MONEY MARKET INSTRUMENTS

CHAPTER -1INTRODUCTIONMoney market instruments are generally characterized by a high degree of safety of principal and are most commonly issued in units of $1 million or more. Maturities range from one day to one year; the most common are three months or less. Active secondary markets for most of the instruments allow them to be sold prior to maturity. Unlike organized securities or commodities exchanges, the money market has no specific location. Available from financial institutions, money markets give the smaller investor the opportunity to get in on treasury securities. The institution buys a variety of treasury securities with the money you invest. The rate of return changes daily, and services such as check writing may be offered. The major participants in the money market are commercial banks, governments, corporations, government-sponsored enterprises, money market mutual funds; futures market exchanges, brokers and dealers. Whenever abear marketcomes along, investors realize (yet again!) that the stock market is a risky place for their savings. It's a fact we tend to forget while enjoying the returns of a bull market! Unfortunately, this is part of therisk-return trade off. To get higher returns, you have to take on a higher level of risk. For many investors, a volatile market is too much to stomach - themoney marketoffers an alternative to these higher-risk investments.

The money market is better known as a place for large institutions and government to manage their short-term cash needs. However, individual investors have access to the market through a variety of different securitiesInthe financial marketplace, a distinction is made between thecapital marketsand themoney markets. The capital market is a source of intermediate-term to long-term financing in the form of equity or debt securities with maturities of more than one year. The money market provides very short-term funds to corporations, municipalities and the United Statesgovernment. Money market securities are debt issues with maturities of one year or lessA segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. The money market is used by participants as a means for borrowing and lending in the short term, from several days to just under a year. Money market securities consist of negotiable certificates of deposit (CDs), bankers acceptances, U.S. Treasury bills, commercial paper, municipal notes, federal funds and repurchase agreements (repos).Money-market instrumentsare high liquid, low risk investments that have maturities of one year or less.There are two types of debt instruments issued in money markets. The first type isdiscount securities. These instruments bear no interest and are sold at a discount to the face value. On the maturity date, the holder receives the face amount. US T-Bills are examples of discount securities.The second type is interest atmaturity securities. These are interest-bearing securities which pay the face amount plus a coupon on the maturity date. The coupon is equal to the product of the coupon rate, the accrual time (from dated date to maturity date) and the face amount. LIBOR deposits are examples of interest at maturity securities.

1.1DEFINITION AND MEANING OF MONEY MARKETOne of the sections of a financial market where securities and financial instruments with short-term maturities are traded is called the money market.

Definition:One of the sections of a financial market where securities and financial instruments with short-term maturities are traded is called the money market. Financial assets like treasury bills, certificates of deposits, commercial paper and bankers' acceptance are some of the short-term debt securities traded in the money market.

Description:The instruments traded in the money market have a short-term maturity period ranging from 30 days to a year. Hence this market is the best source to invest in liquid assets.

The only demerit accompanying the money market is the disorganization. Unlike organized markets, e.g. capital markets, the money market is unregulated and informal. In addition, this market gives lesser returns to the investor. However, the money market is regarded as safe.

MEANINGA segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. The money market is used by participants as a means for borrowing and lending in the short term, from several days to just under a year. Money market securities consist of negotiable certificates of deposit (CDs), bankers acceptances, U.S. Treasury bills, commercial paper, municipal notes, federal funds and repurchase agreements (repos)

CHAPTER-2STRUCTURE,FUNCTIONS,ADVANTAGES & DISADVANTAGES OF MONEY MARKET2.1 STRUCTURE OF MONEY MARKET IN INDIA

There are two kinds of markets where borrowing and lending of money takes place between fund scarce and fund surplus individuals and groups. The markets cateringthe need of short term funds are called Money Markets while the markets that cater to the need of long term funds are called Capital Markets. Thus, money markets is that segment of financial markets where borrowing and lending of the short-term funds takes place. The maturity of the money market instruments is one day to one year. In our country, Money Markets are regulated by both RBI and SEBI. Indian money market is divided into organized and unorganized segments. Unorganized market is old Indigenous market mainly made of indigenous bankers, money lenders etc. Organized market is that part which comes under the regulatory purview of RBI and SEBI.The nature of the money market transactions is such that they are large in amount and high in volume. Thus, the entire market is dominated by small number of large players. At the same time, the money market in India is yet underdeveloped. The key players in the organized money market include Governments (Central and State), Discount and Finance House of India (DFHI), Mutual Funds, Corporate, Commercial / Cooperative Banks, Public Sector Undertakings (PSUs), Insurance Companies and Financial Institutions and Non-Banking Financial Companies (NBFCs).http://www.gktoday.in/blog/structure-functions-of-money-market-in-india/

