T.Y.B.B.I MONEY MARKETIntroductionThe financial system of any country is the backbone of the economyof that country.Thefinancial systemsof all economiesarebroadlysubdi!ided into money market" ca#ital market" $ilted$ed securities market andforei$ne%chan$emarket. Themoneymarket" ca#ital market andthe$iltsecurities market #ro!ides a!enues to the sur#lus sector such as householdinstitutions in the economy to de#loy their funds to the deficit sector such ascor#orate and $o!ernment sectors to mobili&e funds for their re'uirements.The o#erations in the money market are $enerally shortterm (u#to ) year* innature" in ca#ital market shortterm to lon$ term and in $ilt securities market$enerally lon$term. +o,e!er" in an inte$rated financial system" theoccurrence of an e!ent in one market of the financial system ,ill ha!e anim#act on the other market system.TheIndianmoney marketisa market for shorttermmoneyand financialasset that areclosesubstitutes for money" ,hichareclosesubstituteformoney" ,iththeshorttermintheIndianconte%t bein$for )year. Theim#ortant feature of the money market instruments is that it is li'uid and canbe turned 'uickly at lo, cost.

)T.Y.B.B.I MONEY MARKETThe money market is not a ,elldefined #lace ,here the businessis transacted as in the case of ca#ital markets ,here all business is transactedat aformal #lace" i.e. stocke%chan$e. Themoneymarket isbasicallyatele#hone market and all the transactions are done throu$h oralcommunication and are subse'uently confirmed by ,ritten communicationand e%chan$e ofrelati!einstruments.The money marketconsistofmanysubmarket such as the interbank call money" bill discountin$" treasury bills"-ertificate of de#osits (-.s*" -ommercial #a#er (-/s*" Re#urchaseO#tions0Ready 1or,ard (RE/O or R1*" InterBank #artici#ation certificates(IB/-s*" 2ecuritised .ebts" O#tions" 1inancial 1utures" 1or,ard RateA$reement (1RAs*" etc. ,hich collecti!ely constitute the money market.3T.Y.B.B.I MONEY MARKETParticipants in money market Lenders: These are the entities ,ith sur#lus lendable funds likeBanks (-ommercial" -oo#erati!e 4 /ri!ate* Mutual 1unds-or#orate Entities ,ith bulk lendable resources of minimum of Rs. 5 crores #er transaction1inancial Institutions Borrowers: These are entities ,ith deficit funds and includes the ones as abo!e. 1. FEATURES OF MONEY MARKET5T.Y.B.B.I MONEY MARKET). It is a collectionof market for follo,in$instruments -allmoney" notice money" re#os" term money" treasury bills"commercial bills" certificate of de#osits" commercial #a#ers interbank#artici#ationcertificates" intercor#oratede#osits" s,a#s"etc. 3. The sub markets ha!e close inter relationshi# 4 freemo!ement of funds from one submarket to another. 5. A net,ork of lar$e number of #artici#ants e%ists ,hich ,ill add$reater de#th to the market. 6. Acti!ities inthemoneymarket tendtoconcentrateinsomecentre" ,hich ser!es a re$ion or an area. The ,idth of such areamay !ary de#endin$ u#on the si&e and needs of the market itself. 7. The relationshi# that characteri&es a money market isim#ersonal in character so that com#etition is relati!ely #ure. 8. /ricedifferentials for assets of similar ty#e,ill tendtobeeliminated by the inter#lay of demand 4 su##ly. 9. Acertainde$ree of fle%ibilityinthe re$ulatoryframe,orke%ists andthere areconstantendea!oursforintroducin$a ne,instruments 0 inno!ati!e dealin$ techni'ues. :. It isa,holesalemarket 4the!olumeoffundsorfinancialassets traded are !ery lar$e i.e. in crores of ru#ees. The unctions o !one" !