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The Reserve Bank of India's (RBI) liquidity measures to curb volatility in the forex market is likely to helpmoderate inflation, Finance Minister P Chidambaram told parliament on Friday.Last month, the central bank engineered an increase in money-market interest rates in an effort to give

investors in short-term rupee debt an incentive to keep their money in India.

"Liquidity tightening measures though aimed at check(ing) speculation in the currency market, would also have

salutary impact of inflation moderation," Chidambaram said in a written reply.

Money is the value assigned to a commodity, a piece of paper, a coin or electronic data (think online banking

and credit cards). It can be of different types-commodity money, representative money, fiat money and

commercial bank money. Gold coins, cocoa beans, cattle or anything that has a value of its own and is used as

a medium of exchange is commodity money. The use of commodity money is similar to barter, except that the

commodity used is widely accepted and can be easily handled.

Representative money is token coins and notes that can be exchanged for a fixed amount of precious metals or

other commodities. In contrast, fiat money's value is imposed by the government, which makes refusal of

payments made in the notified legal tender, in the form of currency notes and coins, illegal.

Instruments such as cheques, demand drafts and banker's drafts are commercial bank money. They exist as

entries in ledgers of financial intermediaries and can be used to make payments for goods and services.

"The value of a currency depends on factors that affect the economy such as imports and exports, inflation,

employment,interest rates, growth rate, trade deficit, performance of equity markets, foreign exchange

reserves, macroeconomic policies, foreign investment inflows, banking capital,commodity pricesandgeopolitical conditions," says Pramit Brahmbhatt, chief executive officer, Alpari Financial Services (India), a

foreign exchange brokerage.

Asmoneybecame acommodity, the money market became a component of thefinancial marketsfor assets involved in

short-termborrowing,lending, buying and selling with original maturities of one year or less. Trading in the money markets is

doneover the counterand iswholesale. Various instruments exist, such asTreasury bills,commercial paper,bankers'

acceptances,deposits,certificates of deposit,bills of exchange,repurchase agreements, federal funds, and short-

livedmortgage-, andasset-backed securities.[1]It providesliquidityfunding for theglobal financial system. Money markets

andcapital marketsare parts offinancial markets. The instruments bear differing maturities, currencies, credit risks, and

structure. Therefore they may be used to distribute the exposure.[2]

Contents

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1 History

2 Participants

3 Functions of the money market

4 Common money market instruments
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reementhttp://en.wikipedia.org/wiki/Bill_of_exchangehttp://en.wikipedia.org/wiki/Certificate_of_deposithttp://en.wikipedia.org/wiki/Deposit_(finance)http://en.wikipedia.org/wiki/Bankers%27_acceptancehttp://en.wikipedia.org/wiki/Bankers%27_acceptancehttp://en.wikipedia.org/wiki/Commercial_paperhttp://en.wikipedia.org/wiki/Treasury_security#Treasury_billhttp://en.wikipedia.org/wiki/Wholesalehttp://en.wikipedia.org/wiki/Over-the-counter_(finance)http://en.wikipedia.org/wiki/Loanhttp://en.wikipedia.org/wiki/Debthttp://en.wikipedia.org/wiki/Financial_markethttp://en.wikipedia.org/wiki/Commodityhttp://en.wikipedia.org/wiki/Moneyhttp://businesstoday.intoday.in/story/rupee-fall-impact-dip-price-global-commodities/1/21865.htmlhttp://businesstoday.intoday.in/story/invest-companies-fccbs-due-redemption-caution-returns/1/21869.html


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5 Discount and accrual instruments

6 See also

7 References

8 External links

History[edit source|editbeta]

The money market developed because there are parties that had surplus funds, while others needed cash.[3][4]Today it

comprises cash instruments as well.

Participants[edit source|editbeta]

The money market consists offinancial institutionsand dealers in money or credit who wish to either borrow or lend.

Participants borrow and lend for short periods of time, typically up to thirteen months. Money market trades in short -

termfinancial instrumentscommonly called "paper." This contrasts with thecapital marketfor longer-term funding, which is

supplied bybondsandequity.

The core of the money market consists ofinterbank lending--banks borrowing and lending to each other usingcommercial

paper,repurchase agreementsand similar instruments. These instruments are often benchmarked to (i.e. priced by

reference to) theLondon Interbank Offered Rate(LIBOR) for the appropriate term and currency.

Finance companies typically fund themselves by issuing large amounts ofasset-backed commercial paper(ABCP) which is

secured by thepledgeof eligible assets into an ABCP conduit. Examples of eligible assets include auto loans, credit card

receivables, residential/commercial mortgage loans,mortgage-backed securitiesand similar financial assets. Certain large

corporations with strongcredit ratings, such asGeneral Electric, issue commercial paper on their own credit. Other large

corporations arrange for banks to issue commercial paper on their behalf via commercial paper lines.

