Role of Money Markets, Debt Markets, Forex Market and FEMA

Role of Money Markets, Debt Markets, Forex Market and FEMA

Dear bankers,

As we all know that  is Role of Money Markets, Debt Markets, Forex Market and FEMA very most important topic for JAIIB Exam. JAIIB exam conducted twice in a year. So, here we are providing the Role of Money Markets, Debt Markets, Forex Market and FEMA, from (Unit-4), Indian Financial system (Module A), Principle & Practice of Banking JAIIB Paper-1.


Call Money Market

  • The money market is a market for short-term financial assets that are close substitutes of money. The most important feature of a money market instrument is that it is liquid and can be turned into money quickly at low cost and provides an avenue for equilibrating the short-term surplus funds of lenders and the requirements of borrowers.
  • The loans are of short-term duration varying from 1 to 14 days, are traded in call money market
  • The money that is lent for one day in this market is known as “Call Money”
  • It exceeds one day (but less than 15 days) it is referred to as “Notice Money”
  • Term Money refers to Money lent for 15 days or more in the Inter Bank Market.

Participants in the Market

  •  Participants in the call money market are banks and related entities specified by the RBIScheduled commercial banks (excluding RRBs), co-operative banks (other than Land Development Banks) and Primary Dealers (PDs), are permitted to participate in call/notice money market both as borrowers and lenders. As per the new regulations, Payment Banks are also allowed to participate in CMM as both lenders and borrowers.

Functioning of the Call Money Market

  •  Loans are availed through auction/negotiation. The auction is made on interest rate.  Highest bidder (who is ready to give higher interest rate) can avail the loan. Average interest rate in the call market is called call rate. Dealing in call money is done through the electronic trading platform called Negotiated Trading System (NDS). This call money rate is an important variable for the RBI to assess the liquidity situation in the economy. The CMM is known as the most sensitive segment of the financial system.

Borrowing Limits

  • Scheduled commercial banks are permitted to borrow to the extent of 125% of their capital funds in the call/notice money market, however their fortnightly average borrowing outstanding should not exceed more than 100% of their capital funds (Tier I and Tier II capital). At the same time SCBs can lend to the extent of 50% of their capital funds on any day, during a fortnight, but average fortnightly outstanding lending should not exceed 25% of their capital funds. Co-operative Banks are permitted to borrow up to 2% of their aggregate deposits as at the end of March of the previous financial year in the Call/ Notice money market.
  • There is no limit for lending. Primary Dealers can borrow on an average in a reporting fortnight up to 225% of the total Net Owned funds (NOF) as at the end, March of the previous financial year and lend on an average in a reporting fortnight up to 25% of their NOF.

Money Market Instruments

Treasury Bills (T-Bills)

  • Issued by the Central Government, Treasury Bills are known to be one of the safest money market instruments available. However, treasury bills carry zero risk. I.e. are zero risk instruments. Therefore, the returns one gets on them are not attractive. Treasury bills come with different maturity periods like 3-month, 6-month and 1 year and are circulated by primary and secondary markets. Treasury bills are issued by the Central government at a lesser price than their face value. The interest earned by the buyer will be the difference of the maturity value of the instrument and the buying price of the bill, which is decided with the help of bidding done via auctions.
  • Note: Currently, there are 3 types of treasury bills issued by the Government of India via auctions 91-day, 182-day and 364-day treasury bills.

Certificate of Deposits (CDs)

  • A Certificate of Deposit or CD, functions as a deposit receipt for money which is deposited with a financial organization or bank. However, a Certificate of Deposit is different from a Fixed Deposit Receipt in two aspects. The first aspect of difference is that a CD is only issued for a larger sum of money.
  • Secondly, a Certificate of Deposit is freely negotiable. First announced in 1989 by RBI, Certificate of Deposits have become a preferred investment choice for organizations in terms of short-term surplus investment as they carry low risk while providing interest rates which are higher than those provided by Treasury bills and term deposits. CDs are also issued at a discounted price and their tenor ranges between a span of 7 days up to 1 year.
  • However, banks issue Certificates of Deposits for durations ranging from 3 months, 6 months and 12 months. They can be issued to individuals (except minors), trusts, companies, corporations, associations, funds, non-resident Indians, etc.

