Project Report

ON

MONEY MARKET OF INDIA

SUBMITTED TO

SWAMI SAHAJANAND SCHOOL OF MANAGEMENT (SSSM)

UNDER THE GUIDANCE OF
VEDIKA HARIYANI
IN PARTIAL FULFILMENT OF THE REQUIRMENT OF THE AWARD OF DEGREE OF
BACHELOR OF BUSINESS ADMINISTRATION (BBA)
OFFERED BY
MAHARAJA KRISHNAKUMARSINHJI BHAVNAGAR UNIVERSITY
BHAVNAGAR

PREPARED BY :
NAME SID NO: SEAT NO :

SHIVAM .R. JOSHI

BBA ( SEMESTER -4 )
 Student’s Declaration

I hereby declare that the Project Report titled “MONEY MARKET OF INDIA” is a result of my own
work and my indebtedness to other work publications, references, if any, have been duly
acknowledged. If I am found guilty of copying from any other report or published information and
showing as my original work, or extending plagiarism limit, I understand that I shall be liable and
punishable by the university, which may include “Fail” in examination or any other punishment that
university may decide.

SID NO: Name Signature

SHIVAM .R. JOSHI

Place : ___________________
Date : ___________________
 PREFACE

Management today is must for day-to-day life. Management is the integral part of the business. In
this world, all things need proper management for its success. Project report plays an important role
as a part of the curriculum of BBA in SWAMI SAHAJANAND COLLEGE OF COMMERCE &
MANAGEMENT. Here we have tried our level bet to represent our project report and explain our
understanding level through it.
 ACKNOWLEDGEMENT

“If you pick the right people and give them the opportunity to spread their wings and put
compensation as a carrier behind it, you almost do not have to manage them”

- Jack Welch

We are very thankful to our mentor VEDIKA HARIYANI for the inspiration and for initiating diligent efforts and
expert guidance in course of our study and completion of the project.

Our genuine sense of gratitude goes to SWAMI SAHAJANAND COLLEGE OF COMMERCE & MANAGEMENT
and specially to our Principal, Dr. HETAL MEHTA who gave us a chance to brighten our academic qualification that
provided us this opportunity to have a practical knowledge of relevant fields.
 TABLE OF CONTENT

SR No. Particulars Page number

1 Introduction 06
2 Literature Review 14
3 Research Methodology 18
4 Data Analysis 21
5 Findings & Recommendations 25
6 Conclusion 28
7 Bibliography 29
8 Annexure
 Introduction

The financial system of any country is the backbone of the economy of that country. The financial systems of all
economies are broadly sub-divided into money market, capital market, gilt-edged securities market and foreign
exchange market. The money market, capital market and the gilt securities market provides avenues to the surplus
sector such as household institutions in the economy to deploy their funds to the deficit sector such as corporate and
government sectors to mobilize funds for their requirements.

The operations in the money market are generally short-term (up to 1 year) in nature, in capital market short-term to
long term and in gilt securities market generally long-term. However, in an integrated financial system, the
occurrence of an event in one market of the financial system will have an impact on the other market system.
The Indian money market is a market for short-term money and financial asset that are close substitutes for money,
which are close substitute for money, with the short-term in the Indian context being for 1 year. The important feature
of the money market instruments is that it is liquid and can be turned quickly at low cost.

The money market is not a well-defined place where the business is transacted as in the case of capital markets where
all business is transacted at a formal place, i.e. stock exchange. The money market is basically a telephone market and
all the transactions are done through oral communication and are subsequently confirmed by written communication
and exchange of relative instruments. The money market consist of many sub-market such as the inter-bank call
money, bill discounting, treasury bills, Certificate of deposits (CDs), Commercial paper (CPs), Repurchase
Options/Ready Forward (REPO or RF), Inter-Bank participation certificates (IBPCs), Securitised Debts, Options,
Financial Futures, Forward Rate Agreement (FRAs), etc. which collectively constitute the money market.

HISTORY AND EVOLUTION

After the fall of the Bretton Woods System, the government of the Great Britain undertook various steps to prevent
the downslide of the Pound and instituted new internal controls. One of the control measures was the creation of the
Dollar premium market to discourage the direct foreign investment. However, this created opportunities for financial
ingenuity by the British merchant bankers.

To avoid Dollar premium, Parallel Loans were introduced. Here, the parties were required to exchange the principal
on the value date. During the life of the contract, each party was to pay the interests on the currency it had received.
The next crucial step was the introduction of the Back-to-back Loans, in which the loan was directly arranged
between two parent companies in different countries and structured under one agreement. Parallel Loans were strictly
designed to satisfy the letter of the law. That is why four entities – the parent and the subsidiary in each of the two
different countries – had to be involved in structuring each loan. In Back-to-back loans, the intermediary level of the
subsidiary was eliminated. Back-to-back loans tested the legal waters and did not face any problems.In Back-to-back
Loans, only one documentation covered the transaction.These two instruments played an important role in paving the
way for the emergence of the Swaps.

Currency Swaps

The breakdown of the Bretton Woods System had opened up a whole new area of the foreign exchange trading. In a
deregulated market, banks could offer products to the clients, collect a fee, and improve their profit margins. Gaining
entry into the Parallel and the Back-to-back Loans was easy for the banks. But two problems began to emerge.

One was the old issue of the paperwork, except that increased volume of the loans gave a new urgency to its
resolution. The other problem was related to accounting. Both of the above mentioned loans were recorded as two
separate transactions. This ignored the contingent nature of the loansm, inflated the balance sheets and distorted the
accounting ratios that were used in analysing the financial health of the banks. The answer, drawing heavily on the
experience of the swap network, came in the form of the Currency Swaps.

