Presented BY:Akshata Naik 02

Anagha Bhujade 03 Preeti Gohil Hetal Mehta 15 16

Shrikant Bhandre 32 Siddhesh Dalvi 33

Siddhesh Lokhande 34 Suddep Nair 37

MONEY MARKET
There are two types of financial markets viz. the money market and the capital market. The money market in that part of a financial market which deals in the borrowing and lending of short term loans generally for a period of less than or equal to 365 days. It is a mechanism to clear short term monetary transactions in an economy. According to Nadler and Shipman, "A money market is a mechanical device through which short term funds are loaned and borrowed through which a large part of the financial transactions of a particular country or world are degraded. A money market is distinct from but supplementary to the commercial banking system." The definitions help us to identify the basic characteristics of a money market. A money market comprises of a well organized banking system. Various financial instruments are used for transactions in a money market. There is perfect mobility of funds in a money market. The transactions in a money market are of short term nature.

Functions of Money Market

Money market is an important part of the economy. It plays very significant functions. As mentioned above it is basically a market for short term monetary transactions. Thus it has to provide facility for adjusting liquidity to the banks, business corporations, non-banking financial institutions (NBFs) and other financial institutions along with investors. The major functions of money market are given below : To maintain monetary equilibrium- It means to keep a balance between the demand for and supply of money for short term monetary transactions. To promote economic growth- Money market can do this by making funds available to various units in the economy such as agriculture, small scale industries, etc. To provide help to Trade and Industry- Money market provides adequate finance to trade and industry. Similarly it also provides facility of discounting bills of exchange for trade and industry. To help in implementing Monetary Policy- It provides a mechanism for an effective implementation of the monetary policy. To help in Capital Formation- Money market makes available investment avenues for short term period. It helps in generating savings and investments in the economy.

The Characteristics Of The Money Market Are:

1. It is not a single market but a collection of markets for several instruments 2. It is wholesale market of short term debt instruments 3. Its principal feature is honour where the creditworthiness of the participants is important.

4. The main players are: Reserve bank of India (RBI), Discount and Finance House of India (DFHI), mutual funds, banks, corporate investor, non-banking finance companies (NBFCs), state governments, provident funds, Primary dealers, Securities Trading Corporation of India (STCI), public sector undertaking (PSUs), non-resident Indians and overseas corporate bodies. 5. It is a need based market wherein the demand and supply of money shape the market.

Benefits of an Efficient Money Market:

An efficient money market benefits a number of players. It provides a stable source of funds to banks in addition to deposits allowing alternative financing structures and competition. It allows banks to manage risks arising from interest rate fluctuations and to manage the maturity structure of their assets and liabilities. A developed inter-bank market provides the basis for growth and liquidity in the money including the secondary market for commercial paper and treasury bills. An efficient money market encourages the development of non-bank intermediaries thus increasing the competition for funds. Savers get a wide array of savings instruments to choose from and invest their savings. A liquid money market provides an effective source of long term finance to borrowers. Large borrowers can lower the cost of raising funds and manage short term funding or surplus efficiently. A liquid and vibrant money market is necessary for the development of a capital market, foreign exchange market, and market in derivative instruments. The money market supports the long term debt market by increasing the liquidity of securities. The existence of an efficient money market is a precondition for the development of a government securities market and a forward foreign exchange market. Trading in forwards, swaps, and futures is also supported by a liquid money market as the certainty of prompt cash settlement is essential for such transactions. The government can achieve better pricing on its debt as it provides access to a wide range of buyers. It facilitates the government market borrowing. Monetary control through indirect methods (repos and open market operations) is more effective if the money market is liquid. In such a market response to the central banks policy actions are both faster and less subject to distortion.

The Indian Money Market:

The average turnover of the money market in India is over Rs 40,000 crore daily. This is more than 3 per cent 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 per cent 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 a fraction of the daily trading in developed markets.

