TOPIC

“STUDY OF MONEY MARKET”

SUBMITTED BY

PRIYANKA SHANTISWAROOP RAJPUT

TYBFM (V SEMESTER)

PROJECT GUIDE

PROF. PRASANNA CHOUDHARI

SUBMITTED TO

UNIVERSITY OF MUMBAI

RAJHASTHANI SAMMELAN’S

Ghanshyamdas Saraf College

Affiliated to University of Mumbai

ACCREDITED BY NAAC BY ‘A’ GRADE

&

Durgadevi Saraf Junior College

(ARTS & COMMERCE)

S.V Road, Malad (W)

Mumbai: 400 064

Year: 2012-2013

RAJHASTHANI SAMMELAN’S

Ghanshyamdas Saraf College

Affiliated to University of Mumbai

ACCREDITED BY NAAC BY ‘A’ GRADE

&

Durgadevi Saraf Junior College

(ARTS & COMMERCE)

S.V Road, Malad (W)

Mumbai: 400 064

Year: 2012-2013

CERTIFICATE

I Prof. Prasanna Choudhari here by certify that Ms. Priyanka Shantiswaroop

Rajput a student of Ghanshyamdas Saraf College of T.Y.B.F.M (Semester V)

has completed Project on “STUDY OF MONEY MARKET” in the Academic

Year 2012-2013.

This information submitted is true and original to the best of my knowledge

External examiner: Principal:

Date:

Project Co-ordinator: College Seal:

Date:

ACKNOWLEDGEMENT

I take this opportunity to thank the UNIVERSITY OF

MUMBAI for giving me a chance to do this project.

I express my sincere gratitude to the Principal, course Co-

ordinator Mrs. Deepti Soni Madam, Guide Prof. Prasanna

Choudhari and our librarian and other teachers for their constant

support and helping for completing the project.

I am also grateful to my friends for giving support in my

project. Lastly, I would like to thank each and every person who

helped me in completing the project especially MY PARENTS

DECLARATION

I Miss Priyanka Shantiswaroop Rajput a student of

Ghanshyamdas Saraf College of Arts and Commerce, Malad

(W) T.Y.B.F.M (Semester V) hereby declare that I have

completed the project on “STUDY OF MONEY MARKET” in

the academic year 2012-2013. This information submitted is

true and original to best of my knowledge.

Date: Signature of the student

EXECUTIVE SUMMARY

The seventh largest and second most populous country in the world, India has

long been considered a country of unrealized potential. A new spirit of

economic freedom is now stirring in the country, bringing sweeping changes in

its wake. A series of ambitious economic reforms aimed at deregulating the

country and stimulating foreign investment has moved India firmly into the

front ranks of the rapidly growing Asia Pacific region and unleashed the latent

strengths of a complex and rapidly changing nation.

India's process of economic reform is firmly rooted in a political consensus that

spans her diverse political parties. India's democracy is a known and stable

factor, which has taken deep roots over nearly half a century. Importantly,

India has no fundamental conflict between its political and economic systems.

Its political institutions have fostered an open society with strong collective and

individual rights and an environment supportive of free economic enterprise.

India's time tested institutions offer foreign investors a transparent environment

that guarantees the security of their long term investments. These include a free

and vibrant press, a judiciary which can and does overrule the government, a

sophisticated legal and accounting system and a user friendly intellectual

infrastructure. India's dynamic and highly competitive private sector has long

been the backbone of its economic activity. It accounts for over 75% of its

Gross Domestic Product and offers considerable scope for joint ventures and

collaborations.

Today, India is one of the most exciting emerging money markets in the world.

Skilled managerial and technical manpower that match the best available in the

world and a middle class whose size exceeds the population of the USA or the

European Union, provide India with a distinct cutting edge in global

competition. The average turnover of the money market in India is over Rs.

40,000 crores daily. This is more than 3 percents of the total money supply in

the Indian economy and 6 percent of the total funds that commercial banks

have let out to the system. This implies that 2 percent of the annual GDP of

India gets traded in the money market in just one day. Even though the money

market is many times larger than the capital market, it is not even fraction of

the daily trading in developed markets.

OBJECTIVES OF THE STUDY

To study about Money market

To study about the structure of money market and its components

To study about the money market instruments brief.

To study about the role of Reserve bank of India in Indian Money market

To study the defects of money market

INDEX

Sr. No. Contents Page No

1. Introduction 2

2. History 4

3. Meaning of Money Market 5

4. Objectives of Money Market 7

5. Characteristic Of Money Market 8

6. Structure of Money Market 9

7. Component of Money Market 11

8. The Role of Reserve Bank of India in 51 Indian Money Market

9. Defects of Money Market 52

10. Questionnaire 57

11. Suggestion 62

12. Conclusion 63

13. Case Study

14. Articles

15. Bibliography

Introduction

The money market is a key component of the financial system as it is the

fulcrum of monetar y operations conducted by the central bank in its

pursuit of monetary policy objectives.

The money market is a subsection of the fixed income market. We generally

think of the term fixed income as being synonymous to bonds. 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 matures in 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 very liquid 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

a dealer 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 or exchange. Deals are transacted over the phone or

through electronic systems. 

The easiest way for us to gain access to the money market is with a money

market mutual funds, or sometimes through a money market bank account.

These accounts and funds pool together the assets of thousands of investors in

order to buy the money market securities on their behalf. However, some

money market instruments, like Treasury bills, may be purchased directly.

Failing that, they can be acquired through other large financial institutions with

direct access to these markets. There are several different instruments in the

money market, offering different returns and different risks.

History

Till 1935, when the RBI was set up the Indian money market remained highly

disintegrated, unorganized, narrow, shallow and therefore, very backward. The

planned economic development that commenced in the year 1951 market an

important beginning in the annals of the Indian money market. The

nationalization of banks in 1969, setting up of various committees such as the

Sukhmoy Chakraborty Committee (1982), the Vaghul working group (1986),

the setting up of discount and finance house of India ltd. (1988), the securities

trading corporation of India (1994) and the commencement of liberalization

and globalization process in 1991 gave a further fillip for the integrated and

efficient development of India money market.