In a Currency Swap, the notional amount of the trade was designated as off-balance-sheet, and payment of interest by
each party was made contingent upon the other party’s performance. With the principal amount of the Currency Swap
no longer subject to the counterparty default risk, it was possible to classify swaps as off-balance-sheet instruments.
Incorporating the cash-flow structure of the Back-to-back Loans into the legal notion of the contingency took the
Currency Swap one step further from being a concept and made it a financial instrument as well.

The early Currency Swap deals were not disclosed to the public because of the proprietary nature. In 1981, the World
Bank and IBM announced a Currency Swap deal which was well publicised and gave an impetus to the swap market.

Interest Rate Swaps

Building on the two important features of the Currency Swaps - contingency of the payments and
the off-balance-sheet nature of the transaction - international banks created and then expanded
the idea of the IRS market. Although IRS were created based on the concept of the Currency Swaps,
a different set of circumstances brought about their explosion. The Euromarket, where the
Eurodollars are traded, is the birthplace of the IRS.

Euromarket

Beginning in the '50s, the Socialist governments began to deposit their hard currency holdings in European banks
because they were concerned that, in the Cold War environment of the '50s, the US would freeze their assets.
However these deposits were not enough to create and sustain a large market. It was the Dollar holdings of the US
corporations that created the Euromarket, as it was against the outflow of the US funds that the Interest Equalisation
Tax Act (IETA) was passed (IETA created a strong incentive for the US investors to keep their Dollars in Europe).
The Euromarket was created because of the higher rates of return in Europe and it was sustained due to the tax
differentials that could not be arbitraged because of the sovereignty. Euromarket was a concept of the laissez-faire.
Transactions in this market are mostly wholesale in the nature and the interest rates are heavily influenced by the
availability of, and demand for the funds. Loans in this market are basically variable in nature and if necessary, on a
roll over basis with fixed maturities and non-prepayment clauses.

As the '80s began, interest rates in the US market reached unprecedented high levels and this trend split into the rate-
sensitive Euromarket. So the corporations sought hedging vehicles against interest rate fluctuations. This was the
starting point of the IRS. Here, the parties agree to the exchange of the interest payments calculated on a notional
amount. However, interest payments in the IRS are based on the different modes of the same currency.

Thus, we can see that IRS or more precisely the swap market was born as insurance market directly related to the
Euromarket loans. This insurance market fuelled and sustained the swap market. Swaps became insurance vehicle of
the borrowers because their premiums were borrowed.

Secondary Factors in the Development of the Swap Market

As international barriers to financial markets began to disappear, swap dealers were able to switch between
different indexes and different markets. By arbitraging capital and credit markets, they were able to borrow at the
best index available and then swap to the desired index.

Heavy borrowing by the US government and government agencies in the '80s played a major role in the
development of the swap market. Borrowing at the floating rates and swapping to the fixed rates met the needs of
the corporations and in effect added to the depth and the liquidity of the swap market.

Taking a view on the future direction of the interest rates, swaps can be proved to very attractive instrument, and
under a variety of yield curve conditions, they are among the cheapest to transact. Speculative trading of the swaps
added enormously to the depth and liquidity of the market.

FEATURES OF MONEY MARKET

i. It is a collection of market for following instruments- Call money, notice money, repos, term money,
treasury bills, commercial bills, certificate of deposits, commercial papers inter-bank participation
certificates, inter-corporate deposits, swaps, etc.
ii. The sub markets have close inter- relationship & free movement of funds from one sub-market to
another.
 iii. A network of large number of participants exists which will add greater depth to the market.
iv. Activities in the money market tend to concentrate in some centre, which serves a region or an area.
The width of such area may vary depending upon the size and needs of the market itself.
v. The relationship that characterizes a money market is impersonal in character so that competition is
relatively pure.
vi. Price differentials for assets of similar type will tend to be eliminated by the interplay of demand &
supply.
vii. A certain degree of flexibility in the regulatory framework exists and there are constant endeavours for
introducing a new instruments / innovative dealing techniques.
viii. It is a wholesale market & the volume of funds or financial assets traded are very large i.e. in crores of
rupees.
ix. Money market basically refers to a section of the financial market where financial instruments with high
liquidity and short-term maturities are traded. It is used by participants as a means for borrowing and lending
in the short term with maturities that usually range from overnight to just under a year.
x. Over-the-counter trading is done in the money market and it is a wholesale process. The money market is an
unregulated and informal market and not structured like the capital markets, where things are organized in a
formal way.
xi. Withdrawing money from the money market is easier. Money markets are different from capital markets as
they are for a shorter period of time while capital markets are used for longer time periods. 
xii. Due to short maturity term, the instruments of money market are liquid and can be converted to cash easily
and thus are able to address the need of the short term surplus fund of the lenders and short term borrowing
requirements of the borrowers.  
xiii. Money Markets help in effective implementation of the RBI’s monetary policy Money markets help to
maintain demand and supply equilibrium with regard to short term funds.
xiv. They cater to the short term fund requirement of the governments.
xv. They help in maintaining liquidity in the economy.

MONEY MARKET INSTRUMENTS

1.Call Money

Call/Notice money is an amount borrowed or lent on demand for a very short period. If the period is more
than one day and upto 14 days it is called 'Notice money' otherwise the amount is known as Call money'.
Intervening holidays and/or Sundays are excluded for this purpose. No collateral security is required to cover
these transactions

Features
  The call market enables the banks and institutions to even out their day-to-day deficits and surpluses of
money.
 Commercial banks, Co-operative Banks and primary dealers are allowed to borrow and lend in this market for
adjusting their cash reserve requirements.
 Specified All-India Financial Institutions, Mutual Funds and certain specified entities are allowed to access
Call/Notice money only as lenders. It is a completely inter-bank market hence non-bank entities are not
allowed access to this market.
 Interest rates in the call and notice money market are market determined.
 In view of the short tenure of such transactions, both the borrowers and the lenders are required to have
current accounts with the Reserve Bank of India.
 It serves as an outlet for deploying funds on short term basis to the lenders having steady inflow of funds.

