EXECUTIVE SUMMARY

The seventh largest and second most populous country in the world, India has long been
considered a country of unrealized potential. A new spirit of economic freedom is now
stirring in the country, bringing sweeping changes in its wake. A series of ambitious economic
reforms aimed at deregulating the country and stimulating foreign investment has moved
India firmly into the front ranks of the rapidly growing Asia Pacific region and unleashed the
latent strengths of a complex and rapidly changing nation India's process of economic reform
is firmly rooted in a political consensus that spans her diverse political parties.
India's democracy is a known and stable factor, which has taken deep roots over nearly half a
century. Importantly, India has no fundamental conflict between its political and economic
systems .Its political institutions have fostered an open society with strong collective and
individual rights and an environment supportive of free economic enterprise .India's time
tested institutions offer foreign investors a transparent environment that guarantees the
security of their long term investments. These include a free and vibrant press, a judiciary
which can and does overrule the government, a sophisticated legal and accounting system and
a user friendly intellectual infrastructure.

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. Trading in money markets is done over the counter and
is wholesale.

There are several money market instruments, including treasury bills, commercial
paper, bankers' acceptances, deposits, certificates of deposit, bills of exchange, repurchase
agreements, federal funds, and short-lived mortgage- and asset-backed securities.

The money market consists of financial institutions and dealers in money or credit who wish
to either borrow or lend. Participants borrow and lend for short periods, typically up to
thirteen months. Money market trades in short-term financial instruments commonly called
"paper". This contrasts with the capital market for longer-term funding, which is supplied
by bonds and equity.Financial instruments are an essential segment of financial system
.Financial instruments are the foundations of a modern economy. The project mainly focuses
on financial instruments available for investment to an investor. The project also includes
primary and secondary data.

1. INTRODUCTION

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Since liberalization, the Indian economy has seen continuous growth in every sphere of the
financial system. A financial system is basically a link between different savers (individuals,
corporates, governments, and others) with the investors resulting in the development of the
nation. India has been traditionally known as a country of saver. With the opening up of the
Indian markets coupled with various reforms the country has been projected as a very strong
market place in the world. Moreover the limited effect of the global recession around the year
2008 has ensured the faith of all stake holders of the world on the Indian financial system.

The financial system ensures that the resources are duly mobilized to the ultimate end as well
as the production and all allied services can be conducted in a smooth and efficient manner.
For this purpose the capital market and the money market act as a pillar to the system. The
capital market is a market where mostly long term industrial and government securities are
traded. This market also comprises of the long term loan market and STRIPS (separate
trading of registered interest and Principal of securities). The money market on the other hand
ensures the free flow of the short term funds and maintains liquidity provisions.

Money market is a collective name given to all the institutions that are dealing in short-term
funds. It does not refer to a particular place.

Dealers in Money Market

Dealers in the money market are spread throughout the country. Short-term funds are required
for working capital requirements, both in agriculture as well as in industry. Without the short-
term funds, agricultural and industrial activities in the country will come to a halt. When
agricultural and industrial activities are affected, they in turn affect production, trade,
business, employment and income and thereby the economic growth of the country.

Instruments dealt in Money Market

The short-term funds are borrowed by manufacturers, industrialists, traders, businessmen and
even by government which issue credit instruments. These are cheques, bills, promissory
notes, commercial paper, treasury bills and short-dated Government Bonds. These are called
near money. Near money is one which has claim over money and is convertible into money.
1. The bills, consisting of treasury bills are issued by the government.
2. Trade bill, issued by the traders arising out of trade transactions.
3. Finance bill, issued by businessmen for raising short-term funds for business transactions.

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4. Treasury bills are issued at discount by the Government when it requires temporary loans
after calling for tenders, and usually payable in full after 3 months.
5. Foreign bills arising out of foreign transactions either in the form of trade or executing any
projects in foreign country.
Commercial paper is one which is issued by a leading commercial house and it will enable
businessmen to borrow money in the market. These commercial papers carry credit
worthiness, due to the commercial house which is issuing the commercial paper. Short dated
bonds are issued either by government or by quasi government institutions for the purpose of
raising short-term funds.

CONSITITUTENTS OF MONEY MARKET

There are two sets of people in the money market. One is the borrower and other is
the lender.
Who are the borrowers in money market?

Borrowers in money market consists of Government (the biggest borrower), Agriculturists

(for meeting cost of cultivation), Traders, Businessmen, Commercial Banks and Non-Banking
financial companies (NBFCs)

Who are the lenders in money market?

Lenders in money market includes Central Banks, Commercial banks, Co-operative banks,
Foreign banks, Commercial house, Non-banking financial companies (Chit companies,
Nidhis, Benefit societies, finance companies, factoring companies), Money lenders and
indigenous bankers.

Commercial banks and non-banking financial companies are found both on the borrowing
side as well as on the lending side. The commercial banks borrow from the Central bank and
then lend to the businessmen. Non-banking financial companies borrow from the public or
accept deposits from the public and finance others’ activities.

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 1.1 Objectives of the Study

1. To study the concept of money market and instruments traded in organised manner.

2. To understand the procedure of investing in money market.

3. To understand the perception of investors towards the instruments of money market.

4. To study the limitations of money market and its instruments.

5. To analyse the market share of these instruments.

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 1.2 RESEARCH METHODOLOGY
Primary Data: Data which has not been previously published i.e. the data is derived from
a new or original research study & collected directly from first hand sources by means of
surveys observation or experimentation is known as Primary Data.

Secondary Data: Data which has already been collected by someone or an organization
for some other purpose or research study is known as Secondary Data.

Method of Data Collection:

Secondary Data: Secondary Data was collected from various sources such as books, internet,
and newspapers. Secondary data are those which have already been collected by someone
else and which have already passed through the statistical process.Secondary data was
collected from the company website, Company Brochures, Periodicals and past records,
company’s reports, magazines & Reports, Websites, Books,Magazines, Journals newspapers
etc. Secondary data consists of information that already exists somewhere, having been
collected for another purpose.

