So what has changed in the Indian money market in the last 20 years? A lot — a move to market determined interest rates, increased turnover, wider participation base, reporting of all transactions on the electronic platform and much more.

The call money market is now a short-term borrowing and lending platform for banks and Primary Dealers (for example, PNB Gilts, SBI DFHI, Goldman Sachs (India) Capital Markets, Citibank N.A).

Non-bank entities, which too had been a part of this market once, were gradually phased out beginning 2001. Then, in 2002, borrowing and lending limits were prescribed for banks and PDs. This was to keep a check on the banks’ exposure to the market and help minimise the risk of default.

As an alternative, Collateralized Borrowing and Lending Obligations (CBLOs) were introduced in 2003. Non-bank entities phased out of the call money market could borrow/ lend funds ranging one day to a year through Clearing Corporation of India’s electronic dealing system. Borrowers had to deposit the required amount of eligible securities with the CCIL against which funds could be borrowed.

Initially, only the 91-day Treasury Bills (T Bills) were available which were sold on tap. Subsequently, T Bills of other tenures — 182 day and 364 day — were introduced. All T Bills are now sold through auctions conducted on the online platform, Negotiated Dealing System. Way back in 1997, the abolition of the system of issuing ad hoc Treasury Bills helped put an end to the unlimited borrowing by the government from the RBI. With limits being imposed on such borrowings, the RBI could now pursue an independent monetary policy. Simply put, the RBI was now free to decide how much liquidity to inject or suck out as excess liquidity injected via lending to the government was put under control.

Repos which were initially restricted only to certain instruments and participants were expanded in scope overtime. A repo (Repurchase Agreement) involves the sale of a market security by entities wanting to borrow funds (at the repo rate) with an agreement to repurchase it in future.

Conversely a reverse repo involves the purchase of a security against which funds are lent. Repos and Reverse Repos which can be undertaken in Central Government dated securities, T Bills, State Government securities are used by banks, non bank finance companies, mutual funds, insurance companies etc for their short term liquidity management. The RBI uses them too, but for managing the overall liquidity in the financial system, on a day to day basis. These form part of the RBI’s Liquidity Adjustment Facility (LAF), introduced in 2000 and revised in subsequent years.

It was on the back of surging capital flows during 2002-04 that the Market Stabilisation Scheme (MSS) was introduced in April 2004. Under this arrangement, the Government issued T Bills and/or dated securities in addition to the normal borrowing requirements for absorbing excess liquidity from the system.

Commercial Papers (CPs), which were introduced in 1990 as instruments that could be used by highly rated non-bank corporates for borrowing funds, were later extended to PDs, banks and all financial institutions.

Financial institutions and banks can also raise funds through issuance of Certificates of Deposits (CDs) introduced in 1989. For individuals, these money market instruments serve as another investment avenue.

Rates, Turnover, Participants

With the call money market getting restricted to banks and PDs, the market turnover declined. Conversely, volumes in the CBLOs market and the repo market increased. The average daily turnover in the call money declined about 33 per cent between 1997-98 and June 2012.

On the other hand, the average daily turnover in the repo market rose about 162 per cent between FY 2000 to FY 2012. Turnover in the CBLOs market surged by a massive 125200 per cent (2002-03 to June 2012).

There has been a greater co-movement in the rates of these instruments, especially since the introduction of LAF.

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