money market project in finance

7/30/2019 Money Market Project in Finance

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ProjectONMONEYMARKETINSTRUMENTSANDHOWTREASURYBILLSHELPSINCONTROLOFINFLATION

SECTION-FN2SUBMITTEDTO:PROF:HUNDASUBMITTEDBY:ABDULHAMIDROLLNO:02

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WhatareMoneyMarketInstruments?

Byconvention,thetermMoneyMarketreferstothemarketforshorttimerequirement&deploymentoffunds.Moneymarketinstrumentsarethoseinstruments,whichhaveamaturitytimeoflessthan1year.Themostactivepartofthemoneymarketisthemarketforovernightcallandtermmoneybetweenthebanks,institutionsaswellascallmoneytransactions.CallMoneyorRepoareveryshorttermMoneyMarketproducts.Thebelowmentionedinstrumentsarenormallytermedasmoneymarketinstruments:Thesliceofthefinancialmarketwhereinstrumentswithhighliquidandshortmaturitiesaretradediscalledmoneymarket.Itisagenericdefinition.Theplayerswhoindulgeinshorttimefromseveraldaystolessthanoneyear.Itisgenerallyusedforborrow&lendoverthisshortterm.Duetothehighlyliquidnatureofthesecurityandshortmaturities,moneymarketareperceivedasasafeplacetolockinmoney.Theparticipantsinthefinancialmarketperceiveathinline,differentiatingbetweenthecapitalmarket&themoneymarket.Capitalmarketreferstostockmarketswherethecommonstocksaretraded,andbondmarketswherebondsareissuedandtraded.Thisisinsharpcontrasttomoneymarketswhichprovideshorttermdebtfinancingandinvestment.Inmoneymarket,thereisborrowingandlendingforperiodsofayearorless.TreasuryBillsarehighlyliquidshort-timeinstrumentsthatyieldattractivereturns.Short-termborrowinginstrumentsoftheCentralGovt,itisapromisetopayasaidsumafterexpiryofaspecifiedperiod.Itisazero-riskinstrumentava

ilableinbothprimaryandsecondarymarkets.Moneymarketinstrumentsarecharacterisedbyhighdegreeofsafetyoftheprincipal.Commercialpaperisashort-termunsecuredpromissorynoteissuedbycorporatesandfinancialinstitutions.CommercialPaperisshort-termloanthatisissuedbyacorporationuseforfinancingaccountsreceivableandinventories.Issuedatdiscounttothefacevalue,theyyieldattractivereturns.TheGovernmentofIndiasecuritiesaresovereigncouponbearinginstrumentsthatareissuedbytheGovt.ofIndia.Theyareavailablebothforshort-termandlongtenures.

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Asavingscertificateentitlingthebearertoreceiveinterest.Certificateofdepositisshort-termborrowingsthataremorelikebanktermdepositaccounts.Theyaretransferablebyendorsementandaretobestamped.Investorscanconsidermoneymarketfunds.Theseinvestingovernmentsecurities,certificatesofdeposits,commercialpaperofcompanies,andotherhighlyliquidandlow-risksecurities.Thesefundsarerequiredbylawtoinvestinlowrisksecurities.Investorswithlowriskappetitecanoptformoneymarketfunds.TheMoneymarketinstrumentmeetstheshort-termrequirementsofborrowersandprovidesliquiditytolenders.Short-termsurplusfundsatthedisposalofinstitutionsandindividualsarebidbyborrowers,whocouldbeinthesamecategory.Debtinstrumentwhichhaveamaturityoflessthanayearatthetimeofissuearecalledmoneymarketinstruments.Typesofdebtinstrumentsincludenotes,bonds,certificates,mortgages,leasesorotheragreementsbetweenalenderandaborrower.Theseinstrumentsarehighlyliquidandhavenegligiblerisk.ThemajormoneymarketinstrumentsareTreasurybills,certificatesofdeposit,commercialpaper,andrepos.Themoneymarketisdominatedbythegovernment,financialinstitutions,banks,andcorporate.Individualinvestorsscarcelyparticipateinthemoneymarketdirectly.Abriefdescriptionofmoneymarketinstrumentsisgivenbelow.

1)CertificateofDeposit(CD)2)CommercialPaper(C.P)3)InterBankParticipationCertificates4)InterBanktermMoney5)TreasuryBills7)Call/Notice/TermMoney6)BillRediscounting

