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A Project Report on money market

Investment in Capital Market (Adamas University)

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A PROJECT REPORT
ON
“MONEY MARKET IN INDIA”
PRESENTED BY
Shravani Ghosh
AU/07/2018/0002393
UNDER THE GUIDANCE OF
Prof. Shashwata Chowdhury
SUBMITTED TO-
School of Business and Economics
5th Semester of B.Com(Hons)
ADAMAS UNIVERSITY, BARASAT

2020-21

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C E R T I FI CAT E
This is to certify that the project entitled “MONEY MARKET IN INDIA”
submitted by Miss. Shravani Ghosh with Roll No.- UG/07/BCOM/2018/017,
student of B.Com. (5th Semester) examination has not been submitted for any
other examination and does not form a part of any other course undergone by
the candidate. It is further certified that she has completed all required phases of
the project. This project is original to the best of our knowledge and has been
accepted for Internal Assessment.

MENTOR HEAD OF THE

DEPARTMENT

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DECLARATION
I, Miss. Shravani Ghosh student of B.Com. (Semester – 5th ), hereby declare that
the project titled, “Money Market in India” submitted by me to ADAMAS
University,during the academic year 2020-2021, is based on actual work carried
by me under the guidance and supervision of Prof. Shashwata Chowdhury. I
further state that this work is original and not submitted anywhere else for any
examination.

SHRAVANI GHOSH

ACKNOWLEDGEMENT

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At the beginning, I would like to thank GOD for his shower of blessing. The
desire of completing this project was given by my guide Prof. Sunil Gujaran. I
am very much thankful to him for the guidance, support and for sparing her / his
precious time from a busy schedule. I would fail in my duty if I don’t thank my
parents who are pillars of my life. Finally I would express my gratitude to all
those who directly and indirectly helped me in completing this project.

SHRAVANI GHOSH

EXECUTIVE SUMMARY

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A well regulated financial sector is essential in a globalized economy. Financial innovation

has contributed in the economic development. A financial institution is an institution that
provides financial services for its clients or members. Probably the most important financial
service provided by financial institutions is acting as financial intermediaries. Most financial
institutions are highly regulated by government. The definition of money for money market
purposes is not confined to bank notes but includes a range of assets that can be turned into
cash at short notice, such as short term government securities, bills of exchange, and bankers’
acceptances. This paper analyses the real effects of financial markets subsequent to financial
liberalization in an economy with risk savers and learning by lending. Transition from full
financial repression to full financial liberalization might initially slow down the growth
process or even induce a recession, whenever the initial level of valuable investments known
by the financial intuitions is sufficiently scanty. However, lending activity leads to
accumulation of information (learning by lending) regarding valuable investments. The
purpose of this paper is to advocate and encourage financial markets in the overall
development of the economy. Money Market is a market for short term funds. Money is
raised and deployed for short term in this market. The Money Market is the close substitutes
for money with the short term up to one year. A minimum size of Rs. 20 crores for each
transaction was permitted in the participation of the corporate in the call money market. The
maturity period of Certificates of Deposits should not be less than 15 days and not more than
1 year. On the recommendation of the Sukhmoy Chakravarty Committee and the Narasimha
committee, RBI initiated a series of reform in Indian Money Market. To provide safety,
liquidity and return, MMMFs are formed which collect the small savings of a large number of
savers and invest them in the capital market. Gilt-edged (Government) Securities security
have great demand for the banks to maintain the Net Demand and Time Liquidities (NDTL)
position of the bank through its buying and selling. Under the reverse repo transactions,
securities are purchased with a simultaneous commitment to resell at a predetermined rate
and date.

INDEX

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CHAPTER 1........................................................................................
 Introduction and review of literature
CHAPTER 2........................................................................................
 Research Methodology
CHAPTER 3........................................................................................
 Result/Analysis of the work
CHAPTER 4........................................................................................
 Conclusion
Webliography

Chapter: 1

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INTRODUCTION:
A financial system refers to a system which enables the transfer of money between investors
and borrowers. A financial system could be defined as an international, regional or
organization level. The term “system” in “Financial System” indicates a group of complex
and closely linked institutions, agents, procedures, markets, transactions, claims and
liabilities within a economy. FIVE BASIC COMPONENTS OF FINANCIAL SYSTEM:

 Financial Institutions
 Financial Markets
 Financial Instruments (Assets or Securities)
 Financial Services
 Money

FINANCIAL MARKETS:

A financial market is the place where financial assets are created or transferred. It can be
broadly categorized into money markets and capital markets. Money market handles short-
term financial assets (less than a year) whereas capital markets take care of those financial
assets that have maturity period of more than a year.