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 2. PROFILE OF THE COMPANY: RESERVE BANK OF INDIA

2.1 ABOUT THE COMPANY

The Reserve Bank of India (RBI) is India's central banking institution, which controls the
monetary policy of the Indian rupee. It commenced its operations on 1 April 1935 during the
British Rule in accordance with the provisions of the Reserve Bank of India Act, 1934.[6] The
original share capital was divided into shares of 100 each fully paid, which were initially
owned entirely by private shareholders.[7] Following India's independence on 15 August
1947, the RBI was nationalised on 1 January 1949.[8]

The RBI plays an important part in the Development Strategy of the Government of India. It
is a member bank of the Asian Clearing Union. The general superintendence and direction of
the RBI is entrusted with the 21-member Central Board of Directors: the Governor, 4 Deputy
Governors, 2 Finance Ministry representatives, 10 government-nominated directors to
represent important elements of India's economy, and 4 directors to represent local boards
headquartered at Mumbai, Kolkata, Chennai and New Delhi. Each of these local boards
consists of 5 members who represent regional interests, the interests of co-operative and
indigenous banks.

The Central Bank was an independent apex monetary authority which regulates banks and
provides important financial services like storing of foreign exchange reserves, control of
inflation, monetary policy report till 2016 August. A Central Bank is known by different
names in different countries. The functions of a Central Bank vary from country to country
and are autonomous or quasi-autonomous body and perform or through another agency vital
monetary functions in the country. A central bank is a vital financial apex institution of an
economy and the key objects of central banks may differ from country to country still they
perform activities s and functions with the goal of maintaining economic stability and growth
of an economy.

The bank is also active in promoting financial inclusion policy and is a leading member of the
Alliance for Financial Inclusion (AFI).

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 2.2 HISTORY
The Reserve Bank of India was founded on 1 April 1935 to respond to economic troubles
after the First World War. The Reserve Bank of India was conceptualized based on the
guidelines presented by the Central Legislative Assembly which passed these guidelines as
the RBI Act 1934. RBI was conceptualized as per the guidelines, working style and outlook
presented by Bhimrao Ramji Ambedkar in his book titled “The Problem of the Rupee – Its
origin and its solution” and presented to the Hilton Young Commission. The bank was set up
based on the recommendations of the 1926 Royal Commission on Indian Currency and
Finance, also known as the Hilton–Young Commission.[13] The original choice for the seal
of RBI was The East India Company Double Mohur, with the sketch of the Lion and Palm
Tree. However, it was decided to replace the lion with the tiger, the national animal of India.
The Preamble of the RBI describes its basic functions to regulate the issue of bank notes,
keep reserves to secure monetary stability in India, and generally to operate the currency and
credit system in the best interests of the country.[14] The Central Office of the RBI was
established in Calcutta (now Kolkata) but was moved to Bombay (now Mumbai) in 1937. The
RBI also acted as Burma's (now Myanmar) central bank until April 1947 (except during the
years of Japanese occupation (1942–45)), even though Burma seceded from the Indian Union
in 1937. After the Partition of India in 1947, the bank served as the central bank for Pakistan
until June 1948 when the State Bank of Pakistan commenced operations. Though set up as a
shareholders’ bank, the RBI has been fully owned by the Government of India since its
nationalization in 1949.[15]RBI has monopoly of note issue.

The Foreign Exchange Management Act from 1999 came into force in June 2000. It should
improve the item in 2004–2005 (National Electronic Fund Transfer).[30] The Security
Printing & Minting Corporation of India Ltd., a merger of nine institutions, was founded in
2006 and produces banknotes and coins.

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 2.3 FUNCTIONS OF RESERVE BANK OF INDIA
Financial Supervision:-

The primary objective of BFS is to undertake consolidated supervision of the financial sector
comprising commercial banks, financial institutions and non-banking finance companies.

The Board is constituted by co-opting four Directors from the Central Board as members for
a term of two years and is chaired by the Governor. The Deputy Governors of the Reserve
Bank are ex-officio members. One Deputy Governor, usually, the Deputy Governor in charge
of banking regulation and supervision, is nominated as the Vice-Chairman of the Board. The
Board is required to meet normally once every month. It considers inspection reports and
other supervisory issues placed before it by the supervisory departments.

BFS through the Audit Sub-Committee also aims at upgrading the quality of the statutory
audit and internal audit functions in banks and financial institutions. The audit sub-committee
includes Deputy Governor as the chairman and two Directors of the Central Board as
members. The BFS oversees the functioning of Department of Banking Supervision (DBS),
Department of Non-Banking Supervision (DNBS) and Financial Institutions Division (FID)
and gives directions on the regulatory and supervisory issues.

Regulator and supervisor of the financial system:-

The institution is also the regulator and supervisor of the financial system and prescribes
broad parameters of banking operations within which the country's banking and financial
system functions. Its objectives are to maintain public confidence in the system, protect
depositors' interest and provide cost-effective banking services to the public. The Banking
Ombudsman Scheme has been formulated by the Reserve Bank of India (RBI) for effective
addressing of complaints by bank customers. The RBI controls the monetary supply, monitors
economic indicators like the gross domestic product and has to decide the design of the rupee
banknotes as well as coins.

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Managing of exchange control:-

The central bank manages to reach different goals of the Foreign Exchange Management Act,
1999. Objective: to facilitate external trade and payment and promote orderly development
and maintenance of foreign exchange market in India

Issue of currency and other Functions:-

The bank issues and exchanges currency notes and coins and destroys the same when they are
not fit for circulation. The objectives are to issue bank notes and give public adequate supply
of the same, to maintain the currency and credit system of the country to utilize it in its best
advantage, and to maintain the reserves. RBI maintains the economic structure of the country
so that it can achieve the objective of price stability as well as economic development
because both objectives are diverse in themselves. For printing of notes, the Security Printing
and Minting Corporation of India Limited (SPMCIL), a wholly owned company of the
Government of India, has set up printing presses at Nashik, Maharashtra and Dewas, Madhya
Pradesh. The Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL), also has
set up printing presses in Mysore in Karnataka and Salboni in West Bengal. In all, there are
four printing presses.[45] And for the minting of coins, SPMCIL has four mints at Mumbai,
Noida (UP), Kolkata and Hyderabad for coin production.[46] Commercial banks create
credit. It is the duty of the RBI to control the credit through the CRR, bank rate and open
market operations. As banker's bank, the RBI facilitates the clearing of cheques between the
commercial banks and helps the inter-bank transfer of funds. It can grant financial
accommodation to schedule banks. It acts as the lender of the last resort by providing
emergency advances to the banks. It supervises the functioning of the commercial banks and
takes action against it if the need arises.