India has witnessed in the past two decades substantial

changes in the money and capital markets. The money market scenario, which

has emerged since

1980s, has witnessed new instruments and new directions have been chalked

out. It is to be noted

here that, strictly speaking, the money market deals with short term flow of

funds whereas the

capital market, embracing the stock market, deals with medium and long-term

capital flows. But

these two markets can not be placed in water tight compartments and there is

often a spillover

from one market to the other.

1) 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.

2) Definition of Money Market:

According to the McGraw Hill Dictionary of Modern Economics, “money

market is the term designed to include the financial institutions which handle

the purchase, sale, and transfers of short term credit instruments. The money

market includes the entire machinery for the channelizing of short-term funds.

Concerned primarily with small business needs for working capital,

individual’s borrowings, and government short term obligations, it differs from

the long term or capital market which devotes its attention to dealings in bonds,

corporate stock and mortgage credit.”

According to the Reserve Bank of India, “money market is the centre for

dealing, mainly of short term character, in money assets; it meets the short term

requirements of borrowings and provides liquidity or cash to the lenders. It is

the place where short term surplus investible funds at the disposal of financial

and other institutions and individuals are bid by borrowers’ agents comprising

institutions and individuals and also the government itself.”

According to 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.”

Objectives of Money Market

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.

Characteristic of Money Market

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.

Significance of Money Market

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

financing 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.

(iii) 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.

(iv) Self sufficiency of banks

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.

(v) 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.

(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.

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

STRUCTURE OF MONEY MARKET

ORGANIZED SECTOR

UNORGANIZED SECTOR

SUB-MARKET(Instruments)

Certificate of

deposit

Commercial

paper

T-bill’s

Call & short

notice Market

Repos

MMMF ’s

Organized Money Market

The RBI is the apex institution which controls and monitors all the

organizations in the organised sector. The commercial banks can operate as

lenders and operators. The FIs like IDBI, ICICI, and others operate as lenders.

The organised 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.

Main constituents of Organised Money Market

Reserve Bank of India

Reserve Bank of India is the regulator over the money market in India. As the

Central 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 capital requirements. 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.

Mutual Funds

Mutual funds also invest their surplus funds in variou~ 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 of mobilisation 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 organised banking sector,

may be due to lack of security or some other reason.

Money Lenders   (MLs)

MLs are important participants in unorganised 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 Brokers

They 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.

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 it into 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

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 Fund’s (MMFS)

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 Issued by commercial

bank/financial institutions at discount to face institutions. value at market rates.

The Negotiable Instruments Act governs CDs.

Maturity

The 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 is

presented 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, administered

interest rate structure on bank deposits and the danger of CDs giving rise to a

large number of fictitious transactions.

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.

MATURITY

The maturity period of CDs issued by banks ranges from 3 days to 12 months

and 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.

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

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

market segment. 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:

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 sound instrument. 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

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 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 dealer’s 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

Treasury bills incorporate the following general features:

Issuer

TBs are issued by the government for raising short-term funds from 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 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 month’s 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

November 1986.

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 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

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 METHOD’s.

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.

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 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 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

8. Possibility of making enhanced profit by indulging in quick raising of money

against TBs for investing in call money market when call rates are high and

doing the reverse when call rates dip.

REPOS

The term Repo is used as an abbreviation for Repurchase Agreement or Ready

Forward. A Repo involves a simultaneous “sales and repurchase”agreements.

A Repo works as follow as follows. Party A needs short-term funds and PartyB

wants to make a short-term investment. Party A sells securities to Party B at a

certain price and simultaneously agrees to repurchase the same after a specified

time at a slightly higher price. The difference between the sale price and

repurchase price represent the interest cost to Party A (the party doing the repo)

and conversely the interest income for Party B (the party doing the Reverse

Repo). Reverse Repos are a safe and convenient form of short-term

investment.

BENEFITS & FEATURES

Interest Rate

Being collateralized loans, repos help reduce counter

party risk & therefore, fetch a low interest rate.

Contract

The Repo contract provides the seller – bank to get money by partying with its

security and the buyer – bank in turn to get the security by parting with its

money. It becomes a Reserve Repo deal for the purchaser of the security.

Securities are sold first to a buyer bank and simultaneously another contract is

entered in to with buyer to repurchase them at a predetermine date and price in

future. The price of the sale and repurchase of securities is determined before

entering into deal.

Safety

Repo is an almost risk free instrument used to even out liquidity

changes in the system. Repos offer short-term outlet for temporary excess

cash at close to the market interest rate.

Hedge tool

As purchaser of the repo requires title to the securities for the term of agreement

and as the repurchase price is locked in at a time of sale itself. It is possible to

use repos as an effective hedge-tool to arrange the others repos or to sell them

outright or to deliver them to another party to fulfill the delivery commitment in

respect of a forward or future contract or a short sale or a maturing reveres repo.

Period

The minimum period for Ready Forward Transaction Bill willbe 3 day.

However, RBI withdraws this restriction for the minimum period with the effect

from October 30, 1998.

Liquidity Control

The RBI uses Repo as a tool of liquidity control for absorbing surplus liquidity

from the banking system in a flexible way and thereby preventing interest

rate arbitraging. All Repo transaction are to be effected at Mumbai only and

the deals are to be necessary put through the subsidiary General Ledger (SGL)

account with the Reserve Bank of India.

Cash Management Tool

The Repo arrangement essential serves as a short – term cash management tool

as the bank receive cash from the buyer of the securities in return for the

securities. This helps the bankermeet temporary cash requirement. This also

makes the repo a pure money lending operation. On the maturity of the ‘repos’

the security is purchased back by the seller bank from the buyer-bank by

returningthe money to the buyer.

MONEY MARKET MUTUAL FUNDS (MMMFS)

The Reserve Bank of India introduced the Money Market Mutual Funds

(MMMFs) scheme in April 1972. The schemes aim at providing additional

short-term avenues to individual investor in order to bring Money Market

Instrument within their reach. MMMFs are expected to be more attractive to

banks and financial institutions, ho would find them providing greater

liquidity and depth to the money market.