The key functions are:

1. Assist in creation and allocation of credit and liquidity.

2. Serve as intermediaries for mobilization of savings.

3. Help achieve balanced economic growth.

4. Offer financial convenience.

One more classification is possible: primary markets and secondary markets. Primary
markets handle new issue of securities in contrast secondary markets take care of securities
that are presently available in the stock market. Financial markets catch the attention of
investors and make it possible for companies to finance their operations and attain growth.
Money markets make it possible for businesses to gain access to funds on a short term basis,
while capital markets allow businesses to gain long-term funding to aid expansion. Without
financial markets, borrowers would have problems finding lenders. Intermediaries like banks
assist in this procedure. Banks take deposits from investors and lend money from this pool of
deposited money to people who need loan. Banks commonly provide money in the form of
loans.

TYPES OF FINANCIAL MARKETS:

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Within the financial sector, the term "financial markets" is often used to refer just to the
markets that are used to raise finance: for long term finance, the Capital markets; for short
term finance, the Money markets. Another common use of the term is as a catchall for all the
markets in the financial sector, as per examples in the breakdown below.

 Capital markets
 Money markets
 Foreign exchange markets
 Credit markets.

But in our report we are solely going to focus on the Money markets.

Chapter: 2

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MONEY MARKET:
The Money Market is a very important segment of the Indian financial system. It is the
market where short term monetary assets are dealt in to raise short term requirements of
funds and/ or to park short term surpluses. The main characteristic of the Money Market is
the liquid nature. The money market transactions may range from overnight to one year. It
has minimum transaction cost. This unit encompasses the structure of the Money Market
that has undergone vast changes in the last decade. In this unit, we are going to discuss the
different instruments and the defect of Indian Money Market. The unit also discusses the
bill market. Thus, you will be able to understand through this unit the structure, instrument
as well as the defect of the Indian money market. Financial openness is often regarded as
providing important potential benefits. Access to money markets expands investors’
opportunities for a potential for achieving higher risk adjusted rates of return. It also allows
countries to borrow to smooth consumption in the face of adverse shocks, the potential
growth and welfare gains resulting from such international risk sharing can be large . It has
also been argued that by increasing the rewards of good policies and the penalties for bad
policies, free flow of capital across borders may induce countries to follow more
disciplined macroeconomic policies that translate into greater macroeconomic stability. An
increasingly common argument in favour of financial openness is that it may increase the
depth and breadth of domestic financial markets and lead to an increase in financial
intermediation process by lowering costs and “excessive” profits associated with
monopolistic or cartelized markets, thereby lowering the cost of investment and improving
resource allocation. Organized financial markets have existed in India for more than a
century. Today, markets of varying maturity exist in equity, debt, commodities and foreign
exchange. There are 25 stock markets all over the country, the most important of which, are
the Bombay Stock Exchange and the National Stock Exchange. The rupee has been
convertible on the current account since 1992. India Financial Market helps in promoting
the savings of the economy - helping to adopt an effective channel to transmit various
financial policies. The Indian financial sector is well- developed, competitive, efficient and
integrated to face all shocks. In Indian financial market there are various types of financial
products whose prices are determined by the numerous buyers and sellers in the market.
The other determinant factor of the prices of the financial products is the market forces of
demand and supply. 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.

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ROLE OF MONEY MARKET IN ECONOMY:

Money markets play a key role in banks’ liquidity management and the transmission of
monetary policy. In normal times, money markets are among the most liquid in the
financial sector. By providing the appropriate instruments and partners for liquidity trading,
the money market allows the refinancing of short and medium-term positions and facilitates
the mitigation of your business’ liquidity risk. The banking system and the money market
represent the exclusive setting monetary policy operates in. A developed, active and
efficient interbank market enhances the efficiency of central bank’s monetary policy,
transmitting its impulses into the economy best. Thus, the development of the money
market smoothes the progress of financial intermediation and boosts lending to economy,
hence improving the country’s economic and social welfare. Therefore, the development of
the money market is in all stakeholders’ interests: the banking system elf, the Central Bank
and the economy on the whole.

