MONEY MARKETAND CALL MONEY

MARKET: INDIAN MONEY MARKET

COMPOSITIONAND STRUCTURE
DISCOUNT HOUSES)
(ACCEPTANCE HOUSES AND
in
sense to mean financial institutions dealing
is used in the and lending of
The term money marketinstitutional arrangements facilitating borrowing
short-term funds. It refers to lenders who have surplus short-term investible
bring together money markets, funds can
be
short-term funds. Money markets short-term funds. In
types of instruments
who are in need of
funds and the borrowers varying from a day to 12 months against different funds are called near
borrowed for a short perjod,bankers' acceptances, bonds etc. Short term
such as bills of exchange, near
money"also. does not deal in money or cash, it deals with
duration.
market but it of short
Though called the money bills,promissory notes or governnent papers
substitute for money like trade
DEFINITION OFMONEY
MARKET
mainly
Money market is the centre for dealings,
borrowers
Bank of India,
According to Reservemonetary
requirements of
assets; it meets the short-term
character in
ofa short-term or cash to the
lenders."
collective name given to
various
provides liquidity market is the
and Crowther, Money
According to Geoffery in the various grades of near money." individuals, institutions
that deal place, it incdudes all
tirms and institutions refer to any particular place through telephones,
Money market does not funds. Transactions take required. For
intermediaries who deal with short-term and buyer at a particular place is not over India.
and Presence oflender attracts funds from all
Computers, men or [Link] is located in Mumbai but it MARKET
money
example MumbaiFEATURES/CHARACTERISTICS OF MONEY
:
main features of money market the maturity period ofloans is
Following are the short-term funds only,
Short-term Funds: It deals with can
1.
with money. It deals with assets whichassets
under one year. deal cost. These
Near Monev : Money market does not and with minimum transaction
2. into cash without
loss
De readily converted place for money market.
are called near money.
Dealings : There is no fixed geographical
3. No formal Place
for purchase of shares. conducted without. tha
exchange are for sale and markets are
ealings at the stock Generally, transactions in money
4. No Brokers : money market like the
central
help of brokers. Components:There are many components of
banks, discount houses,
acceptance houses etc.
5. Different commercial
the
bank of the country, Sub-markets Money market is not asingle homogeneous market, it is
:
call money market,
acceptance market, bill market etc.
6. Consists of sub-marketsliketlhe
divided into various IMPORTANCE OF MONEY MARKET
FUNCTIONS OR money markets:
functions or reasons ofimportance of
Following are the main Liquidity Position:The basic function of money market
Adjustment of
1 Facilitates liquidity positions of cominercial banks, conpanies and other non-
is to help in adjustment of companies etc.
institutionslike insurance
banking financial
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SBPD Publishing House
2. Outlet to Short-term Surplus Funds :
surplus funds to commercial banks, Money markets provide
investors. companies, non-banking financial outlet to short-t
3. Provision of
Short-term
funds to various borrowers Funds to Borrowers : Money
like businessmen,
institutions
markets provide
and term
other
institutions.
4. An
industrialists, traders, banks
and short-term
Instrument
mechanism credit of Credit of
Control The :
money market constitutes government
country, Reserve Bankcontrol. It serves as medium
through a
which highly a
control on thecentral bankeffiofciethnte
of
India the in case of the
of the
5. Diverting Funds to Better
country to most
India,.exercises
Use : Money markets creation of i
play
a vital role in thee
6.
Encouragement
important and productive uses.
to
Savings and Investments : flow of credi
funds
t.
promotion of liquidity and also
encourages Efficient money
interest encourages people to save
7. Economic more.
savings and investments. Income market
in the helps
for in
economic development Development : More
of the country. savings, and better use of
trade and industry which Money market assures supply
results in strengthening short-term
of
funds leads to
base. short-term funds t
8. Helps ef the industrial
in raising Government in Raising
funds fromshort-term
money
funds at quite low rates of
markets by issuing
Short-termFunds
interest. It
: Money market
is much better tohelps governments
which may lead to inflation. treasury bills etc. instead of going for raise short-term
deficit financing
Structurally DIVISION MONEY MARKET
OF
short-term
(i) organised, and i.e., money markets can be divided into
(ii) unorganised. two parts:

Composition of Indian Money Market

Moncy Market
Organised
Unorganised
Call Bill Coll
Money Market ateral Loan Certificates
of Deposit
Commercial
Papers
Money Repurchase Inter Bank
Market Market Market Agreements Participation
(CDs) (CPs) Mutual (REPOS) Certificates
Funds
Treasury
Bills
Commercial Hundis
Bills Indigenous Nidhis Chit
Bankers and Funds
Moneylenders
loan [Link] Money Market: It consists of call money
market. It is called organised market, bill market and colatera
Reserve Bank of India. Non-bankingbecause its parts are controlled and co-ordinated by e
other insurance companies and the Unitfinancial institutions like Life Insurance CorporatiOn,
(through banks) and not directly. Trust of India also operate in this market but
Quasi-government bodies and large companies alsoindirecuy
their short-term surplus funds available to money market through mase
2. Unorganised Money commercial
Market : The unorganised money market is banks.
indigenous bankers and moneylenders, Nidhis, chitfunds and finance [Link]
unorganised because activities are not systematically co-ordinated and controlled
its It is ca
Reserve Bank of India or any other authority. Indigenous bankers and by
monevlenders opera
 Money Market and Call Money Market... Composition and Structure 263
through hundis of various kinds in whole of India, in isolation of each other and away from
constituents of organised sector.
COMPOSITION OF ORGANISED MONEY MARKET
sfoney market is not a single homogenous market, itshort-term
is composed of several specialised
credit.
sub-markets, each one of which deals in different kind of
The main constituents of money market are:
market.
1,Call money
2. Bill market :
(i) treasury bill market
(ii)commercial bill market
3. Acceptance market
4. Collateral loan market
[Link] papers (CPs)
6. Certificates of deposits (CDs)
7. Money market mutual funds.
PARTICIPANTS IN MONEY MARKET
participants can both
There are two types of participants in Indian money markets, some
lend and borrow and some can lend only. borrowers :
Following are the participants who can operate both as lenders and
[Link] Bank of India.
2. Commercial Banks, both Indian and Foreign.
[Link]-operative Banks.
4. Discount and Finance House of India (DFHI)
5. Securities Trading Corporation of India Ltd. (STCI)
6. Primary Dealers.
Following participants can Operate as lenders only:
1. Life Insurance Corporation of India (LIC)
2. Unit Trust of India (UTI)
3. Industrial Development Bank of India(IDBI)
4. National Bank for Agriculture and Rural Development (NABARD)
5. Private Mutual Funds, subject to certain restrictions.
6. Specified Institutions already operating in bills rediscounting market.
7. Other entities companies and mutual funds with bulk lendable resources (subject to
certain restrictions.)