FEATURES

The Silent features of the MMMFs are as follows.

Eligibility

The MMMFs can be set up by schedule commercial banks and

publicfinancial institution as define under section 4A of the companies Act,

1956, either directly or through their existing Mutual Funds / Subsidiaries who

are engaged in fund management. In addition, private sector Mutual Funds may

also set up MMMFs with the prior approval of RBI, subject to fulfillment of

certain terms and conditions. SEBI’s clearance is required in the event of

MMMFs being set up in the private sector.

Structure

MMMFs can be set up either as Money Market Deposit Accounts (MMDAs) or

Money Market Mutual Funds (MMMFs)

Size

There is no ceiling prescribed for the MMMFs for raising resources.

Investors

The MMMFs are primary indented to serve as a vehicle for individual

investor to participate in the Money Market, the units / shares of MMMFs can

be issued only to individuals. In addition, individual Non Resident Indian

(NRIs) may also subscribe to the share / units of MMMFs. The dividend /

income on such subscription will be allowed to be repatriated, through the

principle amount of subscription will be allowed to be repatriated, though the

principal amount of subscription will not.

Minimum Size of Investment

MMMFs would be free to determine the minimum size of the investment by

single investor. The investor cannot be guaranteed of a minimum rate of return,

the minimum lock-in period for the investment would be 46 days.

Investment by MMMFs

The resources mobilized by MMMFs should be invested exclusively in the

various money market instruments as listed below.

1. Treasury Bills and dated Government Securities having an unexpired

maturity up to 1 year with no minimum limit

2. call / notice money with no maximum limit

3. Commercial Paper with no maximum limit, the exposure to the

commercial paper issue by the individual company being limited to 3% of the

resources of the MMMFs as the prudential requirement

4. Commercial bills arising out of genuine trade / commercial

transactions and accepted / co-accepted by banks with no – maximum limits.

Reserve Requirements

In the MMMFs set up by banks, the resources mobilized by them would not to

be consider part of their net demand, and time liabilities, and as such would be

free of any reserve requirement.

Stamp duty

The share / units issued by MMMFs would be subject to Stamp duty.

Regulatory Authority

RBI is the regulatory that gives the approval for the setting of MMMFs. Beside

this, banks their subsidiaries and public financial institution would also be

required to comply with the guidelines and directives that may be issued by RBI

from time to time for the setting and operation of MMMFs. Similarly, the

Private Sector MMMFs would need to clearance of SEBI, as also approval of

RBI.

Call Money Market

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.

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 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 Sukhumoy Chakravarty 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 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 an environment 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 the operationalisation 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.

Various reform measures have imparted stability to the call money market.

With the transformation of the call money market into a pure inter-bank

market, the turnover in the call/notice money market has declined

significantly. The activity has migrated to other overnight collateralized

market segments such as market repo and CBLO

Participants in the Call Money Market

Participants in call money market include the following:

As lenders and borrowers: Banks and institutions such as commercial banks,

both Indian and foreign, State Bank of India, Cooperative Banks, Discount and

Finance House of India ltd. (DFHL) and Securities Trading Corporation of

India (STCI).

As lenders: Life Insurance Corporation of India (LIC), Unit Trust of India

(UTI), General Insurance Corporation (GIC), Industrial Development Bank of

India (IDBI), National Bank for Agriculture and Rural Development

(NABARD), specified institutions already operating in bills rediscounting

market, and entities/corporates/mutual funds.

The participants in the call markets increased in the 1990s, with a

gradual opening up of the call markets to non-bank entities. Initially DFHI

was the only PD eligible to participate in the call market, with other PDs

having to route their transactions through DFHI, and subsequently STCI. In

1996, PDs apart from DFHI and STCI were allowed to lend and borrow

directly in the call markets. Presently there are 18 primary dealers

participating in the call markets. Then from 1991 onwards, corporates were

allowed to lend in the call markets, initially through the DFHI, and later

through any of the PDs. In order to be able to lend, corporates had to provide

proof of bulk lendable resources to the RBI and were not suppose to have any

outstanding borrowings with the banking system. The minimum amount

corporates had to lend was reduced from Rs. 20 crore, in a phased manner to

Rs. 3 crore in 1998. There were 50 corporates eligible to lend in the call

markets, through the primary dealers. The corporates which were allowed to

route their transactions through PDs, were phased out by end June 2001.

Table 4.2: Number of Participants in Call/Notice Money Market

Category Bank PD F

I MF Corporate Total

I.

Borrower 154 19 - - - 173

II. Lender 154 19 2

0 35 50 277

Source: Report of the Technical Group on Phasing Out of Non-banks from

Call/Notice Money Market, March 2001.

Banks and PDs technically can operate on both sides of the call

market, though in reality, only the P Ds borrow and lend in the call markets.

The bank participants are divided into two categories: banks which are pre-

dominantly lenders (mostly the public sector banks) and banks which are pre-

dominantly borrowers (foreign and private sector banks). Currently, the

participants in the call/notice money market currently include banks

(excluding RRBs) and Primary Dealers (PDs) both as borrowers and lenders.

Call Money Rates:

The rate of interest on call funds is called money rate. Call money rates

are characteristics in that they are found to be having seasonal and daily

variations requiring intervention by RBI and other institutions.

The concentration in the borrowing and lending side of the call

markets impacts liquidity in the call markets. The presence or absence of

important players is a significant influence on quantity as well as price. This

leads to a lack of depth and high levels of volatility in call rates, when the

participant structure on the lending or borrowing side alters.

Short-term liquidity conditions impact the call rates the most. On the

supply side the call rates are influenced by factors such as: deposit

mobilization of banks, capital flows, and banks reserve requirements ; and on

the demand side, call rates are influenced by tax outflows, government

borrowing programme, seasonal fluctuations in credit off take. The external

situation and the behaviour of exchange rates also have an influence on call

rates, as most players in this market run integrated treasuries that hold short

term positions in both rupee and forex markets, deploying and borrowing

funds through call markets.