2.2MONEY MARKET FUNCTIONSA money market performs a number of functions in an economy.Provides Funds:It provides short-term funds to the public and private institutions needing such financing for their working capital requirements. It is done by discounting trade bills through commercial banks, discount houses, brokers and acceptance houses. Thus the money market helps the development of commerce, industry and trade within and outside the country. Use of Surplus Funds:It provides an opportunity to banks and other institutions to use their surplus funds profitably for a short period. These institutions include not only commercial banks and other financial institutions but also large non-financial business corporations, states and local No Need to Borrow from Banks:The existence of a developed money market removes the necessity of borrowing by the commercial banks from the central bank. If the former find their reserves short of cash requirements they can call in some of their loans from the money market. The commercial banks prefer to recall their loans rather than borrow from the central banks at a higher rate of interests. Helps Government:The money market helps the government in borrowing short-term funds at low interest rates on the basis of treasury bills. On the other hand, if the government were to issue paper money or borrow from the central bank. It would lead to inflationary pressures in the economy.Helps in Monetary Policy:A well developed money market helps in the successful implementation of the monetary policies of the central bank. It is through the money market that the central banks are in a position to control the banking .system and thereby influence commerce and industry.Helps in Financial Mobility:By facilitating the transfer for funds from one sector to another, the money market helps in financial mobility. Mobility in the flow of funds is essential for the development of commerce and industry in an economy. Promotes Liquidity and Safety:One of the important functions of the money market is that it promotes liquidity and safety of financial assets. It thus encourages savings and investments. Equilibrium between Demand and Supply of Funds:The money market brings equilibrium between the demand and supply of loanable funds. This it does by allocating saving into investment channels. In this way, it also helps in rational allocation of resources. Economy in Use of Cash:As the money market deals in near-money assets and not money proper, it helps in economising the use of cash. It thus provides a convenient and safe way of transferring funds from one place to another, thereby immensely helping commerce and industry.Constituents of Money Market:Like other markets, money market also has three constituents: (a) It has buyers and sellers in the form of borrowers and lenders, (b) It has a commodity; it deals with short-maturity credit instruments, like commercial bills, treasury bills, etc. (c) It has a price in the form of rate of interest which is an item of cost to the borrower and return to the lender.Heterogeneous Market:The money market is not a single homogeneous market but consists of several sub-markets, each market dealing with a specific short-term credit instrument, e.g., call money market, trade bill market, etc. Thus, it is difficult to talk about a general money market.Dealers of Money Market:The financial institutions in the money market meet the short-term needs of the borrowers. The borrowers in the money market are traders, manufactures, speculators, and even government institutions. The lenders in the money market are commercial banks, central banks, non-bank financial intermediaries, etc.Short-term Loans:Money market deals with short-term loans. In a money market, the borrowers can obtain funds for periods varying from a day, a week, a month, or three to six months.near-Money Assets:Money market does not deal in money, but in short-term financial instruments or near-money assets. These assets are relatively liquid and readily marketable. The assets against which the funds can be borrowed in the money market include short-term government securities, bills of exchange, bankers' acceptances, etc.Physical Contact Not Necessary:Money market does not refer to a specific place where borrowers and lenders meet each other. In fact, it is not necessary that the borrowers and lenders should have personal contact with each other at a particular place.They may carry on their negotiations through telephone or mail. Thus, money market simply relates to the arrangement which establishes direct an indirect contact between the borrowers and lenders.Different from Capital Market:Money market is different from capital market on the basis of maturity period. Money market deals with the short-term lending and borrowing of funds, while capital market deals with medium and long-term lending and borrowing of funds.Association with Big Cities:Generally, money markets are associated with important places or localities. Almost every big city has a money market. In this way, we have London money market, New York money -market, Bombay money market, etc.Change with Place and Time:Though the functions of money markets in different countries are broadly the same, the instruments, institutions and practices of these markets vary considerably from country to country. Money markets also change with time.For example, in London money market, bill of exchange used to be of great importance. But, now because of change in important.2.3ADVANTAGES AND DISADVANTAGES OF MONEY MARKET INVESTMENTSADVANTAGESSAFE TO PARK FUNDSThe stock markets are generally in a continuous flux, and when the investors are not sure of where to park their money, money market instruments can be a safe place to do so.

HIGHER RETURN ON INVESTMENTS Money market funds typically pay slightly higher interest rates than traditional savings and current accounts. Sometimes the money market generates single digit returns, which in a down market can be quite attractive.

