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 under1:"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 under1:"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 under1:"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 under1: "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

Constituents of a Financial System

and

individuals.

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

Stock Exchange

Capital Market

Investment Bankers

Underwriters

Capital

Market,

Market

Role Secondary

Market

to

securities Credit

Corporate services,

advisory Issue

of

securities

Capital Market, Money Subscribe to unsubscribed Market

portion of securities Issue securities to the

Registrars, Depositories, Custodians

Capital Market

investors on behalf of the company

and

handle

share transfer activity Primary Dealers Satellite Dealers Forex Dealers

Money Market Forex Market

Market

making

in

government securities Ensure currencies

exchange

ink

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 incomeyielding 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 shortterm 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 moneymarket 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, Cooperative 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 TBills) 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 > 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 10/26/2007 10/19/2007 10/12/2007 10/5/2007 9/28/2007 9/21/2007 9/14/2007 9/7/2007 8/31/2007 8/24/2007 8/17/2007 8/10/2007 8/3/2007 7/27/2007 7/20/2007 7/13/2007 7/6/2007 6/29/2007 6/22/2007 6/15/2007 6/8/2007 6/1/2007 5/25/2007 5/18/2007 5/11/2007 5/4/2007 4/27/2007 4/20/2007 4/13/2007 4/6/2007

Call Money rate (max) 6.2 6.64 6.65 6.55 9.5 8 7.5 6.58 8.4 45 55 6.75 5 1.5 0.65 4.75 4.9 9.5 7.15 4.75 4 8.1 8.25 9.5 7.75 14 15 20 7.5 16

Date

Call Money rate (max) 10/26/2007

10/19/2007

10/12/2007

10/5/2007

9/28/2007

9/21/2007

9/14/2007

9/7/2007

8/31/2007

8/24/2007

8/17/2007

8/10/2007

8/3/2007

7/27/2007

7/20/2007

7/13/2007

7/6/2007

6/29/2007

6/22/2007

6/15/2007

6/8/2007

6/1/2007

5/25/2007

5/18/2007

5/11/2007

5/4/2007

4/27/2007

4/20/2007

4/13/2007

4/6/2007

Rate %

Call Money rate (max)

60

50

40

30

20

10

0

Date 10/26/2007 10/19/2007 10/12/2007 10/5/2007 9/28/2007 9/21/2007 9/14/2007 9/7/2007 8/31/2007 8/24/2007 8/17/2007 8/10/2007 8/3/2007 7/27/2007 7/20/2007 7/13/2007 7/6/2007 6/29/2007 6/22/2007 6/15/2007 6/8/2007 6/1/2007 5/25/2007 5/18/2007 5/11/2007 5/4/2007 4/27/2007 4/20/2007 4/13/2007 4/6/2007

Call money rate (min) 3.75 3 4 4 2.75 5.5 1 5.25 2.5 4 4.75 2.5 0.05 0.1 0.2 0.01 0.08 0.3 0.07 0.5 0.05 0.1 1.95 3 1 5.25 4 5 1.5 5.25

Date

Call money rate (min)

10/26/2007

10/19/2007

10/12/2007

10/5/2007

9/28/2007

9/21/2007

9/14/2007

9/7/2007

8/31/2007

8/24/2007

8/17/2007

8/10/2007

8/3/2007

7/27/2007

7/20/2007

7/13/2007

7/6/2007

6/29/2007

6/22/2007

6/15/2007

6/8/2007

6/1/2007

5/25/2007

5/18/2007

5/11/2007

5/4/2007

4/27/2007

4/20/2007

4/13/2007

4/6/2007

Rate

Call money rate (min)

6

5

4

3

2

1

0

Date 10/26/2007 10/19/2007 10/12/2007 10/5/2007 9/28/2007 9/21/2007 9/14/2007 9/7/2007 8/31/2007 8/24/2007 8/17/2007 8/10/2007 8/3/2007 7/27/2007 7/20/2007 7/13/2007 7/6/2007 6/29/2007 6/22/2007 6/15/2007 6/8/2007 6/1/2007 5/25/2007 5/18/2007 5/11/2007 5/4/2007 4/27/2007 4/20/2007 4/13/2007 4/6/2007

Call Money Borrowing Rate (Max) 6.2 6.64 6.65 6.55 9.5 8 7.5 6.58 8.4 45 55 6.75 5 1.5 0.65 4.75 4.9 9.5 7.15 4.75 4 8.1 8.25 9.5 7.75 14 15 20 7.5 16

4/6/2007

Date

Series1 10/26/2007

10/19/2007

10/12/2007

10/5/2007

9/28/2007

9/21/2007

9/14/2007

9/7/2007

8/31/2007

8/24/2007

8/17/2007

8/10/2007

8/3/2007

7/27/2007

7/20/2007

7/13/2007

7/6/2007

6/29/2007

6/22/2007

6/15/2007

6/8/2007

6/1/2007

5/25/2007

5/18/2007

5/11/2007

5/4/2007

4/27/2007

4/20/2007

4/13/2007

Rate %

Call money Market Bor. Max. Rate

60

50

40

30

20

10

0

Date 10/26/2007 10/19/2007 10/12/2007 10/5/2007 9/28/2007 9/21/2007 9/14/2007 9/7/2007 8/31/2007 8/24/2007 8/17/2007 8/10/2007 8/3/2007 7/27/2007 7/20/2007 7/13/2007 7/6/2007 6/29/2007 6/22/2007 6/15/2007 6/8/2007 6/1/2007 5/25/2007 5/18/2007 5/11/2007 5/4/2007 4/27/2007 4/20/2007 4/13/2007 4/6/2007