Table 4.3: Call Money Rates

Source:

Handbook

of

Statistics

on Indian

Economy,

2006-07,

RBI

During normal times, call rates hover in a range between the repo rate

and the reverse repo rate. The repo rate represents an avenue for parking short

-term funds, and during periods of easy liquidity, call rates are only slightly

above the repo rates. During periods of tight liquidity, call rates move towards

Year

Year

Maximum

(% p.a.)

Minimum

(% p.a.)

Average

(% p.a.)

Bank rate

(End March)

(% p.a.)

1996 - 97 14.6 1.05 7.8 12.0

1997 - 98 52.2 0.2 8.7 10.5

1998 - 99 20.2 3.6 7.8 8.0

1999 - 00 35.0 0.1 8.9 8.0

2000 - 01 35.0 0.2 9.2 7.0

2001 - 02 22.0 3.6 7.2 6.5

2002 - 03 20.00 0.50 5.89 6.25

2003 -04 12.00 1.00 4.62 6.00

2004 - 05 10.95 0.6 4.65 6.00

the reverse repo rate. Table 4.3 provides data on the behaviour of call rates.

Figure 4.3displays the trend of average monthly call rates.

The behaviour of call rates has historically been influenced by liquidity

conditions in the market. Call rates touched a peak of about 35% in May 1992,

reflecting tight liquidity on account of high levels of statutory pre-emptions

and withdrawal of all refinance facilities, barring export credit refinance. Call

rates again came under pressure in November 1995 when the rates were 35%

par.

MONEY MARKET MUTUAL FUNDS (MMMFS)

The Reserve Bank of India introduced the Money Market Mutual Funds

(MMMFs) scheme in April 1972. The schemes aim at providing additional

short-term avenues to individual investor in order to bring Money Market

Instrument within their reach. MMMFs are expected to be more attractive to

banks and financial institutions, ho would find them providing greater

liquidity and depth to the money market.

FEATURES

The Silent features of the MMMFs are as follows.

Eligibility

The MMMFs can be set up by schedule commercial banks and

publicfinancial institution as define under section 4A of the companies Act,

1956, either directly or through their existing Mutual Funds / Subsidiaries who

are engaged in fund management. In addition, private sector Mutual Funds may

also set up MMMFs with the prior approval of RBI, subject to fulfillment of

certain terms and conditions. SEBI’s clearance is required in the event of

MMMFs being set up in the private sector.

Structure

MMMFs can be set up either as Money Market Deposit Accounts (MMDAs) or

Money Market Mutual Funds (MMMFs)

Size

There is no ceiling prescribed for the MMMFs for raising resources.

Investors

The MMMFs are primary indented to serve as a vehicle for individual

investor to participate in the Money Market, the units / shares of MMMFs can

be issued only to individuals. In addition, individual Non Resident Indian

(NRIs) may also subscribe to the share / units of MMMFs. The dividend /

income on such subscription will be allowed to be repatriated, through the

principle amount of subscription will be allowed to be repatriated, though the

principal amount of subscription will not.

Minimum Size of Investment

MMMFs would be free to determine the minimum size of the investment by

single investor. The investor cannot be guaranteed of a minimum rate of return,

the minimum lock-in period for the investment would be 46 days.

Investment by MMMFsThe resources mobilized by MMMFs should be

invested exclusively in the various money market instruments as listed below.

1. Treasury Bills and dated Government Securities having an unexpired

maturity up to 1 year with no minimum limit

2. call / notice money with no maximum limit

3. Commercial Paper with no maximum limit, the exposure to the

commercial paper issue by the individual company being limited to 3% of the

resources of the MMMFs as the prudential requirement

4. Commercial bills arising out of genuine trade / commercial

transactions and accepted / co-accepted by banks with no – maximum limits.

Reserve Requirements

In the MMMFs set up by banks, the resources mobilized by them would not to

be consider part of their net demand, and time liabilities, and as such would be

free of any reserve requirement.

Stamp duty

The share / units issued by MMMFs would be subject to Stamp duty.

Regulatory Authority

RBI is the regulatory that gives the approval for the setting of MMMFs. Beside

this, banks their subsidiaries and public financial institution would also be

required to comply with the guidelines and directives that may be issued by RBI

from time to time for the setting and operation of MMMFs. Similarly, the

Private Sector MMMFs would need to clearance of SEBI, as also approval of

RBI.

The Role of the Reserve Bank of India in the Money

Market

The Reserve Bank of India is the most important constituent of the money

market. The market comes within the direct preview of the Reserve Bank of

India regulations.

The aims of the Reserve Bank’s operations in the money market are:

To ensure that liquidity and short term interest rates are maintained at levels

consistent with the monetary policy objectives of maintaining price stability.

To ensure an adequate flow of credit to the productive sector of the

economy and

To bring about order in the foreign exchange market.

The Reserve Bank of India influence liquidity and interest rates through a

number of operating instruments - cash reserve requirement (CRR) of banks,

conduct of open market operations (OMOs), repos, change in bank rates and at

times, foreign exchange swap operations.

Defects of Money Market

A well-developed money market is a necessary pre-condition for the effective

implementation of monetary policy. The central bank controls and regulates the

money supply in the country through the money market. However,

unfortunately, the Indian money market is inadequately developed, loosely

organised and suffers from many weaknesses. Major defects are discussed

below:

D

E

F

E

C

T

S

O

F

M

M

Dichotomy between organized and

unorganized sector

Predominance of unorganized sector

Wasteful Competition

Absence of All-India Market

Inadequate banking facilities

Seasonal shortage of funds

Diversity of Interest rates

Absence of Bill market

o Dichotomy between Organised and Unorganised Sectors

The most important defect of the Indian money market is its division into

two sectors: (a) the organised sector and (b) the unorganised sector. There is

little contact, coordination and cooperation between the two sectors. In such

conditions it is difficult for the Reserve Bank to ensure uniform and effective

implementations of monetary policy in both the sectors.

