T.Y.BFM MONEY MARKETIntroductionThe financial system of any
country is the backbone of the economy of that country. The
financial systems of all economies are broadly subdi!ided into
money market" ca#ital market" $ilted$ed securities market and
forei$n e%chan$e market. The money market" ca#ital market and the
$ilt securities market #ro!ides a!enues to the sur#lus sector such
as household institutions in the economy to de#loy their funds to
the deficit sector such as cor#orate and $o!ernment sectors to
mobili&e funds for their re'uirements. The o#erations in the
money market are $enerally shortterm (u#to ) year* in nature" in
ca#ital market shortterm to lon$ term and in $ilt securities market
$enerally lon$term. +o,e!er" in an inte$rated financial system" the
occurrence of an e!ent in one market of the financial system ,ill
ha!e an im#act on the other market system.The -ndianmoney market is
a market forshorttermmoney andfinancial asset that
areclosesubstitutesfor money" ,hichareclosesubstitutefor money"
,iththeshortterminthe-ndianconte%t bein$for )year. The im#ortant
feature of the money market instruments is that it is li'uid and
can be turned 'uickly at lo, cost.The money market is not a
,elldefined #lace ,here the business is transacted as in the case
of ca#ital markets ,here all business is transacted at a formal
#lace" i.e. stock e%chan$e. The money market is basically a
tele#hone market and all the transactions are done throu$h oral
communication and are subse'uently confirmed by ,ritten
communication and e%chan$e ofrelati!einstruments. Themoneymarket
consistof many )T.Y.BFM MONEY MARKETsubmarket suchas
theinterbankcall money" bill discountin$" treasury bills"
.ertificateofde#osits(./s*" .ommercial #a#er(.0s*" Re#urchase
O#tions1Ready For,ard (RE0O or RF*" -nterBank #artici#ation
certificates (-B0.s*" 2ecuritised /ebts" O#tions" Financial
Futures" For,ard Rate A$reement (FRAs*" etc. ,hich collecti!ely
constitute the money market.0artici#ants in money market Lenders:
These are the entities ,ith sur#lus lendable funds likeBanks
(.ommercial" .oo#erati!e 3 0ri!ate* Mutual Funds.or#orate Entities
,ith bulk lendable resources of minimum of Rs. 4 crores #er
transactionFinancial -nstitutions Borrowers: These are entities
,ith deficit funds and includes the ones as abo!e. FEATURES OF
MONEY MARKET). -t is a collectionof market for follo,in$instruments
.all money" notice money" re#os" term money" treasury bills"
commercial bills" certificate of de#osits" commercial #a#ers
interbank #artici#ation certificates" intercor#orate de#osits"
s,a#s" etc. 5T.Y.BFM MONEY MARKET5. The sub markets ha!e close
inter relationshi# 3 free mo!ement of funds from one submarket to
another. 4. A net,ork of lar$e number of #artici#ants e%ists ,hich
,ill add $reater de#th to the market. 6. Acti!ities
inthemoneymarket tendtoconcentrateinsome centre" ,hich ser!es a
re$ion or an area. The ,idth of such area may !ary de#endin$ u#on
the si&e and needs of the market itself. 7. The relationshi#
that characteri&es a money market is im#ersonal in character so
that com#etition is relati!ely #ure. 8. 0ricedifferentials for
assets of similar ty#e,ill tendtobe eliminated by the inter#lay of
demand 3 su##ly. 9. Acertainde$ree of fle%ibilityinthe
re$ulatoryframe,ork e%ists andthere
areconstantendea!oursforintroducin$a ne, instruments 1 inno!ati!e
dealin$ techni'ues. :. -t isa,holesalemarket
3the!olumeoffundsorfinancial assets traded are !ery lar$e i.e. in
crores of ru#ees. The functions of mone m!r"et !re !s fo##ows:(a*
0ro!idin$ 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.
