Indian Financial System

INDIAN

FINANCIAL

SYSTEM

FINANCE

The term "finance" in our simple understanding it is perceived as equivalent

to 'Money'. We read about Money and banking in Economics, about

Monetary Theory and Practice and about "Public Finance". But finance

exactly is not money; it is the source of providing funds for a particular

activity. Thus public finance does not mean the money with the

Government, but it refers to sources of raising revenue for the activities and

functions of a Government. Here some of the definitions of the word

'finance’ both as a source and as an activity i.e. as a noun and a verb.

• The American Heritage® Dictionary of the English

Language, Fourth Edition defines the term as under-

1:"The science of the management of money and other assets.";

2: "The management of money, banking, investments, and credit. ";

3: "finances Monetary resources; funds, especially those of a government or

corporate body"

4: "The supplying of funds or capital."

• Finance as a function (i.e. verb) is defined by the same

dictionary as under-

1:"To provide or raise the funds or capital for": financed a new car

2: "To supply funds to": financing a daughter through law school.

3: "To furnish credit to".

• Another English Dictionary, "WordNet ® 1.6, ©

1997Princeton University " defines the term as under-

1:"the commercial activity of providing funds and capital"

2: "the branch of economics that studies the management of money and

other assets"

3: "the management of money and credit and banking and investments"

• The same dictionary also defines the term as a function in

similar words as under-

1: "obtain or provide money for;" " Can we finance the addition to our

home?"

2:"sell or provide on credit "

All definitions listed above refer to finance as a source of funding an

activity. In this respect providing or securing finance by itself is a distinct

activity or function, which results in Financial Management, Financial

Services and Financial Institutions. Finance therefore represents the

resources by way funds needed for a particular activity. We thus speak of

'finance' only in relation to a proposed activity. Finance goes with

commerce, business, banking etc. Finance is also referred to as "Funds" or

"Capital", when referring to the financial needs of a corporate body. When

we study finance as a subject for generalising its profile and attributes, we

distinguish between 'personal finance" and "corporate finance" i.e. resources

needed personally by an individual for his family and individual needs and

resources needed by a business organization to carry on its functions

intended for the achievement of its corporate goals.

INDIAN FINANCIAL SYSTEM

The economic development of a nation is reflected by the progress of the

various economic units, broadly classified into corporate sector, government

and household sector. While performing their activities these units will be

placed in a surplus/deficit/balanced budgetary situations.

There are areas or people with surplus funds and there are those with a

deficit. A financial system or financial sector functions as an intermediary

and facilitates the flow of funds from the areas of surplus to the areas of

deficit. A Financial System is a composition of various institutions,

markets, regulations and laws, practices, money manager, analysts,

transactions and claims and liabilities.

Financial System;

The word "system", in the term "financial system", implies a set of complex

and closely connected or interlined institutions, agents, practices, markets,

transactions, claims, and liabilities in the economy. The financial system is

concerned about money, credit and finance-the three terms are intimately

related yet are somewhat different from each other. Indian financial system

consists of financial market, financial instruments and financial

intermediation. These are briefly discussed below;

FINANCIAL MARKETS

A Financial Market can be defined as the market in which financial assets

are created or transferred. As against a real transaction that involves

exchange of money for real goods or services, a financial transaction

involves creation or transfer of a financial asset. Financial Assets or

Financial Instruments represents a claim to the payment of a sum of money

sometime in the future and /or periodic payment in the form of interest or

dividend.

Money Market

The money market ifs a wholesale debt market for low-risk, highly-liquid,

short-term instrument. Funds are available in this market for periods

ranging from a single day up to a year. This market is dominated mostly by

government, banks and financial institutions.

Capital Market

The capital market is designed to finance the long-term investments. The

transactions taking place in this market will be for periods over a year.

Forex Market

The Forex market deals with the multicurrency requirements, which are met

by the exchange of currencies. Depending on the exchange rate that is

applicable, the transfer of funds takes place in this market. This is one of the

most developed and integrated market across the globe.

Credit Market

Credit market is a place where banks, FIs and NBFCs purvey short, medium

and long-term loans to corporate and individuals.

Constituents of a Financial System

FINANCIAL INTERMEDIATION

Having designed the instrument, the issuer should then ensure that these

financial assets reach the ultimate investor in order to garner the requisite

amount. When the borrower of funds approaches the financial market to

raise funds, mere issue of securities will not suffice. Adequate information

of the issue, issuer and the security should be passed on to take place. There

should be a proper channel within the financial system to ensure such

transfer. To serve this purpose, Financial intermediaries came into

existence. Financial intermediation in the organized sector is conducted by a

wide range of institutions functioning under the overall surveillance of the

Reserve Bank of India. In the initial stages, the role of the intermediary was

mostly related to ensure transfer of funds from the lender to the borrower.

This service was offered by banks, FIs, brokers, and dealers. However, as

the financial system widened along with the developments taking place in

the financial markets, the scope of its operations also widened. Some of the

important intermediaries operating ink the financial markets include;

investment bankers, underwriters, stock exchanges, registrars, depositories,

custodians, portfolio managers, mutual funds, financial advertisers financial

consultants, primary dealers, satellite dealers, self regulatory organizations,

etc. Though the markets are different, there may be a few intermediaries

offering their services in move than one market e.g. underwriter. However,

the services offered by them vary from one market to another.

Intermediary Market Role

Stock Exchange Capital Market Secondary Market to

securities

Investment Bankers Capital Market, Credit

Market

Corporate advisory

services, Issue of

securities

Underwriters Capital Market, Money

Market

Subscribe to unsubscribed

portion of securities

Registrars, Depositories,

Custodians Capital Market

Issue securities to the

investors on behalf of the

company and handle

share transfer activity

Primary Dealers Satellite

Dealers Money Market

Market making in

government securities

Forex Dealers Forex Market Ensure exchange ink

currencies

What Constitutes the Money Market in India?

Money market refers to the market for short term assets that are close

substitutes of money, usually with maturities of less than a year. A well

functioning money market provides a relatively safe and steady income-

yielding avenue, for short term investment of funds both for banks and

corporate and allows the investor institutions to optimize the yield on

temporary surplus funds. The RBI is a regular player in the money market

and intervenes to regulate the liquidity and interest rates in the conduct of

monetary policy to achieve the broad objective of price stability, efficient

allocation of credit and a stable foreign exchange market. As per definition

given by RBI the money market is "the centre for dealings, mainly short-

term character, in money assets. It meets the short-term requirements of

borrower and provides liquidity or cash to the lenders. It is the place where

short-term surplus investible funds at the disposal of financial and other

institutions and individuals are bid by borrowers, again comprising

Institutions, individuals and also the Government itself" The main segments

of the money market are the call/notice money, term money, commercial

bills, treasury bills, commercial paper and certificate deposits. Mr.G.

Crowther in his treatise "An Outline of Money defines money market as "the

collective name given to the various firms and institutions that deal in the

various grades of near-money". The money market is as concrete as any

other market and one could see it in operation in London's Lambard Street

or New York's Wall Street. Typical of any other commodity market, there is

very close relationship between different segments of the money market,

(like bankers' Call Money market, commercial paper, treasury bills) that the

one is affected by the other. In other words different segments of the money-

market are broadly integrated.

MONEY MARKET INSTRUMENT

Call /Notice-Money Market

The most active segment of the money market has been the call money

market, where the day to day imbalances in the funds position of scheduled

commercial banks are eased out. The call notice money market has

graduated into a broad and vibrant institution .