o Predominance of Unorganised Sector

Another important defect of the Indian money market is its predominance of

unorganised sector. The indigenous bankers occupy a significant position in the

money-lending business in the rural areas. In this unorganised sector, no clear-

cut distinction is made between short-term and long-term and between the

purposes of loans. These indigenous bankers, which constitute a large portion

of the money market, remain outside the organised sector. Therefore, they

seriously restrict the Reserve Bank's control over the money market,

o Wasteful Competition

Wasteful competition exists not only between the organised and

unorganised sectors, but also among the members of the two sectors. The

relation between various segments of the money market are not cordial; they

are loosely connected with each other and generally follow separatist

tendencies. For example, even today, the State Bank of Indian and other

commercial banks look down upon each other as rivals. Similarly, competition

exists between the Indian commercial banks and foreign banks.

o Absence of All-India Money Market

Indian money market has not been organised into a single integrated all-

Indian market. It is divided into small segments mostly catering to the local

financial needs. For example, there is little contact between the money markets

in the bigger cities, like, Bombay, Madras, and Calcutta and those in smaller

towns.

o Inadequate Banking Facilities

Indian money market is inadequate to meet the financial need of the

economy. Although there has been rapid expansion of bank branches in recent

years particularly after the nationalisation of banks, yet vast rural areas still

exist without banking facilities. As compared to the size and population of the

country, the banking institutions are not enough.

Shortage of Capital: Indian money market generally suffers from the shortage

of capital funds. The availability of capital in the money market is insufficient

to meet the needs of industry and trade in the country. The main reasons for the

shortage of capital are: (a) low saving capacity of the people; (b)inadequate

banking facilities, particularly in the rural areas; and (c) undeveloped banking

habits among the people.

o Seasonal Shortage of Funds

A Major drawback of the Indian money market is the seasonal stringency of

credit and higher interest rates during a part of the year. Such a shortage

invariably appears during the busy months from November to June when there

is excess demand for credit for carrying on the harvesting and marketing

operations in agriculture. As a result, the interest rates rise in this period. On

the contrary, during the slack season, from July to October, the demand for

credit and the rate of interest decline sharply.

o Diversity of Interest Rates

Another defect of Indian money market is the multiplicity and disparity of

interest rates. In 1931, the Central Banking Enquiry Committee wrote: "The

fact that a call rate of 3/4 per cent, a hundi rate of 3 per cent, a bank rate of 4

per cent, a bazar rate of small traders of 6.25 per cent and a Calcutta bazar rate

for bills of small trader of 10 per cent can exist simultaneously indicates an

extraordinary sluggishness of the movement of credit between various

markets." The interest rates also differ in various centres like Bombay,

Calcutta, etc. Variations in the interest rate structure is largely due to the credit

immobility because of inadequate, costly and time-consuming means of

transferring money. Disparities in the interest rates adversely affect the smooth

and effective functioning of the money market.

o Absence of Bill Market

The existence of a well-organised bill market is essential for the proper and

efficient working of money market. Unfortunately, in spite of the serious

efforts made by the Reserve Bank of India, the bill market in India has not yet

been fully developed. The short-term bills form a much smaller proportion of

the bank finance in India as compared to that in the advanced countries.

Many factors are responsible for the underdeveloped bill

market in India

(i) Most of the commercial transactions are made in terms of cash.

(ii) Cash credit is the main form of borrowing from the banks. Cash credit is

given by the banks against the security of commodities. No bills are involved

in this type of credit.

(iii)The practice of advancing loans by the sellers also limits the use of bills.

(iv) There is lack of uniformity in drawing bills (bundles) in different parts of

the country.

(v) Heavy stamp duty discourages the use of exchange bills.

(vi) Absence of acceptance houses is another factor responsible for the

underdevelopment of bill market in India.

(vii) In their desire to ensure greater liquidity and public confidence, the Indian

banks prefer to invest their funds in first class government securities than in

exchange bills.

(viii) The Reserve Bank of India also prefers to extend rediscounting facility to

the commercial banks against approved securities

QUESTIONNAIRE

Questionnaire For Indian Money Market

Name:

Age: Gender:

Contact No. Profession:

1) What is your annual income?

□ below 1 lakhs

□ between 1 lakhs- 3 lakhs

□ between 3 lakhs- 5 lakhs

□ above 5 lakhs

2) How do you invest your savings?

□ Deposits in Banks

□ Invest in Real Estate

□ Invest in Capital Market

□ Invest in Money Market Mutual Funds

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

□ Yes

□ No

□ Heard but not know

4) How long would you like to hold your Money Market Instruments?

□ Long term period

□ Short term period

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

□ Low

□ Average

□ Medium

□ High

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

□ below 10 %

□ between 10 % - 20%

□ between 20% - 30%

□ above 30%.

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

□ Poor

□ Average

□ Good

□ Excellent

8) Is recession had affected your investment decision?

□ Yes

□ No

Sampling objective: to find out individual investors for the age group of

18 -55 years.

Sampling area: Mumbai

Particular

s

No. of

investors

Deposits in

Banks

13

Investment in

Real Estate

07

Investment in

Capital

Market

11

Investment in

Money Market

09

The above pie diagram show how the pattern of investment of saving by

individual investors in various field of investment

Investment of Savings

Deposits in Banks32%

Investment in Real Estate

18%

Investment in Capital Market

27%

Investment in Money Market

23%

Deposits in Banks Investment in Real Estate

Investment in Capital Market Investment in Money Market

Risk Involvement

Low8%

Average13%

Medium37%

High42%

Low Average Medium High

Risk

Involvement

No. of

Investors

Low 03

Average 05

Medium 15

High 17

Suggestion

In a view of the various defects in the Indian money market, the following

suggestions have been made for its proper development:

The activities of the indigenous banks should be brought under the effective

control of the Reserve Bank of India.

Hundies used in the money market should be standardised and written in the

uniform manner in order to develop an all-India money market.

Banking facilities should be expanded especially in the unbanked and

neglected areas.

Discounting and rediscounting facilities should be expanded in a big way to

develop the bill market in the country.

For raising the efficiency of the money market, the number of the clearing

houses in the country should be increased and their working improved.