#r$et #re #s o%%ows:6T.Y.B.B.I MONEY MARKET(a* /ro!idin$ an e'uilibratin$ mechanism for le!elin$ out the shortterm sur#luses and deficits.(b* Offerin$ a focal #oint for the central bank inter!ention for influencin$ li'uidity in the economy. (c* -reatin$ an access to the user of shortterm money to meet theirre'uirements at a realistic #rice&.MONEY MARKET INSTRUMENTS7T.Y.B.B.I MONEY MARKET1.'#%% Mone"-all0Notice money is an amount borro,ed or lent on demand for a!ery short #eriod. If the #eriod is more than one day and u#to )6 daysit iscalled;Noticemoney; other,isetheamount iskno,nas-allmoney;. Inter!enin$holidaysand0or 2undaysaree%cludedfor this#ur#ose. No collateral security is re'uired to co!er these transactionsFe#tures The call market enables the banks and institutions to e!en out theirdaytoday deficits and sur#luses of money. -ommercial banks" -oo#erati!e Banks and #rimary dealers areallo,edtoborro,andlendinthismarket forad73 and the scheme,as later modified into Ne, Bills Market scheme (NBM2* in )>9=. Cnderthe scheme" commercial banks can rediscount the bills" ,hich ,ereori$inally discounted by them" ,ith a##ro!ed institutions (!i&." -ommercialBanks" .e!elo#ment 1inancial Institutions" Mutual 1unds" /rimary .ealer"etc.*.?iththe intentionof reducin$#a#er mo!ements andfacilitate multi#lerediscountin$"theRBIintroducedaninstrument called .eri!ati!e Csance/romissoryNotes(.C/N*. 2otheneedfor#hysical transferofbillshasbeen,ai!edandthebankthat ori$inallydiscountsthebillsonlydra,s.C/N. These .C/Ns are sold to in!estors in con!enient lots of maturities(from )7 days u#to >= days* on the basis of $enuine trade bills" discountedby the discountin$ bank.(.E3o%ution o !one" !#r$et in Indi#The e%istence of money market could be traced back to hundis or indi$enousbills of e%chan$e.These,ere inusefromthe )3thcenturyand ita##earsfrom the ,ritin$s of fe, Muslim historians" Euro#ean tra!elers" state records)5T.Y.B.B.I MONEY MARKETandtheAinIakbari that indi$enousbankers#layeda#rominent #art inlendin$ money both under the early Muslim and mo$ul rulers in India. Theindi$enous bankers financed internal and forei$n trade ,ith cash or bill and$a!e financial assistance to rulers durin$ #eriod of stress. The money marketinIndiaisnotasin$lehomo$eneousentityandmaybedi!idedintot,o#artsD (a*thecentral #artconsistin$oftheReser!eBankofIndia" 2tateBank of India" the /ublic 2ector Bank" the /ri!ate 2ector Bank" theE%chan$e Banks" and the other de!elo#ment financial institutionE and (b* theba&aar #art consistin$of themoneyFlenders" indi$enous bankers" loanoffice" chit funds" nidhis" etc." andthecoo#erati!ebanksoccu#yin$theintermediate #osition. The connection bet,een these #arts is incom#lete astheIndianfinancial system,assome,hat looselyor$ani&edand,ithoutmuchcohesionuntil )>57andlackedacentral coordinatin$a$ency.Tillthen" the central #art ,as lar$ely dominated by $o!ernment" ,hichcontrolled currency and throu$h it influenced the bank rate decisi!ely.O,in$totheabsenceofacentral bankuntil )>57" theIm#erial BankofIndia #erformed some of the functions of the bankerGs bank. The other Bankare not bound to kee# balances ,ith it" but in #ractice the e%chan$e Banksandlar$er India 5)* had stron$ly recommended theestablishment of a market in commercial bills. But nothin$ could be done bythe Reser!e Bank till )>73" on account of the ,ar" the indifference of BritishAo!ernment and the #artition of the country.):T.Y.B.B.I MONEY MARKETBanks of India" es#ecially the E%chan$e Banks" used to discount bills ofa##ro!ed #arties fulfillin$ certain