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WhatConstitutestheMoneyMarketinIndia?Themoneymarketisamechanismthatdealswiththelendingandborrowingofshorttermfunds.Moneymarketreferstothemarketforshorttermassetsthatareclosesubstitutesofmoney,usuallywithmaturitiesoflessthanayear.Awellfunctioningmoneymarketprovidesarelativelysafeandsteadyincome-yieldingavenue,forshortterminvestmentoffundsbothforbanksandcorporatesandallowstheinvestorinstitutionstooptimizetheyieldontemporarysurplusfunds.TheRBIisaregularplayerinthemoneymarketandintervenestoregulatetheliquidityandinterestratesintheconductofmonetarypolicytoachievethebroadobjectiveofpricestability,efficientallocationofcreditandastableforeignexchangemarket.AsperdefinitiongivenbyRBIthemoneymarketis"thecentrefordealings,mainlyshort-termcharacter,inmoneyassets.Itmeetstheshort-termrequirementsofborrowerandprovidesliquidityorcashtothelenders.Itistheplacewhereshort-termsurplusinvestiblefundsatthedisposaloffinancialandotherinstitutionsandindividualsarebidbyborrowers,againcomprisingInstitutions,individualsandalsotheGovernmentitself"Themainsegmentsofthemoneymarketarethecall/noticemoney,termmoney,commercialbills,treasurybills,commercialpaperandcertificatedeposits.Mr.G.Crowtherinhistreatise"AnOutlineofMoneydefinesmoneymarketasIftheeconomicrelationshipsbetweennationsarenot,byonemeansoranother,broughtfairlyclosetobalance,thenthereisnosetoffinancialarrangementsthatcanrescuetheworldfromtheimpoverishingresultsofchaos."thecollectivenamegiventothevariou

sfirmsandinstitutionsthatdealinthevariousgradesofnear-money"..

Call/Notice-MoneyMarketThecall/noticemoneymarketformsanimportantsegmentoftheIndianMoneyMarket.Undercallmoneymarket,fundsaretransactedonovernightbasisandundernoticemoneymarket,fundsaretransactedfortheperiodbetween2daysand14days.Themostactivesegmentofthemoneymarkethasbeenthecallmoneymarket,wherethedaytodayimbalancesinthefundspositionofscheduledcommercialbanksareeasedout.Thecallnoticemoneymarkethasgraduatedintoabroadandvibrantinstitution.ABDULHAMIDROLLNO:02


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Call/Noticemoneyisthemoneyborrowedorlentondemandforaveryshortperiod.Whenmoneyisborrowedorlentforaday,itisknownasCall(Overnight)Money.Interveningholidaysand/orSundayareexcludedforthispurpose.Thusmoney,borrowedonadayandrepaidonthenextworkingday,(irrespectiveofthenumberofinterveningholidays)is"CallMoney".Whenmoneyisborrowedorlentformorethanadayandupto14days,itis"NoticeMoney".Nocollateralsecurityisrequiredtocoverthesetransactions.TheentryintothisfieldisrestrictedbyRBI.CommercialBanks,Co-operativeBanksandPrimaryDealersareallowedtoborrowandlendinthismarket.SpecifiedAll-IndiaFinancialInstitutions,MutualFunds,andcertainspecifiedentitiesareallowedtoaccesstoCall/Noticemoneymarketonlyaslenders.ReserveBankofIndiahasrecentlytakenstepstomakethecall/noticemoneymarketcompletelyinter-bankmarket.Hencethenon-bankentitieswillnotbeallowedaccesstothismarketbeyondDecember31,2000.FromMay1,1989,theinterestratesinthecallandthenoticemoneymarketaremarketdetermined.Interestratesinthismarketarehighlysensitivetothedemand-supplyfactors.Withinonefortnight,ratesareknowntohavemovedfromalowof1-2percenttodizzyheightsofover140percentperannum.Largeintra-dayvariationsarealsonotuncommon.Hencethereisahighdegreeofinterestrateriskforparticipants.Inviewoftheshorttenureofsuchtransactions,boththeborrowersandthelendersarerequiredtohavecurrentaccountswiththeReserveBankofIndia.Thiswillfacilitatequickandtimelydebitandcreditoperations.Thecallmarketenablesthebanksandinstitutionstoevenoutthe

irdaytodaydeficitsandsurplusesofmoney.Banksespeciallyaccessthecallmarkettoborrow/lendmoneyforadjustingtheircashreserverequirements(CRR).Thelendershavingsteadyinflowoffunds(e.g.LIC,UTI)lookatthecallmarketasanoutletfordeployingfundsonshorttermbasis.

Inter-BankTermMoneyAshort-termmoneymarket,whichallowsforlargefinancialinstitutions,suchasbanks,mutualfundsandcorporationstoborrowandlendmoneyatinterbankrates.Theloansinthecallmoneymarketareveryshort,usuallylastingnolongerthanaweekandareoftenusedtohelpbanksmeetreserverequirements.Inter-bankmarketfordepositsofmaturitybeyond14daysisreferredtoasthetermmoneymarket.TheentryrestrictionsarethesameasthoseforCall/NoticeMoneyexceptthat,asperexistingregulations,thespecifiedentitiesarenotallowedt