Adequate and less costly remittance facilities should be provided to the

businessmen to increase the mobility of capital.

Variations in the interest rates should be reduced.

Conclusion

The money market specializes in debt securities that mature in less than one

year.

Money market securities are very liquid, and are considered very safe. As a

result, they offer a lower return than other securities.

The easiest way for individuals to gain access to the money market is

through a money market mutual fund.

T-bills are short-term government securities that mature in one year or less

from their issue date. T-bills are considered to be one of the safest investments

- they don't provide a great return.

A certificate of deposit (CD) is a time deposit with a bank.

Annual percentage yield (APY) takes into account compound

interest, annual percentage rate (APR) does not.

CDs are safe, but the returns aren't great, and your money is tied up for the

length of the CD.

Commercial paper is an unsecured, short-term loan issued by a corporation.

Returns are higher than T-bills because of the higher default risk.

Banker's acceptances (BA)are negotiable time draft for financing

transactions in goods.

BAs are used frequently in international trade and are generally only

available to individuals through money market funds.

Eurodollars are U.S. dollar-denominated deposit at banks outside of the

United States.

The average eurodollar deposit is very large. The only way for individuals

to invest in this market is indirectly through a money market fund.

Repurchase agreements (repos) are a form of overnight borrowing backed

by government securities

Articles on Money market

1. SEC Can't Agree on a Fix For Money-Market Funds Updated August 23, 2012, 10:51 a.m. ET

Nothing the government can do will prevent every future financial crisis; they

have been with us since the advent of money and financial markets. But the

government is even having trouble fixing things that made the last crisis so

devastating.

Financial crises can't be prevented, but can the government make changes to

make their impact less devastating? David Wessel reports on The News Hub.

Photo: Bloomberg.

Outnumbered 3-2, Securities and Exchange Commission Chairman Mary

Schapiro on Wednesday abandoned her effort to propose rule changes for

money-market mutual funds, the $1-a-share funds that currently hold $2.6

trillion from individuals and institutions.Backed by the Treasury secretary and

Federal Reserve chairman, Ms. Schapiro had argued changes were needed to

prevent a repeat of the destabilizing September 2008 run on the funds.

The industry is resisting strenuously, arguing the changes would render the

funds less desirable, if not unusable.

But Ms. Schapiro had only one other vote. The swing voter was Luis Aguilar, a

former general counsel of Invesco, which has a money-market fund. He said

Wednesday he would oppose the Schapiro proposal; she called off a vote that

had been tentatively set for next week.

Money-market funds pool investors' money and put it in short-term

government and corporate debt. They generally offer investors (here's the rub)

$1 back for every $1 they invest, a feature unique among mutual funds.

Customers often view them like banks and can write checks on their accounts

—but, unlike banks, the funds aren't backed by government deposit insurance

and don't have cushions to cover any losses on their holdings.

In September 2008, the original money fund, Reserve Primary Fund, had so

much of its money—1.2% of its $63 billion—in Lehman Brothers that when

Lehman went down it "broke the buck." Reserve ended up with 97 cents for

every $1 its remaining customers had invested. That contributed to a run on

prime money-market funds, the ones that invest in securities other than U.S.

Treasurys. In one week, $310 billion, or 15%, fled.

That endangered the big companies hooked on borrowing from the funds, and

led the Treasury to extend an extraordinary taxpayer guarantee to those with

money in the funds.

No one wants to go through that again. So in 2010, the SEC, with industry

backing, required funds to have more ready cash (essentially, securities that are

about to mature or are issued by the government) in case a lot of investors

suddenly want to pull money out.

The industry says that solved the problem, a view that Mr. Aguilar says the

SEC hasn't thoroughly studied. Ms. Schapiro says it solved only one—liquidity

—but didn't solve another: the risk the funds take that some company to which

they have lent money defaults (excluding, of course, funds that limit holdings

to U.S. Treasurys).

As Eric Rosengren, president of the Federal Reserve Bank of Boston, puts it:

Prime money-market funds are trying to do three things—to promise to return

$1 for every $1 invested, to invest in securities with some credit risk and to

hold no capital cushion to absorb losses. The three are incompatible.

The industry notes that only two funds have ever broken the buck—and argues

this is much ado about nothing.Yet that doesn't mean other funds didn't come

close.  A Boston Fed study —unchallenged by the industry—found "frequent

and significant" cases in which companies that sponsor money funds had to

bail them out. At least $4.4 billion was provided between 2007 and 2011 to at

least 78 funds.That's good for shareholders, but will sponsors always be there?

"If sponsor support were explicitly required and planned for, and all sponsors

had the consistent ability to provide support, such a business model might not

be viewed as problematic," the Fed economists said. "But the current model…

reinforces investor confidence in the stability of the product without the ability

of all sponsors to consistently deliver." The industry also argues the 2010 rule

changes were sufficient.

Agence France-Presse/Getty Images

SEC Chairman Mary Schapiro during testimony before a House committee

hearing in June.

Yet the Treasury's Office of Financial Research found that in April 2012—after

those SEC changes had been implemented—there were 105 money-market

funds with combined assets of more than $1 trillion that were at risk of

breaking the buck if any of the top 20 outfits in which they invested defaulted.

Of those, 14 were at risk of breaking the buck if any of the top 30 outfits in

which they invested did so.

In ordinary times, that may be OK. In a crisis, it spells trouble, particularly

since the funds tend to invest in the same securities.

Ms. Schapiro offered two options. One, forbid money-market funds from fixing

share prices at $1 and, instead, let them fluctuate with the market value of their

holdings. The industry hates this, and so do many of those who put money in

the funds. Or, two, require the funds to set aside some capital to absorb losses.

The industry doesn't much like this either because it's expensive. Mr. Aguilar

said either would have sent big bucks into unregulated money funds, and that

would have made the system riskier.The next move is up to the Financial

Stability Oversight Council, created after the crisis to look over the shoulders

of the SEC and other regulators. Ms. Schapiro late Wednesday called for

FSOC's help. "The issue is too important to investors, to our economy and to

taxpayers to put our head in the sand and wish it away," she said.