8. Repos
9. Inter-bank participation certificates.
CHARACTERISTICS OF MONEY MARKET INSTRUMENTS
Money market instruments mentioned above possess some special features which are
described below :
1. Short Duration : Money market instruments are of short duration, for example, the
Call money máy be for a day while a treasury bill may be for a year.
2. Liquid : Money market instruments are highly liquid that is why they are termed as
hear money. They can be converted into cash in very short time without incurring any cost.
They are highly liguid because of their short duration, additionally most of these instruments
an be readily discounted or resold to the Reserve Bank of India or to the Discount and Finance
House of India.
bil s)[Link] : Because money market instruments are issued by the Government (like treasury
scheduled banks (like bills of exchange and certificates of deposit) or reputed financial
264 SBPD Publishing House
institutions (who issue certificates of deposits) or by renowned public or private:
they are considered very safe with nearly zero default risk. sector companies,
4. Few Participants : There are only afew
The participants are the Reserve Bank of India, participants in money market
hanks, big companies etc.
5. Unregulated Interest Rates:
Discount and Finance House of
Borrowing and lending in money market
instcommerci
India, rumentasl.
is done at market determined rates,
6. Dealings in Big
treasury billis for minimum
there are no regulations about interest rates.
Amount Money market instruments are of very high
of?
: instruments
value
(CP) is of minimum value of ? 25 One lakh, a certificate of deposit (CD) or a
lakhs while a call loan may be for few crores commercial nan
of rupees.
CALL MONEY MARKET
Call money market is that part of money
by banks, are traded. The period of
market where short-ternm surplus funds, mostly
loan
are repayable on demand at the option of may vary from one day to 15 days. Call money loans
either
considered most liquid, next only to cash. It is alsothecalled
lender or the borrower. Such loans are
The borrowers are mostly those banks who are the inter-bank call money market.
the banks, who have excess of cash.
Financial
temporarily short of funds and lenders are also
GICand the Life Insurance Corporation as institutions like the Unit Trust of India, IDBI.
special
money market. The main function of call money market cases, also place their surplus cash in call
surplus of funds of the banks among other banks who areisinto redistribute the pool of day-to-day
The shortage or surplus of cash with the need of very short-term cash loans.
banks may
some may end the day with large surplus of cash and arise due to imbalances in days clearing,
market which provides the mechanism to adjust this some with deficit. It is the call money
Call money market is highly sensitive and is surplus or deficit.
greatly
cash. It is tighter during busy season (October to April) and affected by demand and supply of
easy
September). Call money interest rates are also highly volatile. Theduring slack season (May to
interest was 30 percent in 1973 but each year it comes down to highest call money rate of
less percent p.a.). manageable levels (about 8.5 or
Methods of Operation : Business in call money market is transacted
phone. After the terms are settled and the deal orally or over the
has been settled over the phone about the
amount and the rate of interest, the lender issues a cheque and the borrower
money borrowing-receipt." Deals can also be struck through the Discount and gives the "call
of India (DFHI), The borrower informs the DFHI about his Finance House
requirements, the lender informs
about the availability of the funds and the rate of interest. Once the deal is struck, the parties
exchange "Deal Settlement Advice" through DFHI.
Purpose for which call loans are given
Call loans in India, are given for the following purposes :
1. To commercial banks, to tide over their days deficit of clearing or to enable them to
maintain their liquidity ratio with the Reserve Bank of India.
2. To stock brokers and speculators in stock exchanges to meet their commitments.
3. To operators in bill market for meeting their requirements for making payment o
matured bills.
4. To the Discount and Finance House of India and the Securities Trading Corporation ol
India to activate and strengthen the call market.
5. To individuals with high credit standing, to meet their obligations of cash credit or
overdrafts.
Whoare the Lendors and Borrowers permitted to act both as lenders and borrowers of call
are
There are some institutions who
commercial and co-operative banks, the Discount and Finance House of India
loans. These are Corporation of India.
and the Securities Trading
 Money Market and Call Money Market ..... Composition and Struclure 265
ore are some institutions which can lend only (can not borrow). These are the LIC,
UTI, GLI, IDBI, NABARD, special mutual funds etc.
Adyantages of Call Money Market
he main operators in the call money market are commercial banks both as borrowers
andla few financial institutions who lend only. Our discussion about the advantages of
andlenders main advantages are :
ll money market will, therefore, be from their point of view only. The
view investment in call market is
1 Highly Liquid Investment :From lenders' point ofneed.
there is
uery liquid, the loan can be called back anytime, if
view, the rates of interest on call money
2. High Profitability : From lenders' point ofshort duration. At one point of time it was
market are quite high and that too on loans of veryprofits on their short-term surplus.
30 per cent. The lenders, this way, can earn good the loans are safe even though
8. Loans are Safe : As the borrowers are, generally, banks,
unsecured. and
4. No Expenses of Intermediaries: As call money market deals are struck by lenderssaved.
expenses of brokerage are thus
borrowers directly without the intervention ofbrokers, theLiquidity Ralio : As per the Reserve
5. Help to Banks in Maintenance of Statutory to keep certain percentage of their assets in
Bank of India directives, commercial banks have By borrówing on every Friday from call
liquid form and have to report apout it on every Friday. liquidity ratio without keeping
market for a few days the bankscan maintain their statutory
permanent idle cash with them. Market Situation:
6. Central Bank of the Country are is Appriscd of Current Money situation in the country.
Changes and trends in call narket rates indicative of monèy market
bank of the country (RBI in the case of
By studying the behaviour of this market, the central call money market helps the central
India) can adopt suitable monetary policies. Existence of efficiently and effectively.
bank of the country to carry out its open market operations
Drawbacks of Call Money Market
limitations :
The call money market in India suffers from the followings confined to few big industrial
India is
1. Exists only in Few Cities: Call money market inChennai, Bangalore and Ahmedabad
and commercial centres like Mumbai, Kolkata, Delhi,
only, it is not evenly spread. have no connection with each other,
2. Not Integrated :Call markets of different cities
they are not integrated.
3. Volatility in Rates of Interest : Interest rates in the call money markets are volatile
Le, they change very much, sometimes it may be 30 percent per annum and at another time it
centre to centre and from season to
uay be just 5 percent per annum. The rates differ from
season.
Indian call money market.
2. Very Few Players : There are very few players in the
nese are com1nercial banks anda few financial institutions.
Position of Call Money Market in India
compared to UK and USA.
"he size of the call money market in India is quite small when reserves and their need to
bDecause that Indian commercial banks hold fairly large cash
ho Irom call market is therefore relatively small. The bill narket in India underdeveloped
is
underdeveloped call market is
the here is lesser need for call loans and another reason for
industrial securities Lraded on stock exchanges is also relatively small. Call
money nmarketof in India is mainly located in big industrial and conmmercial centres.
meOlume
BILL MARKET
Bill market can be divided in to two sectors:
*Lreasury bill market and II. Commercial bill market.
