INDIAN MONEY
MARKET
Submitted toDr. MOHD. ANEES
University of Lucknow, India
Submitted by HARSH KATIYAR
Sec A, MBA- Ist Year
University of Lucknow, India
DEPARTMENT OF MANAGEMENT
AND BUSINESS ADMINISTRATION
(UNIVERSITY OF LUCKNOW, INDIA)
Acknowledgement
On the very outset of this report, I would like to extend my sincere & heartfelt obligation
towards all the personages who have helped me in this endeavor. Without their active
guidance, help, cooperation & encouragement, I would not have made headway in the
project.
I have taken efforts in this project. I would like to take this opportunity to express my
sincere thanks to my teacher Prof. Mohd. Anees for all the guidance & support & it
would not have been possible without the kind support and help of my friends & family. I
would like to extend my sincere thanks to all of them.
Any omission in this brief acknowledgement does not mean lack of gratitude.
Thanking You
Harsh Katiyar
Section-A
INTRODUCTION:
A money market is a market for borrowing and lending of short-term funds. It
deals in funds and financial instruments having a maturity period of one day to one
year. It is a mechanism through which short-term funds are loaned or borrowed
and through which a large part of financial transactions of a particular country or
of the world are cleared.
As per RBI definitions A market for short terms financial assets that are
close substitute for money, facilitates the exchange of money in primary and
secondary market
INDIAN MONEY MARKET:
The India money market is a monetary system that involves the lending and
borrowing of short-term funds. India money market has seen exponential growth
just after the globalization initiative in 1992. It has been observed that financial
institutions do employ money market instruments for financing short-term
monetary requirements of various sectors such as agriculture, finance and
manufacturing. The performance of the India money market has been outstanding
in
the
past
20
years.
Central bank of the country - the Reserve Bank of India (RBI) has always been
playing the major role in regulating and controlling the India money market. The
intervention of RBI is varied - curbing crisis situations by reducing the cash
reserve ratio (CRR) or infusing more money in the economy.
PLAYERS OF MONEY MARKET:In money market transactions of large amount and high volume take place. It is
dominated by small number of large players. In money market the players are
:-Government, RBI, DFHI (Discount and finance House of India) Banks, Mutual
Funds, Corporate Investors, Provident Funds, PSUs (Public Sector Undertakings),
NBFCs (Non-Banking Finance Companies) etc
FUNCTIONS OF MONEY MARKET:1) It caters to the short-term financial needs of the economy.
2) It helps the RBI in effective implementation of monetary policy.
3) It provides mechanism to achieve equilibrium between demand and supply of
short- term funds.
4) It helps in allocation of short term funds through inter-bank transactions and
3
money
market Instruments.
5) It also provides funds in non-inflationary way to the government to meet its
deficits.
6) It facilitates economic development.
STRUCTURE OF INDIAN MOENY MARKET:-
Organised money market
unorganised money market
Lender
Indigenous bank
Development Bank
Domestic money
Investment Institutions
Chit Fund
Regional Rural bank
Traders & Funds
Foreign bank
Brokers & Dealers
State Finance Corporation
Reserve bank of India (RBI)
Scheduled Commercial bank
Call Money Market Bill Market 364 Day Bill Market CDs PDs
Commercial Bills
TreasuryBills
Types of Money Market instruments in India Money market instruments take care of the borrowers' short-term needs and render
the required liquidity to the lenders. The varied types of India money market
instruments are treasury bills, repurchase agreements, commercial papers,
certificate
of
deposit,
and
bankers
acceptance.
Treasury Bills (T-Bills)
Treasury bills were first issued by the Indian government in 1917. Treasury bills
are short-term financial instruments that are issued by the Central Bank of the
country. It is one of the safest money market instruments as it is void of market
risks, though the return on investments is not that huge. Treasury bills are
circulated by the primary as well as the secondary markets. The maturity periods
for treasury bills are respectively 3-month, 6-month and 1-year. The price with
whichtreasurybillsareissuedcomesseparatefromthatofthefacevalue,
and the face value is achieved uponmaturity.On maturity, onegets the
interestonthebuyvalueaswell.Tobespecific,thebuyvalueisdeterminedbya
biddingprocess,thattooinauctions.
