporate entities and general public and Foreign Institutional Investors. Of the
above-mentioned participants, RBI and commercial banks are the most popular
players. This essentially arises from the nature of relationship between
them. TBs are least popular among the corporate entities and the general
public.
THE ISSUE PROCEDURE
The procedure followed by the RBI for successful issue of treasury bills is briefly
outlined below.
NOTIFICATION
The RBI issues notifications for the sale of 91day TBs on tap basis throughout
the week and the 14-days, 28- days, 91-days, and 364-days, TBs through fortnightly
auction. The notification mentions the date of auction and the last date for
submission of tenders.
TENDERING
Immediately after the issue of notification by theRBI, investors are permitted to
submit bids through separate tenders. The result of the auction mentioning the
price up to which the bids have been accepted is displayed. The successful bidders
are expected to collect letter of acceptance from the RBI and deposit the
same together with a cheque on RBI.
SGL
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SGL is maintained by the RBI for facilitating the purchases and sales of TBs by the
investors like Commercial Banks, DFHI, STCI and other financial institutions.
DFHI
Where the SGL facility is not available to certain investors, purchase and sale takes
DFHI. TBs sold to such investors are held by DFHI on their behalf, which pays the
proceeds of the TBs held, to the investor on the date of maturity. DFHI takes an
active part in the primary auctions of TBs, besides operating in the secondary market
by quoting tow-way rates. In addition, the DFHI also gives buyback and sell-back
commitments for periods up to 14 days at negotiated interest rates, to commercial
banks, financial institutions and public sector undertakings.
AUCTIONING METHODs.
UNIFORM PRICE AUCTION
The system of uniform price auction system in respect of 97-days, TBs was
introduced as to broaden market participation. (Winners curse is a
phenomenon whereby those bidding at lower than the cut-off, end up paying a
premium.) The introduction of uniform price auction is expected to reduce
uncertainty associated with the bidding process. This is peculiar to the
underdeveloped nature of Indian money market, which is afflicted by the lack of
reliable information, causing wide differences in the yiel expectations
before the auctions. The amounts of issue are notified in respect of 97-days TBs
auctions and the dated securities auctions.
TREASURY BILLS
AUCTION
Auction in TBs takes place both on Competitive as well as on
noncompetitive basis. The State Governments, Provident Funds and the Nepal
Rastra Bank are the noncompetitive bidders. Commercial banks and other financial
institutions comprise competitive bidders. It is to be noted that the merits of
enhanced market efficiency and price discovery take place through the competitive
bids.
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POLICY MEASURES
With a view to improving the depth and liquidity in the government
securities market, RBI announced the following policy measures relating to Treasury
Bills with effect from October1999:
1. Price based auction of government dated securities.
2. Auction of 182-day Treasury Bills.
3. A calendar of Treasury Bills Issuance
TB RATE
The discount rate at which the RBI sells TBs known as Treasury Bills rate. The
effective yield on TBs depends on such factors as the rate of discount, difference
between the issue price and the redemption value, and time period of their maturity.
The treasury bills rate is computed as follows:
Y= {[(FV-IP)/IP]*[364/MP]}*100.
Where,
FV = Face Value TBs
IP = Issue Price of TBs
MP = Maturity Period of TBs in days
D = Discount.
BENEFITS
TBs being an important money market instruments provide the following benefits:
LIQUIDITY
Treasury bills command high liquidity. A number of institutions such as RBI, the
DFHI, STCI, commercial banks, etc take part in the TB market. In addition, the
Central bank is always prepared to purchased or discount TBs.
NO DEFAULT RISK
Since there is a guarantee by the central government, TBs are absolutely free from
the risk of default of payment by the issuer. Moreover, the government itself issues
the TBs.
AVAILABILITY
RBI has the policy of making available on a steady basis, the TBs especially through
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the Tap route since July 12, 1965. This greatly helps banks and other institutions to
park their funds temporarily in TBs.
LOW COST
Trading in TBs involves less transaction costs. This is because two-way quotes
with a fine margin are offered by the DFHI on a daily basis.
SAFE RETURN
The biggest advantage of TBs is that they offer a steady and sage return to investors.
There are not many fluctuations in the discount rate. It is also possible for the
investors to earn attractive return by keeping investment in nonearning cash to the
minimum and supplementing it with TBs.
NO CAPITAL DEPRECIATION
Since TBs command high order of liquidity, safely and yield, there is very little
scope for capital depreciation in them.
SLR ELIGBILITY
TBs are of great attraction to commercial banks as it helps them park their funds
(Net Demand and Time Liabilities) as per the norms or SLR announced b
the RBI from time to time. This reason makes commercial banks dominate dealers
in TBs.
FUNDS MOBILIZATION
TBs are used as an ideal tool by the government for raising short-term funds required
for meeting temporary budget deficit.
MONETARY MANAGEMENT
It is also possible for the government to mop up excess liquidity in the economy
through the issue of TBs. Since TBs are subscribed by the investors other than the
RBI, the issue would neither lead to inflationary pressure nor result in monetization.