TAX- FREE The tax free money market funds can also offer an additional boost for those in the higher tax brackets and avoid generating further taxable income.LIQUIDITY Money market investments are the closest to cash in hand and hence can be regarded as the most liquid form of investment. The investors can buy into them and sell them with comparative ease. LESS OR NO FEE Theres little or no fee or sales charges associated with these funds, also since these can be sold or bought at any time, quite like how money can be deposited and withdrawn from the bank. Disadvantages of Money Market Instruments PURCHASING POWERCAN GET IMPACTED If the return is decent but the inflation is just a percent higher, the investor will be losing on the purchasing power each year. Gradually the money they earn may not help them to cope with the rising cost of living, hence making them poorer.SOME RETURNS CAN VARY AND CAN BE RISKIER While money market funds are generally safe and invest only in government securities, however, sometimes to yield better returns they might take some risk. So to earn a greater return percentage, they might invest the money in bonds or commercial papers that carry additional risks, which might not be a smarter idea.OPPORTUNITY COST By investing in money market funds that yields only 2-3%, the investor might be missing out on the opportunity for better rate of return, which can impact the wealth building ability tremendously

ACCESSIBILITYA money market investment culminates in the return of the principal amount at maturity. This period can be set between one day and thirteen months, which makes them more accessible.RISKSThe money markets are in continuous flux. Because risk is lower than investing in stock market shares, it makes use of a money market facility more predictable.RETURN ON INVESTMENTBetter interest rate returns can be obtained than keeping money in a current account. The higher the amount invested, the higher the rate of return.WITHDRAWAL FACILITIESMost money market investments offer the investor some degree of freedom to make withdrawals. Quite often the investor can make between two and five withdrawals during the period of the investment, depending on the length of maturity period.STORING CASH RESERVESCash reserves are needed to deal with anemergency or disaster. Some propagate the need for a reserve to enable survival for up to ten months. Rather than have this cash lying around idly, a money market investment can be very useful to ensure that it at least keeps up with inflation.Money market investments can be a very useful part of a diversified investment portfolio. Consulting a CFP like a Stone House Capital

DISADVANTAGESMarket Absence of Insufficient Lack of Less numberIntegration Funds or Organized of Dealers Lack of proper Resources Banking Poor number of integration The Indian System dealers in the between economy with its short-term Organized Banking system assets who can seasonal suffers from Unorganized structure faces act as mediators segments major between the frequent weaknesses shortage of government and such as the banking financial the NPA, huge recourse. system. losses, poor efficiency

2.4MAJOR PARTICIPANTS IN MONEY MARKET INSTRUMENTSMajor Players in money marketThe major players and their main role in the money market is listed below :PlayerRole

Central BankIntermediary

GovernmentBarrowers/Issuers

BankBarrowers/Issuers

Discount HousesMarket markets

FIsBarrowers/Issuers

MFsLenders/Investors

FIIsInvestors

DealersIntermediaries

CorporatesIssuers

CHAPTER-3MONEY MARKET INSTRUMENTS3.1 INTRODUCTION TO MONEY MARKET INSTRUMENTS The term "Money Market" refers to the market for short-term requirement and deployment of funds. Money market instruments are those instruments, which have a maturity period of less than one year. The most active part of the money market is the market for overnight and term money between banks and institutions (called call money) and the market for repo transactions. The former is in the form of loans and the latter are sale and buy back agreements both are obviously not traded. The main traded instruments are commercial papers (CPs), certificates of deposit (CDs) and treasury bills (T-Bills). All of these are discounted instruments i.e. they are issued at a discount to their maturity value and the difference between the issuing price and the maturity/face value is the implicit interest. One of the important features of money market instruments is their high liquidity and tradability A key reason for this is that these instruments are transferred by endorsement and delivery. Another important feature is that there is no tax deducted at source from the interest

3.2 CHARACTERISTICS OF MONEY MARKET INSTRUMENTSMoney market instruments give businesses, financial institutions and governments a means to finance their short-term cash requirements. Three important characteristics are:

Liquidity -Since they arefixed-income securitieswith short-term maturities of a year or less, money market instruments are extremely liquid.

Safety- They also provide a relatively high degree of safety because their issuers have the highestcredit ratings.

