Economics-II

BILLS AND BONDS MONEY MARKET IN INDIA

Submitted by

Sushmita Kujur

B.A.LL.B (Hons), Batch 2013-18

(Reg. no: BA0130066)

Submitted to:

Assistant prof. Balachamdran Sathyan

TAMIL NADU NATIONAL LAW SCHOOL

Trichy

2015

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 CERTIFICATE

This is to certify that the project entitled “Bills and bonds money market in India” submitted
to Tamil Nadu National Law School in partial fulfillment of the requirement of the award of the
degree of B.A. LL.B (Hons) done by Miss Sushmita Kujur {Economics-II} under the
supervision and guidance of Assistant prof. Balachandran Sathyan Under Graduate Department
of Tamil Nadu National Law School.

Place: Tiruchirappalli Assistant prof. Balachandran Sathyan

Date: 23rdApril, 2015 (mentor)

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 DECLARATION

I do hereby declare that the project work entitled “Bills and bonds money market in India ”
submitted to Tamil Nadu National Law School, in partial fulfillment of the requirement of the
award of degree B.A.LLB. (Hons) is record of original work done by me under the supervision
and guidance of Assistant prof. Balachandran Sathyan, Under Graduate Department of Tamil
Nadu National Law School, and that has not formed the basis for the award of any degree or
diploma or fellowship or any other title to any candidate of any other university.

Place: Tiruchirappalli SushmitaKujur

Date: 23rdApril, 2015

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 ACKNOWLEDGEMET
The outcome of this project work has bee possible only with the help and support, inspirations
and academic assistance from various people.

I am thankful to Prof. Mr. Balachandran Sathyan, Assistant professor of Tamil Nadu National
Law School, who stood as a pillar of support and encouraged in completing my project work.

I extend my heart feet thanks to my lovable friends, who provided me moral support and stood
my side at all time.

Last but not least I thank “The Almighty” for keeping me fit and healthy furing the entire project
work.

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 CONTENTS
CHAPTER-I

I. Introduction

CHAPTER-II

II. ORGANIZED AND UNORGANIZED

1. Unorganized Indian Money Market
 Unregulated Non-Bank Financial Intermediaries
 Indigenous Bankers
 Moneylenders
2. Organized Indian Money Market
 Call Money Market
 Treasury Money Market
 Ready Forward Contract
 Commercial Bill Market
 Certificate of Deposit Market
 Money Market Mutual Funds
 Commercial Paper Market

CHAPTER-III

III. THE ROLE OF RESERVE BANK

IV. CHARACTERISTICS OF THE INDIAN MONEY MARKET
V. REFORM MEASURES TO STRENGTHEN THE INDIAN MONEY MARKET
VI. CONCLUSION

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 INTRODUCTION
Bills, as the table "Treasury Securities at a Glance" indicates, are short-term instruments with
maturities of no more than one year. They fill investment needs similar to money market funds
and savings accounts. They could be a place to "hold" money an investor may need to be able to
access quickly, for example in the event of an emergency. The Treasury bill market is highly
liquid; investors can quickly convert bills to cash through a broker or bank. Treasury bills
function like zero-coupon bonds, which do not pay periodic interest payments. Investors buy
bills at a discount from the par, or face value, and then receive the full amount when the bill
matures. For example, an individual could buy a 26-week bill that pays the full $1,000 at
maturity for $970.28 at the time of purchase, effectively earning an annualized yield of 6.28% on
the investment.
Bonds cover terms of longer than 10 years, and are currently being issued in maturities of 30
years. Interest is also paid semi-annually.

As money became a commodity, the money market became a component of the financial
markets for assets involved in short-term borrowing, lending, buying and selling with original
maturities of one year or less.

Money market, which provide liquidity for the global financial system, and capital markets make
up the financial market or the money market.