In the United States, federal, state and local governments all issue paper to meet funding needs. States and local

governments issuemunicipal paper, while theUS TreasuryissuesTreasury billsto fund theUS public debt:

Trading companies often purchasebankers' acceptancesto be tendered for payment to overseas suppliers.

Retail and institutional money market funds

Banks

Central banks

Cash management programs

Merchant banks

Functions of the money market[edit source|editbeta]

The money market functions are:[5][6]

Transfer of large sums of money

Transfer from parties with surplus funds to parties with a deficit

Allow governments to raise funds

Help to implement monetary policy

Determine short-term interest rates
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Common money market instruments[edit source|editbeta]

Certificate of deposit- Time deposit, commonly offered to consumers by banks, thrift institutions, and credit unions.

Repurchase agreements- Short-term loansnormally for less than two weeks and frequently for one dayarrangedby selling securities to an investor with an agreement to repurchase them at a fixed price on a fixed date.

Commercial paper- short term usanse promissory notes issued by company at discount to face value and redeemed atface value

Eurodollar deposit- Deposits made in U.S. dollars at a bank or bank branch located outside the United States.

Federal agency short-term securities - (in the U.S.). Short-term securities issued bygovernment sponsoredenterprisessuch as theFarm Credit System, theFederal Home Loan Banksand theFederal National Mortgage

Association.

Federal funds- (in the U.S.). Interest-bearing deposits held by banks and other depository institutions at theFederalReserve; these are immediately available funds that institutions borrow or lend, usually on an overnight basis. They are

lent for thefederal funds rate.

Municipal notes- (in the U.S.). Short-term notes issued by municipalities in anticipation of tax receipts or other

revenues.

Treasury bills- Short-term debt obligations of a national government that are issued to mature in three to twelve

months. Money funds- Pooled short maturity, high quality investments which buy money market securities on behalf of retail or

institutional investors.

Foreign Exchange Swaps- Exchanging a set of currencies in spot date and the reversal of the exchange of currencies

at a predetermined time in the future.

Short-livedmortgage-andasset-backed securities

Discount and accrual instruments[edit source|editbeta]

There are two types of instruments in the fixed income market that pay the interest at maturity, instead of paying it as

coupons.Discount instruments, like repurchase agreements, are issued at a discount of the face value, and their maturity

value is the face value. Accrual instruments are issued at the face value and mature at the face value plus interest.[7]

See also[edit source|editbeta]

Look upmoney marketin

Wiktionary, the free

dictionary.

Interbank lending market

Liquidity crisis

Lombard Street: A Description of the Money Market One of the earliest popular books on the money market

Money fund

Money market account

Money supply

Overnight market

Sweep account
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REASONS FOR FALL IN RUPEE.

The government has taken many steps to contain the freefall of rupee in the past few days but has failed to check the slide. Slumping further,the rupee tested new record low of 64 versus the US dollar on Tuesday.

Reserve Bank of Indias (RBIs) recent intervention did precious little to save rupee from depreciating further.

What are the reasons that have impeded the efforts of the government in tackling rupee fall? Why cant the government check the

depreciation of rupee? Why have even RBI measures aimed at tightening liquidity failed to give a boost to the staggering rupee? These are afew questions that continue to crop up every time rupee crashes to newer lows.

Worsening current account deficit

High Current Account Deficit (CAD) is the main reason that has continuously impeded all efforts of government in arrest the fall of rupee.

India posted a record current account deficit of 4.8 percent of gross domestic product (GDP) in the year ending March. Governments failure

to explore new destinations has led to poor growth of exports. In the absence of a single window clearance system and process delays,

exports have failed to register good growth. Even traditional export areas have failed to show resilience making Indian produce globally less

competitive.

Insufficient FDI inflows

Despite all the decisions to allow major reforms in India, the government has failed to tap major FDI inflow in the country. Instead, India has

witnessed withdrawal of major projects by global giants like ArcelorMittal and Posco. Posco pulled out of its Rs 30,000 crore steel plantproject in Karnataka followed by ArcelorMittal that scrapped its $12 billion (Rs 50,000 crore) steel plant project which it was planning to set

up in Odisha. Inordinate delays, land acquisition problems, government clearance delays, lack of promptness have all contributed to the

withdrawal of major companies. Last year Indian companies spent more overseas than Foreign Investors in India.

FII outflows

Overseas investors have pulled out nearly Rs 18,500 crore (about USD 3 billion) from the Indian capital markets in July. In their highest

monthly outflow, overseas investors pulled out a record Rs 44,162 crore (over USD 7.5 billion) in the month of June. Outflows of FIIs have

put a continuous pressure on rupee not allowing it to come out of the slump. Meanwhile, leading global bank Goldman Sachs has

downgraded Indian stocks to underweight and recommended investors to stay selective on concerns of economic growth recovery.