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 2.4 REGULATORY POWERS OF RESERVE BANK OF INDIA

RBI exercises its regulatory powers in a number of ways such as:

 OPERATION MARKET OPERATIONS:

The technique of open market operations as an instrument of credit control is superior to bank
rate policy. The need for open market operation was felt only when the bank rate policy
turned out to be a rather weak, instrument of monetary control. According to some experts,
bank rate policy and open market operations are complementary measures in the area of
monetary management. Open market operation is mainly related to the sale of government
securities and during the busy s4eason, they sell the securities. When commercial banks sell
the securities and when RBI purchases them, the reserve position of the banks is improved
and they can expand their credit to meet growing demands.
Open market operations involve the sale and purchase of government securities by
RBI through its open window. The RBI adjusts the liquidity in the financial system by
its open market operations.

 CHANGES IN THE STATUTORY LIQUIDITY RATIO(SLR):

SLR is the minimum amount of liquid investments to be maintained by the banks.
Many a times, banks maintain SLR investments just up to the amount necessary. In
such a situation if there is an increase in SLR, the liquidity of the banks will be
reduced. This will be due to the transfer of assets from cash into securities.
Under the Banking Regulation Act (sec 24(2A» as amended in 1962, banks have to
maintain a minimum liquid assets of 25 per cent of their demand and time liabilities in
India. The Reserve Bank has, since 1970, imposed a much higher percentage of liquid
assets to restrain the pace of expansion of bank credit. SLR was fixed at 31.5 percent
of the net domestic and time liabilities (NDTL) on the base date 30-9-1994; and for
any increase in NDTL over the level as on September 30, 1994, the SLR was fixed at
25 per cent. Interbank deposits have been taken out of NDTL in April1997. The
overall effective SLR was estimated at 28.2 per cent at the end of March 1995 and
reduced to 25 per cent in October 1997. The average investments in Government
securities to deposits (IGS-D ratio) actually increased from 25.3% in'1980s to 30.4%
in 1990 on account of introduction of prudential norms which imparted discipline in
extending credit and auctions of government securities at market related rates.

 BANK RATE:

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Rate at which banks get finance or refinance facility from the RBI is the bank rate. Bank
rate is the rate charged by the central bank for rediscounting first class bills of exchange
and government securities held by Commercial Banks. The Bank rate policy affects the
cost and availability of credit to the Commercial Banks. When there is inflation the
central bank raises the bank rate. This will raise the cost of borrowing of the Commercial
Banks, so they will charge a higher rate of interest on their loans and advances to the
customer. This would lead to following effects: i) Rise in market rate of interest ii) Rise
in the cost of borrowing money from the banks iii) Decline in demand for credit leading,
to contraction of credit. When there is deflation in the economy, the central bank will
lower the bank rate. Opposite trend takes place leading to expansion of credit to the
economy. In short, an increase in the bank rate leads to rise in the rate of interest and
contraction of credit, which in turn adversely affects investment activities and the
economy as a whole. Similarly, a lowering of bank rate will have a reverse effect. When
the bank rate is lowered money market rate falls. Credit becomes cheaper. People
borrow, these leads to expansion of credit. This increases investment, which leads to
employment and increase in production. Economy gradually progresses. In India, the
bank rate has been of little significance except as an indicator of changes in the direction
of credit policy. The bank rate was changed nine times during the period 1951-74, but
only thrice during 1975-96. In 1997, it was changed thrice; in 1998 four times, twice in
1999 and once in 2000. It should become effective in the near future since interest rates
have been deregulated and market determined through the adoption of auction procedure
for treasury bills and government securities. Variations in bank rate have little
significance in a scenario where hardly any rates are linked to it and the amount of
refinance extended to banks at this rate is minimal.

 CHANGE IN CRR:
A cut in CRR enhances the loan-able funds with the banks. This reduces their
dependence on the money market instruments of the call and term money options. On
the Contrary if the CRR is raised, the banks will have to arrange funds from the
money market. The commercial banks have to keep with the central bank a certain

11
 percentage of their deposits in the form of cash reserves. In India initially CRR was 5
percent. In 1962 RBI was empowered to vary it between 3 to 15 percent since then it
has been increased or decreased a number of times. Increasing the CRR leads to credit
contraction and reducing it will lead to credit expansion. The CRR is applicable to all
scheduled banks including scheduled cooperative banks and the Regional Rural Banks
(RRBs) and non-scheduled banks. However, cooperative banks, RRBs, the non-
scheduled banks have to maintain the CRR of only 3 percent and so far it has not been
changed the RBI. The CRR for both the types of Non-Resident Indians (NRI) the RBI.
The CRR for both the types of Non-Resident Indians (NRI) accounts Non-Resident
(External) Rupee Account (NR(E)RA) and Foreign Currency (Non-Resident Accounts
(FCNRA) - was the same as for other types of deposits till 9th April 1982, the CRR
for these accounts was fixed at 3 percent. Subsequently, it was raised from time to
time. For example in July 1988, it was raised from 9.5 percent to 10 percent. The RBI
has powers to impose penal interest rates on banks in respect of their shortfall in the
prescribed CRR). CRR has been reduced to 10 percent in January 1997 and further to
8 percent (in stages of 0.25 percent per quarter over a two year period) and interbank
deposits have been exempted from April 1997

 CUT IN REPOS:
A cut in the repos will result in bringing down the call rates as well as other term
money rates. This enhance the depth of the existing market and facilities the active
secondary money market.

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 3. CONCEPTUAL FRAMEWORK

3.1 INTRODUCTION TO FINANCIAL SYSTEM

The economic scene in the post-independence period has seen a sea change; the end result
being that the economy has made enormous progress in diverse fields. There has been a
quantitative expansion as well as diversification of economic activities. The experiences of
the 1980s have led to the conclusion that to obtain all the benefits of greater reliance on
voluntary, market-based decision-making, India needs efficient financial systems. The
financial system is possibly the most important institutional and functional vehicle for
economic transformation. Finance is a bridge between the present and the future and whether
it be the mobilisation of savings or their efficient, effective and equitable allocation for
investment, it is the success with which the financial system performs its functions that sets
the pace for the achievement of broader national objectives.

