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Money Market in India

CA Manish K Dhoot (CA, B. Com, NCFM, CPCM) (5015 Points)

22 August 2010

Money Market in India

The money market is the market in which short term funds are borrowed and lent. The lending money market institutions are -

Government of India and other sovereign bodies

Banks and Development Financial Institutions

PSUs [Public Sector Undertakings]

Private sector organizations

The Government /Quasi government owned non-corporate entities.

Large numbers of instruments that are trade in the money market are issued by Government of India, State governments and other statutory bodies. Instruments that are issued by the Development Financial Institutions [DFI] and banks carry the highest credit ratings amongst non-government issuers mainly due to their connection with the Indian Government.

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CA Manish K Dhoot (CA, B. Com, NCFM, CPCM) (5015 Points)
Replied 22 August 2010

Instruments of money market

Call Money -
Call or notice money is an amount borrowed or lent on demand for a very short period. If the period is greater than one day and up to 14 days it is called Notice money; otherwise the amount is known as Call money. No collateral security is needed to cover these transactions.

The call market enables the banks and institutions to even out their day-to-day deficits and surpluses of money. Co-operative banks, commercial banks and primary dealers are allowed to borrow and lend in this market for adjusting their cash reserve requirements.

This is a completely inter-bank market. Interest rates are market determined. In view of the short tenure of these transactions, both borrowers and lenders are required to have current accounts with Reserve Bank of India.
Treasury Bills -
These are the lowest risk category instruments for the short term. RBI issues treasury bills [T-bills] at a prefixed day and for a fixed amount. There are 4 types of treasury bills.
- 14-day T-bill: maturity is in 14 days, it is auctioned on every Friday of every week and the notified amount for auction is Rs. 100 crores.
- 91-day T-bill: maturity is in 91 days, it is auctioned on every Friday of every week and the notified amount for auction is Rs. 100 crores.
- 182-day T-bill: maturity is in 182 days, it is auctioned on every alternate Wednesday, which is not a reporting week and the notified amount for auction is Rs. 100 crores.
- 364-day T-bill: maturity is 64 days, it is auctioned on every alternate Wednesday which is a reporting week and the notified amount for the auction is Rs. 500 crores.
Certificates of Deposits -
After treasury bills, the next lowest risk category investment option is certificate of deposit (CD) issued by banks and Financial Institution (FI).Allowed in 1989, CDs were one of RBI’s measures to deregulate the cost of funds for banks and FIs. A CD is a negotiable promissory note, secure and short term, of up to a year, in nature.

A CD is issued at a discount to the face value, the discount rate being negotiated between the issuer and the investor. Although RBI allows CDs up to one-year maturity, the maturity most quoted in the market is for 90 days.
Commercial Papers -
Commercial papers [CPs] are negotiable short-term unsecured promissory notes with fixed maturities, issued by well-rated organizations. These are generally sold on discount basis. Organizations can issue CPs either directly or through banks or merchant banks [called as dealers]. These instruments are normally issued in the multiples of five crores for 30/45/60/90/120/180/270/364 days.
Inter-Corporate Deposits -
An Inter-Corporate Deposit or ICD is an unsecured loan extended by one corporate to another. Existing mainly as a refuge for low rated corporate, this market allows funds surplus corporate to lend to other corporate.

A better rated corporate can borrow from the banking system and lend in this market. As the cost of funds for a corporate is much higher than a bank, the rates in this market are higher than those in other markets. ICDs are unsecured, and therefore the risk inherent is high. The ICD market is not well organized with very little information available about transaction details.
Ready Forward Contracts -
These are transactions in which two parties agree to sell and repurchase the same security. Under such an agreement the seller sells specified securities with an agreement to repurchase the same at a mutually decided future date and price. Similarly, the buyer purchases the securities with an agreement to resell the same to the seller on an agreed date in future at a predetermined price.

Such a transaction is called Repo when viewed from the prospective of the buyer of securities that is the party acquiring fund. It is called reverse repo when viewed from the prospective of supplier of funds.
Commercial Bills -
Bills of exchange are negotiable instruments drawn by the seller or drawer of the goods on the buyer or drawee of the good for the value of the goods delivered. These bills are called trade bills. These trade bills are called commercial bills when they are accepted by commercial banks. If the bill is payable at a future date and the seller needs money during the currency of the bill then the seller may approach the bank for discounting the bill.
Pass through Certificates -
This is an instrument with cash flows derived from the cash flow of another underlying instrument or loan. The issuer is a special purpose vehicle (SPV), which only receives money, from a multitude of may be several hundreds or thousands, underlying loans and passes the money to the holders of the PTCs. This process is called securitization.

Legally speaking PTCs are promissory notes and hence tradable freely with no stamp duty payable on transfer. Most PTCs have 2-3 year maturity because the issuance stamp duty rate makes shorter duration PTCs unviable.
Dated Government Securities -
These are securities issued by the Government of India and State Governments. The date of maturity is specified in the securities therefore they are known as dated securities. The Government borrows funds through the issue of long term dated securities, the lowest risk category instruments in the economy. They are issued through auctions conducted by RBI, where RBI decides the coupon or discount rate based on the response received. Most of these securities are issued as fixed interest bearing securities, although the government sometimes issues zero coupon instruments and floating rate securities.

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chrisadam2 (Alaska) (22 Points)
Replied 23 August 2010

The India money market is a monetary system that involves the lending and borrowing of short-term funds. India money market has seen exponential growth just after the globalization initiative in 1992. It has been observed that financial institutions do employ money market instruments for financing short-term monetary requirements of various sectors such as agriculture, finance and manufacturing. The performance of the India money market has been outstanding in the past 20 years.

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