2.TREASURY BILLS MARKET

A treasury bill is a promissory note or a finance bill issued by the government under discount for a specified
period(as stated in the bill).

Types of Treasury Bills

In India there are two types of treasury bills

• Ordinary or regular treasury bills

• Ad hoc known as “ad hocs”.

Types of treasury bill through auction

 91-Day

 182-Day

 364-Day

 14-Day

In the short term, the lowest risk category instruments are the treasury bills.
RBI issues these at a prefixed day and a fixed amount.
These are four types of treasury bills.

1) 14-day Tbill- maturity is in 14 days. Its auction is on every Friday of every week. The notified amount
for this auction is Rs. 100 crores.

2) 91-day Tbill- maturity is in 91 days. Its auction is on every Friday of every week. The notified amount
for this auction is Rs. 100 crores.
 3) 182-day Tbill- maturity is in 182 days. Its auction is on every alternate Wednesday (which is not a
reporting week). The notified amount for this auction is Rs. 100 crores.

4) 364-Day Tbill- maturity is in 364 days. Its auction is on every alternate Wednesday (which is a
reporting week). The notified amount for this auction is Rs. 500 crores.

a. A considerable part of the government's borrowings happen through Tbills of various maturities.
Based on the bids received at the auctions, RBI decides the cut off yield and accepts all bids below this
yield.

5) The usual investors in these instruments are banks who invest not only to part their short-term
surpluses but also since it forms part of their SLR investments, insurance companies and FIs.
These Tbills, which are issued at a discount, can be traded in the market. Most of the time, unless the
investor requests specifically, they are issued not as securities but as entries in the Subsidiary General
Ledger (SGL), which is maintained by RBI. The transactions cost on Tbill are non-existent and trading
is considerably high in each bill, immediately after its issue and immediately before its reedemtion.

6) The returns on Tbills are dependent on the rates prevalent on other investment avenues open for
investors. Low yield on Tbills, generally a result of high liquidity in banking system as indicated by
low call rates, would divert the funds from this market to other markets. This would be particularly so,
if banks already hold the minimum stipulated amount (SLR) in government paper.

3. INTER-BANK TERM MONEY

Inter bank market for deposits of maturity beyond 14 days and upto three months is referred to as the term money
market. The specified entities are not allowed to lend beyond 14 days. The development of the term money market is
inevitable due to the following reasons

 Declining spread in lending operations

 Volatility in the call money market
 Growing desire for fixed interest rates borrowing by corporate
 Move towards fuller integration between forex and money market
 Stringent guidelines by regulators/management of the institutions .

4. CERTIFICATE OF DEPOSITS MARKET

After treasury bills, the next lowest risk category investment option is the certificate of deposit Allowed in 1989, CDs
were one of RBI's measures to deregulate the cost of funds for banks and FIs. A CD is a negotiable promissory note,
secure and short term (upto a year) in nature. A CD is issued at a discount to the face value, the discount rate being
negotiated between the issuer and the investor. Though RBI allows CDs upto one-year CDs are issued by banks and
FIs mainly to augment funds by attracting deposits from corporates, high net worth individuals, trusts, etc. the issue
of CDs reached a high in the last two years as banks faced with reducing deposit base secured funds by these means.
The foreign and private banks, especially, which do not have large branch networks and hence lower deposit base use
this instrument to raise funds.

The rates on these deposits are determined by various factors. Low call rates would mean higher liquidity in the

market. Also the interest rate on one-year bank deposits .

5. INTER-CORPORATE DEPOSITS MARKET

Apart from CPs, corporates also have access to another market called the inter- corporate deposits (ICD) market. An
ICD is an unsecured loan extended by one corporate to another. Existing mainly as a refuge for low rated corporates,
this market allows funds surplus corporates to lend to other corporates. Also the better-rated corporates can borrow
from the banking system and lend in this market. As the cost of funds for a corporate in much higher than a bank, the
rates in this market are higher than those in the other markets. ICDs are unsecured, and hence the risk inherent in
high. The ICD market is not well organised with very little information available publicly about transaction details .

6. COMMERCIAL PAPER MARKET

CPs are negotiable short-term unsecured promissory notes with fixed maturities, issued by well rated companies
generally sold on discount basis. Companies can issue CPs either directly to the investors or through banks / merchant
banks (called dealers). These are basically instruments evidencing the liability of the issuer to pay the holder in due
course a fixed amount (face value of the instrument) on the specified due date. These are issued for a fixed period of
time at a discount to the face value and mature at par.

Ideally, the discount rates on CPs ought to be determined by the demand and supply factors in the money market and
the interest rates on the other hand competing money market instruments such as certificate of deposits (CDs),
commercial bills and treasury bills. It has been noticed that in a comparatively stable and low rate conditions in the
money market, the discount rates in the CP markets do somewhat soften whereas in the tight money market situation
it may not be possible even for a best rated company to issue CPs at lower rates than the lending rates on it's banks
lines of credit. This is partly for the reason that banks could also firm up the lending rates during such periods. The
maturity management of CPs should also affect the CP rates. It has been observed that in a period of prolong low and
steady money market rates there is no significant different between the discount rates if CPs for 90 and 180 days.
7. READY FORWARD CONTRACT

It is a transaction in which two parties agree to sell and repurchase the same security. Under such an agreement the
seller sells specified securities with an agreement to repurchase the same at a mutually decided future date and a
price. Similarly, the buyer purchases the securities with an agreement to resell the same to the seller on an agreed date
in future at a predetermined price. Such a transaction is called a Repo when viewed from the prospective of the seller
of securities (the party acquiring fund) and Reverse Repo when described from the point of view of the supplier of
funds. Thus, whether a given agreement is termed as Repo or a Reverse Repo depends on which party initiated the
transaction.