Call Money Borrowing Rate (Min) 3.75 3 4 4 2.75 5.5 1 5.25 2.5 4 4.75 2.5 0.05 0.1 0.2 0.01 0.08 0.3 0.07 0.5 0.05 0.1 1.95 3 1 5.25 4 5 1.5 5.25

Date

Series1 10/26/2007

10/19/2007

10/12/2007

10/5/2007

9/28/2007

9/21/2007

9/14/2007

9/7/2007

8/31/2007

8/24/2007

8/17/2007

8/10/2007

8/3/2007

7/27/2007

7/20/2007

7/13/2007

7/6/2007

6/29/2007

6/22/2007

6/15/2007

6/8/2007

6/1/2007

5/25/2007

5/18/2007

5/11/2007

5/4/2007

4/27/2007

4/20/2007

4/13/2007

4/6/2007

Rate %

Call Money Market Bor. Min Rate

6

5

4

3

2

1

0

Date 10/26/2007 10/19/2007 10/12/2007 10/5/2007 9/28/2007 9/21/2007 9/14/2007 9/7/2007 8/31/2007 8/24/2007 8/17/2007 8/10/2007 8/3/2007 7/27/2007 7/20/2007 7/13/2007 7/6/2007 6/29/2007 6/22/2007 6/15/2007 6/8/2007 6/1/2007 5/25/2007 5/18/2007 5/11/2007 5/4/2007 4/27/2007 4/20/2007 4/13/2007 4/6/2007

C.R.R. 7 7 7 7 7 7 7 7 7 7 7 7 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.25 6.25 6 6

Date

Series1

10/26/2007

10/19/2007

10/12/2007

10/5/2007

9/28/2007

9/21/2007

9/14/2007

9/7/2007

8/31/2007

8/24/2007

8/17/2007

8/10/2007

8/3/2007

7/27/2007

7/20/2007

7/13/2007

7/6/2007

6/29/2007

6/22/2007

6/15/2007

6/8/2007

6/1/2007

5/25/2007

5/18/2007

5/11/2007

5/4/2007

4/27/2007

4/20/2007

4/13/2007

4/6/2007

Rate %

CRR

7.2

7

6.8

6.6

6.4

6.2

6

5.8

5.6

5.4

Date 10/26/2007 10/19/2007 10/12/2007 10/5/2007 9/28/2007 9/21/2007 9/14/2007 9/7/2007 8/31/2007 8/24/2007 8/17/2007 8/10/2007 8/3/2007 7/27/2007 7/20/2007 7/13/2007 7/6/2007 6/29/2007 6/22/2007 6/15/2007 6/8/2007 6/1/2007 5/25/2007 5/18/2007 5/11/2007 5/4/2007 4/27/2007 4/20/2007 4/13/2007 4/6/2007

Deposit Rate Max 9.5 9.5 9.5 9.5 9.5 9.5 9.5 9.5 9.5 9.5 9.5 9.6 9.6 9.6 13.25 9.6 9.6 9.6 9 9 9 9 9 9 9 9 9 9 9 9

4/6/2007

Date 10/26/2007

10/19/2007

10/12/2007

10/5/2007

9/28/2007

9/21/2007

9/14/2007

9/7/2007

8/31/2007

8/24/2007

8/17/2007

8/10/2007

8/3/2007

7/27/2007

7/20/2007

7/13/2007

7/6/2007

6/29/2007

6/22/2007

6/15/2007

6/8/2007

6/1/2007

5/25/2007

5/18/2007

5/11/2007

5/4/2007

4/27/2007

4/20/2007

4/13/2007

Rate %

Deposit rate Max

14

12

10

8

6

4

2

0

Date 10/26/2007 10/19/2007 10/12/2007 10/5/2007 9/28/2007 9/21/2007 9/14/2007 9/7/2007 8/31/2007 8/24/2007 8/17/2007 8/10/2007 8/3/2007 7/27/2007 7/20/2007 7/13/2007 7/6/2007 6/29/2007 6/22/2007 6/15/2007 6/8/2007 6/1/2007 5/25/2007 5/18/2007 5/11/2007 5/4/2007 4/27/2007 4/20/2007 4/13/2007 4/6/2007

Deposit Rate Min 8 8 8 8 8 8 8 8 8 8 8 7.5 7.5 7.5 12.75 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5

Date

Series1 10/26/2007

10/19/2007

10/12/2007

10/5/2007

9/28/2007

9/21/2007

9/14/2007

9/7/2007

8/31/2007

8/24/2007

8/17/2007

8/10/2007

8/3/2007

7/27/2007

7/20/2007

7/13/2007

7/6/2007

6/29/2007

6/22/2007

6/15/2007

6/8/2007

6/1/2007

5/25/2007

5/18/2007

5/11/2007

5/4/2007

4/27/2007

4/20/2007

4/13/2007

4/6/2007

Rate %

Deposit rate Min

14

12

10

8

6

4

2

0

4/6/2007

Date

IDBI Min Term Lending Rate

10/26/2007

10/19/2007

10/12/2007

10/5/2007

9/28/2007

9/21/2007

9/14/2007

9/7/2007

8/31/2007

8/24/2007

8/17/2007

8/10/2007

8/3/2007

7/27/2007

7/20/2007

7/13/2007

7/6/2007

6/29/2007

6/22/2007

6/15/2007

6/8/2007

6/1/2007

5/25/2007

5/18/2007

5/11/2007

5/4/2007

4/27/2007

4/20/2007

4/13/2007

Rate %

IDBI Min Term Lending Rate

60

50

40

30

20

10

0