Name of School: AMITY LAW SCHOOL, Gurgaon

Course
Handout

Program

LL.M.

Registration no.

LL.M-GGN/2015/NS/1019

Assignment Title

Indian Money Market

Submitted To

Mrs. Monika Yadav

Submitted By

Ankita Singh

MONEY MARKET

1)

Meaning of Money Market:-

Money market is very important part of financial market it

refers to the markets for short term loans it is a mechanism
through which short-funds are loaned and borrowed and
through which a large part of financial transactions of a
particular country or of the world are cleared also according
to Crowther money market is the collective name given to
the various firms and to the institutions that deals in the
various grades of near money.1
According to the Reserve Bank of India, money
market is the centre for dealing, m a i n l y o f s h o r t t e rm
character, in money assets; it meets the short
t e rm re q u i re m e n t s o f b o rro w i n g s a n d p ro v i d e s
liquidity or cash to the lenders. It is the place
w h e re s h o r t t e rm surplus investible funds at the
disposal of fi nancial and other institutions and
individuals are bid by borrowers agents comprising
institutions and individuals and also the government
itself. In India also money market is market for short term
instruments with maturity ranging from over night to one
year and these instruments deemed to be close substitute of
money. Thus, money market is concerned with buying and
selling of temporary surplus funds for short periods. It deals
in cash or money and also trade bills, promissory notes and
government papers. The dealers in money market consist of
government, banks, commercial and industrial and the main
lead in money market is taken by the RBI it is the regulatory
body to money market, both government securities and
treasury-bill issued by the RBI on the behalf of government
of India.

1 Business studies of NCERT XII

2)

Features of money market:-

Money market have some essential features as it is bit clear

with the meaning of money market which is stated above
that how the money market works but despite of this there
are some more features or characteristics of money market
are as follow:
(i)
Money market involves dealings in cash or liquid assets of
short-term nature.
(ii) It deals in financial instruments which are close
substitutes for money and also converted into cash with in
a period of one year.
(iii) Dealing in money market easier than capital market it can
be conducted with or without brokers and intermediaries.
(iv) It consists of many sub-markets such as inter-bank call
money market, treasury-bills market, discounting bills
market etc.
(v) It provides reasonable access to users of short term funds
to meet their requirements on reasonable terms or rates
of interest.
These are some important features on which basis money
market are dealing.

3)

Importance of money market:-

Money market plays a very important role in the field of

financial system and also in the economy of any country in
many ways:
(i)
Money market is an important source of financing trade
and industry through commercial bills, commercial
papers etc.
(ii) It provides funds for both internal and international
trade.
(iii) It helps the lenders to earn on their idle or surplus
funds for short periods.
(iv) It allows government to raise funds from investors and
commercial banks.

(v)

The government can check inflationary trend by issuing

documents and decreasing liquidity in the call money
market.
(vi) Money market facilitates implementation of the
monetary policy of the countrys central banks.

4)

Structure of Indian money market:-

Indian money market has two types of segments:

(1)
Organized structure:- The organized segment
consist of the RBI, SBI with its associates banks, public
banks, private banks, developmental banks and other nonbanking financial companies such as life insurance
corporation of India, the international finance corporation,
IDBI, and the cooperative sector.
(2)
Unorganized structure:- The second kind of
segment consist of indigenous bankers, money lenders and
other non banking financial intermediaries such as chit
funds, finance companies, nidhis etc.
5) Growth of Indian money market:In India there is lots of growth and reforms in the money
market. Banks
and other financial institutions have
been able to meet the high expectations of short term
funding of important sectors like the industry service and
agriculture. Functioning under the regulation and control of
the RBI. The organization and structure of the money market
has undergone a change in the last decades in India.
The recommendations of the sukhmoy Chakravarty
Committee on the review of the working of the monetary
system, and Narasimha Committee report on the working of
the financial system in India, 1991, the RBI has initiated a
series of money market reforms basically directed towards
the efficient discharge of its objectives.