RepurchaseAgreements
Repurchase agreements are also called repos. Repos are shortterm loans that
buyersandsellersagreeuponforsellingandrepurchasing.Repotransactionsareallowed
onlyamongRBIapprovedsecuritieslikestateandcentralgovernmentsecurities,Tbills,
PSUbonds,FIbondsandcorporatebonds.Repurchaseagreements,ontheotherhand,
aresoldoffbysellers,heldbackwithapromisetopurchasethembackatacertainprice
andthattoowouldhappenonaspecificdate.Thesameistheprocedurewiththatofthe
buyer,whopurchasesthesecuritiesandotherinstrumentsandpromisestosellthemback
totheselleratthesametime.
CommercialPapers
Commercialpapersareusuallyknownaspromissorynoteswhichareunsecured
andaregenerallyissuedbycompaniesandfinancialinstitutions,atadiscountedratefrom
theirfacevalue.Thefixedmaturityforcommercialpapersis1to270days.Thepurposes
with which they are issued for financing of inventories, accounts receivables, and
settlingshorttermliabilitiesorloans.Thereturnoncommercialpapersisalwayshigher
thanthatofTbills.Companieswhichhaveastrongcreditrating,usuallyissueCPsas
theyarenotbackedbycollateralsecurities.CorporationsissueCPsforraisingworking
capitalandtheyparticipateinactivetradeinthesecondarymarket.Itwasin1990that
CommercialpaperswerefirstissuedintheIndianmoneymarket.
CertificateofDepositAcertificateofdepositisaborrowingnotefortheshort
term just similar to that of a promissory note. The bearer of a certificate of deposit
receivesinterest.Thematuritydate,fixedrateofinterestandafixedvaluearethethree
componentsofacertificateofdeposit.Thetermisgenerallybetween3monthsto5
years.Thefundscannotbewithdrawninstantaneouslyondemand,buthasthefacilityof
being liquidated, if a certain amount of penalty is paid. The risk associated with
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certificateofdepositishigherandsoisthereturn(comparedtoTbills).Itwasin1989
thatthecertificateofdepositwasfirstbroughtintotheIndianmoneymarket.
BankersAcceptanceAbanker'sacceptanceisalsoashortterminvestmentplan
that comes from a company or a firm backed by a guarantee from the bank. This
guaranteestatesthatthebuyerwillpaytheselleratafuturedate.Onewhodrawsthebill
shouldhaveasoundcreditrating.90daysistheusualtermfortheseinstruments.The
termfortheseinstrumentscanalsovarybetween30and180days.Itisusedastimedraft
tofinanceimports,exports.
FeaturescharacteristicsIndianmoneymarket:
IndianMoneyMarkethasthefollowingmajorfeaturesorcharacteristics:
DichotomyStructure:
It is a significant aspect of the Indian money market. It has a simultaneous
existence of both the organized money market as well as unorganised money
markets.TheorganizedmoneymarketconsistsofRBI,allscheduledcommercial
banksandotherrecognizedfinancialinstitutions.However,theunorganizedpart
of the money market comprises domestic money lenders, indigenous bankers,
trader,etc.TheorganizedmoneymarketisinfullcontroloftheRBI.However,
unorganized money market remains outside the RBI control. Thus both the
organizedandunorganizedmoneymarketexistssimultaneously
.
Seasonality:
ThedemandformoneyinIndianmoneymarketisofaseasonalnature.India
beinganagriculturepredominanteconomy,thedemandformoneyisgenerated
fromtheagriculturaloperations.Duringthebusyseasoni.e.betweenOctoberand
April more agricultural activities takes place leading to a higher demand for
money.
MultiplicityofInterestRates:
InIndianmoneymarket,wehavemanylevelsofinterestrates.Theydifferfrom
banktobankfromperiodtoperiodandevenfromborrowertoborrower.Againin
bothorganizedandunorganizedsegmenttheinterestratesdiffer.Thusthereisan
existenceofmanyratesofinterestintheIndianmoneymarket.
LackofOrganizedBillMarket:
IntheIndianmoneymarket,theorganizedbillmarketisnotprevalent.Though
the RBI tried to introduce the Bill Market Scheme (1952) and then New Bill
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MarketSchemein1970,stillthereisnoproperlyorganizedbillmarketinIndia.