The lender or buyer in a Repo is entitled to receive compensation for use of funds provided to the counterparty.
Effectively the seller of the security borrows money for a period of time (Repo period) at a particular rate of interest
mutually agreed with the buyer of the security who has lent the funds to the seller. The rate of interest agreed upon is
called the Repo rate. The Repo rate is negotiated by the counterparties independently of the coupon rate or rates of
the underlying securities and is influenced by overall money market.

The Repo/Reverse Repo transaction can only be done at Mumbai between parties approved by RBI and in securities
as approved by RBI (Treasury Bills, Central/State Government securities)

8. Commercial Paper
Bills of exchange are negotiable instruments drawn by the seller (drawer) of the goods on the buyer (drawee) of the

goods for the value of the goods delivered. These bills are called trade bills. These trade bills are called commercial

bills when they are accepted by commercial banks. If the bill is payable at a future date and the seller needs money

during the currency of the bill then he may approach his bank for discounting the bill. The maturity proceeds or the

bank will receive face value of discounted bill, from the drawee. If the bank needs fund during the currency of the bill

then it can rediscount the bill already discounted by it in the commercial bill rediscount market at the market related

to discount rate .The RBI introduced the Bills Market scheme (BMS) in 1952 and the scheme was later modified into

New Bills Market scheme (NBMS) in 1970. Under the scheme, commercial banks can rediscount the bills, which

were originally discounted by them, with approved institutions (viz., Commercial Banks, Development Financial

Institutions, With the intention of reducing paper movements and facilitate multiple rediscounting, the RBI

introduced an instrument called Derivative Usance Promissory Notes (DUPN). So the need for physical transfer of

bills has been waived and the bank that originally discounts the bills only draws DUPN. These DUPNs are sold to

investors in convenient lots of maturities (from 15 days upto 90 days) on the basis of genuine trade bills, discounted

by the discounting bank.

 Review of Literature: -

Reuters (2009) Article: India call money ends near reverse repo rate, cash abundant. India overnight money rates
brought down to the reverse repo rate of 3.25% on Wednesday these cash surplus in the system will help the banks
meet their reserve needs comfortably. Cheaper money usable at the security borrowing and lending agreement
(CBLO) also reduce the pressure on the inter-bank cash rates. On that day banks were guided to report their position
to RBI once in two weeks. This alteration created an expectation on liquidity resistance. And some analysts said that
the central bank may start rolling back the liquidity as early as on December 2009, as they already pressured the
consumer prices could pose significant inflationary threat to the economy, in the thick of easy cash conditions
Overnight rates are supported around the reverse repo rate because banks holding the surplus funds could also break
up with the same central bank at that rate in its daily liquidity adjustment auctions.

Rastogi Nikhil (2008) Article: Money Market Integration in India: A Time Series Study Says that Indian
financial markets have achieved much from the highly controlled pre-liberalization era. He denotes that the main
focus is on achieving efficiency, which is the trade mark of any developed financial market. This research paper tests
the efficiency and extent of integration between financial markets observed at the short end of the market. The rates
are mainly taken for the purpose of the study of, the compound call market rate, CD (Certificate of Deposit) rate, CP
(Commercial Paper) rate, 91-day T-bill (Treasury bill) rate and 3-month forward premium.

The results, though promising, are mixed. In his research he concluded that although markets have achieved
integration in some of its branches, but they still have to attain full integration. It has absolute implications on the
monetary policy of the Reserve Bank of India. (RBI) since the changes in one market (gilt market) can be used to
coordinate the other market (forex market).

Rusty Sadananda (2007) Article: Market efficiency and financial markets integration in India in their work
examined the impact of economic reforms on the integration of various segments of the financial market in India over
the time series tools during the period from March 2006 to March 2012. The major findings were: (I) various sector
of the financial market in India have achieved market efficiency, (ii) the 91-day Treasury bill rate is the suitable 'base
rate' of the financial sector in India, (iii) the financial markets in India are broadly integrated at the short-end of the
market, and (iv) the long- end of the market is amalgamate with the short-end of the market. From the above
monetary policy should rely more on interest rate and asset price channels to control inflation.

Recommendations of Three Committees: - The issue of whether non-bank participants should constitute
part of call/notice/term money market could be traced first in the Report of the Committee to Review the Working of
the Monetary System (Chairman: S. Chakravarty) in 1985. Since then, the Report of the Working Group on the
Money Market (Chairman: N. Vague) in 1987 and the Report of the Committee on Banking Sector Reforms
(Chairman: M. Narasimha) in 1998 had also deliberated on this issue. It needs to be appreciated that the particular set
of recommendations from these three Committees have to be assessed against the specific objectives for which these
Committees had been constituted as well as the differing initial conditions reflecting the state of Indian financial
market which were prevailing at that particular point of time.
Sukhmoy Chakravarty Committee (1982) Articles: - Recommended for call money market. Examined the
study of call money market for India was first recommended by the Sukhmoy Chakravarty. Committee was set up in
1982 to review the working of the monetary system. They felt that allowing additional nonbank participants into the
call market would not dilute the strength of monetary regulation by the RBI, as resources from non-bank participants
do not represent any additional resource for the system as a whole, and their participation in call money market would
only imply a redistribution of existing resources from one participant to another. In view of this, the Chakravarty
Committee recommended that additional nonbank participants may be allowed to participate in call money market.