Discount Pricing- A third characteristic they have in common is that they are issued at adiscountto their face value.3.3 ADVANTAGES AND DISADVANTAGES OF MONEY MARKET INSTRUMENTSVarietyMoney market instruments include short-term bank certificates of deposit (CDs), municipal bonds, Treasury bills and other government securities. More sophisticated examples include commercial paper, repurchase agreements and bankers' acceptances. Individual investors most commonly invest in money market deposit accounts and money market mutual funds. A money market deposit account is a special type of bank or savings account that allows check writing. A money market mutual fund is not a bank account even if a bank sells it. It is a mutual fund investing in money market instruments.LiquidityLiquidity of an investment refers to how quickly and easily investors can access their money. Money market instruments are relatively liquid by definition because the money is available in a year or less. Fixed terms range from one day to one year. Money market deposit accounts and money market mutual funds have high liquidity, as depositors may access money by check when they need it. Some money market instruments also permit resale to secondary buyers if the investor needs the principal before maturity. Treasury bills and some special CDs fall into this category.ReturnMoney market instruments pay interest to the lender. Bank money market accounts, for example, add interest on each monthly statement. Other instruments, including Treasury bills, pay interest only at maturity. A few types of money market investments pay interest exempt from federal income tax. Short-term exempt bills issued by municipal and state governments fall into this category.SafetyMoney market investments are safer than most due to their liquidity. Their liquidity minimizes long-term uncertainties about companies and governments and helps protect against interest rate increases. Instruments such as Treasury bills gain additional safety from their federal government backing. Government-insured money market deposit accounts also have protection against bank failure if their balances fall within insurance guidelines. As of the date of publication, individual accounts are federally insured for up to $250,000. Money market mutual funds do not carry government insurance, so depositors can lose money if the share price dips below $1.00NEED OF MONEY MARKET INVESTMENTS1. Need for short term funds by banks2. Outlet for deploying funds on short term basis 3. Need to keep the SLR & CRR as prescribed 4. Optimize the yield on temporary surplus funds 5. Regulate the liquidity & interest rates

Risks and DisadvantagesThe various money market instruments have some disadvantages. The most serious risk for any investment is default. If the business or government issuing the instrument fails, the investor can lose part or all of his money. Locking up money for a relatively long period, such as one year, also increases the risk of rising interest rates. Usually investors must pay a penalty to cash out a CD ahead of time. Banks also charge fees for exceeding the allowed number of checks in a money market deposit account. Money market mutual funds typically charge a management fee of 1 percent.

3.4 TYPES OF MONEY MARKET INSTRUMENTSTREASURY BILLSTreasury Bills are Money Market instruments to finance the short term requirements of the Government of India. These are discounted securities and thus are issued at a discount to face value. The return to the investor is the difference between the maturity value and issue priceTreasury Bills or T-Bills as they are known are issued by the Government of India to meet their short-term requirement. T-Bills are issued for 91-day, 182-day and 364-day maturities. T-Bills are issued at a discount to their face value and redeemed at par.364-day T-Bills forms part of the government borrowing programme. There are three types of Treasury Bills.91-day T-bill- maturity is in 91 days. Its auction is weekly on every Wednesday.182-day T-bill- maturity is in 182 days. Its auction is on every alternate Wednesday other than a reporting week.364-Day T-bill- maturity is in 364 days. Its auction is on every alternate Wednesdayin a reporting week.