2. Scrutiny of money market funds continues

The failure of SEC chair's plan to tighten rules underscores an

ongoing investor risk.

By Andrew Tangel, Los Angeles Times August 24, 2012

An unsuccessful effort to tighten rules for money-market mutual funds raises

an unpleasant issue for the millions of investors who rely on the funds.

Should investors keep billions of dollars in a low-yielding investment that

could be far riskier than it seems?

The head of the Securities and Exchange Commission was forced to scrap a

plan to revamp the structure and inner workings of money-market mutual funds

after failing to garner enough support for the plan.

SEC Chairwoman Mary L. Schapiro had argued that money-market funds are

vulnerable to losses during financial panics, which could cause investors to

lose money.

The risk is that funds could "break the buck," or push their value below a dollar

a share, as happened with one high-profile fund during the financial crisis in

late 2008.

Unexpected losses in money-market funds would be a blow to the millions of

Americans who have long relied on the funds as the virtual equivalent of bank

savings accounts.

Investors may not be worried about the funds' safety, but they have noticed

their extremely low yields.

Investors have shifted $1.3 trillion into bank savings accounts since the crisis,

leaving $2.6 trillion in money-market funds, according to Peter Crane,

president of Crane Data, a research firm in Westboro, Mass.

"They're much more concerned about the low yields than they are the remote

risk of at some point losing a penny on the dollar," Crane said.

Money-market funds historically have paid investors 1% to 2% more than bank

savings rates. But since the financial crisis, interest rates have been at historic

lows, bringing the fund yields closer in line with — if not slightly below —

savings accounts rates, which are insured by the Federal Deposit Insurance

Corp.

The average money-market fund yields 0.06%, whereas the average bank

savings rate is about 0.1%, analysts said.

Schapiro on Wednesday canceled a vote on her proposed money-market fund

rules after being unable to get three needed votes from the commission.

Schapiro and other federal regulators say the funds remain a weak link in the

financial system four years after the collapse of Lehman Bros. sent financial

markets — and the economy — into a free fall.

Prior to the trouble of the Primary Reserve Fund in 2008, only one other

money-market fund had broken the buck from 1983 to 2008, according to the

SEC. It was a small fund and had no widespread impact. The Primary Reserve

Fund and other funds faced widespread investor panic, forcing the U.S.

Treasury to guarantee accounts.

As with other types of mutual funds, Schapiro wanted money-market funds to

have floating values. Instead of $1 a share, a fund could drop to, say, 98 cents

if its underlying investments had lost money. Schapiro also wanted the

companies managing money funds to post more capital to cover investor

losses.

The proposal also would have prevented investors from withdrawing their

entire accounts at once to prevent runs.

"The issue is too important to investors, to our economy and to taxpayers to put

our head in the sand and wish it away," Schapiro said in a statement. "Money

market funds' susceptibility to runs needs to be addressed."

The U.S. Treasury said Thursday that it would press further to revamp

regulations.

"Treasury is in the process of consulting with the Federal Reserve Board, the

Securities and Exchange Commission and other regulatory agencies to consider

the appropriate next steps to reduce risks to financial stability from money

market funds," spokeswoman Suzanne Elio said in a statement.

Money-market funds play an important role in finance. They invest in short-

term assets, including U.S. government bonds and commercial paper that

companies use to finance immediate cash needs.

Some analysts said the SEC's regulations could have unintended consequences

that could potentially harm investors and companies' sources of short-term

capital.

"It would diminish the appeal to individual investors greatly," said Greg

McBride, senior financial analyst at Bankrate.com. "And it would also make it

a lot more difficult for money market fund providers to make a profit."

3. Are Money Market Funds a Safe Investment ? Posted in Money Market by DailyDeals on Monday, December 20th, 2010 at 10:39 pm

Although historical stock market gains hover around 8 %, steep declining beark

markets, such as the one we are experiencing in 2008, can result in extreme

negative earnings for equities. Due to the recent credit crisis, stock market

indices have experienced declines of up to 40 % year-over-year. Fortunately,

during these tough economic times, there are financial instruments that actually

yield a positive gain - the intruments that provide such gain are known as

money market instruments. These instruments act as a capital preservation

vehicle during bear markets, and also provide a great source of liquidity, since

these instruments permit redemption in a couple of business days.

Money markets are debt securities of the shor-term variety (one year maturity

or less), and are very liquid instruments, which can be cashed out of at any

time. Their reputation is one of safety, and they typically issued by

government, large corporations, or financial banking institutions. These funds

are usually procured through bank accounts or through mutual funds.

Over the years, the rates of money market funds have moved up and down

consistent with the interest rates of the times. Of late, interest rates for these

funds have been at historical lows, since interest rates have been quite low the

last couple of years. The value of a money market fund is always maintained at

$ 1/share by default, with appropriate interest earned on it, based on the

prevailing rate.

Although historically most government-based and corporate-based money

market funds have not been guaranteed, bank-issued money market rates are

almost always FDIC-insured. However, since the great credit crisis of 2008 has

been bestowed up on us, the government has decided to pony up and insure all

money market funds for at least a year, with a dedicated emergency pool of

money that has been made available. Recently, a well-established multual fund,

the Reserve Primary Fund, "broke-the-buck", when they couldn't meet the

redemption requirements of the fund, after a mass exodus of investors took

place. This breaking-of-the buck resulted from the fund holding debt that was

exposed to Lehman Brothers, an institutional brokerage that went belly-up.

Hence, the government decided to step in quell the storm, by insuring all

money market funds, for a period of at least a year.

Since all money market funds are effectively insured now, it is a prudent time

to park excess cash (or cash that you wish to preserve during the market

downturn) in these funds. Moreover, it is your best bet to invest in bank-issued

money market funds, which are FDIC-insured up to $ 500,000 (for joint

accounts). These are rock-solid investments that will cater to capital

preservation, and provide a very liquid stream of assets.

4. Money Market Reforms Seen Harming an Alternative to Banks

Big businesses' miss givings about large banks show through when the

conversation turns to regulation.