The Money market in India is the money market for short-term and long-term funds with
maturity ranging from overnight to one year in India including financial instruments that are
deemed to be close substitutes of money.1 Similar to developed economies the Indian money
market is diversified and has evolved through many stages, from the conventional platform
of treasury bills and call money to commercial paper, certificates of deposit, repos, forward rate
agreements and most recently interest rate swaps.2

The Indian money market consists of diverse sub-markets, each dealing in a particular type of
short-term credit. The money market fulfills the borrowing and investment requirements of
providers and users of short-term funds, and balances the demand for and supply of short-term

1
"Report on Currency and Finance", Reserve Bank of India. Retrieved 4 October2011.
2
""Structure & Functions of Money Market in India", GKToday, Retrieved 22 April 2015.

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funds by providing an equilibrium mechanism. It also serves as a focal point for the central
bank's intervention in the market.

The Indian money market consists of the unorganised sector: moneylenders, indigenous bankers,
and unregulated Non-Bank Financial Intermediaries (e.g. Finance companies, Chit funds,
Nidhis); organized sector: Reserve Bank of India, private banks, public sector banks,
development banks and other non-banking financial companies (NBFCs) such as Life Insurance
Corporation of India (LIC), the International Finance Corporation, IDBI, and the co-operative
sector.

ORGANIZED AND UNORGANIZED

The Indian Money market is divided into two parts, viz., the unorganized and the organized.

Unorganized Indian Money Market

Unorganized non-bank financial intermediaries such as finance companies, chit funds, nidhis,
etc., indigenous bankers, and money lenders operate in the unorganized sector of the Indian
money market. Lending of the money lenders are rather small, but some finance companies, chit
funds and indigenous bankers do a considerable amount of business. They pursue banking
business in traditional lines.

 Unregulated Non-Bank Financial Intermediaries: Chit funds and nidhis, comes under
Unregulated Non-Bank Financial Intermediaries.
The chit funds are savings institutions. They are of various types lacking any
standardised form. A chit fund has regular members who make periodical subscriptions
to the fund. The periodic collection is given to some member of the chit fund selected on
the basis of previously agreed criterion. Normally, the selection of the beneficiary is
made either on the basis of bids or by draw of lots. In any case, each member of the chit
fund is assured of his turn before the second round starts and any member becomes
entitled to get periodic collection again. The chit fund business is now done in all the
states but Kerala and Tamil Nadu account for the major part of total chit fund business.
Estimates of deposits received by the chit fund companies and their annual turnover are

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 not available. The RBI has absolutely no control over the lending activities of the chit
funds.
The nidhis operate particularly in South India. They are in their character as some kind
of mutual benefit funds because their dealings are restricted only to the members. Since
the nidhis regulate in the unregulated credit market, there is hardly any information
available about the amount of lending business done by them. However, the deposits
mobilized by them are not much. The principle source of funds is deposited from the
members. The loans are given to the membersat relatively reasonable rates for purposes
such as house construction or repairs, etc., and are secured. The nidhis are highly
localizedsingle office institutions. Mainly middle class families in urban centers have
shown interest in this institution.
 Indigenous Bankers: Indigenous Bankers are individuals or private firms, which
receive deposits and give loans and thereby operate as banks. Since their activities are
not regulated, they belong to the unorganized segment of the money market.
Over the past four decades, the indigenous bankers have faced stiff competition from the
commercial or cooperative banks.
The indigenous bankers are engaged in non-banking business also and are unwilling to
separate their banking and non-banking activities.
 Moneylenders: Moneylenders do not constitute one homogenous category. Broadly they
are of two types:
1. Professional moneylenders whose main activity is money ending.
2. Non-professional moneylenders whose main source of income is not money
lending.

The methods of operation of the moneylenders are not uniform. Their activities are
generally localized.

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 Organized Indian Money Market

The organized sector of the Indian Money Market comprises the RBI, commercial banks, foreign
banks, cooperative banks, finance corporations, mutual funds and the Discount and Finance
House of India Limited (DFHI).