Call/Notice money is the money borrowed or lent on demand for a very

short period. When money is borrowed or lent for a day, it is known as Call

(Overnight) Money. Intervening holidays and/or Sunday are excluded for

this purpose. Thus money, borrowed on a day and repaid on the next

working day, (irrespective of the number of intervening holidays) is "Call

Money". When money is borrowed or lent for more than a day and up to 14

days, it is "Notice Money". No collateral security is required to cover these

transactions.

The entry into this field is restricted by RBI. Commercial Banks, Co-

operative Banks and Primary Dealers are allowed to borrow and lend in this

market. Specified All-India Financial Institutions, Mutual Funds, and certain

specified entities are allowed to access to Call/Notice money market only as

lenders. Reserve Bank of India has recently taken steps to make the

call/notice money market completely inter-bank market. Hence the non-bank

entities will not be allowed access to this market beyond December 31,

2000.

From May 1, 1989, the interest rates in the call and the notice money market

are market determined. Interest rates in this market are highly sensitive to

the demand - supply factors. Within one fortnight, rates are known to have

moved from a low of 1 - 2 per cent to dizzy heights of over 140 per cent per

annum. Large intra-day variations are also not uncommon. Hence there is a

high degree of interest rate risk for participants. In view of the short tenure

of such transactions, both the borrowers and the lenders are required to have

current accounts with the Reserve Bank of India. This will facilitate quick

and timely debit and credit operations. The call market enables the banks

and institutions to even out their day to day deficits and surpluses of money.

Banks especially access the call market to borrow/lend money for adjusting

their cash reserve requirements (CRR). The lenders having steady inflow of

funds (e.g. LIC, UTI) look at the call market as an outlet for deploying funds

on short term basis.

Inter-Bank Term Money

Inter-bank market for deposits of maturity beyond 14 days is referred to as

the term money market. The entry restrictions are the same as those for

Call/Notice Money except that, as per existing regulations, the specified

entities are not allowed to lend beyond 14 days.

The market in this segment is presently not very deep. The declining spread

in lending operations, the volatility in the call money market with

accompanying risks in running asset/liability mismatches, the growing desire

for fixed interest rate borrowing by corporates, the move towards fuller

integration between forex and money markets, etc. are all the driving forces

for the development of the term money market. These, coupled with the

proposals for rationalisation of reserve requirements and stringent guidelines

by regulators/managements of institutions, in the asset/liability and interest

rate risk management, should stimulate the evolution of term money market

sooner than later. The DFHI (Discount & Finance House of India), as a

major player in the market, is putting in all efforts to activate this market.

Treasury Bills.

Treasury Bills are short term (up to one year) borrowing instruments of the

union government. It is an IOU of the Government. It is a promise by the

Government to pay a stated sum after expiry of the stated period from the

date of issue (14/91/182/364 days i.e. less than one year). They are issued at

a discount to the face value, and on maturity the face value is paid to the

holder. The rate of discount and the corresponding issue price are

determined at each auction.

The salient features of the auction system of T-Bills are :

• The 14/91/182/364-days bills are issued for a minimum value of

Rs.25,000 and multiples thereof.

• They are issued at a discount to face value.

• Any person in India including individuals, firms, companies,

corporate bodies, trusts and institutions can purchase the bills.

• The bills are eligible securities for SLR purposes.

• All bids above a cut-off price are accepted and bidders are permitted

to place multiple bids quoting different prices at each auction. Till

November 6, 1998, all types of T-Bills auctions were conducted by

means of 'Multiple Price Auction'. However, since November 6, 1998,

auction of 91-days T-Bills are being conducted by means of 'Uniform

Price Auction'. In the case of 'Multiple Price Auction' method

successful bidders pay their own bid prices, whereas under 'Uniform

Price Auction' method, all successful bidders pay an uniform price,

i.e. the cut-off price emerged in the auction.

• The bills are generally issued in the form of SGL - entries in the books

of Reserve Bank of India. The SGL holdings can be transferred by

issuing a SGL transfer form. For non-SGL account holders, RBI has

been issuing the bills in scrip form.

French Auction or Multiple Price Auction System

After receiving written bids at various levels of yield expectations, a

particular yield is decided as the cut-off rate of the security in question.

Auction participants (bidders) who bid at yield levels lower than the yield

determined as cut-off get full allotment although at a premium. The

premium is equal to the yield differential expressed in rupee terms. The yield

differential is the difference between the cut-off yield and the yield at which

the bid is made. All bids made at yield levels higher than that determined as

cut-off yield get entirely rejected.

Dutch Auction or Uniform Price Auction System

This system of auction is exactly identical to that of the French Auction

System as far as the price discovery mechanism part is concerned. The

difference is observed only at the stage of payment obligation. After

determination of the market related cut-off rate, allotment is made to all the

bidders at a uniform price. The concept of premium on account of yield

differential does not exist here.

OTHER INSTRUMENTS

New money market instruments like Certificates of Deposits (CDs) and

Commercial Paper (CPs) were introduced in 1989-90 to give greater

flexibility to investors in the deployment of their short-term surplus funds

Certificates of Deposit

Certificates of Deposit (CDs) - introduced since June 1989 - are negotiable

term deposit certificates issued by a commercial banks/Financial Institutions

at discount to face value at market rates, with maturity ranging from 15 days

to one year.

Being securities in the form of promissory notes, transfer of title is easy, by

endorsement and delivery. Further, they are governed by the Negotiable

Instruments Act. As these certificates are the liabilities of commercial

banks/financial institutions, they make sound investments.

DFHI trades in these instruments in the secondary market. The market for

these instruments is not very deep, but quite often CDs are available in the

secondary market. DFHI is always willing to buy these instruments thereby

lending liquidity to the market.

• Salient features:

• CDs can be issued to individuals, corporations, companies, trusts,

funds, associates, etc.

• NRIs can subscribe to CDs on non-repatriable basis.

• CDs attract stamp duty as applicable to negotiable instruments.

• Banks have to maintain SLR and CRR on the issue price of CDs. No

ceiling on the amount to be issued.

• The minimum issue size of CDs is Rs.5 lakhs and multiples thereof.

• CDs are transferable by endorsement and delivery.

• The minimum lock-in-period for CDs is 15 days.

CDs are issued by Banks, when the deposit growth is sluggish and credit

demand is high and a tightening trend in call rate is evident. CDs are

generally considered high cost liabilities and banks have recourse to them

only under tight liquidity conditions.

CPs enable highly rated corporate borrowers to diversify their sources of

short-term borrowings and raise a part of their requirement at competitive

rates from the market. The introduction of Commercial Paper (CP) in

January 1990 as an additional money market instrument was the first step

towards securitization of commercial bank's advances into marketable

instruments.

Commercial Papers are unsecured debts of corporate. They are issued in the

form of promissory notes, redeemable at par to the holder at maturity. Only

corporate who get an investment grade rating can issue CPs, as per RBI

rules. Though CPs are issued by corporate, they could be good investments,

if proper caution is exercised.

The market is generally segmented into the PSU CPs, i.e. those issued by

public sector unit and the private sector CPs. CPs issued by top rated

corporate are considered as sound investments.

DFHI trades in these certificates. It will buy these certificates, subject to its

perception of the instrument and will also be offering them for sale subject

to availability of stock.

Commercial Papers

Salient Features

• CPs are issued by companies in the form of usance promissory note,

redeemable at par to the holder on maturity.

• The tangible net worth of the issuing company should be not less than

Rs.4 crores.