Commercial Papers (CPs)

  • Commercial Papers are can be compared to an unsecured short-term promissory note which is issued by highly rated companies with the purpose of raising capital to meet requirements directly from the market. CPs usually feature a fixed maturity period which can range anywhere from 1 day up to 270 days. Commercial Papers promise higher returns as compared to treasury bills and are automatically not as secure in comparison. Commercial papers are actively traded in secondary market.
  • (i)The tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs.4cr.
  • (ii) Company has been sanctioned working capital limit by banks or all India financial institutions.
  • (iii)The borrowal account of the company is classified as a Standard Asset by the financing Banks and institutions.

Repurchase Agreements (Repo)

  • Repurchase Agreements, also known as Reverse Repo or simply as Repo, loans of a short duration which are agreed upon by buyers and sellers for the purpose of selling and repurchasing. These transactions can only be carried out between RBI approved parties Repo / Reverse Repo transactions can be done only between the parties approved by RBI. Transactions are only permitted between securities approved by the RBI like treasury bills, central or state government securities, corporate bonds and PSU bonds.

Banker’s Acceptance (BA)

  • Banker’s Acceptance or BA is basically a document promising future payment which is guaranteed by a commercial bank. Similar to a treasury bill, Banker’s Acceptance is often used in money market funds and specifies the details of the repayment like the amount to be repaid, date of repayment and the details of the individual to which the repayment is due. Banker’s Acceptance features maturity periods ranging between 30 days up to 180 days.

Collateralized Borrowing And Lending Obligation (CBLO):

  • CBLOs were developed by the Clearing Corporation of India (CCIL) and Reserve Bank of India (RBI). It is a money market instrument that represents an obligation between a borrower and a lender as to the terms and conditions of the loan.
  • The details of the CBLO include an obligation for the borrower to repay the debt at a specified future date and an expectation of the lender to receive the money on that future date, and they have a charge on the security that is held by the CCIL. CBLOs are used by those who are heavily restricted or have been phased out of the interbank call money market.

Debt Capital Market

The Indian debt market is a market meant for trading (i.e. buying or selling) fixed income instruments. Fixed income instruments could be securities issued by Central and State Governments, Municipal Corporations, Govt. Bodies or by private entities like financial institutions, banks, corporates, etc. Simply put, a bond/debt can be defined as a loan in which an investor is the lender. The issuer of the bond pays the investor interest (at a predetermined rate and schedule) in return for the amount invested. The Indian debt market offers a variety of debt instruments, offered by the Government and non-Government entities. The factors that are propelling the growth of the market are:

  • Introduction of new instruments
  • Increased liquidity
  • Deregulation of interest rates
  • Improved settlement systems

The debt market in India comprises broadly two segments, viz.,

  • Government Securities Market and
  • Corporate Debt Market.

The latter is further classified as Market for:

  • PSU Bonds and
  • Private Sector Bonds.

The corporate bond market, broadly comprises of corporate sector raising debt through public issuance in capital market and also through private placement basis.

FOREX (Foreign Exchange Market)

  • The foreign exchange market is a global online network where traders buy and sell currencies. It has no physical location and operates 24 hours a day.

Inter bank Market

  • The inter bank market is a network of banks that trade currencies with each other. Each has a currency trading desk called a dealing desk. They are in contact with each other continuously. That process makes sure exchange rates are uniform around the world.
  • The minimum trade is 1 million of the currency being traded. Most trades are much larger, between 10 million and 100 million in value. As a result, exchange rates are dictated by the interbank market.


  • LIBOR, which is an acronym of London Interbank Offer Rate, refers to the interest rate that UK banks charge other financial institutions for short-term loans. The loan maturities vary from one day to one year. LIBOR acts as a benchmarking base for short-term interest rates for prices of securities such as currency swaps, interest rate swaps, or mortgages.
  • LIBOR comprises seven maturities, quoted for deposits of each of five major currencies – CHF (Swiss Franc), EUR (Euro), GBP (Pound Sterling), JPY (Japanese Yen), and USD (US Dollar).