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Themarketinthissegmentispresentlynotverydeep.Thedecliningspreadinlendingoperations,thevolatilityinthecallmoneymarketwithaccompanyingrisksinrunningasset/liabilitymismatches,thegrowingdesireforfixedinterestrateborrowingbycorporates,themovetowardsfullerintegrationbetweenforexandmoneymarkets,etc.areallthedrivingforcesforthedevelopmentofthetermmoneymarket.These,coupledwiththeproposalsforrationalisationofreserverequirementsandstringentguidelinesbyregulators/managementsofinstitutions,intheasset/liabilityandinterestrateriskmanagement,shouldstimulatetheevolutionoftermmoneymarketsoonerthanlater.TheDFHI(Discount&FinanceHouseofIndia),asamajorplayerinthemarket,isputtinginalleffortstoactivatethismarket.TreasuryBills.TreasuryBillsaremoneymarketinstrumentstofinancetheshorttermrequirementsoftheGovernmentofIndia.TheTreasurybillsareshort-termmoneymarketinstrumentthatmatureinayearorlessthanthat.Thepurchasepriceislessthanthefacevalue.AtmaturitythegovernmentpaystheTreasuryBillholderthefullfacevalue.TheTreasuryBillsaremarketable,affordableandriskfree.Thesecurityattachedtothetreasurybillscomesatthecostofverylowreturns.TreasuryBillsareshortterm(uptooneyear)borrowinginstrumentsoftheuniongovernment.ItisanIOUoftheGovernment.ItisapromisebytheGovernmenttopayastatedsumafterexpiryofthestatedperiodfromthedateofissue(14/91/182/364daysi.e.lessthanoneyear).Theyareissuedatadiscounttothefacevalue,andonmaturitythefacevalueispaidtotheholder.Therateofdiscountandthecorrespondingissuepricea

redeterminedateachauction.TypesTreasurybills(T-bills)offershort-terminvestmentopportunities,generallyuptooneyear.Theyarethususefulinmanagingshort-termliquidity.Atpresent,theGovernmentofIndiaissuesthreetypesoftreasurybillsthroughauctions,namely,91-day,182-dayand364-day.TherearenotreasurybillsissuedbyStateGovernments.AmountTreasurybillsareavailableforaminimumamountofRs.25,000andinmultiplesofRs.25,000.Treasurybillsareissuedatadiscountandareredeemedatpar.TreasurybillsarealsoissuedundertheMarketStabilizationScheme(MSS).ABDULHAMIDROLLNO:02


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AuctionsWhile91-dayT-billsareauctionedeveryweekonWednesdays,182-dayand364dayT-billsareauctionedeveryalternateweekonWednesdays.TheReserveBankofIndiaissuesaquarterlycalendarofT-billauctionswhichisavailableattheBankswebsite.Italsoannouncestheexactdatesofauction,theamounttobeauctionedandpaymentdatesbyissuingpressreleasespriortoeveryauction.TypeofT-bills91-day182-dayDayofAuctionWednesdayWednesdayofnon-reportingweekDayofPayment*FollowingFridayFollowingFriday

364-dayWednesdayofreportingweekFollowingFriday*Ifthedayofpaymentfallsonaholiday,thepaymentismadeonthedayaftertheholiday.

ThesalientfeaturesoftheauctionsystemofT-Billsare:

The14/91/182/364-daysbillsareissuedforaminimumvalueofRs.25,000andmultiplesthereof.Theyareissuedatadiscounttofacevalue.AnypersoninIndiaincludingindividuals,firms,companies,corporatebodies,trustsandinstitutionscanpurchasethebills.ThebillsareeligiblesecuritiesforSLRpurposes.Allbidsaboveacut-offpriceareacceptedandbiddersarepermittedtoplacemultiplebidsquotingdifferentpricesateachauction.TillNovember6,1998,alltypesofT-Billsauctionswereconductedbymeansof MultiplePriceAuction .However,sinceNovember6,1998,auctionof91-daysTBillsarebeingconducted

bymeansof UniformPriceAuction .Inthecaseof MultiplePriceAuction methodsuccessfulbidderspaytheirownbidprices,whereasunder UniformPriceAuction method,allsuccessfulbidderspayanuniformprice,i.e.thecut-offpriceemergedintheauction.

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ThebillsaregenerallyissuedintheformofSGL-entriesinthebooksofReserveBankofIndia.TheSGLholdingscanbetransferredbyissuingaSGLtransferform.Fornon-SGLaccountholders,RBIhasbeenissuingthebillsinscripform.

FrenchAuctionorMultiplePriceAuctionSystemAfterreceivingwrittenbidsatvariouslevelsofyieldexpectations,aparticularyieldisdecidedasthecut-offrateofthesecurityinquestion.Auctionparticipants(bidders)whobidatyieldlevelslowerthantheyielddeterminedascut-offgetfullallotmentalthoughatapremium.Thepremiumisequaltotheyielddifferentialexpressedinrupeeterms.Theyielddifferentialisthedifferencebetweenthecutoffyieldandtheyieldatwhichthebidismade.Allbidsmadeatyieldlevelshigherthanthatdeterminedascut-offyieldgetentirelyrejected.DutchAuctionorUniformPriceAuctionSystemThissystemofauctionisexactlyidenticaltothatoftheFrenchAuctionSystemasfarasthepricediscoverymechanismpartisconcerned.Thedifferenceisobservedonlyatthestageofpaymentobligation.Afterdeterminationofthemarketrelatedcut-offrate,allotmentismadetoallthebiddersatauniformprice.Theconceptofpremiumonaccountofyielddifferentialdoesnotexisthere.