• Working capital (fund based) limit of the company should not be less

than Rs.4 crores.

• Credit rating should be at least equivalent of P2/A2/PP2/Ind.D.2 or

higher from any approved rating agencies and should be more than 2

months old on the date of issue of CP.

• Corporates are allowed to issue CP up to 100% of their fund based

working capital limits.

• It is issued at a discount to face value.

• CP attracts stamp duty.

• CP can be issued for maturities between 15 days and less than one

year from the date of issue.

• CP may be issued in the multiples of Rs.5 lakh.

• No prior approval of RBI is needed to issue CP and underwriting the

issue is not mandatory.

• All expenses (such as dealers' fees, rating agency fee and charges for

provision of stand-by facilities) for issue of CP are to be borne by the

issuing company,

The purpose of introduction of CP was to release the pressure on bank funds

for small and medium sized borrowers and at the same time allowing highly

rated companies to borrow directly from the market.

As in the case of CDs, the secondary market in CP has not developed to a

large extent.

Commercial Bills

Bills of exchange are negotiable instruments drawn by the seller (drawer) on

the buyer (drawee) for the value of the goods delivered to him. Such bills are

called trade bills. When trade bills are accepted by commercial banks, they

are called commercial bills. If the seller wishes to give some period for

payment, the bill would be payable at a future date (usance bill). During the

currency of the bill, if the seller is in need of funds, he may approach his

bank for discounting the bill. One of the methods of providing credit to

customers by bank is by discounting commercial bills at a prescribed

discount rate. The bank will receive the maturity proceeds (face value) of

discounted bill from the drawee. In the meanwhile, if the bank is in need of

funds, it can rediscount the bill already discounted by it in the commercial

bill rediscount market at the market related rediscount rate. (The RBI

introduced the Bill Market Scheme in 1952 and a new scheme called the Bill

Rediscounting Scheme in November 1970).

With a view to eliminating movement of papers and facilitating multiple

rediscounting, the RBI introduced an innovative instrument known as

"Derivative Usance Promissory Notes" backed by such eligible commercial

bills for required amounts and usance period (up to 90 days). Government

has exempted stamp duty on derivative usance promissory notes. This has

indeed simplified and streamlined the bill rediscounting by Institutions and

made commercial bill an active instrument in the secondary money market.

Rediscounting institutions have also advantages in that the derivative usance

promissory note, being a negotiable instrument issued by a bank, is good

security for investment. It is transferable by endorsement and delivery and

hence is liquid. Thanks to the existence of a secondary market the

rediscounting institution can further discount the bills anytime it wishes

prior to the date of maturity. In the bill rediscounting market, it is possible to

acquire bills having balance maturity period of different days upto 90 days.

Bills thus provide a smooth glide from call/overnight lending to short term

lending with security, liquidity and competitive return on investment. As

some banks were using the facility of rediscounting commercial bills and

derivative usance promissory notes for as short a period as one day merely a

substitute for call money, RBI has since restricted such rediscounting for a

minimum period of 15 days.

The eligibility criteria prescribed by the Reserve Bank of India for

rediscounting commercial bill inter-alia are that the bill should arise out of

genuine commercial transaction evidencing sale of goods and the maturity

date of the bill should not be more than 90 days from the date of

rediscounting.

RBI has widened the entry regulation for Bill Market by selectively

allowing, besides banks and PDs, Co-op Banks, mutual funds and financial

institutions.

DFHI trades in these instruments by rediscounting Derivative Usance

Promissory Notes (DPNs) drawn by commercial banks. DPNs which are

sold to investors may also be purchased by DFHI.

"Derivative Usance Promissory Notes"(DUPN)

IT is an innovative instrument issued by the RBI to eliminate movement of

papers and facilitating easy rediscounting. DUPN is backed by up to 90 days

Usance commercial bills. Government has exempted stamp duty on DUPN

to simplify and steam-line the instrument and to make it an active instrument

in the secondary market. The minimum rediscounting period is 15 days

Ready Forward Contracts (Repos)

Ready forward or Repo is a transaction in which the parties agree to buy and

sell the same security at an agreed price at a future date. It is a combination

of securities trading (involving a purchase and sale transaction) and money

market operation (lending and borrowing). The repo-rate represents the

borrowing/lending rate for use of the money in the intervening period.

Internationally repos are versatile instruments and used extensively in

money market operations. In India repos were discouraged by clamping

severe restrictions on their use on account of large-scale violations of laid

down guidelines leading to the 'securities scam' in 1992. However

subsequently repo trading was permitted to be resumed after plugging all

loopholes in their operation. All dated government securities are eligible for

trading in the repo market.

Repos can be for any period. While earlier there was a minimum period of 3

days, this has since been withdrawn. The RBI has been using repo

instrument effectively for its liquidity management, both for absorbing

liquidity and for injecting funds in to the system.

COVERAGE OF FINANCIAL SECTOR REFORMS

What constituents of the Financial Sector were covered by reforms? The

components of the financial markets that were chosen for effecting measures

under the reforms are:

1. Money Market

2. The Securities market (also called the debt market or

Government securities market).

3.

Objective Of Financial Sector Reforms By Government Of

India & RBI

To widen, deepen and integrate the different segments of financial sector,

namely, the money market, debt market (particularly Government securities)

and foreign exchange market.

Condition Of Money Market In The Pre-Reform Period

(Before 1991)

• Financial system functioned in an environment of constriction, driven

primarily by fiscal compulsions. It was geared to provide significant

support for Government expenditure.

• The monetary and debt management policy was underlined by

excessive monetisation of Central Government's fiscal deficit.

• Money and Govt. Securities market did not display any vibrancy and

had limited significance in the indirect conduct of monetary policy.

• Money Market instruments were few

• Market had a narrow base and limited to a few participants -

commercial banks and six all India Financial Institutions

• Rate of interest on money market instruments was regulated.

• Money market instruments consisted of Treasury Bills (91-days T-

Bills) and term securities of different maturities issued by the Central

and State Governments.

• The average maturity of securities remained fairly long, that is above

20-years, reflecting the preference of more the Issuers than those of

the Investors

• Government borrowings were done at rates, which were far below the

market rates. For example, for 30-year securities the interest rate was

low at 6.5 per cent in 1977-78.

• The Policy led to distortions in the Banking System with high lending

rates on certain segments combined with relatively low interest rates

on deposits.

The Report of the Committee to Review the Working of the

Monetary System - 1985 (Sukkmoy Chakravarthi Committee)

The committee made several recommendations for the development of

money and government securities markets. As a follow up the RBI set up the

working group on money market (Chairman Mr.N.Vaghul), which submitted

its report in 1987

The working group recommended a four pronged strategy to activate the

money market.

1. Attempt to be made to widen and deepen the market by selective

increase in the number of participants

2. An endeavour to be made to activate existing instruments so as to

have a well-diversified mix of instruments suited to the different

requirements of borrowers and lenders.

3. A gradual shift from administered interest rates to market determined

rates.

4. to create an active secondary market for money and Securities,

through a process of establishing new sets of institutions, which

would impart sufficient liquidity to the system.

Follow up Measures initiated by R.B.I based on Chakravarthi

Committee and Vaghul Committee Reports during the period

1985-91

Measures taken to encouraging a secondary market in securities:

1. Maximum coupon rate, which was as low as 6.5 per cent in 1977-78,

was raised in stages to 11.5 per cent in 1985-86. Along with this the

maximum maturity period was reduced from 30 years to 20 years.

