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Banking Book

Banking Book

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Banking Book
Banking Book

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Published by: 9290010274 on Nov 08, 2011
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In view of the various defects in the Indian money market, the following suggestions have
been made for its proper development:

1. The activities of the money-lenders, indigenous bankers, and chit funds should be
brought under the effective control of the Reserve Bank of India.
2. Hundies used in the money market should be standardised and written in the
uniform manner in order to develop an all-India money market.
3. Banking facilities should be expanded, especially in the unbanked and neglected

areas.

4. Discounting and rediscounting facilities should be expanded in a big way to develop
the bill market in the country.
5. For raising the efficiency of the money market, the number of clearing houses in the
country should be increased and their working improved.
6. Adequate and easy remittance facilities should be provided to the businessmen to
increase the mobility of capital.
7. As per recommendation of the Narasimham Committee, well-managed non-banking
financial institutions, like leasing and Hire-purchase companies, Merchant Banks,
Venture capital companies should be allowed to operate in the money market.
8. The Reserve Bank should encourage to open Discount and Acceptance Houses.
9. Harmony between sub-markets and co-ordination of their activities must be
achieved.
10. More participants should be allowed into the money market and more instruments
should be evolved and introduced in the money market. This will develop the
secondary market.

94

Banking

In recent years, the Indian money market has started becoming more deep and wide owing
to a number of innovative measures undertaken by the authorities towards its structural
reforms and the financial liberalisation. We require a well-developed money market to make
our plans a success. A well organised and developed market can help to achieve economic
growth and stability.

Recent Innovations in the Money Market: Since a long time the Indian money market
has been characterised as disintegrated, ill-developed, ill-liquid, shallow and repressed. The
Seventh Plan period, however, witnessed a remarkable improvement in the whole situation
and working of the money market in the country. The authorities positively accepted certain
major recommendations of the Chakravarty Committee and Vaghul Committee in this
context and enthusiastically acted upon in due course of time. In fact, the celebrated reports
of these two committees blew the air of financial liberalisation and innovation in the Indian
monetary system. Consequently, during the last 3-4 years, the Indian money market has
started becoming more deep and wide owing to a number of innovative measures undertaken
by the authorities towards its structural reforms and the financial liberalisation.

14-day Intermediate Treasury Bills: With the discontinuance of tap treasury bills,
the central government introduced the scheme of 14 day treasury bills to provide the State
governments, foreign central banks and specified bodies with an alternative arrangement to
invest their surplus funds. The salient features of the scheme are: (i) treasury bills would be sold
only to the State governments, foreign central banks and other specified bodies with whom the
RBI has an agreement for investing their temporary surplus funds; (ii) these treasury bills would
be sold on a non-transferable basis for a minimum amount of Rs. 1,00,000 and in multiples of
Rs. 1,00,000; (iii) these treasury bills would be repaid / renewed at par on the expiration of 14
days from the date of their issue, and (iv) the discount rate would be set at quarterly interval such
that the effective yield of this instrument would be equivalent to the interest rate on the Ways
and Means advances chargeable to the Central government. The total bills outstanding at end-
March 2000 was Rs. 2,383 crore of which the share of State governments was 96.18 per cent.

14-Day Auction Treasury Bills: The RBI introduced 14-day auction treasury bills on a
weekly basis with effect from June 6, 1997. The dual purpose of introducing these treasury
bills is to facilitate the cash management requirements of various segments of the economy
and to help in forming a complete yield curve for aiding in the pricing of debt instruments.
The 14-day auction treasury bills do not devolve on the RBI unlike the 91-day treasury bills.
The total issues of 14 day auction treasury bills during 1999-2000 amounted to Rs. 16,453
crore of which non-competitive bids aggregated Rs. 11,253 crore, representing 68 per cent of
the total issues. The subscriptions of the RBI aggregated Rs. 1,134 crore.

91-Day Treasury Bills: Earlier there were two types of 91-day treasury bills–ordinary and ad
hoc. With effect from April 1, 1997 ad hoc treasury bills were discontinued. On this day 91 day ad
hoc treasury bills amounting to Rs. 38,130 crore were converted into special securities without
any specific maturity. The interest on these securities was fixed at 4.6 per cent per annum.

Money Market and Capital Market

95

In 1992-93 a scheme for the issue of 91-day treasury bills with the RBI participation was
introduced. The cut off yields on these treasury bills were higher than the fixed discount rate
of 4.6 per cent per annum on 91-day treasury bills sold on tap.

A gross amount of Rs. 8,155 crore was raised during 1999-2000 in respect of 91-day
treasury bills as against Rs. 16,697 crore in the previous year. Out of the total gross amount,
non-competitive bids aggregated to Rs. 2,995 crore accounting for about 36 per cent of the
value of the total issues.

182-Day Treasury Bills: 182-day treasury bills were reintroduced with effect from May
26, 1999. As per the calender, notified amount for 182-day treasury bills remained constant
at Rs. 100 at the fortnightly auctions held on Wednesdays preceding the non-reporting
Fridays. The cut-off yield has varied within the range of 8.53 - 9.97 per cent.

364-Day Treasury Bills: 364-day treasury bills were introduced in April 1992.
Since then these treasury bills are auctioned on a fortnightly basis in a regular manner.
These treasury bills are not rediscountable with the RBI. However, they offer short-term
investment opportunities to banks and other financial institutions. Since 364-day treasury
bills constitute a safe avenue for investment, the auctions of these treasury bills have evoked
good response. Gross mobilisation through issuance of 364-day treasury bills was Rs. 13,000
crore in 1999-2000 as against Rs. 10,200 crore in 1998-99. The subscription by the RBI was
Rs. 2,267 crore or 17.44 per cent of the value of the total issues.

In 1999-2000, there was a relative stability in the yield on both 91-day treasury bills
and 364-day treasury bills. The yield spread between these bills was rather small during the
year.

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