AbsenceofIntegration:
ThisisaveryimportantfeatureoftheIndianmoneymarket.Atthesametimeitis
divided amongseveral segments orsections whichare looselyconnectedwith
eachother.Thereisalackofcoordinationamongthesedifferentcomponentsof
themoneymarket.RBIhasfullcontroloverthecomponentsintheorganized
segmentbutitcannotcontrolthecomponentsintheunorganizedsegment.
HighVolatilityinCallMoneyMarket:
Thecallmoneymarketisamarketforveryshorttermmoney.Heremoneyis
demandedatthecallrate.Basicallythedemandforcallmoneycomesfromthe
commercialbanks.InstitutionssuchastheGIC,LIC,etcsufferhugefluctuations
andthusithasremainedhighlyvolatile.
LimitedInstruments:
ItisinfactadefectoftheIndianmoneymarket.Inourmoneymarketthesupply
of various instruments such as the Treasury Bills, Commercial Bills, Certificate of
Deposits, Commercial Papers, etc. is very limited. In order to meet the varied
requirementsofborrowersandlenders,itisnecessarytodevelopnumerousinstruments.
SquareDrawbacksofIndianMoneyMarket:
ThoughtheIndianmoneymarketisconsideredastheadvancedmoneymarketamong
developingcountries,itstillsuffersfrommanydrawbacksordefects.Thesedefectslimit
theefficiencyofourmarket
.
DefectsdrawbacksIndianmoneymarket:
SomeoftheimportantdefectsordrawbacksofIndianmoneymarketare:
AbsenceofIntegration:
TheIndianmoneymarketisbroadlydividedintotheOrganizedandUnorganized
Sectors.TheformercomprisesthelegalfinancialinstitutionsbackedbytheRBI.
Theunorganizedstatementofitincludesvariousinstitutionssuchasindigenous
bankers,villagemoneylenders,traders,etc.Thereislackofproperintegration
betweenthesetwosegments.
Multiplerateofinterest:
IntheIndianmoneymarket,especiallythebanks,thereexisttoomanyratesof
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interests. These rates vary for lending, borrowing, government activities, etc.
Manyratesofinterestscreateconfusionamongtheinvestors.
InsufficientFundsorResources:
TheIndianeconomywithitsseasonalstructurefacesfrequentshortageoffinancial
recourse.Lowerincome,lowersavings,andlackofbankinghabitsamongpeople
aresomeofthereasonsforit.
ShortageofInvestmentInstruments:
IntheIndianmoneymarket,variousinvestmentinstrumentssuchasTreasury
Bills,CommercialBills,CertificateofDeposits,CommercialPapers,etc.areused.
Buttakingintoaccountthesizeofthepopulationandmarkettheseinstrumentsare
inadequate.
ShortageofCommercialBill:
InIndia,asmanybankskeeplargefundsforliquiditypurpose,theuseofthecommercial
billsisverylimited.Similarlysincealargenumberoftransactionsarepreferredinthe
cashformthescopeforcommercialbillsarelimited.
LackofOrganizedBankingSystem:
In India even though we have a big network of commercial banks, still the
bankingsystemsuffersfrommajorweaknessessuchastheNPA,hugelosses,and
poorefficiency.Theabsenceoftheorganizedbankingsystemismajorproblem
forIndianmoneymarket.
LessnumberofDealers:Therearepoornumberofdealersintheshorttermassets
whocanactasmediatorsbetweenthegovernmentandthebankingsystem.The
lessnumberofdealersleadstheslowcontactbetweentheendlenderandend
borrowers.
CASE ON SHARDA CHIT FUND
The Saradha Group financial scandal was a major financial scam and alleged
political scandal caused by the collapse of a Ponzi scheme run by Saradha Group, a
consortium of over 200 private companies that was believed to be running collective
investment schemes popularly but incorrectly referred to as chit funds in Eastern India.
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The group collected around INR 200 to 300 billion (US$46 billion) from over 1.7
million depositors before it collapsed in April 2013. In the aftermath of the scandal, the
State Government of West Bengal where the Saradha Group and most of its investors
were based instituted an inquiry commission to investigate the collapse. The State
government also set up a fund of INR 5 billion (US$79 million) to ensure that lowincome investors were not bankrupted.