2. 182 days Treasury bills were introduced in November 1986 for the

first time

3. The Discount and Finance House of India Ltd. was set up in April

1988 as a money market institution jointly by RBI, Public sector

banks and all India financial institutions, to develop a secondary

market for money market instruments and to provide liquidity to these

instruments.

Steps taken to strengthen Money Market

1. Interest rate ceiling was completely withdrawn for all operations in

the call/notice money market and also on rediscounting of commercial

bills in May 1989.

2. In May 1990 THE GIC, IDBI and NABARD were allowed to enter

the Call Money Market as lenders. Also 13 financial institutions,

which were already operating in the Bills Rediscounting Scheme,

were granted entry in the call money market as lenders in October

1990.

3. Certain other non-banking institutions were permitted in October 1991

to enter the call money market as lender through the DFHI

(Discounting and Finance of India Ltd.

4. New money market instruments viz. Certificate of Deposit (CD),

Commercial Paper (CP) and inter-bank participation certificates

entered the market in 1989-90. RBI framed guidelines for the issuance

of these instruments.

Recommendations of the Committee on Financial System (the

Narasimhan Committee)

A comprehensive package of stabilization and structural reform measures

was initiated by the Government in mid-1991, in the financial sector based

on the recommendations of the Narasimhan Committee. A second Report

was submitted by Narasimhan in 1987 called as the Report of Narasimhan

Committee II

Reforms with regards to Call, Notice, Term Money Market)

In pursuance of the recommendations of the Narasimhan Committee II, the

RBI has a taken a decision to restrict the call, notice, term money market as

a pure inter-bank market with additional access only to PDs. Steps have been

taken to phase out non-bank participants from the market by granting them

permission to operate in the repo market.

Reasons for the step

Since the withdrawal of the ceiling on the call rate, the call money rate has

shown a tendency to fluctuate significantly on occasions. The sharp

imbalances that arise in the demand and supply of money due to

combination of several factors have led to such volatile behaviour. The most

important of these has been bunching of banks' needs for short-term funds in

order to meet the CRR compliance.

Earlier steps by RBI to reduce instability in the Call Money Market

</P< span>>

In December 1992, RBI injected liquidity through the DFHI and the

Securities Trading Corporation of India. In subsequent years, RBI has been

moderating liquidity and volatalities through continuous use of repos and

refinance operations and changes in the procedure for maintenance of CRR

requirements.

Government Securities- Reform Process in Debt Management

As part of the reform process, debt management underwent significant

changes. The principal objectives of Debt Management were defined as

under :

a. to smoothen the maturity structure of debt

b. to enable debt to be raised at close to market rates

c. To improve the liquidity of government securities by developing an

active secondary market.

d. To make the government securities market vibrant, broad-based and

efficient in view of its role in setting a bench mark for the development of

the financial market as a whole and bringing about an effective and reliable

channel for the use of indirect instrument of monetary control.

Reforms in Primary market

• Auction system of issuing securities has been introduced for both

treasury bills and term securities since 1992-93, in order to pave the

way for market related rates of interest for government paper.

• The base for treasury bills market was widened with auctioning of

different types, introduction of 364-day TB in April 1992 and 91-day

TB in January 1993, and reintroduction of 182-day TBs in May, 1999.

• Funding of auctioned TBs into term securities at the option of holder

as part of debt management.

• New instruments such as Zero coupon bonds, tap stock, partly paid

tap and floating rate bonds were introduced.

• Bringing down the maximum maturity rate government securities

from 30 to 20 years.

• Developments of instruments for repurchase o agreements (repos)

between RBI and commercial banks beginning from December 1997.

• Since April 1997, a new approach was followed by the RBI in its open

market operations that is, sale/purchase operations in government

securities. In setting its price, the RBI responded to market

expectations. It was also prepared to purchase certain securities in

cash.

The effect of the above reform measures resulted in expanding the investor

base gradually to non-traditional investors. The auction system contributed

to a new treasury culture and progressive development of bidding and

portfolio management skills.

Reforms in Secondary market in Government Securities.

• A phased reduction in SLR requirements from an effective 37.4 per

cent in March 1992 to a little over 28 per cent in March 1996.It has

since been reduced to the statutory benchmark level of 25%.

• The DFHI was authorised to deal in government securities in 1992-93

• The Securities Trading Corporation of India (STCI) was set up in

1994 by the RBI jointly with public sector banks and all India

financial institutions with the main objective of fostering the

development of the government securities market (It commenced

operations in September 1994)

• Market transparency was achieved through regular publication of

details of SGL transactions in Government securities put though

Mumbai PDO since September 1994.

• After its establishment and becoming operational in June 1994, the

National Stock Exchange provided secondary market treading

facilities through its wholesale debt market segment.

• A system of Delivery Versus Payment (DVP) in Government

securities was introduced in Mumbai in June 1995 to ensure that the

transactions in government securities were fully secured.

• The Repo market has been activated by allowing repos/reverse repos

transactions in all government securities besides treasury bills of all

maturities.

• Non-bank entities which are holders of account with the RBI have

been allowed to enter reverse repo (but not direct) transactions with

banks/PDs

• With a view to encouraging Mutual Funds to set up gilt funds in

government securities either by way of outright purchase or reverse

repos to the extent of 20 per cent of the outstanding investments.

• Guidelines for satellite dealers in government securities market were

announced in December 1996 And in April 1997 and the RBI granted

approval to 17 entities for registration as satellite dealers in

government securities, to promote/activate retailing in Government

securities

Primary Dealers in Government Securities

Two institutions - DFHI and STCI were accredited as PDs in March 1996

and subsequently four more PDs were allowed to come into operation - SBI

Gilts, PNB Gilts, Gilts Securities Trading Corporation, and ICICI Securities.

A scheme for payment of underwriting commission was introduced in May

1997 replacing earlier scheme for paying nominal commission.

In March 1995 the RBI announced guidelines for setting up of primary

dealers (PD) with the objectives of -

a. strengthening the infrastructure of the government securities market in

order to make it vibrant, liquid and broad based.

b. Ensuring development of underwriting and market capabilities of

government securities outside the RBI.

c. Improving the secondary market trading system, which could

contribute to price discovery, enhanced liquidity and to turn over and

encourage voluntary holdings of government securities outside the RBI.

d. Making PDs an effective conduit for conducting open market

operations.

The full extent of notified amount of the dated government securities were

offered for underwriting and the underwriting fees and amounts to be

allowed to each PD prior to auction of each security. In respect of TBs, the

PDs are required to give minimum holding commitments and fixed

underwriting fees are paid for successful bids. The RBI granted liquidity

support for PDs against their holding in SGL. Account.

Market trnsparency was established through regular publication of details of

SGL transactions in government securities put through at Mumbai PDO

since September 1994. The NSC which became operational in June 1994

also provided secondary market trading facilities through its wholesale debt

market segment since 1994-95.

Gudelines for satellite dealers in the government securities market were

announced in December 1996 and in April 1997. Satellite dealers in

government secuerities are expected to acticvate retailing of government

securities.

Satellite Dealer (SD)System Discontinued

In the Mid-term Review of October 2001, RBI announced its decision to

undertake a review of the Satellite Dealer (SD) system in consultation with

market participants. After obtaining the views of the Primary Dealers

Association of India (PDAI) and after further discussions in TAC and

considering their role in the present conditions, it has been decided to

discontinue the system. Accordingly: No new SDs will be licensed.Existing

SDs will be required to make action plans, satisfactory to RBI for

termination of their operations as SDs by May 31, 2002.