OtherInstruments

NewmoneymarketinstrumentslikeCertificatesofDeposits(CDs)andCommercialPaper(CPs)wereintroducedin1989-90togivegreaterflexibilitytoinvestorsinthedeploymentoftheirshort-termsurplusfunds

CertificatesofDepositCertificatesofDeposit(CDs)-introducedsinceJune1989-arenegotiabletermdepositcertificatesissuedbyacommercialbanks/FinancialInstitutionsatdiscounttofacevalueatmarketrates,withmaturityrangingfrom15daystooneyear.CertificateofDeposit:Thecertificatesofdepositarebasicallytimedepositsthatareissuedbythecommercialbankswithmaturityperiodsrangingfrom3monthsABDULHAMIDROLLNO:02


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tofiveyears.ThereturnonthecertificateofdepositishigherthantheTreasuryBillsbecauseitassumesahigherlevelofrisk.AdvantagesofCertificateofDepositasamoneymarketinstrument1.Sinceonecanknowthereturnsfrombefore,thecertificatesofdepositsareconsideredmuchsafe.2.Onecanearnmoreascomparedtodepositingmoneyinsavingsaccount.3.TheFederalInsuranceCorporationguaranteestheinvestmentsinthecertificateofdeposit.DisadvantagesofCertificateofdepositasamoneymarketinstrument:1.Ascomparedtootherinvestmentsthereturnsisless.2.ThemoneyistiedalongwiththelongmaturityperiodoftheCertificateofDeposit.Hugepenaltiesarepaidifonegetsoutofitbeforematurity.

Beingsecuritiesintheformofpromissorynotes,transferoftitleiseasy,byendorsementanddelivery.Further,theyaregovernedbytheNegotiableInstrumentsAct.Asthesecertificatesaretheliabilitiesofcommercialbanks/financialinstitutions,theymakesoundinvestments.DFHItradesintheseinstrumentsinthesecondarymarket.Themarketfortheseinstruments,isnotverydeep,butquiteoftenCDsareavailableinthesecondarymarket.DFHIisalwayswillingtobuytheseinstrumentstherebylendingliquiditytothemarket.Salientfeatures:

CDscanbeissuedtoindividuals,corporations,companies,trusts,funds,associates,etc.NRIscansubscribetoCDsonnon-repatriablebasis.CDsattractstamp

dutyasapplicabletonegotiableinstruments.BankshavetomaintainSLRandCRRontheissuepriceofCDs.Noceilingontheamounttobeissued.TheminimumissuesizeofCDsisRs.5lakhsandmultiplesthereof.CDsaretransferablebyendorsementanddelivery.Theminimumlock-in-periodforCDsis15days.

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CDsareissuedbyBanks,whenthedepositgrowthissluggishandcreditdemandishighandatighteningtrendincallrateisevident.CDsaregenerallyconsideredhighcostliabilitiesandbankshaverecoursetothemonlyundertightliquidityconditions.CPsenablehighlyratedcorporateborrowerstodiversifytheirsourcesofshorttermborrowingsandraiseapartoftheirrequirementatcompetitiveratesfromthemarket.TheintroductionofCommercialPaper(CP)inJanuary1990asanadditionalmoneymarketinstrumentwasthefirststeptowardssecuritisationofcommercialbank sadvancesintomarketableinstruments.

CommercialPapersareunsecureddebtsofcorporates.Theyareissuedintheformofpromissorynotes,redeemableatpartotheholderatmaturity.OnlycorporateswhogetaninvestmentgraderatingcanissueCPs,asperRBIrules.ThoughCPsareissuedbycorporates,theycouldbegoodinvestments,ifpropercautionisexercised.ThemarketisgenerallysegmentedintothePSUCPs,i.e.thoseissuedbypublicsectorunitandtheprivatesectorCPs.CPsissuedbytopratedcorporatesareconsideredassoundinvestments.DFHItradesinthesecertificates.Itwillbuythesecertificates,subjecttoitsperceptionoftheinstrumentandwillalsobeofferingthemforsalesubjecttoavailabilityofstock.CommercialPapers-SalientFeatures

CPsareissuedbycompaniesintheformofusancepromissorynote,redeemableatpartotheholderonmaturity.ThetangiblenetworthoftheissuingcompanyshouldbenotlessthanRs.4crores.Workingcapital(fundbased)limitofthecompanyshouldnotbelessthanRs.4crores.CreditratingshouldbeatleastequivalentofP2/A2/PP2/Ind.D.2orhigherfromanyapprovedratingagenciesandshouldbemorethan2monthsoldonthedateofissueofCP.CorporatesareallowedtoissueCPupto100%oftheirfundbasedworkingcapitallimits.Itisissuedatadiscounttofacevalue.