Recent Reforms in Indian Money Market

Indian Government appointed a committee under the chairmanship of Sukhamoy Chakravarty in 1984 to review the Indian monetary system. Later, Narayanan Vaghul working group and Narasimham Committee was also set up. As per the recommendations of these study groups and with the financial sector reforms initiated in the early 1990s, the government has adopted following major reforms in the Indian money market. Reforms made in the Indian Money Market are:1. Deregulation of the Interest Rate: In recent period the government has adopted an interest rate policy of liberal nature. It lifted the ceiling rates of the call money market, short-term deposits, bills rediscounting, etc. Commercial banks are advised to see the interest rate change that takes place within the limit. There was a further deregulation of interest rates during the economic reforms. Currently interest rates are determined by the working of market forces except for a few regulations. 2. Money Market Mutual Fund (MMMFs) : In order to provide additional short-term investment revenue, the RBI encouraged and established the Money Market Mutual Funds (MMMFs) in April 1992. MMMFs are allowed to sell units to corporate and individuals. The upper limit of 50 crore investments has also been lifted. Financial institutions such as the IDBI and the UTI have set up such funds. 3. Establishment of the DFI : The Discount and Finance House of India (DFHI) was set up in April 1988 to impart liquidity in the money market. It was set up jointly by the RBI, Public sector Banks and Financial Institutions. DFHI has played an important role in stabilizing the Indian money market. 4. Liquidity Adjustment Facility (LAF) : Through the LAF, the RBI remains in the money market on a continue basis through the repo transaction. LAF adjusts liquidity in the market through absorption and or injection of financial resources. 5. Electronic Transactions : In order to impart transparency and efficiency in the money market transaction the electronic dealing system has been started. It covers all deals in the money market. Similarly it is useful for the RBI to watchdog the money market. 6. Establishment of the CCIL : The Clearing Corporation of India limited (CCIL) was set up in April 2001. The CCIL clears all transactions in government securities, and repose reported on the Negotiated Dealing System. 7. Development of New Market Instruments : The government has consistently tried to introduce new short-term investment instruments. Examples: Treasury Bills of various duration, Commercial papers, Certificates of Deposits, MMMFs, etc. have been introduced in the Indian Money Market.

These are major reforms undertaken in the money market in India. Apart from these, the stamp duty reforms, floating rate bonds, etc. are some other prominent reforms in the money market in India. Thus, at the end we can conclude that the Indian money market is developing at a good speed.

What is the Monetary Policy?

The Monetary and Credit Policy is the policy statement, traditionally announced twice a year, through which the Reserve Bank of India seeks to ensure price stability for the economy. These factors include - money supply, interest rates and the inflation. In banking and economic terms money supply is referred to as M3 - which indicates the level (stock) of legal currency in the economy. Besides, the RBI also announces norms for the banking and financial sector and the institutions which are governed by it. These would be banks, financial institutions, non-banking financial institutions, Nidhis and primary dealers (money markets) and dealers in the foreign exchange (forex) market. What are the objectives of the Monetary Policy? The objectives are to maintain price stability and ensure adequate flow of credit to the productive sectors of the economy. Stability for the national currency (after looking at prevailing economic conditions), growth in employment and income are also looked into. The monetary policy affects the real sector through long and variable periods while the financial markets are also impacted through short-term implications. There are four main 'channels' which the RBI looks at:

Quantum channel: money supply and credit (affects real output and price level through changes in reserves money, money supply and credit aggregates). Interest rate channel. Exchange rate channel (linked to the currency). Asset price.

Tools Used By RBI to Regulate Monetary Policies

1. Bank Rate Bank rate is the minimum rate at which the central bank provides loans to the commercial banks. It is also called the discount rate.

Usually, an increase in bank rate results in commercial banks increasing their lending rates. Changes in bank rate affect credit creation by banks through altering the cost of credit. 2. Cash Reserve Ratio All commercial banks are required to keep a certain amount of its deposits in cash with RBI. This percentage is called the cash reserve ratio. The current CRR requirement is 8 per cent. 3. Statutory Liquidity Ratio Banks in India are required to maintain 25 per cent of their demand and time liabilities in government securities and certain approved securities. These are collectively known as SLR securities. The buying and selling of these securities laid the foundations of the 1992 Harshad Mehta scam. 4. Repo and Reverse Repo A repo or repurchase Agreement is an instrument of money market. In repo Banks borrow money from the RBI by lending securities. The interest paid by them is called repo rate. In a reverse repo Reserve Bank borrows money from banks by lending securities. The interest paid by Reserve Bank in this case is called reverse repo rate.

TREASURY BILLS (T-BILLS)

T-bills are short term instruments used by the govt. to raise short term funds. At present 91- day, 182-day, 364-day.

Features of Treasury Bills

1. It is a negotiable security. 2. It is highly liquid as they are of shorter tenure and there is a possibility of inter- banks repos in them. 3. There is an absence of default risk. 4. At present there are 91- days, 182- days, 364- days T-bills in vogue. 5. T-bills are available for a minimum amount of Rs. 25000 and in multiples thereof.