Features of T-Bills auction All T-Bills auctions are Price-based. All T-Bills are auctioned on Multiple-Price basis.The RBI auctions 91-day T-Bills every Wednesday, 182-day T-Bills on every alternate wednesday and 364-day T-Bills on the Wednesday of the reporting Friday week.RBI GUIDELINES FOR TREASURY BILLThese are issued by the Reserve Bank of India on behalf of the Government of India and are thus actually a class of Government Securities. At present, T-Bills are issued in maturity of 14 days, 91 days and 364 days. The RBI has announced its intention to start issuing 182 day T-Bills shortly. The minimum denomination can be as low as Rs100, but in practice most of the bids are large bids from institutional investors who are allotted T-Bills in dematerialized form. RBI holds auctions for 14 and 364 day T-Bills on a fortnightly basis and for 91 day T-Bills on a weekly basis. For example a Treasury bill of Rs. 100.00 face value issued for Rs. 91.50 gets redeemed at the end of it's tenure at Rs. 100.00. 91 days T-Bills are auctioned under uniform price auction method where as 364 days T-Bills are auctioned on the basis of multiple price auction method. There is a notified value of bills available for the auction of 91 day T-Bills which is announced 2 days prior to the auction. There is no specified amount for the auction of 14 and 364 day T-Bills. The result is that at any given point of time, it is possible to buy T-Bills to tailor ones investment requirements. Banks, Primary Dealers, State Governments, Provident Funds, Financial Institutions, Insurance Companies, NBFCs, FIIs (as per prescribed norms), NRIs & OCBs can invest in T-Bills.Coupon terms T-Bill is a discounted instrument and is issued in the form of a zero coupon instrument at discount to face value redeemable at par on maturity. Repayment The amount on repayment is directly credited to the current account of the investor held with RBI.Risks on investment in T-Bills Price risk. There is price risk due to interest rate sensitivity Liquidity risk ( in some maturity segments). It should be ensured that investment in illiquid T-Bills may not be made for that maturity profile. Counterparty risk. This is minimal due to DVP mode of settlement. Operational risk. This is minimal and it is ensured that trades are confirmed on the trade date itself and the settlement is done before the time prescribed by RBI. Reputation risk. The instances of SGL bouncing has reduced due to introduction of Liquidity Adjustment Facility (LAF) by RBI. RBI has also mentioned the introduction of Real Time Gross Settlement (RTGS) to avoid such instances Taxation The discount earned on T-Bills, as well as the profit/loss on investment is charged under the head Income from Business and Profession. By virtue of provison (iv) to Section 193 of income tax act no tax is required to be deducted at source on interest payable on any security of Central or State Government.(only for coupon payments) No TDS is attracted on discount i.e. differential between issue price and face value in case of treasury bills. Potential investors have to put in competitive bids at the specified times. These bids are on a price/interest rate basis. The auction is conducted on a French auction basis i.e. all bidders above the cut off at the interest rate/price which they bid while the bidders at the clearing/cut off price/rate get pro rata allotment at the cut off price/rate. The cut off is determined by the RBI depending on the amount being auctioned, the bidding pattern etc. By and large, the cut off is market determined although sometimes the RBI utilizes its discretion and decides on a cut off level which results in a partially successful auction with the balance amount devolving on it. This is done by the RBI to check undue volatility in the interest rates. Non-competitive bids are also allowed in auctions (only from specified entities like State Governments and their undertakings and statutory bodies) wherein the bidder is allotted T-Bills at the cut off price.COMMERCIALPAPERSThe instrument issued in the form of a promissory note. CP was introduced in India in 1990 with a view to enabling highly rated corporate borrowers to diversify their sources of short-term borrowings and to provide an additional instrument to investors. These are issued by corporate entities in denominations of Rs2.5mn and usually have a maturity of 90 days. CPs can also be issued for maturity periods of 180 and one year but the most active market is for 90 day CPs. Commercial Paper is the short term unsecured promissory note issued by corporates and financial institutions at a discounted value on face value. They come with fixed maturity period ranging from 1 day to 270 days. These are issued for the purpose of financing of accounts receivables, inventories and meeting short term liabilities. The return on commercial papers is is higher as compared to T-Bills so as the risk as they are less secure in comparison to these bills. It is easy to find buyers for the firms with high credit ratings. These securities are actively traded in secondary market Two key regulations govern the issuance of CPs-firstly, CPs have to be compulsorily rated by a recognized credit rating agency and only those companies can issue CPs which have a short term rating of at least P1. Secondly, funds raised through CPs do not represent fresh borrowings for the corporate issuer but merely substitute a part of the banking limits available to it. Hence, a company issues CPs almost always to save on interest costs i.e. it will issue CPs only when the environment is such that CP issuance will be at rates lower than the rate at which it borrows money from its banking consortium.Who can issue Commercial Paper (CP) Highly rated corporate borrowers, primary dealers (PDs) and satellite dealers (SDs) and all-India financial institutions (FIs) which have been permitted to raise resources through money market instruments under the umbrella limit fixed by Reserve Bank of India are eligible to issue CP. A company shall be eligible to issue CP provided - (a) the tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs. 4 crore; (b) the working capital (fund-based) limit of the company from the banking system is not less than Rs.4 crore and (c) the borrowal account of the company is classified as a Standard Asset by the financing bank/s.Commercial Papers when issued in Physical Form are negotiable by endorsement and delivery and hence highly flexible instruments

Maturity CP can be issued for maturities between a minimum of 15 days and a maximum upto one year from the date of issue. If the maturity date is a holiday, the company would be liable to make payment on the immediate preceding working day.

Denominations CP can be issued in denominations of Rs.5 lakh or multiples thereof.