The Vaghul Committee (1990) Articles: - Introduction of money market instruments. The Vaghul
Committee (1990), while recommending the introduction of a number of money market instruments to broaden and
deepen the money market, recommended that the call markets should be restricted to banks. The other participants
could choose from the new money market instruments, for their short - term requirements. One of the reasons the
committee ascribed to keeping the call markets as pure inter-bank markets was the distortions that would arise in an
environment where deposit rates were regulated, while call rates were market determined.

Narasimham Committee (1998) Articles: - observation on call/money/term money market examined the
Narasimham Committee II (1998) concurred with the Vaghul Committee as it also observed that call/notice/term
money market in India, like in most other developed markets, s hould be strictly restricted to banks. It, however, felt
that exception should be made for Primary Dealers (PDs) who have been acting as market makers in the call money
market and are formally treated as banks for the purpose of their inter-bank transactions and, therefore, they should
remain as part of call money market. With regard to non-banks, it expressed concern that these participants "are not
subjected to reserve requirements and the market is characterized by chronic lenders and chronic borrowers and there
are heavy gyrations in the market". It felt that allowing non-bank participants in the call market "has not led to the
development of a stable market with liquidity and depth and the time has come to undertake a basic restructuring of
call money market". Like the Vaghul Committee, it had also suggested that the non-bank participants should be given
full access to bill rediscounting, Commercial Paper (CP), Certificates of Deposit (CDs), Treasury Bills (TBs) and
Money Market Mutual Funds (MMMFs) for deploying their short-term surpluses.

Kotter and Mosser (2002) Articles: - The Monetary Transmission Mechanism: Some Answers and Further
Questions, examined the Monetary policy’s effect appears to be somewhat weaker than they were in past decades.
Financial Innovation is one possible cause of this change but not the only one improved inventory management and
the conduct of monetary policy itself are others. Thank to financial innovation and institutional changes in housing
finance the housing sector is no longer on the leading edge of the transmission mechanism. However, judging from
the evidence presented for the United. Kingdom, the role of housing assets on households’ balance sheets warrants
further study. Neither financial consolidation nor the shrinking reserve volume appears to be a major factor affecting
monetary transmission—at least not yet. Some loose ends and lacunae remain, however. First, although monetary
policy seems to have retained its effectiveness, the economy’s sensitivity to interest rates remains an open question.
Dr. Y.V. Reddy (2002) Article: - Parameters of Monetary Policy in India attempted to focus on the conduct of
monetary policy and highlighted some of the immediate tasks. In case, there is interest in an overview of theory and
analytics, especially in the context of role of monetary policy in revitalizing growth in India. The conduct of
monetary policy in India would continue to involve the constant rebalancing of objectives in terms of the relative
importance assigned, the selection of instruments and operating frameworks, and a search for an improved
understanding of the working of the economy and the channels through which monetary policy operates. Among the
unrealized medium-term objectives of reforms in monetary policy, the most important is reduction in the prescribed
CRR for banks to its statutory minimum of 3.0 per cent. The movement to 3.0 per cent can be designed in three
possible ways, viz., the traditional way of pre-announcing a time-table for reduction in the CRR; reducing CRR as
and when opportunities arise as is being done in recent years; and as a one-time reduction from the existing level to
3.0 per cent under a package of measures. The Reserve Bank influences liquidity on a day-to-day basis through LAF
and is using this facility as an effective flexible instrument for smoothening interest rates. The operations of non-bank
participants including FIs, mutual funds and insurance companies that were participating in the call/notice money
market are in the process of being gradually reduced according to pre-set norms. Such an ultimate goal of making a
pure inter-bank call money market is linked to the operationalization of the CCIL and attracting non-banks also into
an active repo market. The effectiveness of LAF thus will be strengthened with a pure inter-bank call/notice money
market in place coupled with growth of repo market for non-bank participants

Reserve Bank of India (2010) in his discussion paper “Deregulation of Savings bank Interest rates: A
Discussion paper” try to put the pros and cons of deregulation of savings deposits interest rates in India. Regulation
of interest rates imparts rigidity to the instrument/product as rates are either not changed in response to changing
market conditions or changed slowly. This adversely affects the attractiveness of a product/instrument. In the case of
savings bank deposits, its interest rate has remained unchanged at 3.5 per cent since March 1, 2003 even as the
Reserve Bank’s policy rates and call rates (representing a proxy for operative policy rate as at a time, only one rate –
either the repo rate or the reverse repo rate – is operative depending on liquidity conditions) moved significantly in
either direction. Regulation of savings deposits interest rate has not only reduced its relative attractiveness but has
also adversely affected the transmission of monetary policy. For transmission of monetary policy to be effective, it is
necessary that all rates move in tandem with the policy rates. This suggests that regulation of the interest rate on
savings deposits has impeded the monetary transmission and that deregulation of interest rate will help improve the
transmission of monetary policy. In sum, deregulation of savings deposit interest rates has both pros and cons.
Savings deposit interest rate cannot be regulated for all times to come when all other interest rates have already been
deregulated as it creates distortions in the system. International experience suggests that in most of the countries,
interest rates on savings bank accounts are set by the commercial banks based on market interest rates.

Deepak Mohanty (2011) Article: - Monetary Policy Response to Recent Inflation in India trying to prove the
relation between the Policy framed by the reserve bank of India and the Inflation situation in the country. India,
though initially somewhat insulated from the global developments, was eventually impacted significantly by the
global shocks through all the channels – trade, finance and expectations channels. In response, the Reserve Bank
swiftly introduced a comprehensive range of measures to limit the impact of the adverse global developments on the
domestic financial system and the economy. The Reserve Bank, like most central banks, took a number of
conventional and unconventional measures to augment domestic and foreign currency liquidity, and sharply reduced
the policy rates. In a span of seven months between October 2008 and April 2009, there was unprecedented policy
activism. For example: (I) the repo rate was reduced by 425 basis points to 4.75 per cent, (ii) the reverse repo rate was
reduced by 275 basis points to 3.25 per cent, (iii) the cash reserve ratio (CRR) of banks was reduced by a cumulative
400 basis points of their net demand and time liabilities (NDTL) to 5.0 per cent, and (iv) the total amount of primary
liquidity potentially made available to the financial system was over 5.6 trillion or over 10 per cent of GDP. As
growth took hold and inflation became more generalized, monetary policy response was strengthened. Initially,
monetary transmission was weak as systemic liquidity was in surplus. But once liquidity turned into deficit in July
2010, monetary transmission improved.