I. TREASURY BILL MARKET
government of the
fsury market consists of bills or promissory notes issued by the
country to raise short-term funds.
 SIIPD Publishing lHouse
Fenturs af Treasury Bills
ALrRnsury tilt ie a promisory nuta jnsued by the Government for a
speified
uaallyfr isss han ayear, The iovernment pronnie to pay the am9nt, meptiped perd,
trsRSHFy biil,ta the hearer of the jnstrument on be due date. 4 is a purely finane nthe
duns not arise out of any rAding ransactinn. billsinsei
reasry ills arE jsBued hy the Reserve Bank of India on hehalf of the
wset Lanparary defiits af the (iovernnent The rate f diseaunt is ixed by the
Reerye Bank
Ciassifisntiun et eesuwry Billa
Dn the basis of eriod af maLuriby, Whs LreasHry hils 4n he sdassified into
14 dyu lreaeury hills,
fllowiny

t
 Money Market and Call Money Market .....Composition and Strueture 267
Atool of Monetary Control : Governments can manipulate their monetary policies
through isSue of treasury bills. Por example, excess liquidity in the economy can be checked by
eof treasury bills and inadequate liquidity can be set right by repurchase of treasury bills.
isBue
1. Hedging Against Volatility in CallMarket Rates : Treasury bills can be used as
.ogainst yolatile fluctuations in interest rates of call money market. If ratesin call money
beete are veryhigh invyestors in treasury bills can sell or discount their holdings and obtain
caeh,
B. Help to Punds Managers : Pund managers of financial institutions can so invest
hdrfundsin weasury ills that they mature when money is needed to meet any financial
obligation at a particular time.
Drawbacks of Treasury Bills
Treasury bills haye the tollowing drawhacks :
L. Popr Yield : Rates f interest on treasury bills are the owest among all the short-tera
rudit jnstruments. Inyestors purchase them only when it is statutorily necessary.
[Link] nf Competitive Bids sThough some types of treasury bills are sold on the
basa of Anction whaye mpetitiye rAlks f interest but in practice there are hardly any
bidders And he B/jg9mpelled ta Reyt any bid.
8. Absenkenf Artive Trading sieneraly, invesurs retain treasury bils till maturity.
here js n9 4ireulaion uf prk mabure tyensury bills heneu they are not traded on the secondary
marke,
Pijon in Indis
IensMEy ill markeh in India as ompared ta suh markets in the UBA And UK Ís highly
HHAedaveyed '"hi rke in dia is imied, narrom And inactive, because there are no other
tipnta w h inmaal inatitim, bals gvernnent, pension funda, seml-government
Aepalmen# And fnegn Rna banka Thu vata f veurn onLreasury billa has also been very

.4OMMEWIAL, HL MAHKPT DIOOUNT MALKET)

Hhu t w h htmrhut menn, hu mskut bn whieh sort period papers like bills
hm hmyt ut nal4 mmeial billa nrn the moat importánt ahort period papers
Wt wf hHwtndoumnt eontaning an unconditionalorder,
ytHhndHwww n npurntopay nvurlnin sum of money to, or order of
NN thebH of the rumnt ned tme in future oron demand.
Agea, 11th Jan.,2029

8igned Mani Ratan

Nt hi ul anun, MHHt tutan the dvawerke. the ereditor) and Ram Lal is drawee
vwi i f i l tam tntwill wre the wert "Aecepted"on it and wil put his
ta weit An sun the biltbuek to Munt Natan (the drawer\ Mani Rata
HHh mHat Amtum bat atter three monthx, but ithe ia in inetàate ne
268 SBPDPublishing House
After discounting the bill the bank will claim payment from Ram Lal on maturity. If
fails to pay the amount of th bill on maturity the bank can recover it from the the
Bills are very imnportant device for providing short-term finance to trade and [Link]
Usually the period varies from 30 days to 90 days. Bills are marketable papers i.e.,
resold any number of times before maturity. Banks are prepared to deal in bills they can be industry.
maturity date is fixed and the amount can be recovered from drawee as well as the because their
he
Types of Bills of Exchange : Commercial bills can be (i) inland or (ii) foreign.
be payable on demand or after some period, the later are known as usage bills. If They can
and accept bills not because of sale or purchase of goods but to provide parties draw
temporary
finance to
each other through the process of discounting, these are called accomodation bills. In unorga
money markets the bills of exchange are known by the name of "hundis".
Bill Market Schemes
As early as in 1931 need was felt for developing the bill marketin India by
Enquiry Committee but nothing much was done about it. Central Banin.
Bill Market Scheme of 1952 : The RBI, for the first
scheme in 1952 under which it undertook to make advances time, introduced a bill markot
to scheduled banks having denost
of more than 10 crores against the security of usage
maturity of 90 days or less and bearing two signataures promissory notes or trade bills having
scheduled bank. Later on, on the recommendation of one of which was to be that of a
to all scheduled banks, the minimum limit of the ShroffCommittee the schemne was extended
from ?1 lakh and the minimum limit of advanceadvance of each bill was reduced to 50.000
for a bank was reduced to 10 lakhs from
25 lakhs. In 1957 the schemne was
extended to include
Bill Market Scheme of 1970 : The RBI in 1970,export bills also.
chairmanship of Sh. M. Narasimhan to go into the question appointed a study group under the
of creating bill market in India.
Following the recommendation of this group the lRBI announced a new bill market scheme in
November 1970.
Under this scheme all scheduled banks are eligible for
the bills are genuine trade bills (not accomodation rediscounting from RBI provided
bills). The bills should have at least two good
signatures, one of which should be that of licenced scheduled bank and have
less than 120 days. By later amendment the minimum maturity time of
with the RBI was reduced to 1,000 from 5,000. The value of amount of a bill eligible for rediscount
RBI should not be less than 50,000. It is necessary to lodge bills offered for rediscount with
only if their individual value exceeds 10 lakhs bills rediscounted with RBI the
available in Mumbai, Kolkata, Chennai and New Delhi (previously 2 1akhs) The facility was made
too. In 1990 more amendments were made in the scheme and and
later on in Kanpur and Banglore
more than 25 types of institutions
were permitted to rediscount the bills under this scheme. The new Bill market scheme has
helped a lot in developmnent of bill market in India.
Advantages of Commercial Bill MarkeVDiscount Market
Following are the main advantages of discount market i.e., commercial bill markev
banks and the discount houses :
1. Definite Period of Repayment : The bills are self-liquidating because the ae
repayment of banks loan through discounting and rediscounting is defnite. In contrast cas
credit is not self-liquidating.
2. Greater Liquidity : Bills offer greater liquidity to
others i.e., rediscounted from other financial institutions, banks as these can be further so
if there be need for cash.