Investment in CP CP may be issued to and held by individuals, banking companies, insurance companies, other corporate bodies registered or incorporated in India and unincorporated bodies, Non-Resident Indians (NRIs) and Foreign Institutional Investors (FIIs). However, investment by FIIs would be within the 30 per cent limit set for their investments in debt instruments. Non resident Indians can invest in CPs on a non repatriable, non transferable basis.Trading Trading is Over-the-counter or on the NSE. Market participants quote dealing levels on yield basis specified up to two decimal places. For quotes on the NSE equivalent prices up to 4 decimal prices need to be specified. Two way quotes are rarely offered for Commercial Paper. Secondary market transactions do not attract any stamp duty. There are no brokers in the Commercial Paper market. Trading is done over the counter with the counterparties involved.Risks Involved Liquidity risk : This risk is managed be laying down deal size limits for the dealers, heads of desk and heads of groups. Credit risk : This risk is managed by laying down counterparty limits based upon the financial strength of the counterparty. Operational risk : The risk involved in the operations of the issuer.

Taxation The CBDT vide circular no 647 dated 22nd March 1993 has clarified that the difference between the issue price and the face value of the Commercial Papers and the Certificates of Deposits is to be treated as 'discount allowed' and not as 'Interest paid'. Hence, the provisions of the Income-tax Act relating to deduction of tax at source are not applicable in the case of transactions in these two instruments.Credit-enhanced commercial paper Since its introduction in the Indian market in 1990, commercial paper (CP) has gained popularity as a convenient short-term debt instrument. Companies use it today to reduce their borrowing costs while investors use the tradable instrument to park their short-term funds. Yet, since commercial paper is a confidence-sensitive instrument, its benefits have been limited to highly rated companies so far. This is evident from the fact that 'P1+' paper accounted for 94 per cent of the Indian CP market. Even globally, instruments rated 'P1' and 'P1+' account for 89 per cent of the total CP market. CRISIL, however, believes that, if issuers look beyond plain vanilla CPs, the benefits of this short-term instrument can be extended to companies that have not 2. Asset-Backed Commercial Paper Concept Asset-backed CPs entail the creation of a pool of assets that are assigned to a bankruptcy-remote entity (a special purpose vehicle called conduit) to back up the repayment on the CP. This special purpose vehicle (SPV) buys assets from the issuer and funds them by issuing a CP. The instrument is typically used to fund trade receivables. The issuer collects the receivables and redeems the instrument by passing funds to the investors through the conduit. The conduit is a nominally capitalised SPV and is structured to be bankruptcy-remote. This is accomplished by limiting the scope of the conduit's business activities and liabilities. Such SPVs are generally sponsored by banks, which also provide liquidity support to ensure timely repayments. The underlying pool of assets can also be revolving wherein the pool is regularly replenished with similar assets as and when an asset matures. COMMERCIAL BILLS Bills of exchange are negotiable instruments drawn by the seller (drawer) of the goods on the buyer (drawee) of the goods for the value of the goods delivered. These bills are called trade bills. These trade bills are called commercial bills when they are accepted by commercial banks. If the bill is payable at a future date and the seller needs money during the currency of the bill then he may approach his bank for discounting the bill. The maturity proceeds or face value of discounted bill, from the drawee, will be received by the bank. If the bank needs fund during the currency of the bill then it can rediscount the bill already discounted by it in the commercial bill rediscount market at the market related discount rate. The RBI introduced the Bills Market scheme (BMS) in 1952 and the scheme was later modified into New Bills Market scheme (NBMS) in 1970. Under the scheme, commercial banks can rediscount the bills, which were originally discounted by them, with approved institutions (viz., Commercial Banks, Development Financial Institutions, Mutual Funds, Primary Dealer, etc.). With the intention of reducing paper movements and facilitate multiple rediscounting, the RBI introduced an instrument called Derivative Usance Promissory Notes (DUPN). So the need for physical transfer of bills has been waived and the bank that originally discounts the bills only draws DUPN. These DUPNs are sold to investors in convenient lots of maturities (from 15 days upto 90 days) on the basis of genuine trade bills, discounted by the discounting bank.CERTIFICATE OF DEPOSITS

It is a short term borrowing more like a bank term deposit account. It is a promissory note issued by a bank in form of a certificate entitling the bearer to receive interest. The certificate bears the maturity date, the fixed rate of interest and the value. It can be issued in any denomination. They are stamped and transferred by endorsement. Its term generally ranges from three months to five years and restricts the holders to withdraw funds on demand. However, on payment of certain penalty the money can be withdrawn on demand. The returns on Certificate of Deposits are higher than T-Bills because it assumes higher level of risk. While buying Certificate of Deposit, return method should be seen. Returns can be based on Annual Percentage Yield (APY) or Annual Percentage Rate (APR). In APY, interest earned is based on compounded interest calculation. However, in APR method, simple interest calculation is done to generate the return. Accordingly, if the interest is paid annually, equal return is generated by both APY and APR methods.However, if interest is paid more than once in a year, it is beneficial to opt APY over APR.

