MONEY MARKET IN INDIA

MONEY MARKET IN INDIA

MONEY MARKET

The money market is the market in which short term funds are

borrowed and lent.

Lending Money Market Institutions

The lending money market institutions are -

 Government of India and other sovereign bodies

 Banks and Development Financial Institutions

 PSUs [Public Sector Undertakings]

 Private sector organizations

 The Government /Quasi government owned non-corporate

INSTRUMENTS OF MONEY MARKET

 Call or notice money is an amount borrowed or lent on

  If the period is greater than one day and up to 14 days it is

demand for a very short period.

called Notice money; otherwise the amount is known as Call

 Note: No collateral security is needed to cover these

transactions.

 These are the lowest risk category instruments for the short

 RBI issues treasury bills [T-bills] at a prefixed day and for a fixed

Types Of Treasury Bills

There are 3 types of treasury bills.

91-day T-bill: maturity is in 91 days, it is auctioned on every Friday

of every week and the notified amount for auction is Rs. 100

182-day T-bill: maturity is in 182 days, it is auctioned on every

alternate Wednesday, which is not a reporting week and the

notified amount for auction is Rs. 100 crores.

364-day T-bill: maturity is 64 days, it is auctioned on every

alternate Wednesday which is a reporting week and the notified

amount for the auction is Rs. 500 crores.

Certificates of Deposits

 After treasury bills, the next lowest risk category investment

option is Certificate of Deposit (CD) issued by banks and

Financial Institutions (FI).

 A CD is issued at a discount to the face value, the discount rate

being negotiated between the issuer and the investor.

 Although RBI allows CDs up to one-year maturity, the maturity

most quoted in the market is for 90 days.

Commercial Papers

 Commercial papers [CPs] are negotiable short-term unsecured

promissory notes with fixed maturities, issued by well-rated

organizations.

  These are generally sold on discount basis.

 Organizations can issue CPs either directly or through banks or

merchant banks [called as dealers].

 These instruments are normally issued in the multiples of five

crores for 30/45/60/90/120/180/270/364 days.

Inter-Corporate Deposits –

 An Inter-Corporate Deposit or ICD is an unsecured loan extended

by one corporate to another.

 A better rated corporate can borrow from the banking system and

lend in this market.

 As the cost of funds for a corporate is much higher than a bank,

the rates in this market are higher than those in other markets.

 ICDs are unsecured, and therefore the risk inherent is high.

 The ICD market is not well organized with very little information

available about transaction details.

Ready Forward Contracts

 These are transactions in which two parties agree to sell and

repurchase the same security.

 Under such an agreement the seller sells specified securities with

an agreement to repurchase the same at a mutually decided

future date and price.

 Similarly, the buyer purchases the securities with an agreement to

resell the same to the seller on an agreed date in future at a

predetermined price.

 Such a transaction is called Repo when viewed from the

prospective of the buyer of securities that is the party acquiring

fund. It is called reverse repo when viewed from the prospective

of supplier of funds.

Commercial Bills

 Bills of exchange are negotiable instruments drawn by the seller

or drawer of the goods on the buyer or drawee of the good for

the value of the goods delivered.

 These bills are called trade bills. These trade bills are called

commercial bills when they are accepted by commercial banks.

Pass through Certificates

 This is an instrument with cash flows derived from the cash flow

of another underlying instrument or loan.

 The issuer is a Special Purpose Vehicle (SPV), which only receives

money, from a multitude of, may be several hundreds or

thousands, underlying loans and passes the money to the holders

of the PTCs. This process is called securitization.

Dated Government Securities

 These are securities issued by the Government of India and State

Governments.

 The date of maturity is specified in the securities therefore they

are known as dated securities.

 The Government borrows funds through the issue of long term

dated securities, the lowest risk category instruments in the

 They are issued through auctions conducted by RBI.