Types of Treasury Bills

On tap bills Ad hoc bills Auctioned bills

91 Days T-Bills
T-bills were sold on a tap since 1965 throughout the week to commercial banks and the public at a fixed rate of 4.6% The 91 days adhoc bills were created in favor of RBI, but in 1997-98 they were phased out and totally discontinued from April 1, 1997. In 1992-93 91 days t-bills with a predetermined amount was introduced. The notified amount of each auction was reduced from Rs 500 Cr to 200 Cr from 21 st March- May 2001 increased 100 to 250 and finally raised to 2000 Cr from April 2004.

182 Days T-Bills

It was introduced in November, 1986 to provide short term investment opportunities to financial institutions and others. These bills were introduced with an objective to develop the short term money market. Bills were issued at a discount to face value for a minimum of Rs. 1 lakhs and its multiples thereof. These bills were eligible securities to SLR purposes and for borrowing under the stand by refining facility Of RBI. 182 T-bills were reintroduced in April 2005 with a notified amount of 500 Cr.

364 Days T-Bills

It was introduced in April 1992. Multiple discriminatory price auction is conducted where successful bidders have to pay prices they have actually bid. The features are same as 182 t-bills.

The Call Money Market

The call money market refers to the market for extremely short period loans; say one day to fourteen days. These loans are repayable on demand at the option of either the lender or the borrower. As stated earlier, these loans are given to brokers and dealers in stock exchange. Similarly, banks with surplus lend to other banks with deficit funds in the call money market. Thus, it provides an equilibrating mechanism for evening out short term surpluses and deficits. Moreover, commercial bank can quickly borrow from the call market to meet their statutory liquidity requirements. They can also maximize their profits easily by investing their surplus funds in the call market during the period when call rates are high and volatile.

Operations in Call Market

Borrowers and lenders in a call market contact each other over telephone. Hence, it is basically over-the-telephone market. After negotiations over the phone, the borrowers and lenders arrive at a deal specifying the amount of loan and the rate of interest. After the deal is over, the lender issues FBL cheque in favour of the borrower. The borrower is turn issues call money borrowing receipt. When the loan is repaid with interest, the lender returns the lender the duly discharges receipt. Instead of negotiating the deal directly, it can be routed through the Discount and Finance House of India (DFHI), the borrowers and lenders inform the DFHI about their fund requirement and availability at a specified rate of interest. Once the deal is confirmed, the Deal settlement advice is lender and receives RBI cheque for the money borrowed. The reverse is taking place in the case of landings by the DFHI. The duly discharged call deposit receipt is surrendered at the time of settlement. Call loans can be renewed on the back of the deposit receipt by the borrower.

Call Loan Market Transitions and Participants

In India, call loans are given for the following purposes: 1. To commercial banks to meet large payments, large remittances to maintain liquidity with the RBI and so on. 2. To the stock brokers and speculators to deal in stock exchanges and bullion markets. 3. To the bill market for meeting matures bills. 4. To the Discount and Finance House of India and the Securities Trading Corporation of India to activate the call market. 5. To individuals of very high status for trade purposes to save interest on O.D or cash credit. The participants in this market can be classified into categories viz. 1. Those permitted to act as both lenders and borrowers of call loans. 2. Those permitted to act only as lenders in the market.

3. The first category includes all commercial banks. Co-operative banks, DFHI and STCI. In the second category LIC, UTI, GIC, IDBI, NABARD, specified mutual funds etc., are included. They can only lend and they cannot borrow in the call market.

Advantages of Call Money

In India, commercial banks play a dominant role in the call loan market. They used to borrow and lend among themselves and such loans are called inter-bank loans. They are very popular in India. So many advantages are available to commercial banks. They are as follows: High Liquidity: Money lent in a call market can be called back at any time when needed. So, it is highly liquid. It enables commercial banks to meet large sudden payments and remittances by making a call on the market. High Profitability: Banks can earn high profiles by lending their surplus funds to the call market when call rates are high volatile. It offers a profitable parking place for employing the surplus funds of banks temporarily. Maintenance of SLR: Call market enables commercial bank to minimum their statutory reserve requirements. Generally banks borrow on a large scale every reporting Friday to meet their SLR requirements. In absence of call market, banks have to maintain idle cash to meet5 their reserve requirements. It will tell upon their profitability. Safe and Cheap: Though call loans are not secured, they are safe since the participants have a strong financial standing. It is cheap in the sense brokers have been prohibited from operating in the call market. Hence, banks need not pay brokers on call money transitions. Assistance To Central Bank Operations: Call money market is the most sensitive part of any financial system. Changes in demand and supply of funds are quickly reflected in call money rates and give an indication to the central bank to adopt an appropriate monetary policy. Moreover, the existence of an efficient call market helps the central bank to carry out its open market operations effectively and successfully.