Advantages of Certificate of Deposit as a money market instrument:1. Since one can know the returns from before, the certificates of deposits are considered much safe.2. One can earn more as compared to depositing money in savings account.Disadvantages of Certificate of Deposit as a Money Market instrument:1. As compared to other investments the returns is less.2. The money is tied up along with the long maturity period of the Certificate of Deposit. Huge penalties are paid if one gets out of it before maturity.REPURCHASE AGREEMENT( REPO)Repos were introduced in 1992 . Repo is a repurchase agreement. It means selling a security under an agreement to repurchase it at a predetermined date and rate. Repo transactions are affected between banks and financial institutions and among bank themselves, RBI also undertake Repo.In November 1996, RBI introduced Reverse Repo. It means buying a security on a spot basis with a commitment to resell on a forward basis. Reverse Repo transactions are affected with scheduled commercial banks and primary dealers.In March 2003, to broaden the Repo market, RBI allowed NBFCs, Mutual Funds, Housing Finance and Companies and Insurance Companies to undertake REPO transactions.Repurchase Agreements which are also called as Repo or Reverse Repo are short term loans that buyers and sellers agree upon for selling and repurchasing. Repo or Reverse Repo transactions can be done only between the parties approved by RBI and allowed only between RBI-approved securities such as state and central government securities, T-Bills, PSU bonds and corporate bonds. They are usually used for overnight borrowing. Repurchase agreements are sold by sellers with a promise of purchasing them back at a given price and on a given date in future. On the flip side, the buyer will also purchase the securities and other instruments with a promise of selling them back to the seller. BANKERS ACCEPTANCEBanker's Acceptance is like a short term investment plan created by non-financial firm, backed by a guarantee from the bank. It's like a bill of exchange stating a buyer's promise to pay to the seller a certain specified amount at a certain date. And, the bank guarantees that the buyer will pay the seller at a future date. Firm with strong credit rating can draw such bill. These securities come with the maturities between 30 and 180 days and the most common term for these instruments is 90 days. Companies use these negotiable time drafts to finance imports, exports and other trade.

CALL AND NOTICE MONEY MARKETThe market for extremely short-period is referred as call money market. Under call money market, funds are transacted on overnight basis. The participants are mostly banks. Therefore it is also called Inter-Bank Money Market. Under notice money market funds are transacted for 2 days and 14 days period. The lender issues a notice to the borrower 2 to 3 days before the funds are to be paid. On receipt of notice, borrower have to repay the funds.In this market the rate at which funds are borrowed and lent is called the call money rate. The call money rate is determined by demand and supply of short term funds. In call money market the main participants are commercial banks, co-operative banks and primary dealers. They participate as borrowers and lenders. Discount and Finance House of India (DFHI), Non-banking financial institutions like LIC, GIC, UTI, NABARD etc. are allowed to participate in call money market as lenders.Call money markets are located in big commercial centres like Mumbai, Kolkata, Chennai, Delhi etc. Call money market is the indicator of liquidity position of money market. RBI intervenes in call money market as there is close link between the call money market and other segments of money marketBONDSInfinance, abondis an instrument of indebtedness of the bond issuer to the holders. It is a debtsecurity, under which the issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay theminterest(thecoupon) and/or to repay the principal at a later date, termed thematuritydate. Interest is usually payable at fixed intervals (semiannual, annual, sometimes monthly). Very often the bond is negotiable, i.e. the ownership of the instrument can be transferred in the secondary market. This means that once the transfer agents at the bank medallion stamp the bond, it is highly liquid on the second marketThus a bond is a form ofloanorIOU: theholderof the bond is the lender (creditor), theissuerof the bond is the borrower (debtor), and the couponis the interest. Bonds provide the borrower with external funds to finance long-terminvestments, or, in the case ofgovernment bonds, to finance current expenditure.Certificates of deposit(CDs) or short termcommercial paperare considered to bemoney market instruments and not bonds: the main difference is in the length of the term of the instrument.