MONEY MARKET CONCEPTS

Issued Capital: It is that part of a company’s capital that has been

subscribed to by shareholders. It is a broader concept than paid up

Paid Up capital: It is that part of the issued capital of a company,

paid up by the shareholders (promoters). It is that part, invested by

the promoters. Therefore, an issued capital may or may not be a

paid up capital.

Authorized Capital: It is the amount of share capital fixed in the

Memorandum of an Association and the Articles of the Association

of a company as required by the Company’s act. They are also

known as nominal capital.

Repo Operations: In order to absorb and to neutralize excess

liquidity from the system and even to out call money rates a system

of announcing calendar of Repos auctions on a monthly basis was

introduced with effect from January 13,1997.

Fixed Rate Repos: The fixed rate repo was introduced with effect

from November 29,1997. The repo rate and the period of repo is

announced by the RBI in the evening of the previous day.

Net Asset Value (NAV) : The investment efficiency of the mutual

fund can be measured in terms of the NAV values and Net Sales.

NAV is the indicator of the investment performance and it indicates

the amount each unit holder will get per unit on redemption or

winding up of mutual fund.

Floating Rate Note : It adopts a reference rate of interest which

reflects the market rate of interest. The interest rate of FRN then in

certain percentage points over the reference rate or benchmark

Stock-Invest: Under this scheme a provision of special payment

system for investors in the primary market. Stock-invest is a non-

negotiable bank instrument and its validity is for four months from

the date of the issue.

Zero -Cupon Bonds: It is issued at a discount to face value. No

interest is paid during the period of the bond. But at the time of

maturity full payment or bullet payment of the face value would be

Deep-Discount Bonds: It was first introduced by IDBI in June 1994

followed by ICICI. It is similar to zero-coupon bonds with longer

Jumboo Lot: It is issued in primary and secondary market to reduce

the paper work connected with the processing. The certificates are

Book Building: This is the first draft or preliminary prospectus,

which carries the information of the company and the project.

Dabba Trading: The illegal badla trading, banned since 1993, has

resurfaced in the form of Dabba Trading, a modified form of CFTS. It

is based on bucketing system. It is an illegal practice where a

stockbroker executes a customer’s trade without taking it to a stock

exchange with the hope of earning profit in future.

Insider Trading - Insider Trading is act of buying/Selling Securities

armed with information that is unpublished and price sensitive.

UPSI- Unpublished Price Sensitive Information means having

information on financial results, dividends, change in capital

structure, mergers, demergers, acquisition, delistings, disposal and

expansion of business and changes in key management personnel

before the information become public.

Definition of Negotiable Instrument

A negotiable instrument is a document guaranteeing the payment

of a specific amount of money, either on demand, or at a set time,

with the payer named on the document.

According to section 13 of the Negotiable Instruments Act, 1881,

a negotiable instrument means “promissory note, bill of exchange,

or cheque, payable either to order or to bearer”.

TYPES OF NEGOTIABLE INSTRUMENTS

According to the Negotiable Instruments Act, 1881 there are just

three types of negotiable instruments i.e., promissory note, bill of

exchange and cheque.

Promissory Note

It a signed document containing a written promise to pay a stated

sum to a specified person or the bearer at a specified date or on

Bill of Exchange

Section 5 of the Negotiable Instruments Act, 1881 defines a bill of

exchange as ‘an instrument in writing containing an unconditional

order, signed by the maker, directing a certain person to pay a

certain sum of money only to or to the order of a certain person, or

to the bearer of the instrument’.

The Negotiable Instruments Act, 1881 defines a cheque as a bill of

exchange drawn on a specified banker and not expressed to be

payable otherwise than on demand. Actually, a cheque is an order

by the account holder of the bank directing his banker to pay on

demand, the specified amount, to or to the order of the person

named therein or to the bearer.

Types of Cheque

Open cheque: A cheque is called ‘Open’ when it is possible to get

cash over the counter at the bank.  The holder of an open cheque

can do the following:

 Receive its payment over the counter at the bank,

 Deposit the cheque in his own account

 Pass it to some one else by signing on the back of a cheque.