Rising Import bill

Rising import bill (arising out of gold) is also a major factor that has curtailed governments effort to tackle the fall of rupee. Gold contributes

to over 10 percent of the total import bill. Gold imports were 141 tonnes in April and rose to 162 tonnes in May. Due to certain government

measures gold imports declined significantly in June but could not be held for the month of July.

Overall economic contraction

Poor economic growth in the manufacturing, agricultural and mining sector has dented investor sentiment and they have become wary of

investing in India. Reflecting a persistent slowdown, industrial production in May contracted by 1.6 percent, lowest in the past 11 months.

Last week RBI cut its growth forecast to 5.5 percent for the fiscal year, from 5.7 percent. Unless a better sentiment prevails, confidence in the

rupee will stay shattered.

Strengthening of dollar overseas

In the last six months US dollar index strengthened by 3.52 percent. The strengthening of dollar is beyond governments control which is

ultimately hammering the Indian currency. Gradual recovery in US economy coupled with rising expectations that Federal Reserve will

withdraw its stimulus package soon is underpinning the US dollar index.

However one must not be completely cynical about bouncing back of rupee. A medium to short-term approach towards growth has to be

adopted by the government. Constant efforts of the government might bring a very marginal respite for the rupee, but to bring it back to 55-

level will be an uphill struggle.


5/7

Usual discussions on thefall in the rupeebring up macro-economic matters such as slowing economic

growth, corporate earnings and market volatility. However, the woes aren't restricted to corporate corridors or

the Dalal Street. For the common man, the falling rupee is going to hit where it hurts the most-the pocket.

From essentials such as food and education to foreign vacation and the swanky gadget you plan to buy, the

falling rupee will hurt you in more ways than one.

GROCERY BILL

High inflation has been pinching you for more than a year now. Now, theweakening rupeehas made crude

oil, fertilisers, medicines and iron ore, which India imports in large quantities, costlier. Though these items are

not for your daily consumption, they impact your finances indirectly.

For instance, since India depends on imports for a large part of crude oil it consumes, a weak rupee will

influence petrol and diesel prices. "Fuel being directly connected with the cost of transportation, prices of goods

that are transported from one part of the country to another, such as food, are bound to rise. This will have adirect impact on the household budget," says Paresh Parekh, Tax Partner, Ernst & Young.

Crude palm oil prices set the pace for prices of other edible oils. It is imported in large quantities and any rise in its

price will add to the inflationary pressure

Arvind Chari

Fund Manager, Fixed Income, Quantum Asset Management

FMCG, orfast moving consumer goods, such as soaps, detergents, deodorants and shampoos, of which

crude oil is an input, are likely to become more expensive.

"The impact of rupee depreciation on the FMCG sector will be due to higher cost of imported raw materials.

The companies were already facing cost pressures. The rupee depreciation has added to their woes. They will

have to revise prices. Hindustan Uniliver and Procter & Gamble have already taken steps in this direction.

Many others will increase prices in the coming months," says Kaustubh Pawaskar, FMCG analyst, Sharekhan.

Pulses and oil, which account for a large part of India's imports, will also be affected. "Crude palm oil prices set

the pace for prices of other edible oils. It is imported in large quantities and any rise in its price will add to the

inflationary pressure," says Arvind Chari, fund manager, fixed income, Quantum Asset Management.

"The depreciation of the rupee has considerably affected the price of the edible oil complex in a big way, as we

import 60-70% of our requirement. For instance, in November-December 2011, the price of refined soya oil

shot up by Rs 75 per 10 kg from Rs 651 to Rs 724," says Hanish Kumar Sinha, head, trade and commodityintelligence group, NCMSL. Sinha expects that refined soy oil will test the Rs 800 per 10 kg level by April.

Case Study

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FOREIGN EDUCATION

For Abin Biswas (21), a B.Tech in biotechnology, an opportunity to work as a trainee intern in a Harvard-MITjoint venture project was a dream come true and a proud moment for his parents. The cost was high but DrAnup Biswas, Abin's father, decided to bear the expenses.

"The institute is providing him just a daily travel allowance. So, nearly all expenses have to be borne by us.

Though the amount was huge for us, we agreed to send him as the platform he was getting was big as well,"says Rinijhini Biswas, Abin's mother.

With the rupee weakening, the burden has increased. The rent ($378) of a room he shares with friends was Rs17,000 (at Rs 45/$) in mid-August 2011 when he went. Now, it is Rs 19,500 (Rs 51.52/$). A meal ($6) whichcost him Rs 270 then now costs Rs 300. This means an additional food expense of Rs 1,800 per month.