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CPattractsstampduty.CPcanbeissuedformaturitiesbetween15daysandlessthanoneyearfromthedateofissue.CPmaybeissuedinthemultiplesofRs.5lakh.NopriorapprovalofRBIisneededtoissueCPandunderwritingtheissueisnotmandatory.Allexpenses(suchasdealers fees,ratingagencyfeeandchargesforprovisionofstand-byfacilities)forissueofCParetobebornebytheissuingcompany,

ThepurposeofintroductionofCPwastoreleasethepressureonbankfundsforsmallandmediumsizedborrowersandatthesametimeallowinghighlyratedcompaniestoborrowdirectlyfromthemarket.AsinthecaseofCDs,thesecondarymarketinCPhasnotdevelopedtoalargeextent.

CommercialBillsCommercialPaperisshort-termloanthatisissuedbyacorporationuseforfinancingaccountsreceivableandinventories.CommercialPapershavehigherdenominationsascomparedtotheTreasuryBillsandtheCertificateofDeposit.ThematurityperiodofCommercialPapersareamaximumof9months.Theyareverysafesincethefinancialsituationofthecorporationcanbeanticipatedoverafewmonths.TheconceptofraisingmoneythroughcommercialpaperwasknowtotheUSmarketssince20thcentury.Onourcountrythoughitwasintroducedin1990,theRBIconstantlywatchingthegrowthoftheCPmarketanditismodifyingthegui

delinesfromtimetotime.ForfurtherdevelopmentofCPmarket,thestampdutyonCPshouldbeabolishedsincethereisnostampdutyinUS,UKandFranceandRBIhastorelaxthestringentCreditRatingnormsfromthepresentCreditratingP2ofCRISILtoP3,sincecreditratingisnotcompulsoryinmanycountrieslikeUS,UKandFrance.ThedenominationsofCPshouldbereducedfurtherforthegrowthofsecondarymarketforCP.

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CommercialPaperpolicychanges:Jan1990JulyJulyJulyJuneJulySep.Feb.Oct.Oct.199019911992199419951996199720002004TangibleNet10Crore54CroreWorthCroreWCFBL*25Crore151054CroreCroreCroreCroreMinimumSize1Crore50255LakhLakhLakhMaximumSize20%of30%75%75%of100%of100%ofShouldMPBF**ofofCashCashWCFBLnotMPBFMPBFCreditCreditexceedComponeComponeWCFBLntntDenominations25Lakh105Lakh5LakhLakhMaturity91days-315days7daysPeriod6monthsmonths1year-One1yearYr.CreditRatingP1+byCRISILP2orEqualgradebyotheragenciesOtherMeasures

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Billsofexchangearenegotiableinstrumentsdrawnbytheseller(drawer)onthebuyer(drawee)forthevalueofthegoodsdeliveredtohim.Suchbillsarecalledtradebills.Whentradebillsareacceptedbycommercialbanks,theyarecalledcommercialbills.Ifthesellerwishestogivesomeperiodforpayment,thebillwouldbepayableatafuturedate(usancebill).Duringthecurrencyofthebill,ifthesellerisinneedoffunds,hemayapproachhisbankfordiscountingthebill.Oneofthemethodsofprovidingcredittocustomersbybankisbydiscountingcommercialbillsataprescribeddiscountrate.Thebankwillreceivethematurityproceeds(facevalue)ofdiscountedbillfromthedrawee.Inthemeanwhile,ifthebankisinneedoffunds,itcanrediscountthebillalreadydiscountedbyitinthecommercialbillrediscountmarketatthemarketrelatedrediscountrate.(TheRBIintroducedtheBillMarketSchemein1952andanewschemecalledtheBillRediscountingSchemeinNovember1970).Withaviewtoeliminatingmovementofpapersandfacilitatingmultiplerediscounting,theRBIintroducedaninnovativeinstrumentknownas"DerivativeUsancePromissoryNotes"backedbysucheligiblecommercialbillsforrequiredamountsandusanceperiod(upto90days).Governmenthasexemptedstampdutyonderivativeusancepromissorynotes.ThishasindeedsimplifiedandstreamlinedthebillrediscountingbyInstitutionsandmadecommercialbillanactiveinstrumentinthesecondarymoneymarket.Rediscountinginstitutionshavealsoadvantagesinthatthederivativeusancepromissorynote,beinganegotiableinstrumentissuedbyabank,isgoodsecurityforinvestment.Itistransferablebyendorsementanddeliveryandhenceis

liquid.Thankstotheexistenceofasecondarymarkettherediscountinginstitutioncanfurtherdiscountthebillsanytimeitwishespriortothedateofmaturity.Inthebillrediscountingmarket,itispossibletoacquirebillshavingbalancematurityperiodofdifferentdaysupto90days.Billsthusprovideasmoothglidefromcall/overnightlendingtoshorttermlendingwithsecurity,liquidityandcompetitivereturnoninvestment.Assomebankswereusingthefacilityofrediscountingcommercialbillsandderivativeusancepromissorynotesforasshortaperiodasonedaymerelyasubstituteforcallmoney,RBIhassincerestrictedsuchrediscountingforaminimumperiodof15days.TheeligibilitycriteriaprescribedbytheReserveBankofIndiaforrediscountingcommercialbillinter-aliaarethatthebillshouldariseoutofgenuinecommercialtransactionevidencingsaleofgoodsandthematuritydateofthebillshouldnotbemorethan90daysfromthedateofrediscounting.

