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Indian Financial System

Notes In mid-1960s, the auction system for issue of 91-days Treasury Bills to the market was replaced
by the Tap sale of bills. Though the Tap bill rates were varied in sync with changes in the Bank
Rate till 1974, the discount rate on ad hoc and tap bills continued unchanged since then at the
uniform rate of 4.6 per cent.
Combined with the regime of administered interest rates, there was no congenial environment
for Treasury Bills market to develop. However, the interest in development of Treasury Bills
market came up with the introduction of 182-days Treasury Bill on auction basis in November,
1986 and the constitution of Discount and Finance House of India (DFHI) as a money market
institutions in March 1988.
At present, the Treasury bill market in India deals in the treasury bill issues of weekly, 14-day
and 91-day bill auctions and 364-day bill auctions on a fortnightly basis combined with 14-day
intermediate bills available for state governments and foreign central banks.

3.5.4 Discount Market

Unlike the London discount market, Indian money market does not have discount house to
provide discount facility. The RBI provided rediscounting facility to the commercial banks until
1988 so that banks get abundant liquidity in times of liquidity crisis.
The Banking Commission 1972 for the first time considered the question of establishment of
discount houses in the country. The Commission was of the firm view that there was no need for
specialised acceptance and discount houses though such institutions might be formed as joint-
stock companies in course of time to offer and supply of short-term finance in the market.
The Chore Working Group to review the system of cash credit also looked into, in 1979, the
question of setting up of a discount house in India. The Chore Group was of the considered view
that discount houses along the pattern of the U.K. could be profitably adopted in India. It
recommended that:

1. The proposed discount house should be the sole depository of the surplus liquid funds of
the banking system as well as the non-banking financial institutions.
2. It should use surplus funds to even out the imbalances in liquidity in the banking system
subject to the RBI guidelines.
3. It should create ready market for commercial banks, treasury bills and government
securities by being ready to purchase from and sell to the banking system such securities.

4. The discount house should be sponsored by the commercial banks, LIC, UTI, GIC with
participation by the IDBI, ICICI and SFCs.
5. The discount house should be an autonomous body which should be run strictly on
commercial principles.
6. The RBI should have powers to issue directives to the proposed discount house.
However, the Chore Committee recommendations failed to elicit any response from the
Government and the RBI. The Vaghul Committee after studying the working of the Indian
monetary system and money markets from various angles recommended for the establishment
of an autonomous public limited company, to be called the Finance House, jointly by the RBI,
the public sector banks, and the all-India financial institutions.
Following the Vaghul Committee recommendations, the RBI set up the Discount and Finance
House of India Ltd. in April 1, 1935 year with the solemn objective of deepening and activating
money market. With the establishment of DFHI, discounting facilities are now provided by it,
leading to reduction in the pressure for discounting services on the RBI. Institutions such as
NABARD, Exim Bank, SIDBI and NHB also play an important role in the discount market.

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