Money Market of India - Dated Government Securities

Governments (both central and the states) raise resources through issue of

market loans regularly. As these are the liabilities of Government of India

and the State Governments and because the repayment is made by RBI,

investment in these securities is considered safe and riskfree. These

securities are eligible as SLR investments. Since the date of maturity is

specified in the securities, these are known as dated Government securities.

The dated Government securities market in India has two segments :

1. Primary Market and

2. Secondary Market.

The Primary Market consists of the issuers of the securities, viz., Central and

Sate Government. The secondary market includes commercial banks,

financial institutions, insurance companies, Provident Funds, Trusts,

individuals, Primary Dealers and Reserve Bank of India.

DFHI buys, stocks and trades these securities regularly. Thus as on any day

government securities of any maturity can be purchased from or sold to

DFHI. Though the securities are initially floated for long terms, those

maturing in the near future can be bought as safe short term investments.

Investment in government securities is open to all types of investors

including individuals and there is a very active secondary market. All dated

Central and State Government securities are repo-able (can be traded in the

repo market). Thus these instruments are very liquid.

Further, as in the case of T-Bills, the transactions can be concluded over

telephone and investments parked in the Constituents SGL Account with

DFHI itself till maturity or resale. During last few years, Government of

India has issued new instruments such as Zero Coupon Bonds, Floating

Rates Bonds, Partly-paid Stocks, Capital Index Bonds, Tap Stock, etc.

The Role of Money Market in our National Economy

The money market is an integral part of the economy and it plays a vital role

in the development of the economy. This is endorsed by the fact that in the

less developed countries, money market too is undeveloped. Consequently,

in the absence of well-developed money market in these countries great

difficulty is experienced in pooling funds large enough to finance private

enterprise. Up to the latter half of the Eighties he money market in India was

lopsided. Reserve bank too the initiative and introduced financial sector

reforms to make the money market broad-based and integrated. These details

can be studied in the pages deal with Financial Sector Reforms

Definition of Technical Terms Used

Zero Coupon Bonds

Bonds issued at discount and repaid at face value. The difference between

the issue price and the redemption price represents the return to the investor.

No periodic interest payment is made. Zero Coupon Bonds bear no

reinvestment risk but they are prone to interest rate risk making their prices

highly volatile. The buyer of zero coupon bonds receives one and only one

payment, at maturity of the bond. In contrast, coupon bonds make a series of

periodic coupon payments to the buyer as well as paying face value at

maturity. Zero Coupon Bonds on auction basis was introduced in January

1994 by Government of India.

Floating Rate Bond

Floating Rate Bond is an instrument whose periodic interest or dividend

rates are indexed to some reference index such as Treasury security etc.

These instruments give a variable rate, a characteristic that allows both

issuer and investor to share the risk inherent in changing interest rates. The

volatility of interest rates have led to creation of these instruments designed

to offer some protection to the players. Thus, Floating Rate Bonds enable

investors to take advantage of movements in interest rates. Floating Rate

Bonds were introduced by Government of India on September 29, 1995

linking it to the 364 day Treasury Bill rate.

Tap Stock

A gilt edged security from an issue that has not been fully subscribed and is

released into the market slowly when its market price reaches predetermined

levels. Short taps are short dated stocks and long taps are long dated stocks.

These Stocks were introduced by Government of India on July 29, 1994.

Partly Paid Stock

An innovative instrument was (Government stock auctioned on November

15, 1994) for which the payment is made in instalments. It is designed for

institutions with regular flow of investible resources requiring regular

investment outlets. The instrument has attracted good market response and is

being traded actively.

Capital Indexed Bonds

These bonds were floated on December 29, 1997 on tap basis. The tap was

kept open upto 28th January 1998 and an amount of Rs.704.52 crore was

mobilised. These bonds are of four year maturity and carry a coupon rate of

6 per cent. The objective of the capital indexed bonds was to provide a

complete hedge against inflation for the principal amount of the investment.

Auction

A special market in which there is one seller and many buyers. An auction

sale is conducted by an auctioneer who permits buyers to bid one against

other, the goods going to the highest bidder. The auction system for the sale

of dated government securities is relatively new in India starting from June

2, 1992. The principal features of auction system in India are : wider

participation in the bidding process, a number of instruments sold under the

auction system (including 14 day, 91 day , 182 day and 364 day Treasury

Bills and dated securities of Government of India); bidders provide written

and sealed quotations restricted to notified amounts and the undersubscribed

portion of the notified amount devolving on the Primary Dealers (when

underwriting) and/or RBI, which conducts the auction.

Par Value (face value; nominal value)

It is the nominal price of a share or security. If the market value of a security

exceeds the par value it is said to be above par; if it falls below the par value

it is below par.

Premium

An amount in excess of the nominal value of the share, bond or security.

Discount

The amount by which the market price of a security is below its par value.

Multiple Price Auction

Under a multiple price auction, every bidder gets allocation according to his

bid and apparently the issuer collects a premium from all bidders quoting

lower than the cut-off yield. The drawbacks of the system is, occurrence of a

phenomenon called winner's curse.

Uniform Price Auction

In the case of this auction, competitive bids are accepted at the minimum

discounted price, called cut-off price, determined at the auction, irrespective

of the bid-prices tendered, below/at the cut-off price. This system eliminates

the problem of winner's curse.

Yield Curve

A curve on a graph in which the yield of fixed interest securities is plotted

against the length of time they have to run to maturity. The yield curve

usually slopes upwards indicating that investors expect to receive a premium

for holding securities that have a long time to run. However, when there are

expectations of changes in interest rate, the slope of the yield curve may

change.

Yield

The income from an investment. The nominal yield of a fixed interest

security is the interest it pays, expressed as a percentage of its par value.

However, the current yield (also called interest yield, running yield, earnings

yield or flat yield) will depend on the market price of the stock. Thus current

yield is equal to face value/market price x interest rate.

Cut-off Yield

Cut-off yield is the yield at which or below which the bids are accepted.

Redemption Yield

The redemption yield or yield to maturity covers the current yield plus the

capital gain or loss divided by the numbers of years to redemption.

Open Market Operations (OMO)

The purchase or sale by a Government of bonds (gilt edged securities) in

exchange for money. OMO is a flexible instrument of monetary policy

through which the Central Bank of a country, on its own initiative, can alter

the liquidity in the system by sale or purchase of marketable securities.

Derivatives

A financial instrument that is valued according to the expected price

movements of an underlying asset, which may be a commodity, currency or

a security. Derivatives can be used either to hedge a position or to establish

an open position. Examples of derivatives are futures, options, swaps, etc.

Futures

An agreement to buy or sell a fixed quantity of a particular commodity,

currency, or security for delivery at a fixed date in the future at a fixed price.

Unlike an option, a futures contract involves a definite purchase or sale and

not an option to buy or sell. However, futures provide an opportunity for

those who must purchase goods regularly to hedge against changes in price.

Options

The right to buy or sell a fixed quantity of a commodity, currency, security,

etc. at a particular date at a particular price (also called exercise price).

Unlike futures, the purchaser of an option is not obliged to buy or sell at the

exercise price and will only do so if it is profitable; the purchaser may allow

the option to lapse, in which case only the initial purchase price of the option

is lost. An option to buy is known as a call option and is usually purchased

in the expectation of a rising price; an option to sell is called a put option

and is bought in the expectation of a falling price.