Liberalisation of the Financial System

A radical restructuring of the economic system consisting of industrial deregulation,

liberalisation of policies relating to foreign direct investment, public enterprise reforms,
reforms of taxation system, trade liberalisation and financial sector reforms have been
initiated in 1992- 93. Financial sector reforms in the area of commercial banking, capital
markets and non-banking finance companies have also been undertaken. The focus of reforms
in the financial markets has been on removing the structural weaknesses and developing the
markets on sound lines. The money and foreign exchange market reforms have attempted to
broaden and deepen them. Reforms in the government securities market sought to smoothen
the maturity structure of debt, raising of debt at close-to-market rates and improving the
liquidity of government securities by developing an active secondary market. In the capital
market the focus of reforms has been on strengthening the disclosure standards, developing
the market infrastructure and strengthening the risk management systems at stock exchanges
to protect the integrity and safety of the market. Elements of the structural reforms in various
market segments are introduction of free pricing of financial assets such as interest rate on
government securities, pricing of capital issues and exchange rate, the enlargement of the
number of participants and introduction of new instruments. Improving financial soundness
and credibility of banks is a part of banking reforms under. Taken by the RBI, a regulatory
and supervisory agency over commercial banks under the Banking Companies Regulation
Act 1949. The improvement of financial health of banks is sought to be achieved by capital

13
adequacy norms in relation to the risks to which banks are exposed, prudential norms for
income recognition and provision of bad debts. The removal of external constraints in norms
of pre-emption of funds, benefits and prudential regulation and recapitalisation and writing
down of capital base are reflected in the relatively clean and healthy balance sheets of banks.
The reform process has, however, accentuated the inherent weaknesses of public sector
dominated banking systems. There is a need to further improve financial soundness and to
measure up to the increasing competition that a fast liberalising and globalising economy
would bring to the Indian banking system. In the area of capital market, the Securities and
Exchange Board of India (SEBI) was set up in 1992 to protect the interests of investors in
securities and to promote development and regulation of the securities market. SEBI has
issued guidelines for primary markets, stipulating access to capital market to improve the
quality of public issues, allotment of shares, private placement, book building, takeover of
companies and venture capital. In the area of secondary markets, measures to control
volatility and transparency in dealings by modifying the badla system, laying down insider
regulations to protect integrity of markets, uniform settlement, introduction of screen-based
online trading, dematerialising shares by setting up depositories and trading in derivative
securities (stock index futures). There is a sea change in the institutional and regulatory
environment in the capital market area. In regard to Non-Bank Finance Companies (NBFCs),
the Reserve Bank of India has issued several measures aimed at encouraging disciplined
NBFCs which run on sound business principles. The measures seek to protect the interests of
depositors and provide more effective supervision, particularly over those which accept
public deposits. The regulations stipulate an upper limit for public deposits which NBFCs can
accept. This limit is linked to credit rating by an approved rating agency. An upper limit is
also placed on the rate of interest on deposits in order to restrain NBFCs from offering
incentives and mobilising excessive deposits which they'" may not be able to service. The
heterogeneous nature, number, size, functions (deployment of funds) and level of managerial
competence of the NBFCs affect their effective regulation. Since the liberalisation of the
economy in 1992-93 and the initiation of reform measures, the financial system is getting
market-oriented. Market efficiency would be reflected in the wide dissemination of
information, reduction of transaction costs and allocation of capital to the most productive
users. Further, freeing the financial system from government interference has been an
important element of economic reforms. The economic reforms also aim at improved
financial viability and institutional strengthening. A financial system provides services that
are essential in a modern economy. The use of a stable, widely accepted medium of exchange

14
reduces the costs of transactions. It facilitates trade and, therefore, specialization in
production. Financial assets with attractive yield, liquidity and risk characteristics encourage
saving in financial form. By evaluating alternative investments and monitoring the activities
of borrowers, financial intermediaries increase the efficiency of resource use. Access to a
variety of financial instruments enables an economic agent to pool, price and exchange risks
in the markets. Trade, the efficient use of resources, saving and risk taking are the
cornerstones of a growing economy. In fact, the country could make this feasible with the
active support of the financial system. The financial system has been identified as the most
catalysing agent for growth of the economy, making it one of the key inputs of development.

The Indian financial system is broadly classified into two broad groups:

Organised Indian Financial System

The organised financial system comprises of an impressive network of banks, other financial
and investment institutions and a range of financial instruments, which together function in
fairly developed capital and money markets. Short-term funds are mainly provided by the
commercial and cooperative banking structure. Nine-tenth of such banking business is
managed by twenty-eight leading banks which are in the public sector. In addition to
commercial banks, there is the network of cooperative banks and land development banks at
state, district and block levels. With around two-third share in the total assets in the financial
system, banks play an important role. Of late, Indian banks have also diversified into areas
such as merchant banking, mutual funds, leasing and factoring. The organised financial
system comprises the following sub-systems:

1. Banking system

2. Cooperative system

3. Development banking system

(i) Public sector

(ii) Private sector

4. Money markets and

5. Financial companies/institutions.

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Over the years, the structure of financial institutions in India has developed and become
broad based. The system has developed in three areas - state, cooperative and private. Rural
and urban areas are well served by the cooperative sector as well as by corporate bodies with
national status. There are more than 4, 58,782 institutions channelizing credit into the various
areas of the economy.

Unorganised Indian Financial System

On the other hand, the unorganised financial system comprises of relatively less controlled
moneylenders, indigenous bankers, lending pawn brokers, landlords, traders etc. This part of
the financial system is not directly amenable to control by the Reserve Bank of India (RBI).
There are a host of financial companies, investment companies, and chit funds etc., which are
also not regulated by the RBI or the government in a systematic manner. However, they are
also governed by rules and regulations and are, therefore within the orbit of the monetary
authorities.

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 3.2 STRUCTURE OF FINANCIAL MARKET

A financial market is a market in which people trade financial securities, commodities, and
value at low transaction costs and at prices that reflect supply and demand. Securities include
stocks and bonds, and commodities include precious metals or agricultural products.
In economics, typically, the term market means the aggregate of possible buyers and sellers of
a certain good or service and the transactions between them.

The term "market" is sometimes used for what are more strictly exchanges, organizations that
facilitate the trade in financial securities, e.g., a stock exchange or commodity exchange. This
may be a physical location (like the NYSE, BSE, LSE, JSE) or an electronic system
(like NASDAQ). Much trading of stocks takes place on an exchange; still, corporate
actions (merger, spinoff) are outside an exchange, while any two companies or people, for
whatever reason, may agree to sell stock from the one to the other without using an exchange.
Trading of currencies and bonds is largely on a bilateral basis, although some bonds trade on
a stock exchange, and people are building electronic systems for these as well, similar to
stock exchanges.