The Central Government through the Income Tax Department and Enforcement
Directorate launched a multi-agency probe to investigate the Saradha scam and similar
Ponzi schemes.In May 2014, the Supreme Court of India, citing inter-state ramifications,
possible international money laundering, serious regulatory failures and alleged political
nexus, transferred all investigations into the Saradha Scam and other Ponzi schemes to
the Central Bureau of Investigation (CBI), India's federal investigative agency. Many
prominent personalities were arrested for their involvement in the scam including two
Members of Parliament (MP) - Kunal Ghosh and Srinjoy Bose, former West Bengal
Director General of Police Rajat Majumdar, a top football club official Debabrata Sarkar,
Sports and Transport minister in the West Bengal Government Madan Mitra
To understand and the entire chit-fund scam, one must understand their modus
operandi. Say, with the start-up cash of Rs 50,000 from two depositors, a company floats
a Rupees One Lakh scheme, with an assurance of 20% return. Eventually, the fund
manager or agent needs to cough up Rs 1.20 lakh at the end of the first year. To raise this
sum, he brings in three more investors who contribute Rs 40,000 each. At end of the
second year, the manager has to repay those who contributed the previous year at Rs
48,000 each. To make this payment, the agents raise another Rs 48,000 from three new
investors at the End of the second year to make the previous payments. Now, these new
investors need to be repaid Rs 57,600 each for a total of Rs 1,72,800 at the end of the
third year. The manager now needs more investors and collects Rs 43,200 from four
investors this time to make those payments.
The first rule, therefore, is that the company has to constantly keep on adding fresh
investors. So even if the old depositors do not ask for refunds, the chain instantly treads
into troubled waters if
Whyshardascamhappened?
A failure of state government, SEBI, RBI, Enforcement directory and Indian
companyact1956.
The Companies Act, 1956 doesn't allow to raise capital from more than 50
investorsandtheyshouldbegivenagreenflagfromSEBI.Neitherofthetwohappened
and SEBI issued continuous notices from as early as 2010, reminding the State
administrationofapossible"PonziScheme"...
CONCLUSION:To sum up, the money market is a key component of the financial system as it is
the fulcrum of monetary operations conducted by the central bank in its pursuit of
monetary policy objectives. It is a market for short-term funds with maturity ranging
from overnight to one year and includes financial instruments that are deemed to be close
substitutes of money. The money market performs three broad functions. Firstly, it
provides an equilibrating mechanism for demand and supply of short-term funds.
Secondly, it enables borrowers and lenders of short-term funds to fulfil their borrowing
and investment requirements at an efficient market clearing price. Three, it provides an
avenue for central bank intervention in influencing both quantum and cost of liquidity in
the financial system, thereby transmitting monetary policy impulses to the real economy.
objective of monetary management by the central bank is to align money market rates
with the key policy rate. As excessive money market volatility could deliver confusing
signals about the stance of monetary policy, it is critical to ensure orderly market
behavior, from the point of view of both monetary and financial stability. Thus, efficient
functioning of the money market is important for the effectiveness of monetary policy.
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REFRENCES:Books
R.Bhaskaran,2011,Securities markets and products.
Stansell, S. R., ed., International Financial Market Integration, Oxford, Blackwell.
TIMOTHY D. ROWE (eds.), Instruments of the Money Market, 6th ed. (1986)
Search engine:http: www.google.com
http://business.mapsofindia.com/india-market/money.html
http://www.financialexpress.com/article/industry/banking-finance/reserve-bank-of-india-couldkeep-hold-on-money-market-levers/51517/
http://kalyan-city.blogspot.com/2010/09/structure-and-components-of-indian.html
http://www.quora.com/What-was-the-Saradha-Chit-Fund-scam
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INDEX
INTRODUCTION
FUNCTION OF MONEY MARKET
TYPES OF MONEY MARKET
FEATURES OF INDIAN MONEY MARKET
DEFECTS OF INDIAN MONEY MARKET
CASE ON SHARDA CHIT FUND
CONCLUSION
10
REFRENCE
11
12