conditions" but there ,as no discount inthe discount market in India" e%ce#t the limited bills market #ro!ided by theReser!e Bank for further dealin$s in these bills and banks had either to kee#them until they matured or rediscount them in @ondon discount market" ifthey ,ere e%#ort bills.The RBI #ioneered effort on de!elo#in$ bill culture in India. It introducedBill Market 2cheme (BM2* in )>73 to #ro!ide demand loan a$ainst bankGs#romissorynotessu##ortedbytheirconstituentGs>=daysusancebillsor#romissory notes. The bank could also co!er #art of their ad!ances" loans"etc." into usance #romissory notes for lod$in$ ,ith the RBI collateral. The)>73 Bill Market 2cheme ,as ho,e!er" basically a scheme ofaccommodation for banks. The scheme ,as desi$ned to ease the #roblem of#ro!idin$ tem#orary finance to commercial banks by the Reser!e Bank as alenderoflast resort. But" itdidnotsucceedinde!elo#in$a$enuinebillmarket./romotion of bill culture" ho,e!er" remained one of the ma9=" basedonthe recommendations ofNarasimham committee" RBI introduced Bill Rediscountin$ 2cheme (BR2*also kno,n as Ne, Bill Market 2cheme (NBM2* ,hich continues till datein modified form.Cnder this scheme" all scheduled commercial banks areeli$ibletorediscount $enuinetradebills arisin$out of sale0#urchaseof$oods ,it the RBI and other a##ro!ed institutions.To #romote the bills culture" RBI in March )>: educed the discount ratefor bills for borro,ers from )8.7J to )7.7J. Thereafter" the bills finance has)>T.Y.B.B.I MONEY MARKETal,ays been sub=J of the tenders and #urchases are made by fe, bi$ banksand nearly half of these by the 2tate Bank alone. This makes $o!ernment inIndia de#endent u#on a fe, banks" ,hereas in @ondon" lar$e funds ,hich donot belon$ to banks are in!ested in Treasury Bills and enable Ao!ernmentthere to secure more fa!orable rates. -onse'uently the Reser!e Bank3=T.Y.B.B.I MONEY MARKETsometimes hadtointer!eneand#urchaseBillsonitso,naccount. TheReser!e Bank has tried to or$ani&e and ,iden the Treasury bill market" inorder to secure better control of the money market" ,ith the rediscountin$ ofthe bills ,ith itself and to enable the market to carry a lar$e floatin$ debt andthereby reduce the cost of Ao!ernment borro,in$. The efforts of theReser!e Bank in ,idenin$ the Treasury bill market ha!e not succeeded fullyuntil the late )>:=s" o,in$ to the absence of a discount market in these bills.Banks ,ere reluctant to discount Treasury bill ,ith the Reser!e Bankbecausethemoney market re$ardedsuchdiscountasasi$nof,eakness.This lead to funds bein$ locked in and market elasticity ,as not there in caseof Treasury bill. 2ales of treasury bills ,ere sus#ended from 3=th A#ril )>76to 3nd No!ember )>76 and form 8th A#ril )>78 to )st Au$ust )>7:. +o,e!er"since )>9=s" the treasury bills ,ere issued at a fi%ed rate of 6.8J and ,erefortenureof>)days. +o,e!er",iththesettin$u#ofthe.iscount and1inance +ouse of India (.1+I* in)>::" the secondarymarket for thetreasury bills be$an to de!elo#. 4iii5 Other Sub-marketsTheother im#ortant submarketsthat ha!ecomeintoe%istenceinthemoney market are the -ertificate of de#osits (-.s* market and the-ommercial /a#ers (-/s* market.Thesesubmarketsareofrecentori$in.?hilethe-.smarket becomeso#erational durin$ )>:>)>>=" the -/s market emer$ed in )>>=>).3)T.Y.B.B.I MONEY MARKET'ertiic#te o +e2osit 4'+s5The -.s are basically de#osit recei#ts issued by a bank to the de#ositor. InIndia the Tambe ?orkin$ $rou# in)>:3 ,asthe first oneto e!aluate theintroductionof -.s inthemoneymarket. The$rou#" ho,e!er" didnotrecommend