1. Call Money Market: The call money market deals in short term finance repayable on
demand, with a maturity period varying from one day to 14 days. S.K. Muranjan
commented that call loans in India are provided to the bill market, rendered between
banks, and given for the purpose of dealing in the bullion market and stock exchanges. 3
Commercial banks, both Indian and foreign, co-operative banks, Discount and Finance
House of India Ltd. (DFHI), Securities trading corporation of India (STCI) participate as
both lenders and borrowers andLife Insurance Corporation of India (LIC), Unit Trust of
India (UTI), National Bank for Agriculture and Rural Development (NABARD)can
participate only as lenders. The interest rate paid on call money loans, known as the call
rate, is highly volatile. It is the most sensitive section of the money market and the
changes in the demand for and supply of call loans are promptly reflected in call rates.
There are now two call rates in India: the ‘Inter bank call rate' and the ‘Lending rate of
DFHI’. The ceilings on the call rate and inter-bank term money rate were dropped, with
effect from May 1, 1989. The Indian call money market has been transformed into a pure
inter-bank market during 2006–07. The major call money markets are in Mumbai,
Kolkata, Delhi, Chennai, Ahmedabad.4

2. Treasury Money Market: Treasury bills are instrument of short-term borrowing by

the Government of India, issued as promissory notes under discount. The interest
received on them is the discount which is the difference between the price at which they
are issued and their redemption value. They have assured yield and negligible risk of
default. Under one classification, treasury bills are categorised as ad hoc, tap and auction
bills and under another classification it is classified on the maturity period like 91-days

3
S.K. Muranjan (1952). Modern Banking in India. Bombay: Kamala Publishing House. pp. 98, 138.
4
Bhole L.M., MahakudJitendra. Financial Institutions and Markets (Fifth ed.). New Delhi: Tata McGraw-Hill
Education Pvt Ltd. p. 603.

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 TBs, 182-days TBs, 364-days TBs and two types of 10-days TB’s. In the recent times
(2002–03, 2003–04), the Reserve Bank of India has been issuing only 91-day and 364-
day treasury bills. The auction format of 91-day Treasury bill has changed from uniform
price to multiple price to encourage more responsible bidding from the market
players.5 The bills are two kinds- Adhoc and regular. The adhoc bills are issued for
investment by the state governments, semi government departments and foreign central
banks for temporary investment. They are not sold to banks and general public. The
treasury bills sold to the public and banks are called regular treasury bills. They are freely
marketable. Commercial bank buy entire quantity of such bills issued on tender. They are
bought and sold on discount basis. Ad-hoc bills were abolished in April 1997.

3. Ready Forward Contract: Repo is an abbreviation for Repurchase agreement, which

involves a simultaneous "sale and purchase" agreement.6 When banks have any shortage
of funds, they can borrow it from Reserve Bank of India or from other banks. The rate at
which the RBI lends money to commercial banks is called repo rate, a short term
for repurchase agreement. A reduction in the repo rate will help banks to get money at a
cheaper rate. When the repo rate increases borrowing from RBI becomes more expensive.

4. Commercial Bill Market: The commercial Bill Market is the sub-market in which the
trade bills or the commercial bills are handled. They are instruments of credit are useful
in both business firms and banks. In addition, since the drawees of the bill generally
manage to recover the cost of good from their resale or processing and sale during the
time it matures, the bill acquires a self-liquidating character. Finally it is easier for the
central bank to regulate bill finance.
5. Certificate of Deposit Market: A certificate of deposit is acertificate issued by a bank to
depositors of funds that remain on depositors o funds that remain on deposit at the bank
for a specified period. Thus, CDs are similar to the traditional term deposits but are
negotiable and tradable in the short-term money markets.

5
"RBI, Annual Report, 2002–03" (PDF). p. 188.
6
D.K. Murthy, Venugopal. Indian Financial System. I.K. International Publishing House Pvt. Ltd. p. 20.