BETTER SPREAD
TBs facilitate proper spread of asset mix different maturity as they are
available on tap basis as well as in fortnightly auctions.
PERFECT HEDGE
TBs can be used as a hedge against volatility of call loan market and interest rate
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fluctuations.
FUND MANAGEMENT
TBs serve as effective tools of fund management because of the following reasons:
1. Ready market availability, both for sale and purchase at market driven prices, thus
imparting flexibility.
2. Facility of rediscounting TBs on tap basis.
3. Facility of refinancing from the RBI.
4. Plethora of options available to fund managers to invest in TBs and for raising
funds against TBs especially through and with the help of DFHI
5. Ideally suited for investment of temporary surplus
6. Possibility of building up portfolio of TBs with dates of maturities matching the
dates of payment of liabilities, such as certificates of deposits and deposits of short-
term maturities.
7. Possibility of meeting the temporary difficulties of funds by entering into
buyback transactions for surplus TBs and reversing the transactions when
the financial need is over
Call and notice money market refers to the market for short -term funds ranging
from overnight funds to funds for a maximum tenor of 14 days. Under Call money
market, funds are transacted on overnight basis and under notice money market,funds are transacted for the period of 2 days to 14 days.
The call/notice money market is an important segment of the Indian Money
Market. This is because, any change in demand and supply of short-term funds in
the financial system is quickly reflected in call money rates. The RBI makes use of
this market for conducting the open market operations effectively.
Participants in call/notice money market currently include banks (excluding RRBs)
and Primary dealers both as borrowers and lenders. Non Bank institutions are not
permitted in the call/notice money market with effect from August 6, 2005. The
regulator has prescribed limits on the banks and primary dealers operation in the
call/notice money market.
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Call money market is for very short term funds, known as money on call. The rate
at which funds are borrowed in this market is called `Call Money rate'. The size of
the market for these funds in India is between Rs 60,000 million to Rs 70,000
million, of which public sector banks account for 80% of borrowings and foreign
banks/private sector banks account for the balance 20%. Non-bank financial
institutions like IDBI, LIC, and GIC etc participate only as lenders in this market.
80% of the requirement of call money funds is met by the non-bank participants and
20% from the banking system.
In pursuance of the announcement made in the Annual Policy Statement of April
2006, an electronic screen-based negotiated quote-driven system for all dealings in
call/notice and term money market was operationalised with effect from September
18, 2006. This system has been developed by Clearing Corporation of India Ltd. on
behalf of the Reserve Bank of India. The NDS -CALL system provides an
electronic dealing platform with features like Direct one to one negotiation, real
time quote and trade information, preferred counterparty setup, online exposure
limit monitoring, online regulatory limit monitoring, dealing in call, notice and
term money, dealing facilitated for T+0 settlement type for Call Money and
dealing facilitated for T+0 and T+1 settlement type for Notice and Term Money.
Information on previous dealt rates, ongoing bids/offers on re al time basis imparts
greater transparency and facilitates better rate discovery in the call money market.
The system has also helped to improve the ease of transactions, increased
operational efficiency and resolve problems associated with asymmetry of
information. However, participation on this platform is optional and currently both
the electronic platform and the telephonic market are co-existing. After the
introduction of NDS-CALL, market participants have increasingly started using
this new system more so during times of high volatility in call rates.
Volumes in the Call Money Market
Call markets represent the most active segment of the money markets. Though the
demand for funds in the call market is mainly governed by the banks' need for
resources to meet their statutory reserve requirements, it also offers to some
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participants a regular funding source for building up short -term assets. However,
the demand for funds for reserve requirements dominates any other demand in the
market.. Figure 4.1 displays the average daily volumes in the call markets.
Figure 4.2: Average Daily Volumes in the Call Market (Rs. cr.)
Committee Recommendation on Call Money Market:
There are various committee suggested recommendation on Call Money Market are
as follow:
The Sukhumi Chakra arty Committee
The call money market for India was first recommended by the Sukhumoy
Chakravarty Committee, which 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
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of this, the Chakravarty Committee recommended that additional non-bank
participants may be allowed to participate in call money market.
The Vaghul Committee Report
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 anenvironment where deposit rates were regulated, while call rates were market
determined.
The Narasimham Committee II Report
The Narasimham Committee II (1998) also recommended that call money market
in India, like in most other developed markets, should be strictly restricted to banks
and primary dealers. Since non- bank participants are not subject to reserve
requirements, the Committee felt that such participants should use the other money
market instruments, and move out of the call markets.
Following the recommendations of the Reserve Banks Internal Working Group
(1997) and the Narasimhan Committee (1998), steps were taken to reform the call
money market by transforming it into a pure inter bank market in a phased manner.
The non-banks exit was implemented in four stages beginning May 2001 whereby
limits on lending by non-banks were progressively reduced along with theoperationalisation of negotiated dealing system (NDS) and CCIL until their
complete withdrawal in August 2005. In order to create avenues for deployment of
funds by non-banks following their phased exit from the call money market,
several new instruments were created such as market repos and CBLO.
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Various reform measures have imparted stability to the call money market. With
the transformation of the call money market into a pure inter-bank