There are lots of reforms made by the RBI in Indian money

market are as follows:(i)
Deregulation of the interest rate: - The government
of India has adopted the liberal interest rate policy; it
lifted the ceiling rates of call money market, short term
deposit, discounting bills etc.
(ii) Money Market Mutual Funds: - The RBI encourages
and established the money market mutual funds in April
1992 in order to provide additional short term
investment. MMFs are allowed to sell units to corporate
and individuals. The upper limit of 50 crore investments
has been lifted. Financial institutions like IDBI and UTI
have set up such funds.
(iii) Establishment of the DHFI: - The Discount and
Finance House of India was set up in to impart liquidity
in money market it was set up jointly by RBI, public
sectors banks and financial institutions. DHFI has
played an important role in stabilizing the Indian money
market.
(iv) Liquidity Adjustment Facility (LAF):- Through the
LAF, the RBI remains in the money market on the
continue basis through the repo transaction. LAF adjust
liquidity through absorption and injection of financial
resources.
(v) Electronic Transactions: - In order to maintain
transparency and efficiency in the money market
transaction the electronic dealing system has been
started. It covers all deals in money market.
(vi) Establishment of CCIL: - The Clearing Corporation of
India Limited was set up in April 2001. The CCIL clears
all transactions in government securities, repos
reported on the negotiated dealing system.
(vii) Development of new market instruments:- The
government has consistently tried to introduced new
short term investments instruments. Example is:

Treasury bills of various durations, commercial papers,

certificates of deposits, MMMFs etc. have been
introduced in Indian money market.2

6)

Money Market Instruments:-

Before getting started with money market instrument lets

first get to know about government securities, because some
of the money market instruments are the part of the
government securities on which these instruments are
issued. Government Securities are securities issued by
government for raising public loans or as notified in the
official Gazette. Government securities are sovereign
securities mostly interest bearing dated securities which are
issued by RBI on behalf of Government of India. GOI uses
these borrowed funds to meet its fiscal deficit, while
temporary cash mismatches are met through treasury bills of
91 days. It consist of Government Promissory notes, Bearer
Bonds, Treasury bills or dated government securities,
government bonds are risk free bonds, because government
can, up to a point raise taxes reduced spending and take
various measures to redeem the bond at maturity.
Features of government securities:-3
Usually issued and redeemed at face value.
No default risk as the securities carries sovereign guarantee.
Ample liquidity as the investor can sell the security in the
secondary market.
No tax deducted at source.
Can be held in D-mat form.
Maturity ranges from of 2-30 years.
Qualify as SLR requirements.
2 Narsihma committee 1991-1998.
3 www.sbidfhi.com

This is about the government securities and now move on to

money market instruments which are as follow:
(i) Call Money or Loans:Call money funds are for very short periods ranging from 1
day to 14 days. They may or may not be renewed. The
liquidity of call loans is next only to cash. The borrowers of
call money are commercial banks, faced with temporary
shortage of cash. The suppliers of call money are
generally commercial banks with surplus funds. Call
money transactions are generally on phone and paper
work is completed afterwards. The call money market
deals in short term finance repayable on demand, with
maturity period varying from 1 day to 14 days. The
interest rate paid on call money loans, known as the call
rate is highly volatile. It is the most sensitive sections of
the money market and the changes in the demand for and
supply of call loans are promptly reflected in call rates.
(ii) Treasury Bill:Treasury bills are issued by the RBI on behalf of the central
government to meet its short term financial needs. The
maturity period of T-Bills are 14 days its auction is on
every Friday of every week. The notified amount for this
auction is 100 crore rupees. 91 days its auction is on
every Friday of every week. The notified amount for this
auction is 100 crore rupees. 182 days its auction is on
every alternate Wednesday and notified amount of this tbill 100 crore rupees. 364 days it auction is on every
alternate Wednesday the notified amount for this auction
is 500 crore. These bills are generally purchased by
commercial banks, non- banking financial institutions,
insurance companies etc. They are negotiable instruments
and so freely transferable. They do not carry any interest,
but are issued at a discount. Treasury bills are highly liquid
nature because RBI is every ready to purchase them on
discount. The usual investors in these instruments are