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RBIhaswidenedtheentryregulationforBillMarketbyselectivelyallowing,besidesbanksandPDs,Co-opBanks,mutualfundsandfinancialinstitutions.DFHItradesintheseinstrumentsbyrediscountingDerivativeUsancePromissoryNotes(DPNs)drawnbycommercialbanks.DPNswhicharesoldtoinvestorsmayalsobepurchasedbyDFHI.

DerivativeUsancePromissoryNotes"(DUPN)ITisaninnovativeinstrumentissuedbytheRBItoeliminatemovementofpapersandfacilitatingeasyrediscounting.DUPNisbackedbyupto90daysUsancecommercialbills.GovernmenthasexemptedstampdutyonDUPNtosimplifyandsteam-linetheinstrumentandtomakeitanactiveinstrumentinthesecondarymarket.Theminimumrediscountingperiodis15daysBillRediscountingTheRBIintroducedtheBillsMarketScheme(BMS)in1952whichwaslatermodifiedintotheNewBillsMarketScheme(NBMS).Underthisschemecommercialbankscanrediscountthebillswhichwereoriginallydiscountedbythemwithapprovedinstitutions(viz.,CommercialBanks,DvelopmentFinancialInstitutions,MutualFunds,PrimaryDealersetc.)MultipleRediscountingTheindividualbillscanbesubstitutedbyDerivativeUsancePromissoryNotes(DUPN)oftheequalaggregateamountandmaturitywhicharedrawnbytheissuingbanktoeliminatemovementofpapersandtofacilitatemultiplerediscounting.DUPNsareexemptfromstampdutyandarenegotiableinstruments

ReadyForwardContracts(REPOS)ReadyforwardorReposorBuybackdealisatransactioninwhichtwopartiesagreetosellandrepurchasethesamesecurity.Undersuchanarrangement,thesellersellsspecifiedsecuritieswithanagreementtorepurchasethesameatamutuallydecidedfuturedateandaprice.Similarly,thebuyerpurchasesthe

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securitieswithanagreementtoresellthesametotheselleronanagreeddateinfutureataprefixedprice.Forthepurchaserofthesecurity,itbecomesaReverseRepodeal.Insimpleterms,itisrecognisedasabuybackarrangement.Inastandardreadyforwardtransactionwhenabanksellsitssecuritiestoabuyeritsimultaneouslyentersintoacontractwithhim(thebuyer)torepurchasethemonapredetermineddateandpriceinthefuture.Bothsaleandrepurchasepricesofsecuritiesaredeterminedpriortoenteringintothedeal.Inreturnforthesecurities,thebankreceivescashfromthebuyerofthesecurities.Itisacombinationofsecuritiestrading(involvingapurchaseandsaletransaction)andmoneymarketoperation(lendingandborrowing).Therepo-raterepresentstheborrowing/lendingrateforuseofthemoneyintheinterveningperiod.Astheinflowofcashfromthereadyforwardtransactionisusedtomeettemporarycashrequirement,suchatransactioninessenceisashorttermcashmanagementtechnique.Themotivationforthebanksandotherorganizationstoenterintoareadyforwardtransactionisthatitcanfinancethepurchaseofsecuritiesorotherwisefunditsrequirementsatrelativelycompetitiverates.Onaccountofthisreasonthereadyforwardtransactionispurelyamoneylendingoperation.Underreadyforwarddealthesellerofthesecurityistheborrowerandthebuyeristhelenderoffunds.Suchatransactionoffersbenefitsbothtothesellerandthebuyer.Sellergetsthefundsataspecifiedinterestrateandthushedgeshimselfagainstvolatilerateswithoutpartingwithhissecuritypermanently(therebyavoidinganydistressedsale)andthebuyergetsthesecuritytomeethisSLRre

quirements.Inadditiontopurefundingreasons,thereadyforwardtransactionsareoftenalsoresortedtomanageshorttermSLRmismatches.Internationally,Reposareversatileinstrumentsandusedextensivelyinmoneymarketoperations.Whileinter-bankReposwerebeingallowedpriorto1992subjecttocertainregulations,therewerelargescaleviolationoflaiddownguidelinesleadingtothesecuritiesscam in1992;thisledGovernmentandRBItoclampdownsevererestrictionsontheusageofthisfacilitybythedifferentmarketparticipants.Withthepluggingofloopholeintheoperation,theconditionshavebeenrelaxedgradually.RBIhasprescribedthatfollowingfactorshavetobeconsideredwhileperformingrepo:1.purchaseandsalepriceshouldbeinalignmentwiththeongoingmarketrates

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2.nosaleofsecuritiesshouldbeeffectedunlessthesecuritiesareactuallyheldbythesellerinhisowninvestmentportfolio.3.Immediatelyonsale,thecorrespondingamountshouldbereducedfromtheinvestmentaccountoftheseller.4.Thesecuritiesunderreposhouldbemarkedtomarketonthebalancesheetdate.