introduction of -.s on the $round of inherent ,eakness !i&. (i*absence of secondary market" (ii* administered interest rate on bankde#osits" and (iii* dan$er of $i!in$ rise to fictitious transaction. The Ba$hul?orkin$ Arou# in )>:9 also discussed at lar$e the desirability of launchin$this instrument. The ,orkin$ $rou# ,as of the !ie, that de!elo#in$ -.s asmoneymarket instrument ,ouldnot bemeanin$ful unlesstheshorttermde#osit rate are ali$ned ,ith other rates in the system.As such" it did notrecommend introduction of -.s. The $rou#" ho,e!er" noted the im#ortanceof -.s and recommended feasibility of introduction of -.s aftera##ro#riate chan$es at a later date. 'o!!erci#% ,#2ers 4',s5The -/s as an instrument are unsecured usance #romissory notes issued bythe cor#orate borro,ers ,ith fi%ed maturity e!idencin$ their shortterm debtobli$ation. In India" Ba$hul ?orkin$ Arou# )>:9 ,as the first torecommend introduction of -/s in Indian money market.It noted that -/market has a ad!anta$e of $i!in$ hi$hly rated cor#orate borro,ers chea#erfunds ,hile #ro!idin$ in!estors hi$her interest earnin$s. Thou$h the banks,ould loose some of their first rated borro,in$ clientele and conse'uentlyinterest income they can su##lement their earnin$ by actin$ as issuers and33T.Y.B.B.I MONEY MARKETdealers of commercial #a#ers. Accordin$ly the ,orkin$ $rou# recommendedthe launch of -/s and su$$ested a scheme for issue of -/s.485 The B#7##r ,#rtIm#ortant co$s in the e!olution of the Indian money market e!olutionof the Indian Money Market are the indi$enous institutions. Althou$h" nidhisand chit funds e%ist" they are not im#ortant or money market as such theyabsorb funds that mi$ht other,ise fed into bankin$ system. A more ob!iousmoney market institution ,as the Multani shroff. 1ormerly" and indeed into)>8=s and the early )>9=s" the Multani shroff lent money to customer bydiscountin$ahundi (,hich,asori$inallyin#romissorynoteform* andthen" after endorsement and by arran$ement throu$h a hundi broker"rediscounted,itha schedule banku#tolimits a$reedu#on. Althou$hMultani shroffs ha!e sur!i!ed as a #art of the indi$enous sector" their clan isreadily declinin$ and e%#ected to become e%tinct.+iscount#ndFin#nce9ouseoIndi#4+9FI5 AN+SecuritesTr#din6 'or2or#tion o Indi# 4ST'I5A !ery si$nificant ste# in e!olution of the Indian money market has beensettin$ u# of the .+1I and the 2T-I. As a se'uel to the recommendations ofthe ?orkin$ Arou# of the money market" the .iscount and 1inance +ouseof India ,as set u# by the RBI 78,ithan35T.Y.B.B.I MONEY MARKETautorisedshareca#ital of Rs. )==croressubscribedbytheRBI (Rs. 55crores* and allIndia financial institutions (Rs )8 crores*. .+1I 'uotes re$ular bid and offer rates for treasury bills and commercialbills rediscountin$. +o,e!er only bid #rices for -.s and -/s are normally'uoted. .+1I isalsoautorisedtoundertakeHRE/OItransactiona$ainsttreasury bills and it #ro!ides daily buy back and sell back rates for treasurybills to suit their re'uirements of commercial banks.The 2T-I is of recent ori$n. Basically" setu# for dealin$ in $o!ernmentsecurities market to broaden and dee#en this market" the 2T-I also has beenallo,ed to deal in call money market and the treasury bills market.