Two trade groups for corporate treasurers have sounded the alarm about

proposed reforms of money market funds, warning that proposed regulations

could reduce large companies' financing options — and add to their

dependence on megabanks.

"We are mindful of the need for a healthy banking system, but we're also

mindful of needs for healthy alternatives to the banking system," says Thomas

C. Deas, Jr., the treasurer of chemical company FMC Corp. (FMC) and the

chairman of the National Association of Corporate Treasurers.

The Securities and Exchange Commission has proposed rules that would

revamp the $2.6 trillion U.S. money market fund industry, arguing it remains a

risk to the financial system. Last month, Deas testified before a House

subcommittee that the reforms — such as floating the funds' net asset value or

imposing new capital requirements — would "have a significant negative

impact on the ongoing viability of these funds, and also adversely affect the

corporate commercial paper market."

"The cumulative effect of the proposed changes will drive money market fund

investors to bank deposits, concentrating risk in a sector where over the past 40

years there have been 2,800 failures, costing taxpayers $188 billion," he said in

testimony before the House Financial Services' subcommittee on capital

markets.

Jeff A. Glenzer, who oversees public policy for the Association for Financial

Professionals, raised similar concerns. Though the AFP doesn't "have a

position" on whether big banks should be broken up, "for people who are

worried about 'too big to fail,' that [money-market fund reform] would

exacerbate it," he says.

More than 50% of corporate cash is already held in bank deposits, according to

the association.

Deas also points out how little visibility corporate treasurers sometimes have

into the health of their bank partners.

"A money market fund's public financial statements, giving what their

investments are and duration and credit quality, are very straightforward to

read," Deas said in an interview. Banks' financials can be hard to read, he says,

invoking the massive trading losses that dragged JPMorgan Chase into public

scrutiny this spring and helped re-ignite public discussion about separating

banks' commercial and investment functions.

"Obviously even [JPMorgan Chief Executive] Jamie Dimon, with all of his

access not only to public financial statements but to internal reports and daily

value-at-risk analyses that he receives, was unable to perceive the trouble in

their London trading operation," Deas says. "That's why it's important to us to

have money market funds as an alternative, both for investments and for their

ability in some respects to disintermediate the banks."

5. Money market fund reform stalls

By Chris Isidore @CNNMoneyInvest August 23, 2012: 11:01 AM ET

The SEC has dropped plans for new regulations on money market accounts

after a majority of commission members announced they would vote against

the proposal.

NEW YORK (CNNMoney) -- In a setback for advocates of Wall Street reform,

a proposal to regulate money-market mutual funds has been tabled by the

Securities and Exchange Commission because there weren't enough votes to

approve it.

SEC chairman Mary Schapiro expressed regret for the proposal's withdrawal.

In a statement Wednesday night, she said the 2008 financial crisis highlighted

the need for the reform proposal, which was two years in the making.

"I consider the structural reform of money markets one of the pieces of

unfinished business from the financial crisis," she said. She urged other

policymakers to take up the effort.

Money-market mutual funds, which invest in Treasuries and other debt

securities, played a big role in the 2008 crisis. Shortly after Lehman Bros. filed

for bankruptcy in September of that year, one key fund announced its clients

could get back only 97 cents of every dollar they had put in the fund -- a move

known as "breaking the buck." That triggered a $300 billion run on other

money market funds that led to a virtual freeze in financial markets.

The SEC staff had proposed alternatives to try to reduce the threat of runs on

the funds and the need for more federal intervention in the future.

One would have required money funds to disclose their share prices like other

mutual funds, making it clearer that the funds were investment accounts, not

banking accounts with an implied guarantee.

The other proposal would have required the firms to hold more capital to

protect against losses. And customers who wanted to close out their accounts

would have had to wait 30 days to get a portion of their cash back, which was

seen as reducing the risk of a run on the accounts.

Investment firms that offer money-market accounts fought the proposals. The

Investment Company Institute, an industry trade group, said it was pleased the

SEC would no longer try to implement the rules, saying they would have had

"adverse consequences...for investors, [debt] issuers and the economy."

Jaret Seiberg, a financial services analyst with Guggenheim Washington

Research Group, said there is about $1.6 trillion in the money market accounts

most directly affected by the proposed rules. He said while the accounts are

popular with individual investors, they're not likely to respond one way or the

other to rule changes.

The debate is what would happen to hundreds of billions of corporate cash that

is also in the funds.

"The industry believes this would have been devastating, that money would

have flowed out of money market funds and gone to unregulated investments

overseas," Seiberg said. But he said such moves would pose their own risks for

investors, so it's not clear the funds would have been hurt by the rules.

Seiberg said the push to regulate the funds is not over. He said Schapiro could

start the process again, or it could move to the Financial Stability Oversight

Council, which was created by the Dodd-Frank financial reform act.

"We're in round three. There's a lot more of this fight to go," Seiberg said.

Schapiro's statement did not identify which three members of the five-member

commission opposed the reforms. Besides the two Republican members long

seen as opponents, Luis Aguilar, a Democratic member, was quoted by The

Wall Street Journal and The New York Times as believing the SEC staff had

not adequately studied the issue.

Before being appointed by President George W. Bush in 2008 and reappointed

by President Obama, Aguilar served as general counsel, executive vice

president and corporate secretary of the investment firmInvesco (IVZ). Among

investment firms that trade shares, Federated Investors (FII)rose 5.3% in early

trading Among investment firms that trade shares, Federated

Investors (FII)rose 5.3% in early trading

BIBLIOGRAGHY

BOOKS REFERENCE:

o DYNAMICS OF INDIAN FINANCIAL SYSTEM – BY - PREETY SINGH

o INDIAN FINANCIAL SYSTEM –BY BHARATI V. PATHAK

o FINANCIAL SERVICE AND MARKET-BY DR.S.GURUSWAMY

o NSE DEBT MARKET (BASIC MODULE) WORK BOOK

WEBSITES:

o www.rbi.org.in/weekly statistical supplement/various issues.co.in

o www.investopedia.com. o www.bseindia.com

o www.nseindia.com

o www.economics.indiatimes.com/