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Financial institutions

Financial institutions provide financial services for members and clients.

Banks

Banks are financial intermediaries that lend money to borrowers to generate revenue. They
are typically regulated heavily, as they provide market stability and consumer protection.
Banks include:

 Public banks
 Commercial banks

 Central banks

 Cooperative banks

 State-managed cooperative banks

 State-managed land development banks

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Non-bank financial institutions

Non-bank financial institutions facilitate financial services like investment, risk pooling,
and market brokering. They generally do not have full banking licenses or are not supervised
by a bank regulation agency. Non-bank financial institutions include:

 Casinos and card rooms

 Finance and loan companies

 Insurance companies

 Mutual funds

 Commodity traders

Financial markets

Financial markets are markets in which securities, commodities, and fungible items are traded
at prices representing supply and demand. The term "market" typically means the institution
of aggregate exchanges of possible buyers and sellers of such items.

Primary markets

The primary market (or initial market) generally refers to new issues of stocks, bonds, or
other financial instruments.

Secondary markets

The secondary market refers to transactions in financial instruments that were previously
issued.

Financial instruments

Financial instruments are tradable financial assets of any kind. They include money, evidence
of ownership interest in an entity, and contracts.]

Cash instruments

A cash instrument's value is determined directly by markets. They may include

securities, loans, and deposits.

Derivative instruments

A derivative instrument is a contract that derives its value from one or more underlying
entities (including an asset, index, or interest rate).

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Financial services

Financial services are offered by a large number of businesses that encompass the finance
industry. These include credit unions, banks, credit card companies,
insurance companies, stock brokerages, and investment funds.

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 3.3 MONEY MARKET OVERVIEW

The money market is the centre which is mainly deals with short term liquid assets to meet
the requirement of the borrowers from the lenders having temporary surpluses. It is the arena
in which financial institutions make available to a broad range of borrowers and investors the
opportunity to buy and sell various forms of short term securities. There is no physical
“money market”. Instead it is an informal networks of banks and traders linked by telephones,
computers or any other electronic media. The money market is important for businesses
because it allows companies with temporary cash surplus to invest in short term securities;
conversely, companies with a temporary cash shortfall can sell securities or borrow funds on
a short term basis. In spirit the market acts as a repository for short term funds. Large
corporations generally handle their own short term financial transactions; they participate in
the market through dealers. Small businesses, on other hand often choose to invest in money-
market funds, which are professionally, managed mutual funds consisting only of short term
securities.

The securities and exchange board of India (SEBI) defines a money market as a market for
debt securities that pay off in the short term usually less than one year. For example, the
market for 91 days and 364 days treasury bills or calls money. This market encompasses the
trading and issuance of short term non-equity debt instruments including treasury bills,
commercial papers, certificates of deposits, etc.

The reserve bank of India (RBI) defines the money market as a market for short term funds
with maturities ranging from overnight to one year and includes financial instruments that are
considered to be close substitutes of money. Thus supply of funds for a short period by any
available source to meet the liquidity requirements of the large as well as small and medium
enterprises (SMEs) so that the functions of the enterprises are smoothly carried out may said
to be a money market. Within the one year, depending upon the tenures, money market is
classified into:

a) Overnight market: the tenure of transactions in one working day.

b) Notice money market: the tenure of the transactions is from 2 days to 14 days.
c) Term money market: the tenure of the transactions is from 15 days to one year.

21
Money market is concerned with the supply and the demand for investible funds. Essentially,
it is a reservoir of short-term funds. Money market provides a mechanism by which short-
term funds are lent out and borrowed; it is through this market that a large part of the
financial transactions of a country are cleared. It is place where a bid is made for short-term
investible funds at the disposal of financial and other institutions by borrowers comprising
institutions, individuals and the Government itself. Thus, money market covers money, and
financial assets which are close substitutes for money. The money market is generally
expected to perform following three broad functions:

(1) To provide an equilibrating mechanism to even out demand for and supply of short term
funds.

(2) To provide a focal point for Central bank intervention for influencing liquidity and
general level of interest rates in the economy.

(3) To provide reasonable access to providers and users of short-term funds to fulfil their
borrowing and investment requirements at an efficient market clearing price.

22
 3.4 MONEY MARKET INSTRUMENTS

Money market is a market for borrowing and lending for short periods. It is one constituent of
capital market. However, it is basically concerned with short-term investment. Money market
securities are fixed income securities similar to gilt-edged securities, preference shares and
debentures. Normally individual investors are not interested in money market securities as the
return on the investment is not attractive. However, institutional investors with huge surplus
funds purchase money market securities for short term investments. A money market security
is a debt instrument of short period maturity. Money market securities in India are as
explained below:

1. Treasury Bills
Treasury bill is a short-term money market instrumental used by the Central
Government for short term borrowing from the market for meeting urgent needs.
Treasury Investors in T-bills generally include banks and other institutional investors.
2. GILT – Edged Securities
Government (Central and States) securities and securities issued by financial
institutions such as IDBI,ICICI, etc are called GILT – Edged securities. These are debt
securities issued by the central government, state government, and Semi –
government’s agencies. The market for such securities is called gilt – edged market.
Securities are also gilt – securities. Such securities are in the form of bonds and credit
notes. Institutional agencies such as banks, insurance companies, employee’s
provident funds are the buyers of such securities. Such securities are fully secured as
they have government backing. The maturity period is varying generally upto 10 to 20
years. Gilt – edged securities market constitutes the largest segment of the Indian
Capital Market. This market is expanding rapidly in recent years. Gilt – edged security