3. Maintaining Balance in Supply and Demand of Short-term Funds :Becad
rediscounting facility, hose having short-term surplus funds can invest in bills short-term
of de
maturities and can unload their holding on others when in need of cash. This way
surpluses of some become available to meet the short-run deficits of others.
 MonevMarket und Call Money Market .......Composition and Structure 269
4. Better Return : Comn1ercial bill rate (i.e., commission charged) is much higher than
thetreasury bill rate. Thus employment of short-run surpluses in bills leads to better income
houses.
tn banks and discount
5. Lower Burden on Borrowers : To the borrowers, the cost of bill finance is some what
lower than the rate of interest chargedon cash credits or overdrafts. The rate is lower because
the bills carrythe additional security inthe forn of acceptor's signatures, the drawer's: secondary
iability, time-bound repayment and rediscounting facility.
6. MonetarySystem Becomes Elastic : Because of rediscounting facility of bills with
.he Reserve Bank of India, the monetary system becomes highly elastic. Whenever, due to
asonal demand, the economy is in need of more cash, banks can get their bills rediscounted
with the Reserve Bank of India.
Roasons of Under Development of Commercial Bill Market (Discount Market) in India
The commercial bill market in India has remained under developed because of the following
reasons:
1. Absence of Bill Culture : Businessmen in India prefer overdrafts and cash credit as
methods of obtaining short-term finances from banks, discounting of bills of exchange etc. with
banks is not so popular here.
2. Limited Rediscounting Facilities : Banks in India do not follow the practice of
rediscounting of bills among themselves. Even if one bank has short-term surplus, it will not
rediscount bills discounted by another bank. To encourage rediscounting the RB0 has permitted
various financial institutions like the Life Insurance Corporation of India, General Insurance
Corporation of India, the UTI, the ICICI torediscount genuine trade bills of commercial banks
but still bill discounting has not picked up in India.
3. Absence of Secondary Market for Bills : There is no active sccondary market for
commercial bills. Rediscounting facility is restricted to few financial institutions and that too is
available in few big cities.
4. Absence of Acceptance Services : Tillrecently there were no discount house< in
India like those operating in London and Amnerican money markets. Though the Discount and
Finace House of India has started functioning since 1988 but its contribution in this sector is
not significant.
5. Attitude of Banks: Even commercial banks who can rediscount bills from RBI are shy
of doing this. They prefer to keep the bills discounted by them till maturity, this adversely
affects velocity of circulation of bills.
6. Stamp Duty :Bills have to bear a stamp duty which discourages their use.
7. Difficulty in Determining Genuiness of Trade Bills: Only genuine bills of
Can be discounted and rediscounted by banks and not accomodation exchange
bills. It is difficult to
stinguish between genuine trade bills and accomodation bills.
5. Limited Foreign Trade: In developed countries, bill
ue use of bills in foreign trade. India's volune of foreign trade markets
is rather
have thrived because of
small and hence lesser
use of foreign trade bills.
velopnent of Commercial Bill Market (Discount Market) in India
of [Link] bill market in India is underdeveloped as there is no continuous or substantial supply
The practice of borrowing against bills is scanty. Commercial banks in India do not
make much
1S quite use of bills of exchange for providing credit. The share of bill finance in bank credit
small it has been varying between 8to 22 percent between 1950to 2005. To encourage
bil financing thhe Reserve Bank of India introduced abil market scheme in 1970 and another in
May 1990 by which more than 25 types of institutions have
been permitted to rediscount bills.
COLLATERAL LOAN MARKET
the barket dealing with bank loans, secured or unsecured, is called bank loan market. If
Ioan loans
[Link] backed by collateral security like that of stock, bonds etc. it is called collateral
270 SBPD Publishing House
Bank loans are given for short periods, generally; for afew months. The
traders, brokers and dealers in stocks and shares. The lenders are commercial and
banks. Loans when given for short period are in the form of overdrafts and cash credits borrowers´are
co-operatrative
ive
comparativelylonger period for more than a year are given in the form of term loan.
provide demand loans which can be recalled on demand; they haye no stated Banks also
ACCEPTANCE MARKET mataurity date.
The acceptance market refers to the market where short term genuine trade hille .
accepted by financial intermediaries on behalf of somebody else i.e., borrowers. The nend
acceptance by financial intermediaries arise because all trade bills can not be discounted e
as the person discounting a bill may be afraid that the party who has
accepted the bill mav
be financially sound. When a bill is accepted by some financial intermediary like a banL i
becomes trustworthy as it gets backed up by the reputation of the financial intermediar
becomes easier to get such bills discounted.
Definition : An acceptance refers to the practice of a bill
upon a bank or a financial intermediary and accepted by it. being drawn by a business frm
Acceptance puts upon the acceptor an obligation to pay to the order of a particular party or
to the bearer a certain specific amount at a specific date in future.
The market where the bankers' acceptances are sold and
market. Acceptances ofbankers and financial intermediaries can discounted is known as acceptance
be easily discounted in the money
market because they have the backing i.e., the signatures of a bank or financial intermediary.
The main drawback of acceptance market is that bankersor
discount
only on behalf of financially sound parties. For this they have to make houses will accept bills
about financial position of parties on whose behalf they are going to thorough investigations
accept the bill.
ACCEPTANCE HOUSES
Acceptance houses specialise in the acceptance of trade bills on behalf of their
They provide guarantee service that there customers.
will be no default on bills of exchange. The seller of
goods may not have faith in the creditworthiness of the buyer and
the buyer purchasing the goods on credit and accepting a bill of may have doubts whether
maturity. The creditor may ask the debtor to get the bill acceptedexchange
from an
will pay the bill on
agency or a bank in
which he has faith. Such acceptance houses or banks accept the bill of
exchange
debtor. Since acceptance of a bill on behalf of a customer involves risk of on behalf of the
acceptance houses accept only for those customers in whose creditworthiness default by him,
confidence and only for the amount they consider safe. they have
Accepting agencies keep and collect detailed information about creditworthiness of various
traders in their country and abroad. The acceptance service is provided for a commission.
does not involve either borrowing or lending, essentially it is use ones reputation that it w
meet the bill, if the original acceptor defaults. Acceptance serviceoforiginated and grew many
for finan cing international commercial transactions because the credit
standing
foreign countries is difficult to know. Exporters are particularly in need of acceptance of buyers
In the U.K. there are specialised firms known as acceptance houses which do this sere
acceptance business fora commission. In the USA this function is performedby banks. Inkna lnaa0
there are no specialised acceptance agencies for providing this service for a commiss
Commercial banks also do not provide this service to any significant extent.
DISCOUNT HOUSES
Discounting means granting loans against the security of bills of exchange, promiso who
notes, treasury bills etc. Discount houses also re-discount bills i.e., grant loans to banks
have already granted loans to borrowers against bills. business
Activities : Discount houses are commercial concerns which are engaged inthe
of lending and borrowing against bills of exchanges etc. They do the business of shor
lending and borrow for still shorter period.