Conclusion: - The call money market decreases the repo rate, but the bank manages the cheaper money of their
surplus breakdown through reverse repo rate.

The bank has to report this issue to RBI within to week.

Rastogi says that the Indian money market has achieved more from the preliberalization era.

In his research he concluded that although markets have achieved integration in some of its branches, but they still
have to attain full integration.

He said that the main objective or focus is on creating efficiency or growth of money market.

The monetary policy should rely more on interest rate and asset price channels to control inflation.

The Chakravarty Committee recommended the additional nonbank participants may be allowed to participate in call
money market.

The Vaghul Committee introduce the money market and broaden the instrument of money market. The money market
is usually for short-term period i.e. less than one year.

THE Narasimham Committee study the observation of call and term money.

Interest are collected periodically by the depositor by depositing.

Because of change in RBI regulation there is change the rate of interest.

Because of inflation there is change in the rate of interest it affects the rate of interest.
 Research Methodology: -
Methodology is an essential part of research to find answer to the research objective that initiate the same. Therefore,
it figures as an important part of the study. This chapter focuses on the design and research method utilized in the
study. In addition, the procedure followed to collect, capture, process and analyzed data is presented. The research
approach used in the study is presented below: -

Sample Unit: - Sample size determination is the process of choosing the number of respondents/observations to
include in a statisticalsample. It is an important feature of a research study because on the basis of sample size data is
collected and interpreted to give accurate and appropriate results. The correct and appropriate sample size is said to
give more accurate results

Type of research: - my research is based on descriptive research. It helps to know qualitative and quantitative
aspects of study. It studies the characteristics of Indian Money Market and see to it that how we can bring more
agencies in India. It is used because this topic is being studies only to understand the concept and the problem it
faces. However, my research also studies Review of Literature which acts as a base for Descriptive study

Sampling Objective of Study: -

The objective of the project are as follows: - To study about INDIAN MONEY MARKET AND its related aspects
like its types and the instruments.

To study about the history, participant, organizational structure of INDIAN MONEY (MONETORY) MARKET. To
find out the investors saving preferences.

To study about overcoming the short-term deficit.

To enable liquidity in the market.

Sampled size: - Sample size determination is the process of choosing the number of respondents/observations to
include in a statistical sample. It is an important feature of a research study because on the basis of sample size data is
collected and interpreted to give accurate and appropriate results. The correct and appropriate sample size is said to
give more accurate results. For example, in a census, data is collected from the entire population. Therefore, the
sample size is equal to population of the country. Keeping in mind the rate of non-response and non-availability of
respondents, the sample size was taken between 25 – 50 science students of Mumbai University. It was Random
sampling method that was considered to decide the sample size. Due to the sample size being small there may be
slight inaccuracy of data that can be rectified by further study. (100 respondents)

SAMPLE DESIGN: - The sample design used to represent the survey data is in the formof Pie-Charts and Bar
Charts based on the 80 respondents of the survey. Probability sampling was used to collect responses.

Data Collection: - Data for the study was collected from the primary as well as secondary sources.
SECONDARY SOURCE OF DATA COLLECTION: -
The secondary source of data collection is assessed to gain information and knowledge about our research problem
that may be previously discussed by some other researcher. The secondary is referred to know what has already been
discussed and what more scope can be there for research. The secondary data is taken from selective websites and
from online publication of some researchers. The secondary data was useful for the study of Review of Literature.
We could study various aspects of different researchers which gave us an idea about the factors being previously
discussed and also the conclusions drawn from them. It also gave us an insight on what more could be studied to
solve the research problem.

Data Analysis: - The application of statistical tools and techniques for the data collected by means of
questionnaires is been classified tabulated analyzed and summarized with the help of statistical tool percentage
method.

Limitation of the study: -

The study is based on limited scope of area.

Whole market cannot be collected.

Research methodology: Data and model

Data source and Description

Money market deals with financial claims, assets and securities which have a maturity period of up to one year, for
instance, the call money market, treasury bills market, commercial bills market, market in certificates of deposit,
commercial paper, collateralized borrowing and lending obligations, repo/ reverse repo and others.

The variables used in the study are the call money rate, commercial paper rate, certificate of deposit rate and 91-day
Treasury bills rate. The estimates are based on monthly data from April 1993, through March 2008. The data has
been drawn from Report on Currency and Finance, Reserve Bank of India Bulletin, and All India Handbook of
Statistics (various issues).

The call rates are the weighted average call money rates on monthly basis. The treasury bills rate is the monthly
implicit yield at cut off price in percentage terms. The data for CPs is given fortnightly. Similarly the data for CDs is
also available fortnightly but for some month’s transactions are more frequently given and thus we have ignored the
values other than those which are closer to 30th of each month. We have not taken the average of lower and the
higher end of the rate of interest on monthly basis.

Data for treasury bills is available weekly. In this case also we have taken the values, which are closest to
30th of each month. Here also we have not taken the average of all the transactions given for each month. The three
instruments, that is, the CPs, CDs and the Treasury bills are given in discounted form whereas the CMM instrument
is not in discounted form.
Repo/Reverse repo has also not been considered as a money market instrument in our study because of two
reasons. First, the repo rate tends to remain the same continuously for many months. It would therefore, behave like a
non stochastic variable and cannot be embedded in a cointegrating equation. This implies that the variance would be
zero. Second, the repo/reverse repo rate is an administered rate and unlike other money market rates is not market
determined. Also, CBLOs has not been considered in the paper since it is a more recent phenomenon.