36T.Y.B.B.I MONEY MARKET*. Reco!!end#tion o 3#rious co!!ittees The Indian money market has under$one metamor#hosis durin$ the lastfe,years o,in$toaseries of measure,hichincreasedthenumber of#artici#ants" introduced ne,er instrument and dere$ulated interest rate. TheReser!e Bank of India (RBI* set u# a committee to re!ie, the functionin$ ofmonetary system" !i&." 2CK+MOY-+AKRABARTY-OMMITTEEin)>:3" a,orkin$$rou#tore!ie,thefunctionin$ofmoneymarket" !i&."BAA+C@ ?ORKINA AROC/ in )>:8 and the NARA2I+M+AM-OMMITTEEtore!ie,thefunctionin$ofthefinancial systeminIndia.?hile the -hakra!arthy -ommittee recommended measures forim#ro!ement in the monetary system" the Ba$hul ?orkin$ Arou#recommended measures to acti!ate and !itali&e the money market and theNarasimham -ommittee recommended measures to streamline thefunctionin$ of the financial system. RBI a##ointed a ,orkin$ $rou# on Money market under the -hairmanshi#of N Ba$hul" ,hich su$$ested a number of measures to dee#en the moneymarket. As a follo, u# the RBI took the follo,in$ initiati!esK 1ormationof .1+I" aninstitutionestablishedinMarch)>::" to#ro!ide li'uidity to money market instruments.KIncreasin$ the ran$e of money market instrumentsE -/" -. and Interbank#artici#ation-ertificatesaresomeof theinstrumentsintroducedin)>:::>.37T.Y.B.B.I MONEY MARKETK1reein$ of call money rates in sta$es from interest rate re$ulation to#rice disco!ery based on market forces.Today the Bank Rate has emer$ed as a reference rate and the call moneyrates $enerally o#erate in a corridor ,ith the Re#o rate actin$ as a floor andthe Bank Rate as a ceilin$.At #resent the o!erni$ht money market rate is the only floatin$ ratebenchmark. Themethodolo$yusedfor calculatin$theo!erni$ht inde%istrans#arent.Reuters MIBOR is the ,ei$hted a!era$e of call money transactions of 33banks and other #layers.N2EMIBOR(Mumbai InterbankOffer Rate* istherates#olledfromare#resentati!e #anel of 53banks0 institutions0 /.s.The other benchmark instruments are )6" >)" ):3 4 586 day T.bills. Also ,eha!e the 2BI/@R rate.

38T.Y.B.B.I MONEY MARKETReco!!end#tion o N#r#si!h#! 'o!!ittee 4A2ri% 1::;5The!ariousrecommendationsinres#ect ofthemoneymarket inthesubT.Y.B.B.I MONEY MARKET Inte6r#tion o M#r$ets The other im#ortant as#ect of the fi%ed income market is the close interlinka$ebet,eenthemoneyanddebtse$ments.The-all" Notice4Termmoneymarketsaretobemade#urelyinterbankmarkets. Thenonbank#artici#antsarebein$shiftedtotheRe#omarket. +o,e!er thee%istin$#layers ha!e been allo,ed to #ark their shortterm in!estments till they findother a!enues. The cor#orates ha!e the facility of routin$ their calltransactions throu$h the /.s.,ri!#r" +e#%ersIn order to make the $o!ernment securities market more !ibrant" li'uid andtoensuremarket makin$ca#abilitiesoutsideRBI asystemof /.Gs,asestablished.The/.sha!ebeenallo,edtoo#erateacurrentaccountandalon$ ,ith a 2A@ account. They also ha!e been allo,ed to o#en constituent2A@ accounts. RBI has #ro!ided them li'uidity su##ort facility. In order tofacilitate their continued#resence inauctions the RBI in!ites bids forunder,ritin$inres#ect of all auctions. Routin$of o#erationsinthecallmoneymarket isallo,edthrou$h/.Gs. Theyareallo,edthefacilityoffunds from one centre to another under RBIGs Remittance facility scheme.The number of /.s has been increased from 9 to )5. Infact the introductionof /.s has added to the li'uidity in the market. 5=T.Y.B.B.I MONEY MARKET=#%u#tion o securitiesBanks ha!e been re'uired to mark 9=J of their #ortfolio to market from theyear )>>:>> and 97J from )>>>3===.Forei6n Institution#% In3estors 4FIIs51IIs ha!e been allo,ed to trade in T. Bills ,ithin the o!erall debt ceilin$.They no, ha!e access to all ty#es debt instruments.