Crossed cheque: The payment of such cheque is not made over the

counter at the bank.  It is only credited to the bank account of the

payee.  A cheque can be crossed by drawing two transverse parallel

lines across the cheque, with or without the writing ‘Account payee’

or ‘Not Negotiable’.

Bearer cheque: A cheque which is payable to any person who

presents it for payment at the bank counter is called ‘Bearer

cheque’.  A bearer cheque can be transferred by mere delivery and

requires no endorsement.

Order cheque: An order cheque is one which is payable to a

particular person. In such a cheque the word ‘bearer’ may be cut

out or cancelled and the word ‘order’ may be written.  The payee

can transfer an order cheque to someone else by signing his or her

name on the back of it.

A Hundi is a negotiable instrument by usage. It is often in the form

of a bill of exchange drawn in any local language in accordance with

the custom of the place. Some times it can also be in the form of a

promissory note. A hundi is the oldest known instrument used for

the purpose of transfer of money without its actual physical

movement. The provisions of the Negotiable Instruments Act shall

apply to hundis only when there is no customary rule known to the

Each country has to keep economic transaction with other countries

of the world and India also has a healthy trade relationship with

several countries. Foreign trade brings into play the commercial

transaction of payment and receipt for goods and services sent

(export) or received (import). The difference between these two

creates the concept of Balance of Payment and Balance of Trade.

According to Benham, “Balance of Payments of a country is a

record of the monetary transactions over a period with rest of the

Ordinarily, a country has to deal with other countries in respect of

three items, namely;

(i) Visible items, which include all types of physical goods exported

(ii) Invisible   items, which include all those services,  whose  export

and import are not visible.

(iii) Capital transfer, which are concerned with capital receipts and

capital payments.

Balance of Trade (BoT)

When the difference in the value of imports and exports of only

physical goods or visible items, is taken into account, it is called

Balance of Trade or Net Exports.

Balance of Payments (BoP)

When the difference in the value of imports and exports of all the

three items i.e., visible, invisible and capital transfers, is taken into

account, it is called Balance of Payments (BoP). Balance of Payments

(BoP) is thus an overall record of all economic transactions of a

country in a given period, with rest of the world.

Balance of Payments (BoP) account broadly comprises of the

following components (i) Current account transaction and (ii)

Capital account transaction.

Current account transactions

These are the transactions relating to inflows and outflows of forex

of a routine transactions such as exports of goods and services,

remittances received from non-resident Indians, foreign tourists

visiting India and bringing forex into India and outflows in the form

of imports of goods and services, remittances by expatriates to their

home countries, expenses of resident Indians travelling abroad.

These inflows and outflows never match. When the outflows exceed

the inflows, a country has current account deficit.

Components of Current Account

Current account records the following transactions

(i) Export and import of goods (or of visible items).

(ii) Export and import of services (or of invisible items),

(iii) Uniliteral transfers from one country to the other.

  Current Account Balance = Balance of Visible Trade   + Balance of

Invisible Trade + Balance of Uniliteral Transfers

Capital account transactions

These are the transactions that lead to change in asset or liability

position of residents of a country, outside their own country. These

are longer-term flows in the form of borrowings (ECB), investments

(FDI), assistance by India to other countries or to India by other

Components of Capital Account

Following are the principal forms of capital account transactions

1. Foreign Investment : It has two sub-components

(i)  Foreign Direct Investment (FDI) referring to the purchase of assets

in the rest of the world, which allows control over that assets.

Example Purchase of a firm by TATA in the rest of the world.

(ii)  Portfolio Investment referring to purchase of an asset in the rest

of the world, without any control over that asset. Portfolio

investment into India also consists of Foreign Institutional

Investment (FIl).