Drawbacks of Call Money

The call market in India suffers from the following drawbacks: Uneven Development: The call market in India is confined to only big industrial and commercial centers like Mumbai, Kolkata, Chennai, Delhi, Bangalore and Ahmadabad. Generally call markets are associated with stock exchanges. Hence the market is not evenly development. Lack Of Integration: The call markets in different centers are not fully integrated. Besides, a large number of local call markets exist without an\y integration. Volatility In Call Money Rates: Another drawback is the volatile nature of the call money rates. Call rates vary to greater extant indifferent centers indifferent seasons on different days within a fortnight. The rates vary between 12% and 85%. One cannot believe 85% being charged on call loans.

COMMERCIAL PAPER (CP)

Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note. It was introduced in India in 1990. It was introduced in India in 1990 with a view to enabling highly rated corporate borrowers/ to diversify their sources of short-term borrowings and to provide an additional instrument to investors. Subsequently, primary dealers and satellite dealers were also permitted to issue CP to enable them to meet their short-term funding requirements for their operations. CP can be issued for maturities between a minimum of 15 days and a maximum up to one year from the date of issue. It can issue by Individual, Corporates, primary dealers (PDs) and the All-India Financial Institutions (FIs), NRI, are eligible to issue CP.

Investors in CP
Individuals, banking companies, other corporate bodies registered or incorporated in India and unincorporated bodies, Non-Resident Indians (NRIs) and Foreign Institutional Investors (FIIs) etc. can invest in CPs. However, amount invested by single investor should not be less than Rs.5 lakh (face value). However, investment by FIIs would be within the limits set for their investments by Securities and Exchange Board of India (SEBI).

Features of Commercial Paper

Cheaper source of funds than limits set by banks. Highly liquid instrument. Transferable by endorsement and delivery. Issued for a minimum period of 30 days and a maximum up to 1 year. Issued at a Discount to face value. Backed by liquidity and earnings of issuer. There is no physical delivery of the securities (DMAT A /c)

Types of CP
Direct Papers Issued directly by company to investors without any intermediary. Dealer Papers Issued by a dealer or a merchant banker on behalf of a client.

Guidelines for Issuance of Cp

Eligibility : Corporates ,primary dealers and all Indian Financial Institutions are eligible to issue CP Rating Requirement: Minimum rating shall be P2 of CRISIL or other equivalent rating of such approved agencies Maturity: Maturity period is for a minimum of 7 days and a maximum of upto 1 year from date of issue Denomination: Amount of Rs 5 lakhs and multiples thereof is the minimum limit, it should not be less than Rs 5 lakhs Limits and Amount: Banks and financial institutions will have the flexibility to fix working capital limits duly taking in to account the resource pattern of companies financing including CPs Issuing and Paying Agent (IPA): Only scheduled commercial banks can at as a IPA Investment in A CP: A CP may be held by individuals , banks, corporate, unincorporated bodies, NRIs and FIIs Mode of issuance : A CP can be issued as a promissory note or in a dematerialized form. CP will be issued at a discount to a face value as may be determined by the issuer.

CERTIFICATE OF DEPOSIT:
Meaning
Certificate of Deposits are short term tradable time deposits issued by commercial banks and financial institution. They are the unsecured negotiable instruments.

Detailed Information
CDs were introduced in June [Link] scheduled commercial banks excluding Regional Rural Banks and Local Area banks were allowed to issue them [Link] Institutions were permitted to issue certificates of deposit within the umbrella limit fixed by reserve bank of india in [Link] are similar to that of fixed deposit the only difference is since CDs are bearer they are easily transferable and [Link] are issued by the banks during periods of tight liquidity,at relatively high interest rates,they represent a high cost liability.

Features:
CRR/SLR applicable on the issue price in case of banks Transfer : through endorsement & delivery Pre-mature cancellation not allowed Loan against collateral of cd not permitted Other conditions If payment day is holiday, to be paid on next preceding business day Issued at a discount to face value. Duplicate can be issued after giving a public notice & obtaining indemnity

Guidelines for CDs:

Eligibility: Schedule Commercial Bank excluding Regional Rural Bank & Local area banks. Aggregrate Amount: Banks have freedom to issue CDs depending on their recruitment whereas other financial institution can issue CDs within the overall umbrella limit fixed by RBI. Minimum Size:It is Rs. 1 lakh and amount can be increased in multiples of Rs.1Lakhs Who can subscribe: Individuals,Corporate Companies,trust [Link] may also subscribe to CDs but only on non-repatriable basis. Maturity: By banks- not less than 7 days and not more than 1 year, By FI- not less than 1 year and not exceeding 3 years. Discount Rate: CDs may be issued at a discount on face values, Banks /FIs are also allowed to issue CDs on floating rate.