Swaps

The means by which intending parties can exchange their cashflows, usually

through the intermediary of a bank. A currency swap will enable parties to

exchange the currency they possess for the currency they need. An interest

rate swap (IRS) is an agreement between two parties to exchange interest

obligations (or receipts) for a given national principal for a defined period.

Strips

"STRIPS" stands for separately Traded Registered Interest and Principal of

Securities Strips are created by separating the coupon from the principal and

trading them independently. Thus, if a conventional bond of five year

maturity has ten semi annual coupon payments and one payment of

principal, ten coupon STRIPS and one Principal STRIP will be created on

stripping the bond.

Bench-mark Rates

In developed markets, Treasury Bill rates set the course of other short term

rates in the system. In India, the cut-off yield rates arrived through the

competitive bids received in the auctions of Treasury Bills have emerged as

benchmark short term rates. Since April 1997 Bank Rate has been activated

as a bench-mark rate.

WHEN ISSUED MARKET

It refers to a security being allowed to be traded in the market well before its

actual date of issue, after the announcement about the issue.

Primary Dealers (PDs)

Primary Dealers are market makers in government securities. In India 2 PDs

(including DFHI) became fully operational from February 29, 1996, 4 PDs

from June 11, 1996 and 4 PDs from February 6, 1999 and 3 PDs from April

1999 - taking total number of PDs to 13. They have a minimum threshold

limit of Net Owned Funds of Rs.50 crore and are expected to strengthen the

government securities market by acting as underwriters and market makers

with commitments to bid in auctions and to offer two way quotes.(Presently

system ofsatellite dealers is withdrawn and not in vogue)

Satellite Dealers

Satellite Dealers form the second tier in government securities market after

PDs and are expected to provide a retail outlet for government securities

thereby encouraging voluntary holding of government securities among a

wider investor base. They have a lower minimum requirement of net owned

funds of Rs.5 crore. Nine Satellite Dealers have been registered with

Reserve Bank of India as on November 18, 1997. RBI have since abolished

the category of Satellite Dealers. There are now only primary Dealers.

Private Placements

Government may sell bonds by various ways. Some bone can be publicly

placed, whereas some bonds may be sold directly to one or only to few

buyers. When it is placed with few or one buyer it is referred to as private

placements.

Interest Rate Swaps and Forward Rate Agreements

An Interest Rate Swap (IRS) is a financial contract between two parties

exchanging or swapping a stream of interest payments for a 'notional

principal' amount on multiple occasions during a specified period. Such

contracts generally involve exchange of a 'fixed to floating' or 'floating to

floating' rates of interest. Accordingly, on each payment date that occurs

during the swap period-cash payments based on fixed/floating and floating

rates, are made by the parties to one another.

A Forward Rate Agreement (FRA) is a financial contract between two

parties to exchange interest payments for a 'notional principal' amount on

settlement date , for a specified period from start date to maturity date .

Accordingly , on the settlement date, cash payments based on contract

(fixed) and the settlement rate, are made by the parties to one another. The

settlement rate is the agreed bench-mark/ reference rate prevailing on the

settlement date.

Scheduled commercial banks (excluding Regional Rural Banks), primary

dealers (PDs), Mutual funds and all-India financial institutions (FIs) are free

to undertake FRAs/IRS as a product for their own balance sheet

management or for market making. Banks/FIs/PDs can also offer these

products to corporates for hedging their (corporates) own balance sheet

exposures.

The party intending to enter into IRS/FRA will have to collect all

information/documents relating to status of the Counterparty, duly executed

swap agreements etc.

1. Status of the counterparty: Before entering into a deal, first determine whether the counterparty

has legal capacity, power and authority to enter into an interest rate

swap transaction. The Memorandum and Articles of Association,

Board resolution for authorisation of swap deals and signatures of

authorised persons should be obtained and scrutinised. Also a suitable

counterparty limit for entering into IRS/FRA has to be fixed.

2. Documentation : The counterparties should sign ISDA master agreement before

entering into a swap deal. The parties should appropriately change the

Schedule to the agreement according to the terms and conditions

settled between them.

3. Accounting of IRS/FRA: The parties can enter into swap deals for hedging interest rate risk on

their own portfolio or for market making. The parties should make

clear distinction between swaps that are entered into for hedging their

own balance sheet positions and more which are entered into for

trading. The transactions for market making purposes should be

marked to market (at least at fortnightly intervals), and those for

hedging purposes could be accounted for on accrual basis.

Money Market in India "Derivative Usance Promissory Notes"

(DUPN)

It is an innovative instrument issued by the RBI to eliminate movement of

papers and facilitating easy rediscounting. DUPN is backed by up to 90 days

Usance commercial bills. Government has exempted stamp duty on DUPN

to simplify and steam-line the instrument and to make it an active instrument

in the secondary market. The minimum rediscounting period is 15 days

Ready Forward Contracts (REPOS)

Ready forward or Repos or Buyback deal is a transaction in which two

parties agree to sell and repurchase the same security. Under such an

arrangement, the seller sells specified securities with an agreement to

repurchase the same at a mutually decided future date and a 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 prefixed price. For the purchaser of the

security, it becomes a Reverse Repo deal. In simple terms, it is recognised as

a buy back arrangement. In a standard ready forward transaction when a

bank sells its securities to a buyer it simultaneously enters into a contract

with him (the buyer) to repurchase them on a predetermined date and price

in the future. Both sale and repurchase prices of securities are determined

prior to entering into the deal. In return for the securities, the bank receives

cash from the buyer of the securities. It is a combination of securities trading

(involving a purchase and sale transaction) and money market operation

(lending and borrowing). The repo-rate represents the borrowing/lending

rate for use of the money in the intervening period. As the inflow of cash

from the ready forward transaction is used to meet temporary cash

requirement, such a transaction in essence is a short term cash management

technique.

The motivation for the banks and other organizations to enter into a ready

forward transaction is that it can finance the purchase of securities or

otherwise fund its requirements at relatively competitive rates. On account

of this reason the ready forward transaction is purely a money lending

operation. Under ready forward deal the seller of the security is the borrower

and the buyer is the lender of funds. Such a transaction offers benefits both

to the seller and the buyer. Seller gets the funds at a specified interest rate

and thus hedges himself against volatile rates without parting with his

security permanently (thereby avoiding any distressed sale) and the buyer

gets the security to meet his SLR requirements. In addition to pure funding

reasons, the ready forward transactions are often also resorted to manage

short term SLR mismatches.

Internationally, Repos are versatile instruments and used extensively in

money market operations. While inter-bank Repos were being allowed prior

to 1992 subject to certain regulations, there were large scale violation of laid

down guidelines leading to the 'securities scam' in 1992; this led

Government and RBI to clamp down severe restrictions on the usage of this

facility by the different market participants. With the plugging of loophole in

the operation, the conditions have been relaxed gradually.

RBI has prescribed that following factors have to be considered while

performing repo:

1. purchase and sale price should be in alignment with the ongoing

market rates

2. No sale of securities should be affected unless the securities are

actually held by the seller in his own investment portfolio.

3. Immediately on sale, the corresponding amount should be reduced

from the investment account of the seller.

4. The securities under repo should be marked to market on the balance

sheet date.