+e3e%o2!ents in the Mone" M#r$ets'#%%>Notice Mone" M#r$et As#erthesu$$estionsoftheNarasimham-ommitteeII" theRBIintheMidTerm Re!ie, of October )>>: that it ,ould mo!e to,ards a #ure interbankcall0notice0termmoneymarket" includin$the/.s.To,ardsthisendthe nonbank #artici#ants can in!est their shortterm resources in the Re#omarket and other money market instruments. Takin$ into consideration thetransitional #roblems" it has also been decided to continue ,ith the #resentsystem of #ermittin$ 1Is and M1s to lend in the call0notice money market.Thecor#oratescanroutetheircall0noticemoneytransactionsthrou$hthe/.s.5)T.Y.B.B.I MONEY MARKETTer! R#teInterbank -RR" other then minimum 5J has been done a,ay ,ith. In thisdirectiontheInterest Rate2,a#s(IR2* ha!ebeenintroducedforthe#artici#ants to hed$e their interest risks. 1or benchmarkin$ ,e ha!e the)6" >)4 586 T.Bills. Also ,e ha!e the -/s. No, it is to the #artici#antsto use this o##ortunity.Mone" M#r$et Mutu#% Funds 4MMMFs5Many Mutual 1unds ha!e started funds ,hich s#cifically focus on moneymarket. They ha!e also been #ermitted to in!est in rated cor#orate bonds anddebentures ,ith a residual maturity of u# to only one year" ,ithin the ceilin$e%istin$ for -/.Re2os #nd Re3erse Re2osNonbank entities" ,hich are currently #ermitted to take Re#os" ha!e been#ermittedtoborro,moneythrou$hre!erseRe#osat #ar,ithbanksand/.s. Thereisnorestrictionfor thedurationof aRe#o. All $o!ernmentsecuritiesha!ebeenmadea!ailableforRe#o.TheRe#osha!ealsobeen#ermitted in /2C bonds and #ri!ate cor#orate debt securities #ro!ided theyareheldindemat forminade#ositoryandthetransactionsaredoneinreco$ni&ed stock e%chan$es.53T.Y.B.B.I MONEY MARKET..Needs or i!8i8in6 de2th to the !#r$et+i3ersi"in6 in3estor 8#seActi!e #artici#ation by a number of in!estor se$ments" ,ith di!erse !ie,sand #rofiles" ,ould make the market more li'uid. In order to attract retailin!estors there is need to e%em#t the interest income from income ta%. Themutual funds are e%#ected to take the markets in a bi$ ,ay.Sett%e!ent s"ste! reor!sIn the settlement and transfer of ,holesale trades"thou$h .B/ settlementhas been introduced" intercity settlement continues to be a #roblem. It is not#ossible to buy and sell a security on the same day as transactions are settledon a $ross basis and short sellin$ is not allo,ed. The RBI #lans to introducethe Real Time Aross 2ettlement (RTA2*" ,hich ,ill add efficiency. Tr#ns2#renc".e!elo#ment of technolo$y is an inte$ral #art of reformin$ the debt market"es#ecially in the conte%t of #ro!idin$ a technolo$ically su#erior dealin$ andsettlement system. +encetheRBI has embarkedu#onthetechnolo$icalu#$radation of the debt market. This includes screenbased trade re#ortin$system ,ith the use of B2AT communication net,ork com#limented by acentrali&ed2A@ accountin$system. Itshallalsofacilitatelo$$in$bidsin55T.Y.B.B.I MONEY MARKETauctions of dated securities and T.Bills. This ,ill broaden the #artici#ation inthe auction system.The#artici#ants,ouldbere'uiredto#ro!idet,o,ay'uotes. It isalsobelie!ed that the screen ,ould ha!e a chat line mode. The system ,ill beinte$rated ,ith the re$ional current account system. Nothin$ seems to ha!ebeen finali&ed as of no,. Any,aythissystemmaynot reallybeeffecti!eenou$htosubstitutethetele#honicmodeofo#eration. Thesystemashasbeen#lanneddoesnot#ro!ide for a #artici#ant to ,ithhold his identity. No, this factor alone couldlead to inefficiencies in /rice disco!ery" as in the case of a ma:. M#r$et MicrostructureTo de!elo# the #rimary and the secondary markets the follo,in$ #oints needcareful e!aluation).At #resent the /.s under,rite a si&eable #ortion