RISK SHARING:
One of the most important functions of a financial system is to achieve an optimal
allocation of risk. There are many studies directly analyzing the interaction of the risk
sharing role of financial systems and economic growth. These theoretical analyses clarify
the conditions under which financial development that facilitates risk sharing promotes
economic growth and welfare. Quite often in these studies, however, authors focus on
either markets or intermediaries, or a comparison of the two extreme cases where every
financing is conducted by either markets or intermediaries. The intermediate case in which
markets and institutions co-exist is rarely analyzed in the context of growth models because
the addition of markets can destroy the risk-sharing opportunities provided by
intermediaries. In addition, studies focus on the role of financial systems that face
diversifiable risks. The implications for financial development and financial structure on
economic growth are potentially quite different when markets cannot diversify away all of
the risks inherent in the economic environment. One importance of risk sharing on
economic growth comes from the fact that while avers generally do not like risk, high-
return projects tend to be riskier than low return projects. Thus, financial markets that ease
risk diversification tend to induce a portfolio shift onwards projects with higher expected
returns. The ability to hold a diversified portfolio of innovative projects reduces risk and
promotes investment in growth-enhancing innovative activities.

LIQUIDITY:
Money market funds provide valuable liquidity by investing in commercial paper,
municipal securities and repurchase agreements: Money market funds are significant
participants in the commercial paper, municipal securities and repurchase agreement (or
repo) markets. Money market funds hold almost 40% of all outstanding commercial paper,
which is now the primary source for short-term funding for corporations, who issue
commercial paper as a lower-cost alternative to short-term bank loans. The repo market is
an important means by which the Federal Reserve conducts monetary policy and provides

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daily liquidity to global financial institutions. Quantum of liquidity in the banking system is
of paramount importance, as it is an important determinant of the inflation rate as well as
the creation of credit by the banks in the economy. Market forces generally indicate the
need for borrowing or liquidity and the money market adjusts itself to such calls. RBI
facilitates such adjustments with monetary policy tools available with it. Heavy call for
funds overnight indicates that the banks are in need of short term funds and in case of
liquidity crunch, the interest rates would go up.

DIVERSIFICATION:
For both individual and institutional investors, money market mutual funds provide a
commercially attractive alternative to bank deposits. Money market funds offer greater
investment diversification, are less susceptible to collapse than banks and offer investors
greater disclosure on the nature of their investments and the underlying assets than
traditional bank deposits. For the financial system generally, money market mutual funds
reduce pressure on the FDIC(Federal Deposit Insurance Corporation), reduce systemic risk
and provide essential liquidity to capital markets because of the funds’ investments in
commercial paper, municipal securities and repurchase agreements.

Role of Government and Role of Central Bank (RBI):

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ROLE OF GOVERNMENT:
To increase the constancy of Financial Institutions and Markets Government intervenes in
the interest rates and money supply in the Money Markets. Government has several ways to
control income and interest rates which can be divided into two broad groups such as,

 Fiscal policy
 Monetary policy

The government to adjust the exchange rate intervenes with the foreign exchange markets;
there may be a result on the financial base and the supply of money. When the currency is
falling, foreign currencies should be sold and the currency should be bought to steady its
price. The use of deposits of the national currency to do this suggest that the prepared
deposits of the banking sector must be reduced, causing the financial base to fall, affecting
the supply of money. Equally by selling the national currency to decrease its rate, the
monetary base will increase. Securities may be sold on the open market in an effort to
dampen the effects of inflows of the national currency, but this would imply a raise in
interest rates and cause the currency to rise further still. A number of institutions can affect
the supply of money but the greatest impact on the money supply is had by the Reserve
bank and the commercial banks. By raising or lowering interest rates the demand for money
is respectively reduced or increased. If it sets them at a certain level it can clear the market
at level by supplying sufficient money to match the demand. Alternatively it could fix the
money supply at a convinced rate and let the market clear the interest rates at the balance.
Trying to fix the money supply is not easy so central banks regularly set the interest rate
and provide the amount of money the market demands.

ROLE OF CENTRAL BANK (RBI):

• Firstly the central bank could do this by setting a necessary reserve ratio, which would
restrict the ability of the commercial banks to increase the money supply by loaning out
money. If this condition were above the ratio the commercial banks would have wished to
have then the banks will have to create fewer deposits and make fewer loans then they
could otherwise have profitably done. If the central bank imposed this requirement in order
to reduce the money supply, the commercial banks will probably be unable to borrow from
the central bank in order to increase their cash reserves if they wished to make further
loans. They might try to attract further deposits from customers by raising their interest
rates but the central bank may retaliate by increasing the necessary reserve ratio.

• The central bank can influence the supply of money through special deposits. These are
deposits at the central bank which the banking sector is required to lodge. These are then
frozen, thus preventing the sector from accessing them even though interest is paid at the
average Treasury bill rate. Making these special deposits reduces the level of the
commercial banks’ operational deposits which forces them to cut back on lending.

• The supply of money can also be prohibited by the central bank by adjusting its interest
rate which it charges when the commercial banks wish to borrow money (the discount rate).