 MonevMarket and Call Money Market ...... Composition and Structure 271
Keatures of Discount Houses
Bollowing are the main features or characteristics of discount houses :
WhodoThis Work: Discount houses are commercial concerns which may be organised
in the form of com panies. Banksand other financial institutions can also undertake this work.
What is Their Work: Discount houses discount short-term, genuine trade bills i.e.,
hey give cash against security of commercial or treasury bills ete. before their maturity. Some
tscount houses also act as brokers or comnission agents.
3. Duration ofLoans :Discount houses grant loans through discounting for short duration
only (2 or 3months), it can be for a period of 364 days in the case of treasury bills.
4. In What Instruments do they deal in : Discount houses, generally, deal in money
market instruments like commercial and treasury bills, certificates of deposits (CDs) commercial
papers (CPs).
5. Source of Income : Discount houses earn profits in the form of difference between rate
of interest they pay on borrowed funds and the discounting commission they charge.
6. Source of Funds: The main source of funds of discount houses are their own capital,
the other sources are : borrowings from the central bank of the country and borrowings from
commercial and foreign banks. They also aceept short term deposits.
In some developed countries there are some financial intermediaries who specialise in
discounting business. In London money market there are institutions known as 'discount houses'
which specialise only in the business of discounting of bills. Such institutions do not exist in
India though some commercial banks had been doing this work.
Slow Development of Discount Houses in India : There has been very
slow.
development of discount houses in India due to insufficient development of the bill market. The
question of setting up of discount houses was considered by the banking commission in early
seventies but it was felt that there was no immediate need for specialised discount houses, the
merchant banking institutions could take up the discount business with their
Though Core Committee recomended setting up of discount houses in 1979 butother activities.
authorities did
not think it proper to implement its recommendations. The Vaghul Committee once again
recommended setting up of an autonomous public limited company called the finance house to
deal in money market instruments and eventually the Reserve Bank of
Discount and Finance House of India with the object of activating the India in 1988 set up the
money market.
DISCOUNT AND FINANCE HOUSE OF INDIA (DFHI)
The Discount and Finance House of India was set up in the form of a
Jontly owned by Reserve Bank of India, public sector banks and manyjoint stock company
asatutions with authorised capital of 250 crores and paid up capital of? 200all-India financial
crores. It becamei:
operative in 1988.
Functions
ollowing are the main functions or activities of DFHI:
ofthe Depository of Surplus Funds : DFHI acts as depository of short-term surplus funds
entire banking and non-banking financial institutions.
etting Right Liquidity Imbalances: The main objective of DFHI is to stablise the
Lquidity imbalances
in the of the money market. It uses its surplus funds to even out the imbalances
market
liquidity
of the
oviding
banking system.
Ready Market for Money Market Instruments : DFHI provides ready
for money market instruments like commercial and treasury bills and Government
Securi
acts astieas. It sells and purchases these securities to banking system on large scale. In fact, it
of specialised intermediary of money market instruments. It also helps in development
treasursecondar
y biyl s by offeringtwo way prices for their sale and purchase. DFHI
market for these instruments and provides ready market
als0 participates in
for sale and purchase of

iortnightly auctions of treasury bil s. This way it has helped in creation of secondary market.
272 SBPD Publishing House
4. Buy Back and Rediscounting : DFHI undertakes buy back operations
and approved dated securities. It does the work of rediscounting of bills alreadyin
banks and other financial institutions. It reguiarly announces its rediscount
basis. It has provided the facility of mutipie rediscounting by starting
bills
disGover
rates on count nementd
by
fortnightly
rediscounting of commme
through "Deposit and Promissory Notes" (DPNs).
5. Dealings in Variety of Instruments : DFHI deals in a variety
instuments like conmercial bills, treasury bills of91 days and 364 days. It of money market
call money market, term deposits, Government dated also participates
securities, commercial
certifcates deposit (CDs). DFHI has been a major player in the call
of papers (CPsl
acts both as lender and borrower in the inter-bank call móney money market also i
Role
market.
The role of DFHI is both deveiopmnental and
market intermediary for stimulating activity in money stabilizing. It works as a specialised mone
deais not only ín commercial bills but also in treasury billsmarket
and
instruments. It discounts and
DFHI was accredited as a primary dealer in 1996. other mnoney market instruments
DPHI has been playing a vítal role in developing an
market ínstruments in India. It has made treasury bills active secondary market in money
highly liquid
in secondary market has facilitated
profitable manner. corporate entities to invest their instrunent, its presenge
short-term surpluses in
SECURITIES TRADING CORPORATION OFINDIA (STCI)
STCI was set up in 1994, its objective was to promute secondary market for debt
Its paid up capital ís ? 500 crore which has insiruments.
been contributed by banks,
Corporation India and the Reeerve Bank of India. It is one of the primary
of the Life Insurante
seeurities. has refinance facility with the RBI. The STCI is
It dealers in Government
by dealing with companies and expeted to target retail market
individuals. Its aim is to deveiop retail rnarket for debt.
STOCK HOLDINGCORPORATION OF INDIA (SHCIL)
The Stock Holding Corporation of India was
Companies Act with authorised capital of? 25 crores establíshed in 1987 a a company under the
capítai was subecribed by seven all-India financial and paid up capital of? 10.5 erores. The
LIC, GIC and IIBI. institutions namely IDBI, IFCI, ICICI, èT,
Management : SHCIL is managed by a board of directore and a whole tíme managing
dírector. There is large experienced
head office is ocated in Mumbaiand and professionally qualificd staff tomanage its
therc are reginal centres at New Delhi, [Link] ls
Chennai cte. It has vast infra-structure comprising of 135 Kolkata
country. It has fully computerised wystem of working. ofices spread over whole of t
Services : Poliowing are the main services of S1ICIL:
[Link] Services : SHCIIL was the firat instítution to be registered as a depositor
participant of the National Securities Deponiory
2. Clearing and Settlement : SHCIL Ís aLtd.
exchanges of India. It helps in recciving the príicesmenber of clearing houses of major soc
for the securitícs sold and colleding t
detfvery of the securities bought, after each settlement
3. Providing Information : SHCæ. also acts as at the concerned stock exchange.
ita sporsoring institutions. The iínformatíon can be aboutprovider of management information
bonus shares, book clsurcs, offers of rights a
redemption and conversion of
[Link] Agent:SHCIL also handlespreference
transfers
shares and debentures ete.
of securitieson behalf of itssponors
institutions, other investors and stock brokers.
[Link] Agent andCustodial
eoMpons, rights and bonos shares ee. for itServiee:SHCIL
collets dividend warrants intere
sponsoríng instítutíons from companies.
6131 Money Market and Call Money Market. Composition and Structure 273
COMMERCIAL PAPER (CP)
nefnition : A commercial paper is a short-term unsecured loan of fixed maturity, bearing
.est or issued at discount, given to a company in exchange for a promissory note. Which is
negotiable by endorsement and delivery.