Example Purchase of some shares of a company by TATA in the rest

2. Loans : It has two sub-components

(i) Commercial Borrowings referring to borrowing by a country

(including government and the private sector), from the

international money market. This involves market rate of interest

without considerations of any concession,

(ii) Borrowings as External Assistance referring to borrowing by a

country with considerations of assistance. It involves lower rate of

interest compared to that prevailing in the open market.

3. Banking Capital Transactions : referring to transactions of

external financial assets and liabilities of Commercial Banks and

Cooperative Banks operating as authorised dealers in foreign

exchange. These transactions include NRI deposits.

4. Reserve Account : The official reserve account records the

change in stock of reserve assets (also known as foreign exchange

reserves) at the country’s monetary authority.

Foreign Institutional Investment (Fll)

These are investments by entities from outside the country into the

financial assets like debts and shares of companies from a different

country, in which they are incorporated. FIIs are required to register

with SEBI (Securities and Exchange Board of India) and any foreign

individual wanting to invest into India has to co^pie through one of

Participatory Notes (P-Notes)

These are financial instruments used by investors or hedge funds

that are not registered with the Securities and Exchange Board of

India to invest in Indian securities. Indian-based brokerages buy

India-based securities and then issue participatory notes to foreign

investors. Any dividends or capital gains collected from the

underlying securities go back to the investors.

Global Depository Receipts (GDRs)

These are equity instruments issued in international markets like

London, Luxembourg etc. Indian companies use GDRs to raise

capital from abroad. GDRs are designated in dollars, euros etc.

American Depository Receipts (ADRs)

These are the equity instruments issued to American retail and

institutional investors. They are listed in New York, either on Nasdaq

or New York Stock Exchange.

Indian Depository Receipts (IDRs)

These are similar to ADR/GDR. They are used by non-Indian

companies in the Indian stock markets for issuing equity to Indian

NEER and REER

The Nominal Effective Exchange Rate (NEER) and Real Effective

Exchange Rate (REER) indices are used as indicators of external

competitiveness of the country over a period of time.

External Commercial Borrowings (ECBs)

An external commercial borrowing (ECB) is an instrument used in

India to facilitate the access to foreign money by Indian

corporations and PSUs (public sector undertakings).

ECBs include commercial bank loans, buyers' credit, suppliers'

credit, securitised instruments such as floating rate notes and fixed

rate bonds etc., credit from official export credit agencies and

commercial borrowings from the private sector window of

multilateral financial Institutions such as International Finance

Corporation (Washington), ADB, AFIC, CDC, etc. ECBs cannot be

used for investment in stock market or speculation in real estate.

NON-RESIDENT DEPOSITS - FEATURES

1. Account holder: NRI of Indian nationality or origin (RBI approval

for Bangladesh/Pakistan citizens).

2. Joint account: Can be in the names of two or more NRIs. With

close resident relatives, joint account (Former or Survivor) can be

opened. Relatives can operate a/c as power of attorney holder for

local withdrawals or remittance abroad in name of account holder.

3. Currencies: Any convertible currency.

4. Type of account: FOR only for a tenure of (a) 1 year and above

less than 2 years (b) 2 years and above less than 3 years (c) 3 years

and above less than 4 years (d) 4 years and above less than 5 years

(e) 5 years only. RD, SB or CA is not allowed.

5. Nomination facility is available.

6. Income Tax: Interest is not taxable. IDS not applicable.

NON-RESIDENT EXTERNAL (RUPEE ACCOUNT)

1. Account holder : NRIs of Indian nationality or origin (RBI approval

for Bangladesh/Pakistan citizens).

2. Joint account: Can be in the names of two or more NRIs. With

close resident relatives, joint account (Former or Survivor) can be

opened. Relatives can operate a/c as power of attorney holder for

local withdrawals or remittance abroad in name of account holder.

3. Currencies: Indian rupee by converting foreign currency.

4. Type of account: Current, saving or FOR. FOR period is at

discretion of banks.