4T.Y.BFM MONEY MARKET(c* .reatin$ an access to the user of
shortterm money to meet their re'uirements at a realistic
#rice6T.Y.BFM MONEY MARKET$% MONEY MARKET INSTRUMENTS$% &!##
Mone.all1Notice money is an amount borro,ed or lent on demand for a
!ery short #eriod. -f the #eriod is more than one day and u#to )6
days it iscalled;Noticemoney; other,isetheamount iskno,nas.all
money;. -nter!enin$holidaysand1or 2undaysaree%cludedfor this
#ur#ose. No collateral security is re'uired to co!er these
transactionsFe!tures The call market enables the banks and
institutions to e!en out their daytoday deficits and sur#luses of
money. .ommercial banks" .oo#erati!e Banks and #rimary dealers are
allo,edtoborro,andlendinthismarket forad=
days../sareissuedbybanksandF-smainlytoau$ment fundsbyattractin$
de#osits from cor#orates" hi$h net ,orth indi!iduals" trusts" etc.
the issue of ./s reachedahi$hinthelast
t,oyearsasbanksfaced,ithreducin$ de#osit base secured funds by
these means. The forei$n and #ri!ate banks" es#ecially" ,hichdonot
ha!e lar$e branchnet,orks andhence lo,er de#osit base use this
instrument to raise funds. The rates on these de#osits are
determined by !arious factors. @o, call rates ,ould mean hi$her
li'uidity in the market. Also the interest rate on oneyear bank
de#osits acts as a lo,er barrier for the rates in the market.-%
INTER)&OR,ORATE +E,OSITS MARKETA#artfrom .0s"cor#oratesalso
ha!eaccess to anothermarket calledthe inter cor#orate de#osits
(-./* market. An -./is an unsecured loan e%tended by one cor#orate
to another. E%istin$ mainly as a refu$e for lo, rated cor#orates"
this market allo,s funds sur#lus cor#orates to lend to other
cor#orates. Alsothebetterratedcor#oratescanborro,fromthebankin$
system and lend in this market. As the cost of funds for a
cor#orate in much hi$her than a bank" the rates in this market are
hi$her than those in the other markets. -./s are unsecured" and
hence the risk inherent in hi$h. The -./ >T.Y.BFM MONEY
MARKETmarket is not ,ell or$anised ,ith !ery little information
a!ailable #ublicly about transaction details8. &OMMER&IAL
,A,ER MARKET .0s are ne$otiable shorttermunsecured #romissory notes
,ith fi%ed maturities" issued by ,ell rated com#anies $enerally
sold on discount basis. .om#anies can issue .0s either directly to
the in!estors or throu$h banks 1 merchant banks (called dealers*.
These are basically instruments e!idencin$ the liability of the
issuer to #ay the holder in due course a fi%ed amount (face !alue
of the instrument* on the s#ecified due date.These are issued for a
fi%ed#eriodof timeat adiscount totheface!alueandmatureat
#ar.-deally" the discount rates on .0s ou$ht to be determined by
the demand and su##ly factors in the money market and the interest
rates on the other handcom#etin$moneymarket
instrumentssuchascertificateofde#osits (./s*" commercial
billsandtreasurybills. -t hasbeennoticedthat ina
com#arati!elystable andlo,rate conditions inthe moneymarket" the
discount rates in the .0 markets do some,hat soften ,hereas in the
ti$ht money market situation it may not be #ossible e!en for a best
rated com#any to issue .0s at lo,er rates than the lendin$ rates on
it;s banks lines of credit. This is #artly for the reason that
banks could also firm u# the lendin$ rates durin$ such #eriods. The
maturity mana$ement of .0s should also affect the .0 rates. -t has
been obser!ed that in a #eriod of #rolon$ lo, and steady )=T.Y.BFM
MONEY MARKETmoneymarketratesthereisnosi$nificantdifferent
bet,eenthediscount rates if .0s for >= and ):= days. A+.ANYA/ES
OF &,0sThe ad!anta$e of .0 lies in its sim#licity in!ol!in$
less #a#er ,ork as lar$e amounts can be raised ,ithout ha!in$ any
underlyin$ transaction. -t $i!es fle%ibility to the com#any by
#ro!idin$ an additional o#tion of raisin$ funds #articularly ,hen
the conditions #re!ailin$ in the money market are fa!orable. -n a
re$ime ,here there is a #rescri#tion of a minimum lendin$ rate for
banks ad!ances" the raisin$ of funds by a com#any u#to 97C of its
,orkin$ ca#ital limit throu$h issue of .0s at some,hat lo,er
interest rates" enables it to reduce the o!erall cost of shortterm
funds. -t is" ho,e!er" to be reco$nisedthat under the cashcredit
systemof lendin$" theborro,ers; effecti!e interest cost is lo,er
than the #rescribed lendin$ rate as this system affords
fle%ibilitytoborro,ers toreduce the outstandin$as and,hen
sur#lusfundsaccruetothem. +ence" acom#any#ro#osin$toissue.0s should
ha!e a clear #erce#tion as to its cash flo, durin$ the #eriod for
,hich .0sare#ro#osedtobeissuedandaccordin$lyfi%thediscount ratesat
,hich the instrument is to be issued.From the in!estor;s #oint of
!ie," the in!estment in .0s $i!es com#arati!ely hi$her
yieldsthanthoseobtainedonbankde#ositsof similar maturities.