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Banks generally have a ratio of cash to deposits which they consider to be the minimum
safe level. If command for cash is such that their reserves fall below this level they will able
to borrow money from the central bank at its discount rate. If market rates were 8% and the
discount rate were also 8%, then the banks might decrease their cash reserves to their
minimum ratio knowing that if demand exceeds supply they will be able to borrow at 8%.
The central bank, even if, may raise its discount rate to a value above the market level, in
order to encourage banks not to reduce their cash reserves to the minimum during excess
loans.

Chapter: 3

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INDIAN MONEY MARKET:

The Indian market can be classified into organized and unorganized sectors. The
unorganized sector consists of money lenders, chit funds, and indigenous bankers. These
people satisfy the credit requirement of a large section of the rural masses. The organized
part comprises commercial banks in India both public sector and private sector banks and
foreign banks. The Reserve bank of India the apex bank is the regulator of the money
market in India. It regulates the flow of the credit and money in the economy. To influence
the liquidity in the system the RBI intervenes in the money market from time to time either
to augment or reduce the supply of credit. The open market operation of the RBI provides
signals for other segments of the financial system regarding the future monetary and credit
policy of the apex bank.

THE WEAKNESS OF THE INDIAN MONEY MARKET:

The indigenous bankers and money lenders are still dominating the semi-urban and rural
areas in India. In India the organized and unorganized money markets exist side by side.
This is a major weakness to the Indian money market. The unorganized money markets
follow its own rules and regulation of banking and finance so it does not come into the
purview of RBI rules and regulations. In the recent days there are large number of Nonbank
Financial companies (NBFC) have come up raising deposits from the public. These
NBFC’s perform functions like lending, investing, hire purchase etc. these institutions are
not effectively controlled by the RBI. There is an absence of a well-organized banking
system. Though developed to some extent in the recent years their presence is insignificant
in rural areas even today. The absence of banking facilities to the rural masses due to slow
branch expansion in the country is a matter of concern.

GROWTH OF MONEY MARKET IN INDIA:

While the need for long term financing is met by the capital or financial markets, money
market is a mechanism which deals with lending and borrowing of short term funds. Post
reforms period in India has witnessed tremendous growth of the Indian money markets.
Banks and other financial institutions have been able to meet the high expectations of short
term funding of important sectors like the industry, services and agriculture. Functioning
under the regulation and control of the Reserve Bank of India (RBI), the Indian money
markets have also exhibited the required maturity and resilience over the past about two
decades. Decision of the government to allow the private sector banks to operate has
provided much needed healthy competition in the money markets, resulting in fair amount
of improvement in their functioning.

MONEY MARKET MUTUAL FUND:

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A money market mutual fund is a kind of mutual fund that invests in ultra-safe or low risk
securities. The purpose of the fund is to conserve the capital of the fund and it is unusual to
see the NAV of a money market mutual fund go below one. The NAV can go below one if
the securities do badly but it is quite rare to happen.

A money market fund is a mutual fund that invests solely in money market instruments.
Money market instruments are forms of debt that mature in less than one year and are very
liquid. Treasury bills make up the bulk of the money market instruments. Securities in the
money market are relatively risk-free. Money market funds are generally the safest and
most secure of mutual fund investments.

The goal of a money-market fund is to preserve principal while yielding a modest return.
Money-market mutual fund is akin to a high-yield bank account but is not entirely risk free.
When investing in a money-market fund, attention should be paid to the interest rate that is
being offered.

DEFECTS OF INDIAN MONEY MARKET:

Money market is the market for lending and borrowing of short term funds. A well
developed money market denotes an implementation of effective monetary policy. But the
Indian money market suffers from many weaknesses.

1. LACK OF INTEGRATION:

The Indian Money Market is divided into two sectors viz, the organized and unorganized
money market. But both the markets are completely separate from each other. They are
working independently and have little effect on each other. RBI is fully effective in
controlling the organized sector. But, it has very less control on the unorganized sector.

2. LACK OF RATIONAL INTEREST RATES STRUCTURE:

The Indian Money Market exist too many interest rates. For example, the deposit and
lending rates of commercial banks, the borrowing rate of Government etc. In the past these
created excess demand for credit and the RBI had to rely often on cash reserve ratio.
Though the RBI has tried to bring rationality in the interest rates, the situation in the Indian
money market is still not effective.

3. EXISTENCE OF UNORGANISED MONEY MARKET:

The existence of the unorganized sector in money market still prevails in Indian Money
Market. The indigenous banker does not make any distinction between short term and long-
term finance. They have no coordination with each other and have no link with other
banking sectors. They do not follow any sound banking regulations. The RBI has no control
over these bankers.