 Reserve requirement:Banks have to maintain the appropriate reserve requirements ie: CRR & SLR on issue price of CDs Transferability:Physical CDs are freely transferable by endorsement and delivery, dematted Cds can be transferred as per the procedure applicable to other demat securities Loans/Buy Backs: Banks/FIs cannot grant loan against CDs neither they can buy back the own CDs before maturity Format of CDs: Banks/FIs should issue CDs only in the dematerialised forms.

COMMERCIAL BILLS
Meaning
Commercial bills are negotiable instrument drawn by the seller on the buyer which are, in turn, accepted and discounted by commercial banks.

Process
Bills of exchange are negotiable instrument drawn by seller on the buyer Such bills are called trade bills Trade bills are accepted by commercial banks When they are accepted by commercial banks they are called commercial bills

Features
Commercial bills is a short term negotiable instrument Commercial bills has self liquidity feature Commercial bills carries low risk It carries liability to make payment

Types of Commercial Bills

Demand Bill It is payable on demand i.e. at sight or on presentation of drawee Usance Bill It is payable after a specified time Inland Bill It is drawn or made in India It must be payable in India Drawn upon resident of India Foreign Bill It is drawn or made outside India It is may be payable in India or outside India

Guidelines
Banks are presently required to open letter of credit and purchase/discount/ negotiate bills under letter of credit only in case of genuine commercial and trade transactions Bills rediscounting should be restricted to usance bills Accommodation bill should not be discounted Bills should not rediscount bills earlier discounted by NBFC Service sector bills should not be rediscounted

COLLATERALISED BORROWING and LENDING OBLIGATIONS (CBLO)

Collateralised Borrowing & Lending Obligations (CBLO) was launched by CCIL on January 20, 2003. It provides liquidity to non bank entities Maturity Period: 1- 19 days & can range up to 1year as per RBI guidelines. In order to enable the market participants to borrow and lend funds, CCIL provides the dealing system through: Indian financial network (INFINET), a closed user group to the members of the negotiated dealing system (NDS) who maintain current account with RBI. Internet gateway for other entities who do not maintain current account with rbi.

Participants of CBLO
Banks Financial institutions Insurance companies Mutual funds Primary dealers etc.

What is CBLO?
Is an RBI approved money market instrument; is an instrument backed by gilts as collaterals; creates an obligation on the borrower to repay the money borrowed along with interest on a predetermined future date; A right and authority to the lender to receive money lent along with interest on a predetermined future date; creates a charge on the collaterals deposited by the borrower with CCIL for the purpose;

Membership
Membership to CBLO segment is generally extended to repo eligible entities as per RBI guidelines. Cblo membership is granted to nds members and non nds members.

 Entities who have been granted cblo membership are classified based on their nds membership. CBLO members who are also NDS members are CBLO (NDS) members and other CBLO members are CBLO (non NDS) members or associate members.

Eligible Securities:
Eligible securities are central government securities including treasury bills as specified by CCIL from time to time.

Borrowing Limit and Initial Margin:

The members can borrow up a maximum of borrowing limit including all amounts which are borrowed and outstanding at that point in time. Members are required to deposit initial margin generally in the form of cash (minimum rs.1 lac) and government securities. Initial margin is computed at the rate of 0.50% on the total amount borrowed/lent by the members.

Minimum size
The minimum and multiple lot size for CBLO Normal market is Rs.5 lakhs. The minimum lot size for CBLO Auction market is Rs.50 lakhs and multiple lot size is Rs.5 lakhs.

Types of markets available under CBLO segment CBLO Normal market CBLO Auction market

Facilitates borrowing and lending by members on an online basis

Facilitates borrowing and lending by members through submission of bids and offers in the system and its acceptance and announcement of cut off by Clearcorp

The orders get matched in CBLO Normal market on Yield Time priority among the orders present at that point in time

The bids and offers result in to trades in CBLO Auction market after the Auction market closes and cut off determined by Clearcorp

Available to both CBLO (NDS) members and Associate member

Available only to NDS Members having settlement a/c at RBI