of the market loansand 'uote an under,ritin$ commission. It has been su$$ested that it be madecom#ulsory for them to bid for a minimum #ercent for a minimum #ercentof thenotifiedamount. Byincreasin$thenumber of /.sthetotal bidsshould be brou$ht u#to )==J of the notified amount.3.TheRBI shouldtryandmo!eout of the#rimaryauctionsbut intransition could take u#to 3=J of the notified amount. Incase of the issuebein$ not fully subscribed the RBI should ha!e the o#tion of cancelin$ theentire issue.5.AraduallytheRBI shouldmo!eout of the)6and>)dayT.Billauctionandthenthe586dayauctionandthenfinallyfromthedatedofsecurities.58T.Y.B.B.I MONEY MARKETThe RBI should ha!e a stron$ #resence in the secondary market by means of#ro!idin$ t,o,ay 'uotes. St#nd#rdi7#tion o ,r#ctices2tandard#ractices inthemarket needtobee!ol!ed,ithre$ardtothemannerof'uotes" conclusionofdeals" etc. It hasbeen#ro#osedthat the/rimary .ealers Association and 1IMM.2I 'uickly setu# a timeframe for-/. Theminimumthedocumentationandmarket #ractices" minimumthelock in #eriod. If needed RBI ,ill come for,ard and indicate a time frame.Most im#ortantly the code of conduct ,ill ha!e to be com#atible ,ith thecontem#lated dealin$ screen and the technolo$ical u#$radation.Ris$ M#n#6e!entIn!estors in debt instrument face three maT.Y.B.B.I MONEY MARKET#ayable. L and Y enter into an IR2 transaction under ,hich L a$rees to #ayY a fi%ed interest rate of )=.7 #ercent and Y a$rees to #ay L a floatin$ rateof interest rate of @IBOR#lus =.37 #ercent. This transaction may bere#resented dia$rammatically as follo,s.Aninterestin$Indiane%am#leof anIR2isoneenteredintobyMarutiCdyo$@imited (MC@*. On)8T+March" )>:6" MC@tooka syndicateforei$n loan of C2 M 97 million. The terms of the loan a$reement s#ecifiedthat MC@ ,oulddra,M5=millionby)8T+March" )>:7" M6=millionby)8T+March" )>:8" andM7=millionby)8T+March" )>:9. Theloan,asre#ayable from March )>:: throu$h March )>>). The rate of interest on the6= Y X Floating rate borrowing Fixed rate borrowing 10.5% LIBOR + 0.25%T.Y.B.B.I MONEY MARKETloan ,as sti#ulated to be 50: #ercent o!er @IBOR till March )>:: and )0 3#ercent o!er @IBOR thereafter. -oncerned about the dollar @IBORfluctuation" MC@ in consultation ,ith the $o!ernment" the Reser!e Bank ofIndia" and the 2tate Bank of India" decided to $o in for a IR2. On 5=th Nuly")>:7" MC@ enteredintoatransaction,ithBankof AmericaforanIR2.Cnder the deal" Bank of America a$reed to #ay Bank of Tokyo an interest of50: #ercent o!er @IBOR on 3= million ,hile MC@ a$reed to #ay a fi%ed rateof interest of )=.7 #ercent to Bank of America. It must benotedthat IR2aredifferent from1or,ardRateA$reements(1RA*. ?hile in 1RA" a certain interest rate a##lies for a certain #eriod oftime in the futureE an IR2 is a #ortfolio of 1RAGs. All IR2 can bedecom#osed into se#arate 1RAGs.IntroductionoForw#rdR#te A6ree!ents#ndInterestR#teSw#2sThe Indi#n scene 4Source: RBI ?uide%ines5O8T.Y.B.B.I MONEY MARKET;.9istor" G E3o%utionAfterthefalloftheBretton ?oods2ystem" the$o!ernment oftheAreatBritain undertook !arious ste#s to #re!ent the do,nslide of the /ound andinstituted ne,internal controls. One of the control measures ,as thecreationof the.ollar #remiummarket todiscoura$e the direct forei$nin!estment. +o,e!er"thiscreatedo##ortunitiesforfinancial in$enuitybythe British merchant bankers.To a!oid .ollar #remium" /arallel @oans ,ere introduced. +ere" the #arties,ere re'uired to e%chan$e the #rinci#al on the !alue date. .urin$ the life ofthecontract" each#arty,asto#aytheinterests onthecurrencyit