banks who invest not only to invest their short term

surpluses but also to get benefited for maintaining the
Statutory Liquidity Ratio.
Advantages of treasury bills: No tax deducted at source.
Zero default risk being sovereign paper.
Highly liquid money market instrument.
Better returns especially in the short term.
Transparency.
Simplified settlement.
High degree of tradability and active secondary
market
facilities
meeting
unplanned
fund
requirements.
(iii) Commercial bills:A commercial bill is an instrument containing an
unconditional order signed by the maker directing a
certain person to pay a specified sum of money to a
particular person. A business firm selling goods credit to
another business firm will draw a trade bill on the latter
payable after a period of not more than 90 days. Such bills
are negotiable instruments and also freely transferable.
These could be sold to commercial banks or discounted
with them to meet the short term financial requirements
of business.
(iv) Commercial papers:Commercial paper is an unsecured money market
instrument in the form of a promissory note. Commercial
paper is privately placed instrument issued by private
company to meet its working capital requirements. The
maturities of such papers vary from 3 months to 12
months. These instruments are generally purchased by
commercial banks, insurance companies and unit trust.
Commercial papers are not backed by any security so they
can be issued by credit worthy companies only. Every
company proposing to issue commercial paper should

submit the proposal in the form prescribed by the RBI to

the bank which provides working capital along with the
credit rating of company.
Conditions for issue of commercial paper: Tangible net worth (paid-up capital plus free
reserves) is not less than rupees 4 crores.
Has been sanctioned working capital limit by banks
Borrowal account of the company is classified as
standard assets by banks.
(v) Certificates of Deposits:A certificate of deposit raised represents a time deposit
raised by a commercial bank. It is a document of title to
the time deposit. It is issued by a bank against deposits
given by a company. It can be issued for a period ranging
from 1 year and up to 3 years. They normally give a
higher. It is a transferable instrument and can be sold to
any business firm. Banks are not allowed to discount the
certificates of deposit. Certificate of deposits are
negotiable and transferable, they are issued at discount
on the actual amount of deposit.
(vi) Repurchase agreement (Repos):Repurchase agreement involves I Sale and purchase
agreement. When banks have any shortage of funds they
can borrow it from RBI or from other banks. The rate at
which the RBI lends money to commercial banks is called
repo rate, a reduction in the repo rate will help banks to
get money at a cheaper rate, when repo rate increases
borrowing from RBI becomes more expensive. Repo
transaction represents a loan backed by securities. If the
borrower defaults on the loans has a claim on the
securities. Most repo transactions use government
securities and some can involve such short term securities
like commercial papers and certificates of deposit. The
participants of repo transactions are money market funds,
non financial institutions. The maturity for repo

transaction is one day to 15 days or three months, six

months. There is no secondary market for repo
transaction.
(vii) Money Market Mutual Funds:Money market mutual funds invest money in specifically,
high quality and very short maturity based on money
market instrument. The RBI has approved the
establishment of very few such funds in India. In 1997
only one MMMF was in operation, and that too with very
small amount of capital. Mutual funds are very low risk
and low return investment.

7)

Role of RBI in the money market:-

RBI plays a very important role in the money market sector it

is the regulatory body for money market in India, the money
market directed according to the regulations and guidelines
given by the RBI.
Some of the most important roles and aims which are done
by the RBI are as follow: RBI has to ensure that liquidity and short term interest
are maintained at level consistent with monetary policy.
Maintaining the price stability in the market.
To ensure that adequate flow of credit to the productive
sector of the economy.
To bring about the order in the foreign exchange
market.
To maintain all these objectives RBI influence the
liquidity and short term interest in many ways like cash
reserve ratio (CRR), Statutory liquidity ratio (SLR), and
open market operation, repos, change in bank rates
time to time and also foreign exchange swap
operations. All these operations are done by the RBI for
protecting its aims and promote money market. 4
8) Drawbacks of Indian Money Market:4 www.scribd.com.

Indian money market consider as the advance money

market among the developing countries but it is not advance
as the other developed countries like London money market
and newyork money market etc. Indian money market has
some drawbacks and these kinds of drawbacks or defects
can harm the efficiency of our market.
Some of the important drawbacks which limiting the growth
of market are as follows:(i) Absence of Integration:Indian money market has been structured in two parts
one is organized and other is unorganized, organized
structure consist of legal financial institutions and they
are backed by the RBI itself but the unorganized sector
include indigenous bankers, money lenders and traders
etc, and this sector is out of the control of the RBI and
both sectors working simultaneously thats why there is
lack of integration or co-ordination between these two
sectors they are not working together.
(ii) Multiple rate of Interest:In Indian money market have different rate of interest
and these interest rates differ from bank to bank from
period to period and also from borrower to borrower
and also include sectors to sectors that is organized
and unorganized and these kind multiple interest rates
create confusion in investors mind.
(iii) Insufficient funds and resources:The other drawback of our money market is its
seasonality Indian market is seasonal in nature and
faces frequent shortage of financial resources, lower
income, lower saving and also lack of banking habit
among the people and its is the one of the reason that
Indian money market cannot grow rapidly.
(iv) Limited investment instruments:It is also one of the defect of the Indian money market
is limited investment instruments. The supply of various