Model Specification

We shall be empirically testing for money market efficiency. This has three aspects.

Firstly, we shall be establishing the time series properties and we shall test for the precise long term relationship
which tells us about long term efficiency.

Secondly, we would be testing for the nature of the structure of market integration.

Thirdly, we would be testing for the effect of one sub market on the other in a dynamic framework.

All these aspects have important policy relevance. In the first case, apart from testing the ordinary properties of
stationarity we need to test for the precise model of stationarity.

When we say that the markets are efficient it means that the fluctuations in rate of interest between the markets,
which are integrated, would adjust to each other. This happens through a process of arbitrage, that is, funds flow from
the market where the rate of interest is low to the market where the rate of interest is high. So long as market
integration is complete, the long run price or the interest rate would stabilize across markets, that is, individually each
market is volatile, and jointly the rate of interest across the integrated markets would be stable. Therefore, our testing
framework for market integration has to account for the possibility of non stationarity and volatility in different sub
markets and develop a theoretical and empirical framework for establishing market efficiency in the presence of non
stationarity and volatility..
 DATA ANALYSIS
Interpretation and presentation :-
1.) What is your annual income ?

SR. No PARTICULAR FREQUENCY PERCENTAGE

1 Below 1 lakh 7 7%

2 Between 1 lakh to 3 10 10%

lakhs

3 Between 3 lakh to 4 lakhs 15 15%

4 Above 5 lakhs 38 38%

5 No income 30 30%

Interpretation :- There were total 100 responses out of which 7% respondents have annual income of below 1 lakh
10% respondents have an annual between 1 lakh to 3 lakh , between 3 lakhs to 5 lakh were of 15% , above five lakh
were 38% and for no income there are 30% .

2.)How do you invest in your saving ?

SR.NO PARTICULAR FREQUENCY PERCENTAGE

1 Invest in capital market 49 49%

2 Invest in money market 54 54%

mutual fund
3 Invest in bank 60 60%

4 Invest in real estate 20 20%

Interpretation :- From the above data we can see that 49% of the respondents invest in capital market 54% of
respondent invest in money market mutual fund, 60% invest in banks and 20% invest in real estate .

3.) Do you have any knowledge about money market instrument ?

SR..NO PARTICULAR FREQUENCY PERCENTAGE

1 Yes 75 75%

2 NO 8 8%
 3 Maybe 6 6%

4 Heard but don’t know 11 11%

Interpretation: - From the above analysis we can see that 75% have heard about money market and knows about
that, while there are 6% people who aren't sure about this, 11% people have heard about the term money market but
have no knowledge about that and then about 8% of the respondents don't know anything about money market

4.)How long would you like to hold your money market instrument?

Sr.NO PARTICULAR FREQUENCY PERCENTAGES

1 LONG TERM METHOD 78 78%

2 SHORT TERM METHOD 22 22%

INTERPRETATION :- From the above data 78% of the people like to keep money market instruments for long
term method while other people which are about 22% keep it for short term method . we can see that them are willing
to keep their investment for long term ..

5.)How much risk will you be willing to take ?

SR.NO PARTICULR PREQUENCY PERCENTAGES

1 LOW 13 13%

2 AVERAGE 19 19%

3 MEDIUM 51 51%

4 HIGH 17 17%

INTERPRETATION :- From the above data we can see that 13% respondents will take low level of risk, while 17%
of respondents will take high amount of risk. 19% of respondents will take risk at average level. Most of the
respondents are willing to take average number of risks.

6.) In your opinion what is your expected rate of return ?

SR.NO PARTICULAR FREQUENCY PERCENTAGE

1 BELOW10% 17 17%

2 BETWEEN 10 TO 20% 32 32%

3 BETWEEN 20 TO 30% 43 43%
 4 ABOVE 30% 8 8%

INTERPERTATION :- From the above data we can see that 17% respondents expect returns below 10%. 32%
respondents expect Returns between 10%-20%. 43% respondents expect returns between 20%-30%. 8% respondents
expect returns above 30%.

7.)How would you rate your experience with Indian money market ?

SR.NO PARTICULAR FREQUENCY PERCENTAGE

1 AVERAGE 18 18%

2 POOR 10 10%

3 GOOD 58 58%

4 EXCELLENT 14 14%

INTERPRETATION :- From the above analysis we can see that 10% respondents didn't have a good experience
with Indian market while 14% respondents had excellent experience with Indian Market.

8.)Is recession had affected your investment decision ?

SR.NO PARTICULAR FREQUENCY PERCENTAGES

1 YES 86 86%

2 NO 14 14%

INTERPRETATIONS :- From the above data we can see that 86% respondents experienced that recession has
affected their Investment decision while 14% respondents were not affected by recession

9.) For fixed income what types of instrument would prefer ?

SR.NO PARTICULAR FREQUENCY PERCENTAGES

1 Corporate bond 51 51%

2 Treasury bills 57 57%

3 Government securities 53 53%

4 Commercial papers 47 47%

INTERPRETATIONS :- From the above data we can see that 51% of respondent invest in corporate bonds, 57% in
treasury bills, 53% in government securities and 47% of respondents invest in commercial paper.

10.) What will be you course of action during recession ?

 SR.NO PARTICULARS FREQUENCY PERCENTAES

1 BUY 39.2 39.2

2 SELL 23.7 23.7

3 HOLD 37.1 37.1

Interpretation; - From the above analysis we can see that 39.2% of the respondents buy the instruments at the time
of recession, 37.1% of the respondents sells the instruments, and 23.7% of the respondents hold the instruments .