Althou$h .0 is an unsecured #romissory note" the a!ailability of
standby facility by banks to the issuin$ com#anies makes it;s
holders confident of ))T.Y.BFM MONEY
MARKET$ettin$the#aymentonduedates.
Thisa$reementalsofacilitated'uicker
#aymentasacom#any;sbankerandmakethe#aymenttotheholderson their
behalf andasthecom#anies#ermissible,orkin$ca#ital limit $ets
reinstated to the e%tent of maturin$ .0s #ro!ided" ho,e!er" at the
time of maturity of .0s" the com#anies ma%imum #ermissible bank
finance has not been re!ised do,n,ards.1% REA+Y FOR2AR+
&ONTRA&T -t is a transaction in ,hich t,o #arties a$ree to
sell and re#urchase the same security. Dnder such an a$reement the
seller sells s#ecified securities ,ith an a$reement to re#urchase
the same at a mutually decided future date and a #rice. 2imilarly"
thebuyer #urchasesthesecurities,ithana$reement to resell the same
to the seller on an a$reed date in future at a #redetermined #rice.
2uch a transaction is called a Re#o ,hen !ie,ed from the
#ros#ecti!e of the seller of securities (the #arty ac'uirin$ fund*
and Re!erse Re#o ,hen described from the #oint of !ie, of the
su##lier of funds. Thus" ,hether a $i!en a$reement is termed as
Re#o or a Re!erse Re#o de#ends on ,hich #arty initiated the
transaction.The lender or buyer in a Re#o is entitled to recei!e
com#ensation for use of funds#ro!idedtothecounter#arty.
Effecti!elytheseller of thesecurity
borro,smoneyfora#eriodoftime(Re#o#eriod*at a#articularrateof
interest mutuallya$reed,iththebuyer of thesecurity,hohaslent the
funds to the seller. The rate of interest a$reed u#on is called the
Re#o rate. )5T.Y.BFM MONEY MARKETThe Re#orate is ne$otiatedbythe
counter#arties inde#endentlyof the cou#on rate or rates of the
underlyin$ securities and is influenced by o!erall money market
conditions.The Re#o1Re!erse Re#o transaction can only be done at
Mumbai bet,een
#artiesa##ro!edbyRB-andinsecuritiesasa##ro!edbyRB-(Treasury Bills"
.entral12tate Ao!ernment securities* Uses of RE,O0s -t hel#s banks
to in!est sur#lus cash.-t hel#s in!estor achie!e money market
returns ,ith so!erei$n risk. -t hel#s borro,er to raise funds at
better rates.An 2@R sur#lus and .RR deficit bank can use the Re#o
deals as a con!enient ,ay of ad76 to 5nd No!ember )>76 and form
8th A#ril )>78 to )st Au$ust )>7:. +o,e!er" since )>9=s"
the treasury bills ,ere issued at a fi%ed rate of 6.8C and ,ere
fortenureof>)days. +o,e!er" ,iththesettin$u#ofthe/iscount and
Finance +ouse of -ndia (/F+-* in)>::" the secondarymarket for
the treasury bills be$an to de!elo#. 6iii7 Other
Sub-marketsTheother im#ortant submarketsthat
ha!ecomeintoe%istenceinthe money market are the .ertificate of
de#osits (./s* market and the .ommercial 0a#ers (.0s*
market.Thesesubmarketsareofrecentori$in.?hilethe./smarketbecomes
o#erational durin$ )>:>)>>=" the .0s market emer$ed in
)>>=>).55T.Y.BFM MONEY MARKET&ertific!te of +e4osit
6&+s7The ./s are basically de#osit recei#ts issued by a bank to
the de#ositor. -n -ndia the Tambe ?orkin$ $rou# in )>:5 ,as the
first one to e!aluate the introductionof ./s inthemoneymarket.