5. Nomination facility is available.

6. Income Tax: Interest is not taxable. TDS not applicable.

SPECIAL ECONOMIC ZONE (SEZ)

The term special economic zone (SEZ) is commonly used as a

generic term to refer to any modern economic zone. In these zones

business and trades laws differ from the rest of the country.

Broadly, SEZs are located within a country's national borders.

The aims of the zones include: increased trade, increased

investment, job creation and effective administration.

•   Asia’s first Export Processing Zone (EPZ), was set up in Kandla, India

•   The first SEZ policy was announced in April, 2000, which inter-alia

provided for to make SEZ an engine of growth supported by quality

infrastructure backed up by altractive fiscal package.

SOME IMPORTANT TERMS IN INTERNATIONAL BANKING

1. Offshore Banking Units

As per RBI policy of Nov 12, 2002, within SEZs, the OBUs would be

virtually foreign branches of Indian banks located in India. The

major aspects of the guidelines are:

Eligibility Criteria : Banks operating in India viz. public sector,

private sector and foreign banks authorised to deal in foreign

exchange are eligible to set up OBUs.

Capital: Parent bank to provide a minimum of US$ 10 million to its

2. Currency Accounts

These accounts may be Nostro, Vostro or Loro Accounts.

NOSTRO ACCOUNT

A nostro account is one which is held within a foreign country by a

domestic bank, in the currency of the foreign country.

VOSTRO ACCOUNT

A vostro account is one which is held within a domestic country by a

foreign bank, in the currency of the domestic country.

Speaking from the bank's point-of-view:

 A nostro is our account of our money, held by you

 A vostro is your account of your money, held by us

LORO ACCOUNT (their account with you)

If a bank in India (say SBI) has an account with Citibank, New York

and another Indian bank say, BoB wants to refer to that account

while corresponding with Citibank, New York, it would refer the said

account as Loro account.

MIRROR ACCOUNT

The account of a foreign bank, as maintained in the books of a bank

in India is called Mirror or Shadow account. It is the exact copy of

the entries in Nostro Account.

It is a transaction where the bank purchases or sells the foreign

currency simultaneously, for different maturities, say purchase of

spot and sale of forward or vice-versa OR purchase of two month

forward and sale of three month forward (which is called forward to

forward swap). Compared to ordinary deals, in a swap deal, the

difference between the buying and selling rates is ignored and

buying and selling is done at the same rate.

A foreign currency is generally quoted at different rates in different

market due to uncertainties prevailing. The banks may purchase and

sell foreign currency in different centres to take advantages of these

rate differentials. Such transactions are called arbitrage operation.

It is  a contract whose value is derived from the value of another

assets, which could be a share, a stock market index, an interest

rate, an oil price or a currency. When price of this asset changes, the

value of derivative also changes.

6. Forex reserves

“These are the reserves with the country (with RBI in India on behalf

of Govt. of India) which are used to finance imports/make payments

to countries abroad in settlement of transactions. The movement in

forex reserves is the net result of all external transactions.

7. FREE TRADE ZONES

FTZ or Export Processing Zones are those industrial estates

cordoned off from domestic tariff areas, where trade barriers

applicable to the rest of the economy do not apply and where

export-oriented units can operate free of import duties or

quantitative restrictions and are given other advantages including

tax exemption.

8. Globalisation

Globalisation means adoption of a global outlook for the business

and business strategy aimed at enhancing global competitiveness.

The purchase or sale of a futures or options contract as a safeguard

usually against an opposite position in the cash market.

It is the London Inter-Bank Offered Rate and represents the rate at

which the banks in London will lend a currency to other banks for a

given period of time.

11. Bill of Lading

Bill of Lading (BL) is a legal document between the shipper

(generally exporter) of a particular commodity and the carrier

(shipping company) detailing the type, quantity and destination of

the goods being carried. This is also called Waybill in US and Canada.