Finding & suggestion

Finding

 Is past price affect the present price?

 There may be change in the price because of change in demand or change in the
 economic condition due to this price can increase or decrease as the demand
 changes or there can be no change in price even the demand changes.

 Is there any change in economic growth?

 Yes, there can be change in the economic condition as in the above itself say that
 change in the economic condition tends to change the price, therefore there can be
 positive, negative, or no change in the economic growth.

 Recession may have positive or negative impact on economy

 How can one manage the short-term deficit?

 One can overcome the short-term deficit by managing the funds

 Managing the funds means there can be issue of money market securities or,

 One can do nothing i.e. (under come of short term deficit).

 Does recession tend to liquidate the money market instruments?

 From the above question at the time of recession, the investor may liquidate their
 investment from the market, purchase the instrument or do nothing (hold).

 Recession have an impact on the liquidity.

 Is there a risk in money market instruments?

 Money market instruments is a minimal risk or no risk instruments in the market as they are for shorter period
i.e. (a year or less than one year).it has low risk or no risk
 instrument in the market.

 The instrument is divided in various risk categories elevated risk, minimal risk, or no risk instruments.

 The Indian money market was controlled by tight controls and administered interest rate structure up to
late 1980s. However, following the policy measures during the early 1990s the money market has become
broad based with the enlargement of participants and instruments, and change in liquidated conditions is
quickly transmitted. The reform measures have greatly contributed to the development of inter-linkages;
increasing liquidity across various segments of the money market. An enabling environment has thus been
created whereby the monetary authority can gradually switch away from the direct instruments of control
to indirect methods like open market operation, including repos. The market determined interest rate is
gradually emerging as an important intermediate target with the ultimate objective of achieving price
stability and economic growth.
  Radical measures are taken to transform the Indian money market from a closed, inward and narrow
domestic space to open, outward-looking and international, can have competitive and efficient operation
for optimal gain. Interest rates have been freed at certain level of bank deposits and lending, foreign
financial institutions have been allowed to invest in domestic market. Securities market has been
reorganised with the setting up of new institutions (like DFI and Primary Dealers), introduction of new
instruments (like CP, CD) and new organisation (like NSE).

Suggestion: -

 Few suggestions relevant to the development of money market in India are enumerated below:

 There should be a mechanism to make the call range bound which may reduce uncertainty and provide
confidence to the bankers for lending/borrowing. In the context, it is emphasized that Repos and Reverse
Repos conducted by RBI has the potential to set the floor and ceiling in the call money market.

 Besides, Repo mechanism, call money market, needs to be supplemented by Open Market Operation (OMO).
OMO can influence interest rate as well as volumes in the market.

 Non-bank segment should be brought under the same regulation on par with the banks early as possible so
that level playing field is created.

 Transparency should be ensured in money market transaction. There should be screen based trading with two-
way quotes for each money market instruments.

 The lock-in period of CDs and CPs should be completely removed in a phase manner. Retailing of
government papers should be encouraged. The primary dealers can play a role in this context.

 Currently FIIs are allowed in government dated securities in primary as well as secondary market. More FII
participation could be encouraged.

 Money Market Mutual Funds should be set up by various banks and institutions. This would increase the
retail participation in the market.

 There should be a mechanism to make the call range bound which may reduce uncertainty and provide
confidence to the bankers for lending/borrowing. In the context, it is emphasized that Repos and Reverse
Repos conducted by RBI has the potential to set the floor and ceiling in the call money market.

 Besides, Repo mechanism, call money market, needs to be supplemented by Open Market Operation (OMO).
OMO can influence interest rate as well as volumes in the market.

 Non-bank segment should be brought under the same regulation on par with the banks early as possible so
that level playing field is created.
 Transparency should be ensured in money market transaction. There should be screen based trading with two
way quotes for each money market instruments. The lock-in period of CDs and CPs should be completely
removed in a phase manner.

 Retailing of government papers should be encouraged. The primary dealers can play a role in this context.
Currently FIIs are allowed in government dated securities in primary as well as secondary market. More FII
participation could be encouraged.
Conclusion
The money market is a vibrant market, affecting our everyday lives. As the shortterm market for money, money
changes hands in a short time frame and the players in the market have to be alert to changes, up to date with news
and innovative with strategies and products.

The withdrawal of non-bank entities from the inter-bank call-money market is linked to the improvement of
settlement systems.

Any time-bound plan for the evolution of a pure inter-bank call/notice money market would be ineffective till the
basic issue of settlements is addressed.

In brief, various policy initiatives by the Reserve Bank have facilitated development of a wider range of
instruments such as market repo, interest rate swaps, CDs and CPs.

This approach has avoided market segmentation while meeting demand for various products.

These developments in money markets have enabled better liquidity management by the Reserve Bank.

The money market specializes in debt securities that mature in less than one year

Money market securities are very liquid, and are considered very safe. As a result, they offer a lower return than
other securities.

The easiest way for individuals to gain access to the money market is through a money market mutual fund.
 Bibliography
SOURCE SOURCE

R .S . AGGARWAL EMERGING MONEY MARKET

M .S. GOPALAN INDIAN MONEY MARKET STRUCTURE , OPERATION AND

DEVELOPMENT

PRASAMA CHANDRA FINANCIAL MANAGEMENT

P.K.BANDGAR SECURITIES MANAGEMENT AND PORTFOLIO

MANAGEMENT

Interest Rate Swaps NASSER SABER

RBI SITE http://rbi.org.in

SBI DHFI SITE http://sbidhfi.com/

INDIAN INSTITUTE OF
BANKING AND FINANCE http://www.iibf.org.in

GOOGLE