instruments like treasury bills, commercial bills,

commercial papers etc. are very limited and not fulfill
the requirements of borrower and lenders it is
necessary to develop the number of instruments
according to size of population and market.
(v) Lack of organized banking system:In Indian money market we have lack of banking
organized system, banking system suffer from various
weakness such as NPA, poor efficiency, big loss etc.
(vi) Less number of dealers:It is the main concern of Indian market is that the no. of
dealers or investors in money market is very less the
less no. of dealers leads to slow down the process
between the borrower and lenders and also slow down
the money market.
This all about the drawbacks of Indian money market
which causes the slow growth of money market which
has to be cure by the RBI and government of India and
promote the money market in India.5
9) Difference between money market and capital
market:There is lots of difference between both these markets of
financial system and the main points of difference between
these two are as follows:
(i) Duration:Money market is concerned with short term funds used
for financing the business and short term requirements
of the government. The maturity period for money
market is one year or less than one year. But capital
market Is concerned with long term loans required by
industries or government the maturity period for capital
market is more than one year.
(ii) Institutions:5 www.blogspot.in

(iii)

(iv)

(v)

(vi)

(vii)

The institutions dealing in money market is mainly

commercial banks and moneylenders but in capital
market include investment banks, brokers, and financial
institutions.
Instruments:On the basis of instruments there is also a difference in
money market the instruments used are treasury bills,
commercial bills, commercial papers, certificate of
deposits, etc. In capital market there are shares and
debentures of industrial and commercial undertakings,
debentures and bonds etc.
Participants:In money market, the participants include banks,
financial institution and finance companies, in other
words only institutions can operate in money market,
but in capital market individual known as retail
investors are also allowed to deals in securities as well
as banks, financial institutions, investment trust etc.
Amount of investment:Money market instruments are of high value and
transaction involves huge sum of money. But
investment in capital market does not require a huge
amount for investment. The face values of shares
generally range from Rs. 10 to Rs. 100 and a share lot
may consist of 100 shares only.
Liquidity:Money market enjoys higher degree of liquidity such
instruments can be enhanced promptly with the
discount finance house of India. Capital market
instruments are not as liquid as the money market
instruments.
Safety:Investment in money market is safer as the funds are
invested for a shorter period in investments issued by
commercial banks and highly rated companies. But

capital market instruments are more risky both with

respect to return and repayment of principal.
(viii)
Regulation:Money market is regulated by the Reserve Bank of India
(RBI). And Capital market is regulated by the Securities
and Exchange Board of India (SEBI).6

10)

Conclusion:-

It is cleared from above headed lines that money market is

short term loans with maturity period from 1day to 1year;
money market investment is more liquid than the capital
market and may be it responsible for faster growth of economy
if promoted well by the government of India, as see the feature
of money market it is highly liquid and short term investment
but same time some of drawbacks of it limited its growth, the
government of India must takes the major steps to overcome
the defects of Indian money market, and should educated and
promote the investors interest in money market.
Money market is very safe and offers a lower return than other
securities because the instruments are backed by the
government securities which play a very important role in
Indian money market. It is also concluded that the RBI is head
player in money market organized structure of money market is
totally handle by the RBI and RBI time to time sets the
guidelines for operating the money market and also money
market is more transparent and easily inquired by the
investors. Its easier to invest in money market and also get the
discount on investments. On the other hand government of
India keep protecting and promoting the investments in money
market for its growth.

6 Business studies of NCERT XII.

11)

Bibliography:

www.googel.in
www.weekipedia.org
Studymaterila4u.blogspot.in
www.scribd.com
Business studies NCERT class XII
Study material capital market and securities law