4. ABSENCE OF AN ORGANISED BILL MARKET:

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In Indian Money Market, there is an absence of adequate bill market. There is an absence of
commercial bill market or a discount for short term commercial bills. There are many
factors responsible for the underdeveloped bill market such as

(i) relying more on cash transaction,

(ii) cash credit of commercial bank,

(iii) seller’s limited use of bills,

(iv) imposition of heavy stamp duty,

(v) absence of acceptance houses etc.

5. SHORTAGE OF FUNDS IN THE MONEY MARKET:

The lack of banking habit, inadequate banking facility, less saving habit, etc created has
shortage of fund in the money market. On the other hand, the increasing demand for loan
able funds in the money market far exceeds its supply.

6. INADEQUATE BANKING FACILITY:

Now-a-days, the commercial banks have opened many new branches of banking facilities.
But, it still leaves much scope for further development. In a developing country like India,
people live below poverty line and have less saving habit. Their savings are very small and
they do not have much access to banking facilities till now.

7. SEASONAL STRINGENCY OF MONEY:

During the part of the year the interest rates are become high due to the increasing demand
for funds in the money market for the operation in the agricultural sector. Basically, it is
seen in the period from October to June.

Measure:
The major drawback of India Money Market is its high volatility. Gradually the money
market transaction is increasing. But, on the recommendation of the Sukhmoy Chakravarty
Committee (on the review of the working of the Monetary System) and the Narasimham
committee (on the Report on the working of the financial system in India, 1991), RBI
initiated a series of reform in Indian Money Market. The following are some of the
measures undertaken:

1. INTRODUCING NEW MONEY MARKET INSTRUMENT:

Many new money market instruments are introduced like Commercial Papers, Certificates
of Deposits, 182-day Treasury, 364-day Treasury etc. The Discount and Finance House
have also developed. These facilitate different short term borrowings to the different
borrowers to collect fund as and when required to maintain their financial position.

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2. RELAXATION OF INTEREST RATE REGULATIONS

The all types of interest rates like lending as well as deposit rates of the banks and financial
institution are controlled and regulated by RBI. But, gradually the interest rates of the bank
loans are controlled by the market forces which result decontrolled of it.

3. REMITTING THE STAMP DUTIES:

In August 1989, Government remitted the stamp duty. But, it is not effective till it
discourages the cash credit system in favour of using the bill system.

4. SECTOR SPECIFIC REFINANCE:

Export credit refinance and general refinance are two refinance schemes that are in
operation in the current financial system. The refinance is used by the central bank to
control credit conditions and the liquidity positions in the system.

5. INTRODUCTION OF REPO:

This is used by the banks for short term liquidity through sale or purchase of debt
instruments. It is an agreement to repurchase them at a predetermined rate and date between
the RBI and commercial banks.

6. INTRODUCING MONEY MARKET MUTUAL FUNDS:

The Money Market Mutual Funds were introduced in April 1991. The collection of the
small savings invested generates short term avenues to the different investors.

7. SETTING THE DISCOUNT AND FINANCE HOUSE IN INDIA:

The DFHI equilibrated the surplus of fund and the deficit amounts of the banks. The DFHI
helps in lending and borrowing of funds to the different banks as well as financial
institutions.

Money market rates also reflect market expectations of how the policy rate could evolve in
the near term. As per standard expectations hypothesis, money market rates for different
time duration should equal expected future short-term rates, plus term premium and risk
premium. Bernanke (2004) had examined how expectations of the likely future course of
the federal funds rate respond to the Federal policy actions and statements. Our findings
support the view that FOMC statements have proven a powerful tool for affecting market
expectations about the future course of the federal funds rate.

Chapter: 4

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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. The 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. Though the LAF helped to
develop interest rate as an instrument of monetary transmission, two major weaknesses
came to the fore. First was the lack of a single policy rate, as the operating policy rate
alternated between repo during deficit liquidity situation and reverse repo rate during
surplus liquidity condition. Second was the lack of a firm corridor, as the effective
overnight interest rates dipped (rose) below (above) the reverse repo (repo) rate in extreme
surplus (deficit) conditions.

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REFERENCE:

WEBLIOGRAPHY:

 www.fxcmmarkets.com
 www.kkhsou.in/main/EVidya2/commerce/indian_money.htm
 study-material4u.blogspot.com/.../chapter-5-indian-money-market.html
 www.rbi.org.in/scripts/bs_viewmmo.asp
 www.vitt.in/market/money

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