"Abin's monthly budget, roughly $1,000, has risen from Rs 45,000 to Rs 53,000, the last instalment we paid. Itwill be difficult for us to bear his expenses if the trend continues," says Rinijhini Biswas.

Students who have taken loans to fund their foreign degree are also bearing the brunt. Education loans areusually in rupees, but as students pay their expenses in a foreign currency, the cost of education and stay hasincreased. For $100,000, a student had to pay Rs 45 lakh. Now, he has to shell out Rs 52-54 lakh, dependingupon the exchange rate.

"The cost is in a foreign currency while the borrowing is in rupees. So, the students may fall short of funds asthe loan would have been taken according to the initial requirements. In such a scenario, either the student'spersonal contribution will have to increase or he will have to ask the bank to increase the loan amount," says

Ashutosh Khajuria, president, treasury, Federal Bank.

JOBS AND REMUNERATION

Not only is the rupee falling, for some, the pay cheque may shrink as well. Every industry which is dependenton imports will have to face an increase in cost of production and operations.

"In order to nullify the increase, these companies will have to rationalise costs within their control. One of thiswill be human resources. So, either lesser number of people will be hired or the salary bill will be kept constantor reduced," says Rituparna Chakraborty, co-founder and senior vice president, TeamLease Services.

However, it is a good time for industries which earn in dollars. "The information technology sector stands togain, but global recessionary conditions may set off the impact," says Chakraborty.

VACATIONS

The falling rupee is bad news for itinerant Indians and vacationers to a foreign country. "Air fares are going updue to an increase in fuel surcharge. The stay will be costlier by at least 3-5%. Also, shopping can becomeexpensive by 5%. Eating out will also be costlier by the same percentage," says Karan Anand, head,relationships, Cox & Kings India.

Air fares are going up. Your foreign stay will be costlier by at least 3-5 per cent while shopping can become

expensive by 5 per cent. Eating out will also be costlier by the same percentage.

Karan Anand

Head, Relationships, Cox & Kings India

However, that holiday package you booked in advance before the rupee fell is safe. The impact of rupee

depreciation will not become evident immediately as most people usually make travel plans well in advance.


7/7

"The real impact will be felt by summer of 2012. We have received requests for cancellations, but these are

within the normal range. There are certainly some changes in travel patterns'holidays are being cut short,

short-haul destinations are being preferred and people are opting for non-dollar destinations such as Sri Lanka,

Dubai, Bali and Phuket or sticking to domestic destinations such as Kashmir, Kerala and Goa," says Anand

Kandadai, senior vice president, holidays, Makemytrip.com.

The travel cover, mandatory in some cases, may cost more as well. "At present, travel policies' benefits aredenominated in US dollars. The depreciation of the rupee will not impact customers but will cost re-insurers

more. But if this trend continues there is a strong case for upward revision of premiums," says Gaurav Garg,

MD and CEO, Tata AIG General Insurance.

BUYING A CAR

The depreciation of rupee has impacted the automobile sector in three ways. First, input costs have risen as

these companies use imported components. Second, some companies will have to pay higher royalty to foreign

parent firms. Third, many have foreign currency loans in the form of external commercial borrowings and

foreign currency convertible bonds.

Therefore, more or less all auto companies will have to increase prices. "We expect at least a further 2%increase in prices. Maruti has already revised prices twice in last two months. Others like Hyundai, Honda and

Ford that have large import content in their cars will have to soon increase prices to protect margins," says

Deepak Jain, assistant VP and research analyst, Sharekhan Institutional Research.

ENTERTAINMENT

The imported paperback, your favourite pizza and the latest laptop will also become more expensive. "There is

an increase in the cost of imported books as well as the cost of sourcing them.

In most cases we are trying to absorb the increased cost, but there may be scenarios where the end-user will

get impacted," says Ankit Nagori, VP, categories, Flipkart.com.

Electronic consumer goods such as computers, televisions, mobile phones, etc, with imported components will

also become costlier. International food chains which run outlets in India are not denying the impact on

profitability.

"The depreciating rupee has had a significant impact on our capital expenditure as we import a lot of special

kitchen equipment. There has been an indirect impact too as a small part of inputs are imported by our

suppliers. If the trend continues, we will be forced to pass on some burden to customers," says Vikram Bakshi,

managing director and JV Partner, McDonald's India (North & East).

Therupee, which reached 68 vs US dollar on Wednesday, hasn't been this bad in over 18 years. It is going to affect

the common man in many ways like expensive foreign travel, costlier imported goods and higher EMIs.
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Documents

Rupee Fall Notes (Autosaved)