The$rou#" ho,e!er" didnot recommend introduction of ./s on the
$round of inherent ,eakness !i&. (i* absence of secondary
market" (ii* administered interest rate on bank de#osits" and (iii*
dan$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 as moneymarket instrument ,ouldnot bemeanin$ful
unlesstheshortterm de#osit rate are ali$ned ,ith other rates in the
system. As such" it did not recommend introduction of ./s. The
$rou#" ho,e!er" noted the im#ortance of ./s and recommended
feasibility of introduction of ./s after a##ro#riate chan$es at a
later date. &ommerci!# ,!4ers 6&,s7The .0s as an instrument
are unsecured usance #romissory notes issued by the cor#orate
borro,ers ,ith fi%ed maturity e!idencin$ their shortterm debt
obli$ation. -n -ndia" Ba$hul ?orkin$ Arou# )>:9 ,as the first to
recommend introduction of .0s in -ndian money market. -t noted that
.0 market has a ad!anta$e of $i!in$ hi$hly rated cor#orate
borro,ers chea#er funds ,hile #ro!idin$ in!estors hi$her interest
earnin$s. Thou$h the banks ,ould loose some of their first rated
borro,in$ clientele and conse'uently interest income they can
su##lement their earnin$ by actin$ as issuers and 54T.Y.BFM MONEY
MARKETdealers of commercial #a#ers. Accordin$ly the ,orkin$ $rou#
recommended the launch of .0s and su$$ested a scheme for issue of
.0s.6:7 The B!9!!r ,!rt-m#ortant co$s in the e!olution of the
-ndian money market e!olution of the -ndian Money Market are the
indi$enous institutions. Althou$h" nidhis and chit funds e%ist"
they are not im#ortant or money market as such they absorb funds
that mi$ht other,ise fed into bankin$ system. A more ob!ious money
market institution ,as the Multani shroff. Formerly" and indeed
into )>8=s and the early )>9=s" the Multani shroff lent money
to customer by discountin$ahundi
(,hich,asori$inallyin#romissorynoteform* and then" after
endorsement and by arran$ement throu$h a hundi broker"
rediscounted,itha schedule banku#tolimits a$reedu#on. Althou$h
Multani shroffs ha!e sur!i!ed as a #art of the indi$enous sector"
their clan is readily declinin$ and e%#ected to become
e%tinct.+iscount !ndFin!nce ;ouseof Indi!6+;FI7AN+Securites Tr!din8
&or4or!tion of Indi! 6ST&I7A !ery si$nificant ste# in
e!olution of the -ndian money market has been settin$ u# of the
/+F- and the 2T.-. As a se'uel to the recommendations of the
?orkin$ Arou# of the money market" the /iscount and Finance +ouse
of -ndia ,as set u# by the RB- 78,ithan 56T.Y.BFM MONEY
MARKETautorisedshareca#ital of Rs. )==croressubscribedbytheRB- (Rs.
44 crores* and all-ndia financial institutions (Rs )8 crores*. /+F-
'uotes re$ular bid and offer rates for treasury bills and
commercial bills rediscountin$. +o,e!er only bid #rices for ./s and
.0s are normally 'uoted. /+F-
isalsoautorisedtoundertakeIRE0OJtransactiona$ainst treasury bills
and it #ro!ides daily buy back and sell back rates for treasury
bills to suit their re'uirements of commercial banks.The 2T.- is of
recent ori$n. Basically" setu# for dealin$ in $o!ernment securities
market to broaden and dee#en this market" the 2T.- also has been
allo,ed to deal in call money market and the treasury bills
market.
*% Recommend!tion of 5!rious committees The -ndian money market
has under$one metamor#hosis durin$ the last fe,years
o,in$toaseriesof measure,hichincreasedthenumber of #artici#ants"
introduced ne,er instrument and dere$ulated interest rate. The
Reser!e Bank of -ndia (RB-* set u# a committee to re!ie, the
functionin$ of monetarysystem" !i&."