TherelaxationsovertheyearsmadebyRBIwithregardtorepotransactionsare:i.ii.iii.iv.InadditiontoTreasuryBills,allcentralandStateGovernmentsecuritiesareeligibleforrepo.Besidesbanks,PDsareallowedtoundertakebothrepo/reverserepotransactions.RBIhasfurtherwidenedthescopeofparticipationintherepomarkettoalltheentitieshavingSGLandCurrentwithRBI,Mumbai,thusincreasingthenumberofeligiblenon-bankparticipantsto64.Itwasindicatedinthe Mid-TermReview ofOctober1998thatinlinewiththesuggestionoftheNarasimhamCommitteII,theReserveBankwillmovetowardsapureinter-bank(includingPDs)call/noticemoneymarket.Inviewofthisnon-bankentitieswillbeallowedtoborrowandlendonlythroughRepoandReverseRepo.Hencepermissionofsuchentitiestoparticipateincall/noticemoneymarketwillbewithdrawnfromDecember2000.Intermsofinstruments,reposhavealsobeenpermittedinPSUbondsandprivatecorporatedebtsecuritiesprovidedtheyareheldindematerialisedfrominadepositoryandthetransactionsaredoneinarecognisedstockexchange.

v.

Apartfrominter-bankreposRBIhasbeenusingthisinstrumenteffectivelyforitsliquiditymanagement,bothforabsorbingliquidityandalsoforinjectingfundsintothesystem.Thus,ReposandReverseRepoareresortedtobytheRBIasatoolofliquiditycontrolinthesystem.Withaviewtoabsorbingsurplusliquidityfromthesysteminaflexiblewayandtopreventinterestratearbitraging,RBIintroducedasystemofdailyfixedratereposfromNovember29,1997.

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ReserveBankofIndiawasearlierprovidingliquiditysupporttoPDsthroughthereversereporoute.ThisprocedurewasalsosubsequentlydispensedwithandReserveBankofIndiabegangivingliquiditysupporttoPDsthroughtheirholdingsinSGLA/C.TheliquiditysupportispresentlygiventothePrimaryDealersforafixedquantumandattheBankRatebasedontheirbiddingcommitmentandalsoontheirpastperformance.ForanyadditionalliquidityrequirementsPrimaryDealersareallowedtoparticipateinthereverserepoauctionundertheLiquidityAdjustmentFacilityalongwithBanks,introducedbyRBIinJune2000.Themajorplayersintherepoandreverserepurchasemarkettendtobebankswhohavesubstantiallyhugeportfoliosofgovernmentsecurities.Besidestheseplayers,primarydealerswhooftenholdlargeinventoriesoftradablegovernmentsecuritiesarealsoactiveplayersintherepoandreverserepomarket.

Banker sAcceptance:Itisashort-termcreditinvestment.Itisguaranteedbyabanktomakepayments.TheBanker sAcceptanceistradedintheSecondarymarket.Thebanker sacceptanceismostlyusedtofinanceexports,importsandothertransactionsingoods.Thebanker sacceptanceneednotbeheldtillthematuritydatebuttheholderhastheoptiontosellitoffinthesecondarymarketwheneverhefindsitsuitable.

TREASURYBILLSANDINFLATIONCONTROLTreasuryInflation-ProtectedSecurities(or

TIPS)aretheinflation-indexedbondsissuedbytheRBITreasury.Thesesecuritieswerefirstissuedin1997.TheprincipalisadjustedtotheConsumerPriceIndex,thecommonlyusedmeasureofinflation.Thecouponrateisconstant,butgeneratesadifferentamountofinterestwhenmultipliedbytheinflation-adjustedprincipal,thusprotectingtheholderagainstinflation.TIPSarecurrentlyofferedin5-year,7-year,10-yearand20-yearmaturities.30-yearTIPSarenolongeroffered.ABDULHAMIDROLLNO:02