23
 is highly liquid asset as it can be sold easily. Tax benefits are available to gilt – edged
securities.
3. Commercial Paper
CPs as a source of short – term finance is used by corporates as an alternative to bank
Finance for working capital. Generally, corporates prefer to raise funds through this
route when the interest rate on working capital charged by banks is higher than the
rate at which funds can be raised through CP.
CP is a short-term, unsecured usuance promissory note issued at a discount to face
value by well known or reputed companies who carry a high credit rating and have a
strong financial background.
Any private sector company, public sector unit, non – banking company can raise
funds through commercial paper. CPs are generally open to all the investors –
individuals, banks, corporates and also non-resident Indians (NRIs).
CPs are issued in multipies of Rs. 5 lakhs and the minimum size of each issue is Rs. 5
lakhs. Also CPs have a minimum maturity period of 15 days and a maximum of 1
year. Unlike Certificate of Deposits, the issuer can Buy-Back its Own CP. The
company needs to get the commercial paper credit rated by one of the approved credit
rating agencies like CRISIL/ICRA/DCR, as prescribed by RBI.
4. Certificate of Deposits
Certificate of deposits (CDs are issued by banks in the form of usuance promissory
notes. Due to their negotiable nature, these are also known as negotiable certificate of
deposits (NCDs).CDs are issued at a discount to face value. The discount rate is freely
determined by the issuing bank considering the prevailing call money rates, treasury
bills rate, maturity of the CD and its relation with the customer, etc.Banks can issue
CDs for a minimum period of 15 days to a maximum of one year whereas a financial
institution can issue CDs for a minimum of 1 year and a maximum of 3 years.The
minimum size for the issue of CDs is Rs. 5 lakhs (face value) and thereafter in
multiplies of Rs. 1 lakh. It should be taken into consideration that there is no ceiling
on the maximum amount that can be raised by them.

24
 3.5 TREASURY BILLS

Treasury bills or T-bills are short term debt instrument issued by India and are presently
issued with a tenure of 91 days , 182 days, and 364 days. Treasury bills are zero coupon
securities and pay no interest. They are issued at a discount and redeemed at the face value at
maturity.

The reserve bank of India conducts auctions usually every Wednesday to issue T-bills.
Payments for the T-bills purchased are made on the following Friday. The 91 days T-bills are
auctioned on every Wednesday. The treasury bills 182 days and 364 days tenure are auctioned
on the Wednesday prior to a non-reporting Fridays. The reserve bank releases an annual
calendar of T-bill issuances for a financial year in the last week of March of the previous
financial year. The reserve bank of India announces the issue details of T-bills through a press
release every week. Also 14 day treasury bills are now introduced in the Indian money market
soon with the state government’s owning up the entire 14 day T-bill instruments. There is
also a proposal to launch 28 day T-bills.

Advantages:

 The treasury bills have optimum safety as they are issued by the RBI on behalf of the
governments. The payment on maturity is also guaranteed ate the face value.
 Due to the existence of a secondary market these bills can be traded ate the option of
the investors providing tremendous liquidity to them.
 The bank use treasury bills to maintain their SLR and CRR due to its liquidity.
 The treasury bills enable the government to absorb any excess liquidity in the market.
 The government uses treasury bills to raise short term funds.
 The cost of such funds is also less since these bills are issued at a discount.

Disadvantages:

 The yield or returns generated is quite low in comparison to many other securities.
 Usually investors hold the T-bills till maturity thereby the secondary market od such
bills is affected.
 Although the treasury bills are sold through auctions the competitiveness of such
auctions is also not very transparent.

3.6 COMMERCIAL BILLS

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Commercial paper (CP) is an unsecured money market instrument issued in the form of a
promissory note. Corporate, primary dealers (PDs) and the all India financial institutions (FIs)
that have been permitted to raise short term resources as fixed by the Reserve Bank of India
are eligible to issue CPs. CP can be issued for maturities between a minimum of 7 days and
maximum of one year from the date of issue.

It is short term unsecured since promissory note. It is issued at a discount to the face reflected
by the prevailing market interest rates by well-known and highly rated companies, public
sector undertaking (PSUs), non-banking financial companies (NBFCs) etc. the CPs are issued
to all investors like individuals, banks, corporates, non-resident Indians (NRI). The investors
prefer to invest in CPs due to high liquidity, varied maturity and better yield than bank
deposits. It favours both the borrowers and the investors as it is a combination of liquidity and
returns in short term market.

Commercial papers have a minimum maturity period of 15 days and a maximum of 1 year.
The special feature of this instrument is that the issuer can buy back its own security. They
are issued in multiples of Rs.5 lakhs and the minimum size of each issue is Rs.5 lakhs. A
single investor willing to invest in this market needs a minimum of Rs.5 lakhs.

It can be issued either directly by the company to the investors i.e. as a direct paper or
through an intermediary known as dealer paper. A corporate entity to issue commercial paper
requires to banker. It also has to mandatory appointed an issuing and paying agent (IPA).
Further they have to obtain a resolution from the company board for issue of the commercial
paper and then approve it by any credit rating agency like CRISIL, ICRA, etc.

The company should complete the issue proposed within a time span of 2 weeks and
immediately intimate their banker to reduce the working capital limit to extent of capital
raised. Based on maturity the company has to pay the applicable stamp duty. After the issue is
completed, the company needs to issue the RBI the actual amount raised by CP

CPs are issued at a discount to face value and redeemable at par on maturity. The discount is
the effective rate of interest.

Advantages:

26
 Minimal paper work:

The paper work involved in raising funds through the CP is very minimal because more
funds can be arranged without any underlined transaction.

 Flexibility:

The issuing company usually matches the cash flow of the company with the maturity of
CPs. In the case the market is favourable; the flexibility provided by the instruments
enable the company to raise additional funds.

 Returns:

The CP provides the investors with returns higher than the bank deposit. Although they
are unsecured, the standby facility provides confidence to the investors to get the
returns on the due date.

 Movement of funds:

CPs facilitates securitization of loans. As a result a secondary market for the efficient
movement of funds is created.

 Lesser cost of capital:

For the company the cost of capital is reduced considerably because it can raise 75% of
its working capital through the commercial paper issued at the interest rate lower than
the banks. They can reduce the outstanding amount as and when they get surplus funds.
Thus results in effective reduction in the interest cost.

 Diversification:

A well rated company can raise funds from different investors like banks, NRIs,
individual investors, etc.

Disadvantages

27
 Limited entry of corporate as investor:
Due to stringent conditions laid down by the RBI, the entry is difficult for the corporates
into this market.
 High amount of investors:
The minimum amount required to make an individual in the CP is Rs. 5 lakhs. With no
tax benefits, it is a huge amount for the individual investors to pool in. hence they shy
away from this investment.