2DK+MOY.+AKRABARTY.OMM-TTEEin )>:5"
a,orkin$$rou#tore!ie,thefunctionin$ofmoneymarket" !i&." BAA+D@
?ORK-NA AROD0 in )>:8 and the NARA2-+M+AM
.OMM-TTEEtore!ie,thefunctionin$ofthefinancial systemin-ndia. ?hile
the .hakra!arthy .ommittee recommended measures for im#ro!ement in
the monetary system" the Ba$hul ?orkin$ Arou# recommended measures
to acti!ate and !itali&e the money market and the 57T.Y.BFM
MONEY MARKETNarasimham .ommittee recommended measures to streamline
the functionin$ of the financial system. RB- 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 money market. As a
follo, u# the RB- took the follo,in$ initiati!esK Formationof /F+-"
aninstitutionestablishedinMarch)>::" to #ro!ide li'uidity to
money market instruments.K-ncreasin$ the ran$e of money market
instrumentsF .0" ./ and -nterbank#artici#ation.ertificatesaresomeof
theinstrumentsintroducedin )>:::>.KFreein$ 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 money rates $enerally o#erate in a
corridor ,ith the Re#o rate actin$ as a floor and the Bank Rate as
a ceilin$.At #resent the o!erni$ht money market rate is the only
floatin$ rate benchmark.
Themethodolo$yusedforcalculatin$theo!erni$ht inde%is
trans#arent.Reuters M-BOR is the ,ei$hted a!era$e of call money
transactions of 55 banks and other #layers.N2EM-BOR(Mumbai
-nterbankOfferRate* istherates#olledfroma re#resentati!e #anel of
45banks1 institutions1 0/s.58T.Y.BFM MONEY MARKETThe other
benchmark instruments are )6" >)" ):5 3 486 day T.bills. Also ,e
ha!e the 2B-0@R rate.
Recommend!tion of N!r!simh!m &ommittee 6A4ri# $T.Y.BFM MONEY
MARKET,rim!r +e!#ers-n order to make the $o!ernment securities
market more !ibrant" li'uid and toensuremarket
makin$ca#abilitiesoutsideRB- asystemof 0/Hs,as established.
The0/sha!ebeenallo,edtoo#erateacurrentaccountand alon$ ,ith a 2A@
account. They also ha!e been allo,ed to o#en constituent 2A@
accounts. RB- has #ro!ided them li'uidity su##ort facility. -n
order to facilitate their continued#resence inauctions the RB-
in!ites bids for under,ritin$inres#ect of all auctions. Routin$of
o#erationsinthecall moneymarket isallo,edthrou$h0/Hs.
Theyareallo,edthefacilityof funds from one centre to another under
RB-Hs Remittance facility scheme. The number of 0/s has been
increased from 9 to )4. -nfact the introduction of 0/s has added to
the li'uidity in the market. .!#u!tion of securitiesBanks ha!e been
re'uired to mark 9=C of their #ortfolio to market from the year
)>>:>> and 97C from )>>>5===.Forei8n
Institution!# In5estors 6FIIs7F--s 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.+e5e#o4ments in the Mone
M!r"ets&!##>Notice Mone M!r"et 4=T.Y.BFM MONEY
MARKETAs#erthesu$$estionsoftheNarasimham.ommittee--" theRB-inthe
MidTerm Re!ie, of October )>>: that it ,ould mo!e to,ards a
#ure interbankcall1notice1term moneymarket"includin$ the
0/s.To,ards this end the nonbank #artici#ants can in!est their
shortterm resources in the Re#o market and other money market
instruments. Takin$ into consideration the transitional #roblems"
it has also been decided to continue ,ith the #resent system of
#ermittin$ F-s and MFs to lend in the call1notice money market.
Thecor#oratescanroutetheircall1noticemoneytransactionsthrou$hthe
0/s.Term R!te-nterbank .RR" other then minimum 4C has been done
a,ay ,ith. -n this directionthe-nterest Rate2,a#s(-R2*
ha!ebeenintroducedforthe #artici#ants to hed$e their interest
risks. For benchmarkin$ ,e ha!e the )6" >)3 486 T.Bills. Also ,e
ha!e the .0s. No, it is to the #artici#ants to use this
o##ortunity.Mone M!r"et Mutu!# Funds 6MMMFs7Many Mutual Funds ha!e
started funds ,hich s#cifically focus on money market. They ha!e
also been #ermitted to in!est in rated cor#orate bonds and
debentures ,ith a residual maturity of u# to only one year" ,ithin
the ceilin$ e%istin$ for .0.4)T.Y.BFM MONEY MARKETRe4os !nd Re5erse
Re4osNonbank entities" ,hich are currently #ermitted to take Re#os"
ha!e been
#ermittedtoborro,moneythrou$hre!erseRe#osat#ar,ithbanksand 0/s.