  • MIBOR is the acronym for Mumbai Interbank Offer Rate, the yardstick of the Indian call money market. it is used as a reference rate for floating rate notes, corporate debentures, term deposits, interest rate swaps and forward rate agreements. The pricing of overnight indexed swaps, a type of overnight interest rate swap used for hedging interest rate risk is based on overnight MIBOR.
  • Based on the recommendation of the Committee for the Development of Debt Market, the National Stock Exchange (NSE) launched the Mumbai Interbank Offer Rate (MIBOR) and Mumbai Interbank Bid Rate (MIBID) in June, 1998. Subsequently, the NSE developed a benchmark rate for the term money market, like the 14-day, 1-month and 3-month MIBOR.

Foreign Exchange Management Act (FEMA)

  • The Foreign Exchange Management Act (FEMA) was an official Act that consolidated and amended laws governing foreign exchange in India. The primary objective of FEMA act was “facilitating external trade and payments and promoting the orderly development and maintenance of foreign exchange market in India”. FEMA was enacted by the Parliament of India in the winter session of 1999 to replace the Foreign Exchange Regulation Act (FERA) of 1973.

Important FEMA Guidelines and Features

Most significantly, FEMA regarded all forex-related offences as civil offences, whereas FERA regarded them as criminal offences. Additionally, there were other important guidelines such as:

  • FEMA did not apply to Indian citizens who resided outside India. This criterion was checked by calculating the number of days a person resided in India during the previous financial year (182 days or more to be a resident). It was noted that even an office, a branch, or an agency could be a ‘person’ for the purpose of checking residency.
  • FEMA authorized the central government to impose restrictions on and supervise three things – payments made to any person outside India or receipts from them, forex, and foreign security deals.
  • It specified the areas around acquisition/holding of forex that required specific permission of the Reserve Bank of India (RBI) or the government.
  • FEMA put foreign exchange transactions into two categories – capital account and current account. A capital account transaction altered the assets and liabilities outside India or inside India but of a person resident outside India. Thus, any transaction that changed overseas assets and liabilities for an Indian resident in a foreign country, or vice versa, was classified as a capital account transaction. Any other transaction fell into the current account category.

Important Provisions of the Act

  • Section 3: Prohibits dealings in foreign exchange except through and authorized person. This section states that on person can, without general or special permission of the RBI:
  • (i)Deal in or transfer any foreign exchange or foreign securities to any person not being an authorized person
  • (ii)Make any payment to or for the credit of any person resident outside India in any manner.
  • (iii)Receive otherwise through an authorized person, any payment by order or on behalf of any person resident outside India in any manner.
  • Section 4: Restrains any person resident in India from acquiring, holding, owning, possessing or transferring any foreign exchange, foreign security or any immovable property situated outside India except as specifically provided in the Act. The term “foreign exchange” and “foreign security” are defined in sections 2(n) and 2(o) respectively of the Act. The Central govt. has made Foreign Exchange Management Rules 2000.
  • Section 6: Deals with Capital account transactions. This section allows a person to draw or sell foreign exchange form or to an authorized person for a capital account transaction.
  • Section 7: Deals with export of goods and services. Every exporter is required to furnish to the RBI or any other authority, a declaration, etc, regarding full export value.
  • Section 8: Cast the responsibility on the person resident in India who have any amount of foreign exchange due or accrued in their favour to get the same realized and repatriated to India within the specific period and the manner specified by RBI.
  • Section 10 and 12- Deal with duties and liabilities of the authorized person.
  • Section 13 and 15- of the Act Deal with penalties and enforcement of the orders of Adjudicating Authority as well power to compound contraventions under the Act.
  • Section 36 and 37 Pertains to the establishment of Directorate of Enforcement and the power the investigate the violation of any provisions of Act, rule regulation, notification directions or order issued in exercise of the power under this Act.

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