3.7CERTIFICATE OF DEPOSIT (CDs):

28
Certificate of deposit (CDs) is a negotiable money market instrument and issued in
dematerialized form or as a usance promissory note, for funds deposited a bank or other
eligible financial institutions for a specified time period. Banks can issue CD’s for maturities
from 7 days to one a year whereas eligible FIs can issue for maturities 1 year to 3 years.

The issuers of CDs are commercial banks, financial institutions, etc. for subscription by
individuals, NRIs, trust, etc. Due to their negotiable nature, they are also known as negotiable
certificates of deposit (NCD). They may be referred to as a money market instrument, a
receipt for funds deposited in a financial institution for a specific time, for a specific interest
rate. It is a document of title to time deposit and is distinct from conventional time deposit
due to negotiability and marketability. CDs are freely transferable by endorsement and
delivery. They may be issued in dematerialized (DE mat) form also.

CDs should be issued in denomination of 1 lac of maturity value/face value. They are to be

Purchased for a minimum of Rs. 1 lac or in multiples of Rs. 1 lac. The banks can issue CDs
for a minimum period of 15 days to a maximum of 1 year. However financial institutions (FI)
can issue it for a minimum of 1 year and maximum of 3 years. Bank CDs are usually issued at
discount to the face value, whereas FIs issue as a coupon bearing security.

CDs are freely transferable by endorsement and delivery, immediately after the date of issue
and can be traded in secondary market from the date of issue, unlike conventional deposits.
Unless otherwise mutually agreed upon by the buyer and seller, trade settlement takes place
on T + 1 day basis. However there is a ceiling of T + 5 days in the settlement period. Or
alternatively such period of settlement may be specified by the exchange whenever the trade
is done on a recognized stock exchange.

The major motive for introducing CDs by banks was to meet competition. At the same time
they could also maintain their share in the financial market due to CD’s advantage over time
deposits.

Features:

29
  CDs are unsecured negotiable instruments and are issued at a discount to the face
value.
 Discount on CDs is market determined
 CDs issued by bank are always discounted bills, whereas those issued by financial
institutions are coupon bearing.
 CDs are freely transferable.
 Banks are not allowed to grant loans against CDs.
 CDs are different from term deposits of banks because they involve the creation of a
market instrument.
 CDs rates are usually higher than the term deposit rates, due to the low transactions
costs.

Advantages:
 Since one can know the returns from before, the certificates of deposits are considered
much safe.
 One can earn more as compared to depositing money in savings account.
 The Federal Insurance Corporation guarantees the investments in the certificate of
deposit.
Disadvantages:
 As compared to other investments the returns is less.
 The money is tied along with the long maturity period of the Certificate of Deposit.
Huge penalties are paid if one gets out of it before maturity.

 Investors can redeem bank-issued CDs prior to maturity. However, you will typically
be charged an early withdrawal penalty. These penalties are set by each bank and
differ nationwide.
 Unlike Treasury notes, the interest on CDs is not exempt from state and local taxes.
CDs are fully taxable at the state, local and federal levels.
 The investment is locked in at a specific rate, even if interest rates increase

3.8CALL MONEY MARKET

Call money market is a market for uncollateralized lending and borrowing of funds. This
market is predominantly overnight and is open for participation only to scheduled commercial
banks and the primary dealers. This market is also called as notice money or term money
market depending on the tenure of borrowing.

30
  Call money refers to the borrowing or lending of funds for 1 day.
 Notice money refers to the borrowing and lending of funds for 2-14 days. Notice
money is also known as short notice money.
 Term money refers to borrowing and lending of funds for a period of more than 14
days.

The duration of the call money loan is 1 day. Banks resort to these type of loans to fill the
asset liability mismatch, comply with the statutory CRR and SLR requirements and to meet
the sudden demand of funds. RBI, banks primary dealers etc are the participant of the call
money market.

Advantages:
 Money lent in a call market enjoys maximum liquidity as it may be called back at any
point of time.
 In situation when the call rates are highly volatile, banks and other institutions may
invest their surplus funds to reap good profits.
 Maintaining SLR ratio at all-time requires the bank to adequately generate funds to
be invested at the appropriate time. At such times banks resort to the call market.
 Any changes in the economy is quickly reflected in the call money rates thereby
indicating the stakeholders to make monetary reforms accordingly.

3.9 INVESTORS ATTITUDE TOWARDS INVESTMENT

Indians are traditionally known for their orientation towards savings and preference
for safe investments. Post independent India has been continuously witnessing higher rates
of savings. The increase is more pronounced during the recent years. On the investment side,
many new instruments have been introduced during the last two decades to attract the
public. The advertisements for various investment schemes are not adequate, as majority of

31
the respondents are aware of the various schemes only through parents, friends and relatives.
Therefore, it is recommended to various financial institutions to adopt a broad advertising
strategy in order to enable the investors to know the various investment schemes.

Though various new avenues are introduced for investment purposes, investors in rural and
urban area still prefer bank deposits. The major reason for selecting this investment is owing
to safety and security. Only a few investors preferred t he investment on public issues but
they are not aware of the market value of their holdings. A planned marketing approach,
covering customer awareness, offering better value with a high and constant return to the
investors and every effort may be made to draw the rural sector into the mainstream of
national economic develo pment. A constant effort is essential to promote the savings and
investments behaviour at both rural and urban investors to enrich the total economy.

The results of the study indicate that the investors prefer to invest only in safer avenues.
Further analysis of the data indicates that the family culture plays a dominant role in
investments decisions. Among the conventional investment avenues, bank deposits and gold
are the most preferred avenues, while insurance schemes and post office instruments are
getting increased attention. Majority of the respondents have not preferred to invest their
savings in UTI and Mutual funds which are the latest investment schemes and hence the
government should take appropriate steps to persuade the investors to invest in the above
schemes.

32
3.10 RECENT DEVELOPMENT IN MONEY MARKET INSTRUMENTS

In India money market has remarkably over the years. A number of measures has been taken
by the government as well as RBI to ensure growth of the money in the country. Some of the
significant measures taken towards the development of money market are as under:

Integration of unorganized market with organized market:

The RBI initiated the process of integrating the organised sector with the unorganized sector.
A significant move was making the refinancing facilities of commercial bills to the organized
sector money lenders, indigenous sector has started invading themselves in some or the other
way in the organised sector.