The relaxations over the years made by RBI with regard to repo transactions

are:

i. In addition to Treasury Bills, all central and State Government

securities are eligible for repo.

ii. Besides banks, PDs are allowed to undertake both repo/reverse repo

transactions.

iii. RBI has further widened the scope of participation in the repo market

to all the entities having SGL and Current with RBI, Mumbai, thus

increasing the number of eligible non-bank participants to 64.

iv. It was indicated in the 'Mid-Term Review' of October 1998 that in line

with the suggestion of the Narasimham Committe II, the Reserve

Bank will move towards a pure inter-bank (including PDs) call/notice

money market. In view of this non-bank entities will be allowed to

borrow and lend only through Repo and Reverse Repo. Hence

permission of such entities to participate in call/notice money market

will be withdrawn from December 2000.

v. In terms of instruments, repos have also been permitted in PSU bonds

and private corporate debt securities provided they are held in

dematerialised from in a depository and the transactions are done in a

recognised stock exchange.

Apart from inter-bank repos RBI has been using this instrument effectively

for its liquidity management, both for absorbing liquidity and also for

injecting funds into the system. Thus, Repos and Reverse Repo are resorted

to by the RBI as a tool of liquidity control in the system. With a view to

absorbing surplus liquidity from the system in a flexible way and to prevent

interest rate arbitraging, RBI introduced a system of daily fixed rate repos

from November 29, 1997.

Reserve Bank of India was earlier providing liquidity support to PDs

through the reverse repo route. This procedure was also subsequently

dispensed with and Reserve Bank of India began giving liquidity support to

PDs through their holdings in SGL A/C. The liquidity support is presently

given to the Primary Dealers for a fixed quantum and at the Bank Rate based

on their bidding commitment and also on their past performance. For any

additional liquidity requirements Primary Dealers are allowed to participate

in the reverse repo auction under the Liquidity Adjustment Facility along

with Banks, introduced by RBI in June 2000.

The major players in the repo and reverse repurchase market tend to be

banks who have substantially huge portfolios of government securities.

Besides these players, primary dealers who often hold large inventories of

tradable government securities are also active players in the repo and reverse

repo market.

DFHI is very active in the Repo Market. It has been selling and purchasing

on repo basis T-Bills and eligible dated Government Securities.

Scheme of Liquidity Adjustment Facility

Pursuant to the recommendations of the Narasimham Committee Report on

Banking Reforms (Narasimham Committee II), it was decided in principle,

to introduce a Liquidity Adjustment Facility (LAF) operated through repo

and reverse repo since 5th June 2000.

Under this scheme, (i) Repo auctions (for absorption of liquidity) and (ii)

reverse repo auctions (for injection of liquidity) will be conducted on a daily

basis (except Saturdays). But for the intervening holidays and Fridays, the

repo tenor will be one day. On Friday, the auctions will be held for three

days maturity to cover the following Saturday and Sunday. With the

introduction of the Scheme, the existing Fixed Rate Repo has been

discontinued. The liquidity support extended to all scheduled commercial

banks (excluding RRBs) and Primary Dealers through Additional

Collaterialised Lending Facility (ACLF) and refinance/reverse repos under

Level II, have also been withdrawn. Export Refinance and Collateralised

Lending Facility (CLF) at Bank Rate will continue as per the existing

procedures. Like-wise, Primary Dealers will continue to avail of liquidity

support at level I at Bank Rate. The funds from the Facility are expected to

be used by the banks/PDs for their day-to-day mismatches in liquidity.

Interest rates in respect of both repos and reverse repos will be decided

through cut off rates emerging from auctions on "uniform price" basis

conducted by the Reserve Bank of India, at Mumbai

LATEST CHANGE IN RATE

Date Call Money rate (max)

10/26/2007 6.2 10/19/2007 6.64 10/12/2007 6.65 10/5/2007 6.55 9/28/2007 9.5 9/21/2007 8 9/14/2007 7.5 9/7/2007 6.58

8/31/2007 8.4 8/24/2007 45 8/17/2007 55 8/10/2007 6.75 8/3/2007 5

7/27/2007 1.5 7/20/2007 0.65 7/13/2007 4.75 7/6/2007 4.9

6/29/2007 9.5 6/22/2007 7.15 6/15/2007 4.75 6/8/2007 4 6/1/2007 8.1

5/25/2007 8.25 5/18/2007 9.5 5/11/2007 7.75 5/4/2007 14

4/27/2007 15 4/20/2007 20 4/13/2007 7.5 4/6/2007 16

Call Money rate (max)

0

10

20

30

40

50

604/6

/2007

4/1

3/2

007

4/2

0/2

007

4/2

7/2

007

5/4

/2007

5/1

1/2

007

5/1

8/2

007

5/2

5/2

007

6/1

/2007

6/8

/2007

6/1

5/2

007

6/2

2/2

007

6/2

9/2

007

7/6

/2007

7/1

3/2

007

7/2

0/2

007

7/2

7/2

007

8/3

/2007

8/1

0/2

007

8/1

7/2

007

8/2

4/2

007

8/3

1/2

007

9/7

/2007

9/1

4/2

007

9/2

1/2

007

9/2

8/2

007

10/5

/2007

10/1

2/2

007

10/1

9/2

007

10/2

6/2

007

Date

Rate

%

Call Money rate (max)

Date Call money rate

(min) 10/26/2007 3.75 10/19/2007 3 10/12/2007 4 10/5/2007 4 9/28/2007 2.75 9/21/2007 5.5 9/14/2007 1 9/7/2007 5.25

8/31/2007 2.5 8/24/2007 4 8/17/2007 4.75 8/10/2007 2.5 8/3/2007 0.05

7/27/2007 0.1 7/20/2007 0.2 7/13/2007 0.01 7/6/2007 0.08

6/29/2007 0.3 6/22/2007 0.07 6/15/2007 0.5 6/8/2007 0.05 6/1/2007 0.1

5/25/2007 1.95 5/18/2007 3 5/11/2007 1 5/4/2007 5.25

4/27/2007 4 4/20/2007 5 4/13/2007 1.5 4/6/2007 5.25

Call money rate (min)

0

1

2

3

4

5

64/6

/2007

4/1

3/2

007

4/2

0/2

007

4/2

7/2

007

5/4

/2007

5/1

1/2

007

5/1

8/2

007

5/2

5/2

007

6/1

/2007

6/8

/2007

6/1

5/2

007

6/2

2/2

007

6/2

9/2

007

7/6

/2007

7/1

3/2

007

7/2

0/2

007

7/2

7/2

007

8/3

/2007

8/1

0/2

007

8/1

7/2

007

8/2

4/2

007

8/3

1/2

007

9/7

/2007

9/1

4/2

007

9/2

1/2

007

9/2

8/2

007

10/5

/2007

10/1

2/2

007

10/1

9/2

007

10/2

6/2

007

Date

Rat

e

Call money rate (min)

Date Call Money Borrowing Rate (Max)

10/26/2007 6.2 10/19/2007 6.64 10/12/2007 6.65 10/5/2007 6.55 9/28/2007 9.5 9/21/2007 8 9/14/2007 7.5 9/7/2007 6.58

8/31/2007 8.4 8/24/2007 45 8/17/2007 55 8/10/2007 6.75 8/3/2007 5

7/27/2007 1.5 7/20/2007 0.65 7/13/2007 4.75 7/6/2007 4.9

6/29/2007 9.5 6/22/2007 7.15 6/15/2007 4.75 6/8/2007 4 6/1/2007 8.1

5/25/2007 8.25 5/18/2007 9.5 5/11/2007 7.75 5/4/2007 14

4/27/2007 15 4/20/2007 20 4/13/2007 7.5 4/6/2007 16

Call money Market Bor. Max. Rate

0

10

20

30

40

50

604/6

/2007

4/1

3/2

007

4/2

0/2

007

4/2

7/2

007

5/4

/2007

5/1

1/2

007

5/1

8/2

007

5/2

5/2

007

6/1

/2007

6/8

/2007

6/1

5/2

007

6/2

2/2

007

6/2

9/2

007

7/6

/2007

7/1

3/2

007

7/2

0/2

007

7/2

7/2

007

8/3

/2007

8/1

0/2

007

8/1

7/2

007

8/2

4/2

007

8/3

1/2

007

9/7

/2007

9/1

4/2

007

9/2

1/2

007

9/2

8/2

007

10/5

/2007

10/1

2/2

007

10/1

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007

10/2

6/2

007

Date

Rate

%

Series1

Date Call Money Borrowing Rate (Min)