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 In March 1989, the RBI introduced CDs with the objective of the winding the range of
money market instruments and to provide investors greater flexibility in the development
of their short-term surplus funds.

6. Money Market Mutual Funds: Money market mutual funds invest money in
specifically, high-quality and very short maturity-based money market instruments. The
RBI has approved the establishment of very few such funds in India. In 1997, only one
MMMF was in operation, and that too with very small amount of capital.7

7. Commercial Paper Market: The commercial paper is the short-term investment of

raising funds by corporates. It is essentially a sort of unsecured promissory note sold by
an issuer to a banker or a security house.

THE ROLE OF RESERVE BANK

The influence of the Reserve Bank of India's power over the Indian money market is confined
almost exclusively to the organised banking structure.It is also considered to be the biggest
regulator in the markets. There are certain rates and data, which are released at regular intervals
which have a huge impact on all the financial markets in INDIA. The unorganised sector, which
consists mostly of indigenous bankers and non-banking financial companies, although occupying
an important position in the money market have not been properly integrated with the rest of the
money market.8

7
D.K. Murthy, Venugopal. Indian Financial System. I.K. International Publishing House Pvt. Ltd. p. 24.
8
RuddarDatt&K.P.M.Sundharam (2010)."49". Indian Economy (Sixty one ed.). S. Chand & Co. Ltd. pp. 864, 865.

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 CHARACTERISTICS OF THE INDIAN MONEY MARKET

1. Lack of Integration: The Indian money market if divided into two sectors viz., the
unorganized sector, and the organized sector. As the two sectors are completely separate
from each other their financial operations are quite independent, and whatever goes on in
one sector has little effect on the other.
There is more of competition than cooperation and coordination between various
components of the Indian Monet Market.

2. Lack of rational interest rates structure:For a long time a major defect of the Indian
money market has been lack of rational interest rates structure. The number of
administered rates on bank advances was reduced to 2 from 20 in 1989-1990. Further,
interest rate structure was also deregulated.

3. Absence of an organized bill market: Due to the presence of inter-bank call money
market, commercial banks never felt the real necessity of an organized bill market.

4. Shortage of Funds in the money market: Invariably demand for loanable funds in the
money market far exceeds its supply.

5. Seasonal stringency of funds and fluctuations in interest rates: Had the money market
been sufficiently elastic and the supply of funds could be augmented more or less
automatically in response to seasonal rise in the demand, interest rates would have been
very much stable.
6. Inadequate banking facilities: Compared to the USA where per 1,200 persons there is a
branch of a commercial bank, in India, we have a branch on an average for roughly
15,900 persons.

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 REFORM MEASURES TO STRENGTHEN THE INDIAN MONEY MARKET

The money market in India does not satisfy the criteria for a developed money market.
Moreover, in terms of organization, resources, stability and elasticity it is hardly comparable to
London and New York money markets.

The RBI and the Government have taken various measures to strengthen the Indian money
market over the years. Of these the following are important:

1. Remitting the stamp duty.

2. Deregulation of money market interest rates.
3. Introducing new money market instruments.
4. Introduction of repos and reverse repos.
5. Setting the discount and finance house of India.
6. Introducing Money Market mutual funds.
7. Developing call/notice money market.
8. Removing constraints on development of the term money market.
9. Sector-specific refinance facilities.

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 CONCLUSION

A review of money market development in India and its current states shows that India is not
lagging behind in any significant manner. According to Y.N. Reddy,

" While a base has been created with a variety of products in a money market, the market has not
acquired the required depth in terms of both volume and liquidity."

It is widely expected that the institutional and other reforms will provide the necessary depth in
future. With that the Indian Money Market will get integrated with debt and foreign exchange
markets and may pave the way for the RBI's increased use of indirect tools of monetary
regulation.

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