Features of commercial paper
Following are the main features of commercial papers :
market instrument
[Link]-term Instrument:Commercial paper is a short-term moneymaturity.
and has fixed
in the form of a promissory note or in dematerialised form
2. Unsecured : The debts are unsecured.
at fixed rate
8. Issued at Discount or Bear nterest: Commercial papers bear interest
discount
or may be issued at papers
4. Issued by Banks, Insurance and Finance Companies etc. : Conmercial
investors. Issuing
can be issued directly by banks, insuran ce or finance companies to
organisations can buy back the CPs, should there be a need. 5
6. High Denominations : The minimum amount investible in commercial paper is ?
lakhs and any further amount in multiples of 5 lakhs. endorsement and
6. Easy Negotiability : Commercial papers can be easily negotiated by
delivery.
7. Purchasers of [Link] : [Link]. may be held by individuals banks, companies, foreign
financial institutions and non-resident Indians.
RBI Guidelines About Issue of Commercial Papers
Important guidelines of RBI about issue of commercial papers are :
[Link] of the Issuing Institutions : Only those institutions and companies
can issue commercial papers which satisfy the following conditions :
) have net tangible worth of ? 4 crores;
() have minimum current cash reserve ratio of 1.33:1;
(Gi) have fund base working capital limit of ? 5 crores or more;
(iv) have debt servicing ratio closer to 2;
(v) are listed on a stock exchange;
(vi) are subject to CAS discipline,
(vii) have credit rating of P2 from CRISIL or A2 from ICRA.
2. Amount of Minimum Investment: Commercial papers shall be issued for minimum
amount of 5 lakhs and in multiples of?5 lakhs thereafter.
3. Maturity Period : Commercial papers shall be issued for a minimum maturity period
of7days and maximum period of 1 year.
4. Total Amount of Iesue : The aggregate amount shall not exceed 75 percent of the
issuers fund based working capítal.
5. Porm of Issue : Commercial paper shall be issued in the form of promissory note with
hatariy after some definite period. It can be issued in dematerialised form also.
6. Who can Invest : Investment in commercial papers can be made by any individual
bank, Indian companies, other association of persons and foreign financial institutions. NRIs
can ínvest on non-repatriation basis.
7. Compliance of Law : The companies issuíng commercial papers have to ensure that
Oovisions of variousstatutes such as Companies Act, Income Tax Act, and Negotiable Instruments
hct are complied with.
8. Issuing and Paying Agents : Only scheduled banks can act as an issuing and paying
sgenta.
274 SBPD Publishing House
Advantages of Commercial Papers 6131
1. Simple to Issue : Unlike issue of shares, issue of commercial paper does
much formalities or documentation between the issuer and the investor. not
Only a involve
note is to be issued.
2. Flexibility : The issuer i.e., the company can issue commercial
papers
promissory
tailor-made to its requirements i.e., the period for which it needs money. with maturities
3. Borrowing at Cheaper Rates: A company of good
obtain short-term funds through this method at cheaper rates reputation and credit standing a
than borrowings from bani
through other money market instruments.
4. Higher Return to Investors :By
investing
earn higher rate of interest than through investmentthrough commercial papers investor
in banks for short-term.
[Link] of Secondary Market:
notes are negotiable instruments and canCommercial papers issued in the form of promissory
be bought and sold in the secondary market
results in transfer of funds from cash surplus entities to cash thi
6. Lesser Handling Costs : As the commercial deficient entities.
papers are issued for 5 lakhs or more
accounts have to be kept for a few invstors only, and not for a large number of small investors
as in the case of public deposits.
Limitations of Commercial Papers
Structural rigidities such as credit rating requirements, timings and ternms of
range, high denomination and low interest issue, maturity
paper market.
rates have hindered the development of commercial
Assessment of Contribution of Commercial Papers in Indian Money Market
Commercial papers have brought together the investors and the borrowers of large
without the intervention of banks. Borrowing companies amounts
rates than from banks. The banks have been gainers in one have been able to borrow at cheaper
are gainers in the sense that they can gainfully employ their sense and losers in another. They
papers and they are losers in the sense that there will be short-term
fewer
surpluses in commercial
them because companies can raise funds through commercial short-term loan takers from
There has been good progress in the commercial papers papers from investors.
secondary market for them. The market in commercial market but there is hardly any
and regulatory measures are relaxed. papers can develop if stringent conditions
CERTIFICATE OF DEPOSIT (CD)
When an investor deposits a large sum (minimum 10 lakhs) in a bank for
the bank gives a promissory note in return, it is called a short-period and
certiicate of deposit or CD in shor.
Definition : Certificates of deposits are marketable receipts of funds in the form o
promissory notes deposited in banks for specified period at a specified rate of interest.
Features of CD's and RBI Guidelines
1. Issued by Banks :CD's are issued by banks or financial
institutions.
2. Period: These are issued for a period between 7 days to 1 year.
can issue CDs with maturity period of 1 to 3 years. Term lending instituou
3. Form : The receipts for deposit are in the form of promissory notes. The debts a
unsecured.
4. Transferability : CD's are freely transferable by endorsement and delivery afte
lock-in period of 30 days from the date of issue.
5. Interest. These are issued at discount or bear a fixed rate of interest.
6. Minimum Amount :The minimum size of an issue to a single investor is ?5lakhs and
in multiples of ? 5 lakhs thereafter.
7. Who can Issue CDs : Allbanks (except regional rural banks),IDBI, ICICI, IFCI #
allowed to issue CDs without any ceiling.
 Monev Marketand Call Money Market.......Composition and Structure 275
o Whom can be Issued:These can be issued to individuals, corporations, companies,
trustfunds,
associations and to NRI's on non-repatriation basis.
No BuyBack or Loans :Issuing banks can not buy back the CD's before maturity or
them.
grant loan against
10. Stamnp Duty :CD's are subject to stamp duty.
11. CD's are subject to CRA and SLR requirements.
Advantages of CD's
Advantages of CD's are the same as those of the commercial papers. The main advantages
of Cds are:
1. Simple to Issue : CD's are simple toissue, they do not require any documentation.
2. Liquidity :CD's offer maximum liquidity, they are easily transferable.
. Return: Investment in CD's provide good return to investors having short-term surplus
funds.
4. Profitable Employment of Funds : From the point of view of banks CD's provide
them avenues for short-term gainful employment of funds. CD can not be encashed before
maturity date nor loans are granted against them.
Limitations of CD's
Though scheme of CD's has been in operation since 1989 it is yet to prove popular, it has
remained confined to less than fifty banks. The main reasons for their unpopularity are :
[Link] Duty : CD'sare subejct to stamp duty which makes them less attractive.