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Inadditiontotheirvalueforaborrowerwhodesiresprotectionagainstinflation,TIPScanalsobeausefulinformationsourceforpolicymakers:theinterest-ratedifferentialbetweenTIPSandconventionalTreasurybondsiswhatborrowersarewillingtogiveupinordertoavoidinflationrisk.Therefore,changesinthisdifferentialareusuallytakentoindicatethatmarketexpectationsaboutinflationoverthetermofthebondshavechanged.Theinterestpaymentsfromthesesecuritiesaretaxedforfederalincometaxpurposesintheyearpaymentsarereceived(paymentsaresemi-annual,oreverysixmonths).Theinflationadjustmentcreditedtothebondsisalsotaxableeachyear.Thistaxtreatmentmeansthateventhoughthesebondsareintendedtoprotecttheholderfrominflation,thecashflowsbythebondsareactuallyinverselyrelatedtoinflationuntilthebondmatures.Forexample,duringaperiodofnoinflation,thecashflowswillbeexactlythesameasforanormalbond,andtheholderwillreceivethecouponpaymentminusthetaxesonthecouponpayment.Duringaperiodofhighinflation,theholderwillreceivethesameequivalentcashflow(inpurchasingpowerterms),andwillthenhavetopayadditionaltaxesontheinflationadjustedprincipal.Thedetailsofthistaxtreatmentcanhaveunexpectedrepercussions.BycomparingaTIPSbondwithastandardnominalTreasurybondacrossthesamematuritydates,investorsmaycalculatethebondmarket sexpectedinflationratebyapplyingFisher sequation.Sometimesappropriatemarketstructureshavedevelopedonlyaftercentralbanksandgovernmentshavetakenthelead.Forexample,ReservebankofIndiarealizedquiteearlyinitsexistencethatawellfunctionin

gmoneymarket-dealingintreasurybills,commercialpaper,overnightfunds,andthelike-wouldassisttheimplementationofmonetarypolicyaswellastheoverallefficiencyoftheeconomy.Butalthoughthebankingsystemassuchhadbeenwelldevelopedformanydecades,anactivemoneymarketemergedonlyafteraseriesofRBIFromtheviewpointofmonetarycontrol,andthereforeinflationcontrol,thedevelopmentoftheCanadianmoneymarkethadtwoparticularlydesirablefeatures.Inthefirstplace,themoneymarket sdevelopmentprovidedanavenueforincreasedrelianceonprice-relatedmethodsofmonetarymanagement-broadlyspeaking,openmarketoperations.Andinthisprocess,relianceonjawboningandonbankliquidityratiostoinfluencecommercialbanks extensionofcreditbecamelessandless-tothepointthatthesefeaturesnowhavenoroleinIndiaSecondly,thebroadeningofoutletsfortheplacementofgovernmentdebt-toincludethemoneymarketaswellasthebondmarket-helpedtoprovideafirstlineofass

urancethatgovernmentdeficitfinancingwouldnotimpingeuponmonetarycontrol.ABDULHAMIDROLLNO:02


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Ingeneral,intheabsenceofbroadandresilientfinancialmarketsthroughwhichtoabsorbfinancingdemands,thecentralbankwouldfinditverydifficulttodeflectdirectpressurefromgovernmentMonetaryPolicyandtheControlofInflationdeficitsonitsbalancesheetandthereforeoninflationofthemonetarybase.Todeflectthepressureby,forexample,imposinghigherbankreserverequirementsincash,oringovernmentsecurities,isnotanadequatesolution.Attheveryleastitcausesproblemsfortheefficiencyandcompetitivenessofthedeposit-takingpartofthefinancialsystem.Abettersolutionwouldbeforthegovernmenttopayaninterestratesufficientlyhighthatitattractswillinglenders,andwithoutpumpingupthemoneysupply.Ingeneral,ifcreditofvariouskindsreallyhastobesubsidizedorchannelledpreferentially,thesubsidyshouldbeoutintheopenandnotfinancedthroughwhatisineffectatax(andthereforefiscal,notmonetary,policy)ontheintermediationofsavingsthroughthebankingsystem.Arelatedissuewithimplicationsforcontrollinginflationistheimportanceofdevelopingatanearlystageaworkablesystemofprudentialoversightforfinancialinstitutions,includingdeterminingwhichinstitutionswillhaveaccesstothelender-of-lastresortfacilityforliquiditypurposes.This,too,isaseparatetopicofdiscussioninalatersession.Itsimportanceforinflationcontrolistoremoveapotentialconstraintontheconductofmonetarypolicy.Thepresenceofdistressedinstitutionsmayinhibitmonetarydiscipline,forfearofprecipitatingacrisisinthefinancialsystemorofdisruptingtheflowofinvestmentfinancetothenon-financialsector,

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BIBLIOGRAGHY:BOOKSREFERENCE:

DYNAMICSOFINDIANFINANCIALSYSTEMBY-PREETYSINGHINDIANFINANCIALSYSTEMBYBHARATIV.PATHAKFINANCIALSERVICEANDMARKET-BYDR.S.GURUSWAMYNSEDEBTMARKET(BASICMODULE)WORKBOOKBUSINESSWENVIRONMENTBYFRANCISCHERUNILAMMONEYBANKINGTRADEANDPUBLICFINANCEBYD.M.MITTHANI

WEBSITES:www.rbi.org.in/weeklystatisticalsupplement/variousissues.co.inwww.investopedia.com.www.bseindia.comwww.nseindia.comwww.economics.indiatimes.com

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money market project in finance

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