BANK GUARANTEEAGuarantee by Bank (banker's guarantee)is a written undertaking wherein the bank agrees to make stipulated payments on your behalf should you fail to fulfill or carry out specified terms of a contract. Guarantees may also be issued in respect of the purchase of fixed property and against cash cover.The bank's liability is restricted to the payment of a sum of money and under no circumstances accepts responsibility for the completion of the customer's contract.Features Guaranteesmay be continuing or for a specified period - wherever possible a definite or determined expiry date or a clause specifying a period of notice or withdrawal is to be included in the guarantee. The party in whose favor the guarantee is issued is entitled to specify the wording of the document. (At your request the bank can draft the wording of the document.) Any demands for payment under a guarantee are to be made in writing.Benefits You can avoid having to pay in advance or lodging cash cover to secure a purchase or contract thereby saving interest on your funds. If cash cover is lodged with the bank under pledge you will be paid interest on the investment.EURODOLLARSEurodollars are bank deposit liabilities denominated in U.S. dollars. It's not subject to U.S. banking regulations. For the most part, banks offeringEurodollar depositsare located outside the United States. However, since late 1981 non-U.S. residents have been able to conduct business free of U.S. banking regulations at International Banking Facilities (IBFs) in the United States. Individuals, corporations, or governments from anywhere in the world may own Euro deposits. The exception are that only non-U.S. residents can hold deposits at IBFs.

The Money Market Instruments

InstrumentPrincipal Borrowers

Discount WindowBanks

Negotiable Certificates ofDeposit (CDs)Banks

Eurodollar Time Depositsand CDsBanks

Repurchase AgreementsSecurities dealers, banks, non-financial corporations, governments (principal participants)

Treasury BillsU.S. government

Municipal NotesState and local governments

Commercial PaperNon-financial and financial businesses

Bankers AcceptancesNon-financial and financial businesses

Government-SponsoredEnterprise SecuritiesFarm Credit System,Federal Home Loan BankSystem, Federal NationalMortgage Association

Shares in Money MarketInstrumentsMoney market funds, localgovernment investmentpools, short-terminvestment funds

Futures ContractsDealers, banks (principalusers)

Futures OptionsDealers, banks (principalusers)

SwapsBanks (principal dealers

CHAPTER-4CURRENT SCENARIO :MONEY MARKET RATES AND VOLUMES

Money Market Rates and Volumes

DateTypeOpenHighLowLast TradeWtd AvgVolume (Rs. Cr.)

05-Oct-2015Call6.75006.90005.25006.10006.620413273.46

05-Oct-2015Repo6.85006.90006.00006.70006.712842389.73

05-Oct-2015CBLO6.75006.75006.50006.50006.666779484.65

05-Oct-2015LAF Repo6.75006.75006.75006.75006.75004022.00

03-Oct-2015Call5.25007.25004.50005.75005.55051134.16

03-Oct-2015Repo0.00000.00000.00000.00000.00000.00

03-Oct-2015CBLO6.10006.15004.05005.76005.848316380.65

03-Oct-2015LAF Repo6.75006.75006.75006.75006.75000.00

03-Oct-2015LAF Reverse Repo5.75005.75005.75005.75005.750015294.00

INDIAN MONEY MARKET RATESIndian Overnight RatesNDS-CALLCROMSCBLONDS-OMFX-ClearMarketOpenHighLowLTRVolume (Crs.)WARPrev. Day WARPrev. Day Vol (Crs.)

CALL6.756.905.256.1013273.466.625.551134.16

CBLO6.756.756.506.5079484.656.675.8516380.65

REPO6.856.906.006.7042389.736.710.000.00

Money Market135147.846.685.8317514.81

CHAPTER-5CONCLUSIONSThe money market is a vibrant market, affecting our everyday lives.As the short-term market for money, money changes hands in a short time frame and the players in the market have to be alert to changes, up to date with news and innovative with strategies and products In brief, various policy initiatives by the Reserve Bank have facilitated development of a wider range of instruments such as market repo, interest rate swaps, CDs and CPs. This approach has avoided market segmentation while meeting demand for various products. These developments in money markets have enabled better liquidity management by the Reserve BankThese are major reforms undertaken in the money market in India. Apart from these, the stamp duty reforms, floating rate bonds, etc. are some other prominent reforms in the money market in India. Thus, at the end we can conclude that the Indian money market is developing at a good speed.

CHAPTER- 6BIBLIOGRAPHYREFERENCES & ARTICLESFabozzi, Frank J., Steven V. Mann, and Moorad Choudhry.The Global Money Markets. John Wiley and Sons, 2002.

Levinson, Marc.Guide to Financial Markets. Bloomberg Press, 2003.

Madura, Jeff.Financial Markets and Instruments. Thomson South-Western, 2006WEBSITES:RBIs site http://rbi.org.inIndian Institute Of Banking & Finance http://www.iibf.org.inSBI DFHIs site http://sbidfhi.comwww.economictimes.com

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