Thereisnorestrictionfor thedurationof aRe#o. All $o!ernment
securitiesha!ebeenmadea!ailableforRe#o. TheRe#osha!ealsobeen
#ermitted in 02D bonds and #ri!ate cor#orate debt securities
#ro!ided they areheldindemat
forminade#ositoryandthetransactionsaredonein reco$ni&ed stock
e%chan$es.?%Needs for im:i:in8 de4th to the m!r"et+i5ersifin8
in5estor :!seActi!e #artici#ation by a number of in!estor se$ments"
,ith di!erse !ie,s and #rofiles" ,ould make the market more li'uid.
-n order to attract retail in!estors there is need to e%em#t the
interest income from income ta%. The mutual funds are e%#ected to
take the markets in a bi$ ,ay.45T.Y.BFM MONEY MARKETSett#ement
sstem reforms-n the settlement and transfer of ,holesale trades"
thou$h /B0 settlement has been introduced" intercity settlement
continues to be a #roblem. -t is not #ossible to buy and sell a
security on the same day as transactions are settled on a $ross
basis and short sellin$ is not allo,ed. The RB- #lans to introduce
the Real Time Aross 2ettlement (RTA2*" ,hich ,ill add efficiency.
Tr!ns4!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$ically su#erior dealin$ and settlement system. +encetheRB-
has embarkedu#onthetechnolo$ical u#$radation of the debt market.
This includes screenbased trade re#ortin$ system ,ith the use of
B2AT communication net,ork com#limented by a
centrali&ed2A@accountin$system.
-tshallalsofacilitatelo$$in$bidsin auctions of dated securities and
T.Bills. This ,ill broaden the #artici#ation in the auction
system.The#artici#ants,ouldbere'uiredto#ro!idet,o,ay'uotes. -t
isalso belie!ed that the screen ,ould ha!e a chat line mode. The
system ,ill be inte$rated ,ith the re$ional current account system.
Nothin$ seems to ha!e been finali&ed as of no,.
Any,aythissystemmaynot reallybeeffecti!eenou$htosubstitutethe
tele#honicmodeof o#eration. Thesystemashasbeen#lanneddoesnot
#ro!idefor a#artici#ant to,ithholdhisidentity. No,thisfactor alone
44T.Y.BFM MONEY MARKETcouldleadtoinefficienciesin0ricedisco!ery"
asinthecaseofama Y X Floating rate borrowing Fixed rate borrowing
10.5% LIBOR + 0.25%T.Y.BFM MONEY MARKETAninterestin$-ndiane%am#leof
an-R2isoneenteredintobyMaruti Ddyo$@imited(MD@*. On)8T+March"
)>:6" MD@tooka syndicate forei$n loan of D2 M 97 million. The
terms of the loan a$reement s#ecified that
MD@,oulddra,M4=millionby)8T+March" )>:7" M6=millionby )8T+March"
)>:8" andM7=millionby)8T+March" )>:9. Theloan,as re#ayable
from March )>:: throu$h March )>>). The rate of interest
on the loan ,as sti#ulated to be 41: #ercent o!er @-BOR till March
)>:: and )1 5 #ercent o!er @-BOR thereafter. .oncerned about the
dollar @-BOR fluctuation" MD@ in consultation ,ith the $o!ernment"
the Reser!e Bank of -ndia" and the 2tate Bank of -ndia" decided to
$o in for a -R2. On 4=th Nuly" )>:7"
MD@enteredintoatransaction,ithBankofAmericaforan-R2. Dnder the
deal" Bank of America a$reed to #ay Bank of Tokyo an interest of
41: #ercent o!er @-BOR on 5= million ,hile MD@ a$reed to #ay a
fi%ed rate of interest of )=.7 #ercent to Bank of America. -t must
benotedthat -R2aredifferent fromFor,ardRateA$reements (FRA*. ?hile
in FRA" a certain interest rate a##lies for a certain #eriod of
time in the futureF an -R2 is a #ortfolio of FRAHs. All -R2 can be
decom#osed into se#arate FRAHs.6=T.Y.BFM MONEY
MARKETIntroductionofForw!rdR!teA8reements!ndInterestR!te Sw!4sThe
Indi!n scene 6Source: RBI /uide#ines7O:=ecti5e To further dee#en
the money markets To enable banks" #rimary dealers and all -ndia
financial institutions to hed$e interest rate risks.These
$uidelines are intended to form the basis for de!elo#ment of Ru#ee
deri!ati!e #roducts suchas FRAs1-R2inthe country. Theyha!e been
formulated inconsultation ,ithmarket #artici#ants. The $uidelines
are sub:>>H announced on Octo:er (DE $