2. Lack of Secondary Market :There is very limited secondary market for CD's inspite
of efforts of the Discount and Finance House of India. CD holders get attractive returns on
them and therefore are reluctant to part with them before maturity.
3. Lock in Period : CDs can not be negotiated before expiry of 30 days from the date of
issue, this restricts their transferability.
Difference Between CPs and CDs
Basis of Commercial Papers Certificates of
No. Diference (CP's) Deposits (CD's)
Issuers Issued by banks, insurance companies, Issued by all scheduled banks, IDBI,
finance companies. IÇICI,IFCI etc.
2. Minimum 5 lakhs and further amounts in? 5 lakhs and further amounts in
amount of multiples of 5 lakhs. multiples of 5 lakhs.
investnent
3. Maturity period7 days to 1 year. 7 days to one year.
4. Purchasers
Individuals, banks, companies, foreign Individuals corporations, trust funds,
financial institutions and non-resident associations and non-resident Indians.
Indians.
5. |Lock in period 7 days, after the date of issue |Thereis no lock-in period.
Similarities Between CPs and CDs
Lo Both are short term unsecured investments.
2. Both are issued in the form of promissory notes or in dematerialised form.
O. Both are transferable by endorsement and delivery.
4. Both have to bear stamp duty.
OTactically all kinds of investors can invest in them.
MONEY MARKET MUTUAL FUNDS (MMMFs)
Money market mutual funds invest their funds in highly liquid and safe securities like
commercial
of money market banker's
papers,mutual funds
tresury bills etc. The
was introduced by the Reserve Bank of India in April,scheme
acceptances, certificates of deposit,
1992.
276 SBPD Publishing House
Only Scheduled commercial banks in the form of separate trusts are allowed to setin n
Recently mutual funds registered with the private sector have also been allowedtME.
MMMFs. The Reserve Bank of India has laid down stringent regulations about
MMMFs. MMMFs of registered mutualfunds are regulated by SEBI(Mutual working of
Funds) Regul
1996.
MMMFs are a new concept in India. They have not yet gained popularity, their
ations,
yet to develop. market is
REPURCHASE AGREEMENTS (REPOs)
Repo means repurchasing under Repo transaction, there are two parties, a borrower and
a lender, the borrower sells his securites to the lender under an agreement, to repurehe
them after a fixed period at a specified price. The difference between the repurchase price ad
the originl price is its cost to the borrower. For example, a borrower may sell his treasry
bills for 1,00,000 on 1st May and promise to re-purchase them at 1,01,000 after 3 dava
? 1000 in this case is the cost to the borrower. The cost of borrowing is called Repo rate whic
is,generally, a little cheaper than normal pure borrowing rates. In India Repos are normall
conducted for a period of 3 days.
Repo and Reverse Repo : A Repo is looked at from the point of view of the lender. If A
lends money to B, from the point of A, it is case of Repo and from the point of Bit is a Reverse
Repo.
The Securities for the purpose of Repo are determined by the RBI. Usually, thèse securities
are treasury bills, government promissory notes and bonds of public sector undertakings.
Repo transactions are done to manipulate short term interest rates and manage liquidity
levels in the money market. When the RBI announces a fixed Repo rate for certain number of
days or for a period or it indirectly conveys its intention to the market the desirable levels of
short-term interest rates. If the Reserve Bank of India itself conducts the Repo the short-term
rates of interest in the money market may not go below the level of the RBI Repo-rate. If the
rates of interest are lower in other segments of the market e.g. foreign exchange market or
treasury bill market etc. the holders of funds will prefer to go in for Repos with the RBI. Repo
transactions, this way, ensure stability in short-term rates of interest in the money market. If
the RBI wants to induct fresh funds in the money market it will conduct Reverse Repo
transacations against Government securities.
Importance of Repos : Repos are very important instruments of money market. They
enable snooth adjustment of short-term liquidity among varied catagories of money market
participants. It isa popular instrument of advancedfinancial markets and constitutes a major
share of security market transacation. It is much safer than call money market operations
becuase the loans are given against the security of treasury bills or Government treasury bl
An active Repo market leads to increase in money market turnover and the Reserve Bank or
India can use it as an integral part of open market operations.
INTER-BANK PARTICIPATION CERTIFICATES
Inter-bank participation certificates are short term debt instruments issued by aborrowin
bank to a lending bank, when the lending bank agrees to share a partloans
of theand
loans given by
advances to 1t5
borrowing bank. For example, a bank named ABC bank has given
customers amounting to five crores of rupees, it approaches another bank named XYZ bank o
share these loans and takes two crores of rupees from XYZ bank on interest by issung
non-recovery
"inter bank participation certificate". The lender bank does not bear the risk ofborrowing ban
loans given to its customers by the borrowing bank. This means that the
to the lending bank (called
(called issuing bank) is bound to repay the borrowed amount
purchasing bank)on maturity even if its borrowers make a [Link] of participations
As per RBI guidelines about inter-bank participations, two participations
are
risk'. Bankspermitted to issue
permitted namely with risk' and without
 Money Market and Call Money Market....Conposition and Structure 277
with risk' nomenclature for advances classified under Health Code-I status and the aggregate
amount off such participation in any account should not exceed 40 per cent of the outstandings
he account at the time of issue of participation certificates.
Under inter-bank participation certificate mechanism, banks are able to fund their short
needs from within
term the banking system. These provide banks an additional instrument to
liquidity problems.
sort out short-term
The scheme is confined to scheduled commercial banks only and the period of participation
is restricted to minimum 91 days and maximum 180 [Link] is noceiling on the amount of
funds lent under without risk'.
Advantages of Inter-bank Participation Certificates
1. The scheme is beneficial to the issuing (borrowing) banks because it provides them
access to funds against advances given without following any cumbersome procedure as is the
case when funds are borrowed through regular consortium tie-ups. Those banks who are insn
[Link]
short-term funds can take advantage of this system to cover up their over-lent position.
system also benefits the banks having short-term surplus funds, they can earn
more and with ease as compared to complicated procedure involved in tie-ups.
Suggestions for Improvement of the Scheme
1, Need for More Participants: At present only scheduled banks are allowed to participate
in this scheme, it is suggested that financial institutions like UTI, LIC, GIC should also be
allowed to participate so that its market becomes more broad based.
2. Second Tier Transferability : The loans should be made transferable, it will make
the scheme more attractive.
3. Extension of Time Limit : If the lender and borrower banks agree the
tenure of
participation should be extended beyond the present limit by another 30 days.
4. Pre-mnature Redemption Facility : There should be provision for
before the due date, if parties agree. redemption of loan
5. Limit on Interest Rate : The difference in rate of interest charged by
issuing bank
from its borrowers and rate paid to the lender bank should not exceed 0.5 percent.
