hema cha new edt

7/28/2019 Hema Cha New Edt

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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

hema cha new edt

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