Also the absence of the existence of the banking facilities pushed the rural folks towards the
unorganized sector. Moreover credit was not supplied to them assuming their credit
worthiness to be lesser than expected.

With the expansion of banks branches and measures by the government to bring a large part
of the population under the financial ambit the government of India has also launched
schemes to attract these people to the formal sector. The Pradhan mantra Jan dhan yojana and
the Atal pension yojana have been instrumental towards this aspect. Continuous financial
inclusion measures may result in the gradual wise out of the unorganised sector.

 Widening of call money market:

A large number of development institution like the LIC,GIC,IDBI,UTI etc. have been
although set up for different purposes, they have been permitted to enter the call money
market lenders.

Also specified mutual funds have been allowed to enter the call money market. The preview
of the institutions like DHFI and STCI are now expanded. They may participate to invest in
the call money market as both lenders and borrowers. Thus the market is expanding definitely
thereby the activeness of the market is also moving at interesting levels.

 Introduction to innovative instruments:

Many changes were made by the Chakravarthy committee and Vaghul committee based on
which a number of instruments during the late 1980s and early 1990s were introduced like
182 and 364 days treasury bills were introduced, however recently many more instruments

33
have introduced like cash management bills (CMBs) in 2010, dated government securities
and collateral borrowing and lending obligation (CBLO) were introduced by the government
to meet the changing requirements of the growing economy.

This shows that the stakeholders are making necessary attempts to provide the borrowers a
wide array of instruments which will suit their wants. When the borrowers needs and the
supplier’s expectations match the instruments take off in full swing leading to a developed

Promotion of bill culture:

The corporate firms have always shown a tendency of availing cash credit and overdrafts
rather drawing a bill on the customers. This has been because of varied reasons like
discouragement by banks, discounting charges one time arrangement of overdraft facility,
convenience of banking over bill discounting etc. the banks also earlier did not have
reference option in respect of their bills. As a result they discouraged customers from drawing
and discounting bills.

The DHFI was specifically set up in order to provide the banks with a financial recourse so
that they do not have to wait for the recovery of the funds from the drawee. Also the RBI
provides rediscounting facilities to the commercial banks. Thus the bill culture is being
promoted.

Offering of market rates of interest:

From the year 1989, the call money rate, interbank rate, bill discounting rate etc. have been
opened up and freed. Also the ceiling on the interest rates in case of the money market
instruments were abolished. The rates of interest are presently determined by the market
forces of demand and supply. As a result the prevailing a market rates are offered on these
instruments.

Entry of money market mutual funds:

With the increasing preference of the investors towards mutual funds and consolidation of the
mutual funds industry, the government also capitalized on the opportunity by allowing
selected mutual fund companies to start money market mutual funds. As a result many fund
houses started investing in the money markets and passed on the benefits of such an
investment to the end users. These mutual funds at regular intervals pump money into the
instrument and also churn out at an appropriate time. This resulted in the expansion of the

34
money market as well as has opened up the prospect of secondary markets for the money
market instruments.

Setting up of credit rating agencies:

In India a number of credits rating agencies has been set up during 1990s like credit rating
information services of India (CRISIL), credit analysis and research limited (CARE) etc.
have been set up.

The main function of these credit rating agencies is to evaluate the security and provide
ratings based on which retail investors take their investment decisions. All these measures
have paved a way for an institution about the safe and liquid investment thereby
strengthening the money market.

35
 6. Conclusion

The money market specializes in debt securities that mature in less than one year. Money
market instruments are liquid and safe. As a result, they offer a lower return than other
securities.

The easiest way for individuals is to gain access to the money market is through money
market mutual funds, t-bills are short term government securities that mature in one year or
less for their issue date. T-bills are considered to be the one of the safest investments. They
don’t provide great return.

A certificate of deposits is the time deposit with the bank. CDs are safe but returns aren’t
good enough. Money is tied up for length of CDs

Commercial paper is unsecured, short term loan issued by a corporation. Returns are higher
than t-bills because of higher default of risk.

36
 APPENDICIES

Q.1) Do you invest?

 Yes
 No

Q.2) In which instrument do you invest?

 Treasury bills
 Commercial paper
 Certificate of deposits
 Call money market

Q.3) Are you aware about money market instruments?

 Yes
 No

Q.4) Which are the following market instrument are you aware off?

 Treasury bill
 Commercial papers
 Certificate of deposits
 Call money market

Q.5) How much amount of your income do you invest?

 0-5%
 5 - 10 %
 10 - 15 %
 15 - 20 %

Q.6) What is the purpose of making investment in money market instruments?

 Tax saving
 Regular fixed income
37
  Safety
 Wealth creation
 Liquidity

Q.7) Factor considered before investing?

 Past records
 Tax benefit
 Income returns
 Any other factor

Q.8) Which money market instrument is most preferable?

 Treasury bills
 Certificate of deposits
 Commercial bill
 Call money market

Q.9) Which instrument provides higher return and greater liquidity?

 Treasury bills
 Certificate of deposits
 Commercial bill
 Call money market

Q.10) What is current trend in money market instrument?

 Slow
 Steady
 Increasing
 Decreasing

Q.11) Are you aware about money market mutual funds?

 Yes
 No

Q.12) Do you feel money market in India has developed over period of time?

 Yes
 No

38
Q.13) Which are the regulatory authorities regulating money market?

 Reserve bank of India (RBI)

 Securities and exchange board of India (SEBI)
 Forward market commission (FMC)
 Insurance regulatory and development authority (IRDA)

Q.14) Which of the following defaults are responsible for under developed money market in
India?

 Absence of bill market

 Limited participants
 Absence of integration
 Limited secondary market

Q.15) Steps to be taken for development of money market?

 Promotion of T-bills
 Establishment of DHFI
 Providing secondary market

BIBLOGRAPHY

BOOKS REFERENCE:

 DYNAMICS OF INDIAN FINANCIAL SYSTEM – BY - PREETY SINGH

 INDIAN FINANCIAL SYSTEM –BY BHARATI V. PATHAK

 FINANCIAL SERVICE AND MARKET-BY DR.S.GURUSWAMY

 NSE DEBT MARKET (BASIC MODULE) WORK BOOK

WEBSITES:

 www.rbi.org.in/weekly statistical supplement/various issues.co.in

39
 www.investopedia.com.

 www.bseindia.com

 www.nseindia.com

 www.economics.indiatimes.com/

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