Characteristics of Developed Money Market
A developed money market should posses certain qualities or characteristics which are
mentioned below
1, Existence of Efficicnt Commercial Banking System : Commercial banks are the
hackbone of any money market system, they serve as links between the investor and the
borrower and the central bank of the country.
b. Presence of Apex Central Bank: The second essential characteristic of a developed
uoney market is the existence of effective central bank at the top. It is the central bank of the
cuntry which monitorsthe monetary health of the country, it decides about credit policies and
Ontrols the banking system and other constituents of the money market.
ç. A Network of Dealers and Brokers : There should be a network of dealers and
brokers in the country to assist public in sale and purchase of credit instruments.
,Availability of Credit Instruments : In a developed money market various types of
Ot instruments like bills of exchange, promissory notes, treasury bills,
short-termn
overnment bonds etc. should be available and used for doing business transactions.
O. Bxistence of Sub-markets : Existence of sub-markets like call money market, bill
de, collateral market, discount market and acceptance market are essential for any
developed money market. Larger the number of submarkets more developed wil be the money
market.
thereeioordination
is proper Among
coordination Sub-markets
between different : The money
types of market should
submarkets. Variousbesub-markets
so organisedshould
that
be
complementary to each other and not unconnected or isolated.
278 SBPD Publishing House
7. Responsive to Environments :A developed money market should be highly responsive
to national and international events affecting the economy. Any economic or political
háppening anywhere in the world should affect the money market. event
8. Integrated Interest Structure : A developed money market should
coordinated and integrated interest structure. It means that any change in bank havein well
rate
country should be reflected in the interest rates of the whole money market.
9. Remittance Facilities : In a developed money market cheap and quick
remitance offunds from one place to another should be available. Money facilities
market can for
function in the absence of cheap and quick remittance facilities.
10. Political Stability and Economic Growth : For developed money maket it is
essential that the country should be econonmically developed, there should be alarge volume
trede and commerce and political stability in the country.
Money market of U.K. is the best example of highly developed money market.
Characteristics or Deficiencies of Indian Money Market
Indian money market is yet in the process of development. At present it is not onlv
heterogeneous but unorganised also. Some of its important deficiencies are:
[Link] Unorganised Money Market :There are a large number ofindigenous bankers
and mòney lenders who dó business in their own way and indulge in unscrupulous practices.
They are not under the control of the Reserve Bank of India.
2. Lack of Coordination : Indian money market stands divided into different sections
which are loosely connected to each other, there is no coordination between them. The
unorganised sectori.e., indigenous bankers have no connection with the organised sector. The
Reserve Bank of India has control on organised sector only.
3. Inadequate Bill Market : The bill market which is an essential characteristic of
developed money market is grossly undeveloped in India. There is great paucity of sound
commercial bills of exchange market in India.
4. Absence of Well Organised Banking System : A well organised banking system,
which is the backbone ofany money market, is as yet underdeveloped in India. Banking facilities
are restricted to cities and towns and are non-existent in rural areas. The operations in rural
areas are mostly confined to maintenance of saving bank accounts only.
5. Difference in Interest Rates in Different Sections of the Money Market: Due to
lack of homogeneity and uniformity in the Indian money market there is vast difference in the
rates of interest. This is due to immobility of funds from one section of the money market to
in interest rates now
the other e.g. from call market to bill market etc. However, the difference control of tne
gets adjusted to changes in "bank rate" but indigenous sector is yet out of the
Reserve Bank of India.
6. Different Interest Rates in Different Areas: Due to immobility different of money i.e., absen
prevail in areas of te
of cheap and fast remittance facilities, different rates of interest
country.
7. Shortage of Funds in Busy Season :Thereproducts is shortage of short-term funds durs
busy season from October to June when agricultural like rice and wheat come n
market and seasonal industries like sugar and jaggery are at full swing. much foreign funds se
8. No Foreign Funds: Indian money market does not attract call
London money market. inter-bank
9. Too Few Instruments : The core of Indian money
market are papersis
bills, and commercial
transactions. Use of the instrumnents like trade bills, treasury short
very limited. market for bills
10. Inadequate Secondary Market : There is very limited secondary treasury
commercial and the.
term credit instruments, it is restricted to rediscounting of tradein
to hold bills till maturity rather than to
Commercial banks have the tendency
 Money Market and Call Money Market ........ Composition and Structure 279
RECENT TRENDS IN INDIAN MONEY MARKET
lo the recent years Indian money market scene has undergone a fast change. Some
important indicators are:
Widening of the Call Money Market : The call money market has widened in recent
Tife Insurance Corporation, General Insurance Corporation, Industrial Development
of India,Unit Trust of India, and some mutual funds have started participating in the call
Dmarket. The Discount and Finance House of India and the Securities Trading Corporation
tndia have been permitted to operate both as lenders and borrowers in the call money
market.
2. Decline in Bank Rate : There has been continuous decline in prime lending rate by
he Reserve Bank of India which has affected the cut-off prices of 91 days treasury bills, rate of
discounting of bills of exchange and rates of interest of other short-term instruments.
9. Development of Secondary Market for Money Market Instruments : Previously
there was no secondary market for money market instuments, but now the Discount and
Finance House of India has been trying to develop an active secondary market for the money
market instruments and integrate various segments of the market in order to facilitate
smoothening of short-term liquidity imbalances.
4. Setting up of Standing Committee for Development of Money Market : The
Reserve Bank of India has set up a 10 member standing committee under the Chairmanship of
Dr. Y.V. Reddy for development of money market in the country. It will suggest ways to strengthen
the role of money market in the financial system and advise measures needed for orderly
functioning of call money market. It will also suggest ways for developing the secondary market
for money market instruments and willalso advise on linkages between money, foreign
exchange, government securities and capital market.
[Link] on Unorganised Sector: By offering rediscount facility of hundis and bills to
indignous moneylenders through commercial banks, the Reserve Bank of India is trying to
integrate unorganised sector of money market with the organised sector.
6. Introduction of New Instruments : New money market instruments such as
certificates ofdeposits (CD), commercial papers (CP), inter-bank participation certificates have
been introduced in the money market to diversify this market.
7. Development of Bill Market:By granting exemption fromn stamp duty on rediscounting
of derivative usage of promissory notes, an attempt is being made to popularise bill financing.
8. Entry of Mutual Funds in Money Market : Certain private sector mutual funds and
Subsidiaries of commercial banks have recently been permitted to deal in money market
instruments. This will lead to expansion of money market and development of secondary market
in short-term credit
instruments.
Questions for Practice
0 Long Answer Type Questions
L. Define money market. Clearify nature and object of money market.
Bxplain the important segments of money market and inter-relationship between them.
The money market possesses different operational features as compared to capital'market."
Explain.
"Por the successful and effective working of a Central Bank, it is necessary that the money
market is highly organised." Explain this statement.
aPoint out defects of Indian money market. What remedies can you suggest ?
D What steps have been taken in present time to develop the Indian money market ?
Call money market is an important part of Indian money market." Explain.
8. What do you mean by call money market. How does this market work ?