hadrecei!ed. Thene%t crucial ste#,astheintroductionoftheBacktoback@oans" in ,hich the loan ,as directly arran$ed bet,een t,o #arentcom#anies in different countries and structured under one a$reement./arallel @oans ,ere strictly desi$ned to satisfy the letter of the la,. That is,hy four entities F the #arent and the subsidiary in each of the t,o differentcountriesFhadtobein!ol!edinstructurin$eachloan. InBacktobackloans" the intermediary le!el of the subsidiary ,as eliminated. Backtobackloans tested the le$al ,aters and did not face any #roblems.In Backtoback@oans" only one documentation co!ered the transaction.These t,oinstruments #layed an im#ortant role in #a!in$ the ,ay for the emer$ence ofthe 2,a#s.7=T.Y.B.B.I MONEY MARKETCurrency SwapsThe breakdo,n of the Bretton ?oods 2ystem had o#ened u# a ,hole ne,area of the forei$n e%chan$e tradin$. In a dere$ulated market" banks couldoffer #roducts to the clients" collect a fee" and im#ro!e their #rofit mar$ins.Aainin$ entry into the /arallel and the Backtoback @oans ,as easy for thebanks. But t,o #roblems be$an to emer$e.One ,as the old issue of the #a#er,ork" e%ce#t that increased !olume of theloans $a!e a ne, ur$ency to its resolution. The other #roblem ,as related toaccountin$. Both of the abo!e mentioned loans ,ere recorded as t,ose#arate transactions. This i$noredthecontin$ent natureof theloansm"inflated the balance sheets and distorted the accountin$ ratios that ,ere usedin analysin$ the financial health of the banks. The ans,er" dra,in$ hea!ilyon the e%#erience of the s,a# net,ork" came in the form of the -urrency2,a#s.In a -urrency 2,a#" the notional amount of the trade ,as desi$nated as offbalancesheet" and #ayment of interest by each #arty ,as made contin$entu#on the other #artyGs #erformance. ?ith the #rinci#al amount of the-urrency2,a#nolon$ersub>>follo,sDInterest rate swaprefers to a financial contract bet,een t,o #artiese%chan$in$ a stream of interest #ayments for a notional #rinci#al amount onmulti#le occasions durin$ a s#ecified #eriod.Forward rate agreement(1RA* is bein$ defined as the same on settlementdate for a s#ecified #eriod from start date to maturity date."he playersD2cheduledcommercial bankse%cludin$re$ional ruralbanks"#rimary dealers (/.s* and allIndia financial institutions ha!e been allo,edto undertake IR2 as a #roduct of their o,n asset liability mana$ement andmarketmakin$ #ur#oses."ypesD Banks0/.s01Is undertake different ty#es of #lain !anilla 1RAs0IR2for interest rate risks arisin$ on account of lendin$s or borro,in$s made atfi%edor !ariable interest rates. +o,e!er" s,a#s ha!in$e%#licit0im#licito#tion features like ca#s" floors or collars are not #ermitted.#enchmark rateD The #layers can use anydomestic money or de!t marketrates as reference rate for enterin$ into 1RA0IR2" #ro!ided methodolo$y of7:T.Y.B.B.I MONEY MARKETcom#utin$the rate is ob:=s. +o,e!er" follo,in$the #olicy measures durin$ the early )>>=s the money market hasbecome broad based ,ith the enlar$ement of #artici#ants andinstruments" and chan$e in li'uidated conditions is 'uickly transmitted.Thereformmeasures ha!e$reatlycontributedtothede!elo#ment ofinterlinka$esE increasin$ li'uidity across !arious se$ments of the moneymarket. Anenablin$en!ironment has thus beencreated,herebythemonetary authority can $radually s,itch a,ay from the directinstrumentsofcontroltoindirect methodslikeo#enmarket o#eration"includin$ re#os. The market determined interest rate is $raduallyemer$in$ as an im#ortant intermediate tar$et ,ith the ultimate ob