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260 Financial Management
Intermediate Treasury Bills from April 1997 at a discount rate equivalent to
the rate of interest on ways and means advances to the Government of India–these
bills cater to the needs of State Governments, foreign central banks and other
specified bodies (these have surplus funds which can be invested for very short
periods), (ii) A new category of 14 days Treasury Bills, sold through action
for the first time in June 1997 to meet the cash management requirements of
various sections of the economy.
Dated Government Securities: The Government of India has also decided to
sell dated securities (of 5 year maturity and 10 maturity) on an auction basis. The
purpose of this Government decision is:
(i) to develop dated securities as a monetary instrument with flexible yields;
(ii) to provide financial instruments to suit investors’ expectations; and
(iii) to meet Government needs directly from the market.
A very interesting development is the introduction of repurchase auctions (Repos, for
short), since December 1992, in respect of Central Government dated securities. Repos are
now a regular feature of RBI’s market operations. One purpose of Repos is to even out shortterm
fluctuations in liquidity of the money market.
When Government securities are repurchased from the market, RBI makes payment to
commercial banks and this adds to their liquidity. Repos are developing into a useful
instrument to even out sharp fluctuations in the money market.
Discount and Finance House of India Ltd. (DFHI)
DFHI has been set up as a port of the package of reform of the money market. It fills the
long-standing need of a discount house in India, which will buy bills and other short-term
paper from banks and financial institutions. In this way, DFHI enables banks and financial
institutions to invest their idle funds for short periods in bills and short dated paper.
Banks can sell their short-term securities to DFHI and get funds, in case they need them,
without disturbing their investments. The DFHI has been very active in the short-term
money market and has effectively contributed to the overall stability of the money market.
3. Commercial bills market: Another Sub-division of money market is commercial
bill market. A commercial bill or a bill of exchange is a short-term, negotiable,
and self liquidating money market instrument. It may be classified into clean bills,
document bills, inland bills, foreign bills, accommodation bills and supply bills etc.
Commercial Paper (CP)
The commercial paper (CP) is issued by companies with a net worth of Rs. 5 crores. The CP
is issued in multiples of Rs. 25 lakhs subject to a minimum issue of Rs. 1 crore. The maturity
of CP is between 3 to 6 months. The CPs are issued at a discount rate is freely determined.
The maximum amount of CP that a company can raise was limited to 20% (now raised
to 30%) of the maximum permissible bank finance. The purpose of introducing CP is to