10/26/2007 3.7510/19/2007 310/12/2007 410/5/2007 49/28/2007 2.759/21/2007 5.59/14/2007 1

9/7/2007 5.258/31/2007 2.58/24/2007 48/17/2007 4.758/10/2007 2.5

8/3/2007 0.057/27/2007 0.17/20/2007 0.27/13/2007 0.01

7/6/2007 0.086/29/2007 0.36/22/2007 0.076/15/2007 0.5

6/8/2007 0.056/1/2007 0.1

5/25/2007 1.955/18/2007 35/11/2007 1

5/4/2007 5.254/27/2007 44/20/2007 54/13/2007 1.5

4/6/2007 5.25

Call Money Market Bor. Min Rate

0

1

2

3

4

5

64/6

/2007

4/1

3/2

007

4/2

0/2

007

4/2

7/2

007

5/4

/2007

5/1

1/2

007

5/1

8/2

007

5/2

5/2

007

6/1

/2007

6/8

/2007

6/1

5/2

007

6/2

2/2

007

6/2

9/2

007

7/6

/2007

7/1

3/2

007

7/2

0/2

007

7/2

7/2

007

8/3

/2007

8/1

0/2

007

8/1

7/2

007

8/2

4/2

007

8/3

1/2

007

9/7

/2007

9/1

4/2

007

9/2

1/2

007

9/2

8/2

007

10/5

/2007

10/1

2/2

007

10/1

9/2

007

10/2

6/2

007

Date

Rate

%

Series1

Date C.R.R. 10/26/2007 710/19/2007 710/12/2007 710/5/2007 79/28/2007 79/21/2007 79/14/2007 7

9/7/2007 78/31/2007 78/24/2007 78/17/2007 78/10/2007 7

8/3/2007 6.57/27/2007 6.57/20/2007 6.57/13/2007 6.5

7/6/2007 6.56/29/2007 6.56/22/2007 6.56/15/2007 6.5

6/8/2007 6.56/1/2007 6.5

5/25/2007 6.55/18/2007 6.55/11/2007 6.5

5/4/2007 6.54/27/2007 6.254/20/2007 6.254/13/2007 6

4/6/2007 6

CRR

5.4

5.6

5.8

6

6.2

6.4

6.6

6.8

7

7.24/6

/2007

4/1

3/2

007

4/2

0/2

007

4/2

7/2

007

5/4

/2007

5/1

1/2

007

5/1

8/2

007

5/2

5/2

007

6/1

/2007

6/8

/2007

6/1

5/2

007

6/2

2/2

007

6/2

9/2

007

7/6

/2007

7/1

3/2

007

7/2

0/2

007

7/2

7/2

007

8/3

/2007

8/1

0/2

007

8/1

7/2

007

8/2

4/2

007

8/3

1/2

007

9/7

/2007

9/1

4/2

007

9/2

1/2

007

9/2

8/2

007

10/5

/2007

10/1

2/2

007

10/1

9/2

007

10/2

6/2

007

Date

Rat

e %

Series1

Date Deposit Rate Max 10/26/2007 9.510/19/2007 9.510/12/2007 9.510/5/2007 9.59/28/2007 9.59/21/2007 9.59/14/2007 9.5

9/7/2007 9.58/31/2007 9.58/24/2007 9.58/17/2007 9.58/10/2007 9.6

8/3/2007 9.67/27/2007 9.67/20/2007 13.257/13/2007 9.6

7/6/2007 9.66/29/2007 9.66/22/2007 96/15/2007 9

6/8/2007 96/1/2007 9

5/25/2007 95/18/2007 95/11/2007 9

5/4/2007 94/27/2007 94/20/2007 94/13/2007 9

4/6/2007 9

Deposit rate Max

0

2

4

6

8

10

12

144/6

/2007

4/1

3/2

007

4/2

0/2

007

4/2

7/2

007

5/4

/2007

5/1

1/2

007

5/1

8/2

007

5/2

5/2

007

6/1

/2007

6/8

/2007

6/1

5/2

007

6/2

2/2

007

6/2

9/2

007

7/6

/2007

7/1

3/2

007

7/2

0/2

007

7/2

7/2

007

8/3

/2007

8/1

0/2

007

8/1

7/2

007

8/2

4/2

007

8/3

1/2

007

9/7

/2007

9/1

4/2

007

9/2

1/2

007

9/2

8/2

007

10/5

/2007

10/1

2/2

007

10/1

9/2

007

10/2

6/2

007

Date

Rate

%

Date Deposit Rate Min

10/26/2007 8 10/19/2007 8 10/12/2007 8 10/5/2007 8 9/28/2007 8 9/21/2007 8 9/14/2007 8

9/7/2007 8 8/31/2007 8 8/24/2007 8 8/17/2007 8 8/10/2007 7.5

8/3/2007 7.5 7/27/2007 7.5 7/20/2007 12.75 7/13/2007 7.5

7/6/2007 7.5 6/29/2007 7.5 6/22/2007 7.5 6/15/2007 7.5

6/8/2007 7.5 6/1/2007 7.5

5/25/2007 7.5 5/18/2007 7.5 5/11/2007 7.5

5/4/2007 7.5 4/27/2007 7.5 4/20/2007 7.5 4/13/2007 7.5

4/6/2007 7.5

Deposit rate Min

0

2

4

6

8

10

12

144/6

/2007

4/1

3/2

007

4/2

0/2

007

4/2

7/2

007

5/4

/2007

5/1

1/2

007

5/1

8/2

007

5/2

5/2

007

6/1

/2007

6/8

/2007

6/1

5/2

007

6/2

2/2

007

6/2

9/2

007

7/6

/2007

7/1

3/2

007

7/2

0/2

007

7/2

7/2

007

8/3

/2007

8/1

0/2

007

8/1

7/2

007

8/2

4/2

007

8/3

1/2

007

9/7

/2007

9/1

4/2

007

9/2

1/2

007

9/2

8/2

007

10/5

/2007

10/1

2/2

007

10/1

9/2

007

10/2

6/2

007

Date

Rate

%

Series1

IDBI Min Term Lending Rate

0

10

20

30

40

50

60

4/6/

2007

4/13

/200

7

4/20

/200

7

4/27

/200

7

5/4/

2007

5/11

/200

7

5/18

/200

7

5/25

/200

7

6/1/

2007

6/8/

2007

6/15

/200

7

6/22

/200

7

6/29

/200

7

7/6/

2007

7/13

/200

7

7/20

/200

7

7/27

/200

7

8/3/

2007

8/10

/200

7

8/17

/200

7

8/24

/200

7

8/31

/200

7

9/7/

2007

9/14

/200

7

9/21

/200

7

9/28

/200

7

10/5

/200

7

10/1

2/20

07

10/1

9/20

07

10/2

6/20

07

Date

Rate

%

IDBI Min Term Lending Rate