Posts tagged ‘Money Market Instruments’

A Brief Note on Money Market Instruments


The India money market is a monetary system that involves the lending and borrowing of short-term funds. It is a centre in which financial institutions join together for the purpose of dealing in financial or monetary assets. Money market instruments take care of the borrowers’ short-term needs and render the required liquidity to the lenders. The varied types of India money market instruments are treasury bills, repurchase agreements, commercial papers, certificate of deposit, and banker’s acceptance. Central bank of the country – the Reserve Bank of India (RBI) has always been playing the major role in regulating and controlling the India money market. The money market provides a mechanism for evening out short-term liquidity imbalances within an economy. The development of the money market is, thus, a prerequisite for the growth and development of the economy of a country.

Money Market vs. Capital Market

Money Market is a place for short term lending and borrowing, typically within a year. It deals in short term debt financing and investments. On the other hand, Capital Market refers to stock market, which refers to trading in shares and bonds of companies on recognized stock exchanges or buying in primary market (Issue of Security by the Company). Individual players cannot invest in money market as the value of investments is large, on the other hand, in capital market, anybody can make investments through a broker. Stock Market is associated with high risk and high return as against money market which is more secure. Further, in case of money market, deals are transacted on phone or through electronic systems as against capital market where trading is through recognized stock exchanges.

Money Market Instruments

  • T-bills :

    A Treasury Bill is an instrument for short-term borrowing by the Government of India. It is issued by the Reserve Bank of India on behalf of the Government of India in the form of a promissory note. The necessity for issuing treasury bills .arises because of the periodic nature of receipts of Government while the Government expenditure is on a continuing basis. Taxes are payable to the Government after quarterly intervals or so, but Government has to meet its expenditure on daily or monthly basis. Thus, to bridge this mis-match between the timings of Government receipts and expenditure, Government borrows money on short-term basis by issuing Treasury Bills. The Treasury Bills are issued for different maturity periods. Till May 14, 2001, the maturity periods were 14 days, 91 days,. 182 days and 365 days. The Treasury Bills are sold through auctions. While auctions of 91 days Treasury Bills take place on a weekly basis, the auctions for 364,days Treasury Bills are held on a fortnightly basis. The Reserve Bank of India also notifies the amounts in respect of the Treasury Bill auctions. (View RBI Notifications Here)

  • Certificate of Deposit :

    A Certificate of Deposit is a receipt for a deposit of money with a bank or a financial institution. It differs from a fixed Deposit Receipt in two respects. First, it is issued for a big amount and second, it is freely negotiable. The Reserve Bank of India announced the scheme of Certificates of Deposit in March 1989. Certificate of Deposits are a popular avenue for companies to invest their short-term surpluses because Certificate of Deposits offer n risk-free investment opportunity at rates of interest higher than Treasury bills and term deposits, besides being fairly liquid. For the Issuing Banks, Certificate of Deposits provides another source of mobilizing funds in bulk. CDs are discounted instruments and are issued at a discounted price and redeemed at par value. The tenor of issue can range from 7 days to 1 year, however most CDs are issued by banks for 3, 6 and 12 months. CDs can be issued to individuals (other than minors), corporations, companies, trusts, funds, associations, etc. Non Resident Indians may also subscribe to CDs. However they are mainly subscribed to by banks, mutual funds, provident and pension funds and insurance companies. The minimum amount of a CD should be Rs. 1 lakh i.e., the minimum deposit that can be accepted from a single subscriber should not be less than Rs 1 lakh. and in multiples of Rs 1 lakh thereafter. (View CDs Traded)

  • Commercial Papers :

    Commercial Paper is a short-term usance promissory note with fixed maturity, issued by creditworthy and highly rated corporations. It is negotiable by endorsement and delivery. The Reserve Bank of India permitted its introduction in January 1990 as an additional source of short-term finance to corporates and also as an avenue for investment of funds by large investors. All eligible issuers are required to obtain a credit rating for issuance of Commercial Paper from a credit rating agency as may be specified by the Reserve Bank of India from time to time. The minimum credit rating should be P-2 of CRISIL or such equivalent rating by other agencies. P can be issued for maturities between a minimum of 7 days and a maximum up to one year from the date of issue and can be issued in denominations of Rs.5 lakh or multiples thereof. CP may be issued to and held by individuals, banking companies, other corporate bodies registered or incorporated in India and unincorporated bodies, Non-Resident Indians (NRIs) and Foreign Institutional Investors (FIIs). However, investment by FIIs would be within the limits set for their investments by Securities and Exchange Board of India. Mutual Funds, Banks, Insurance companies etc are the dominant investors in the CP market. Secondary market trading takes place through the interbank broking market between institutional participants.  CPs are issued at a discount to face value, as may be determined mutually by the issuer & investor. (View CPs Traded)

  • Call / Notice & Term Money :

    The call/notice/term money market is a market for trading very short term liquid financial assets that are readily convertible into cash at low cost. The period of lending may be for a period of 1 day which is known as call money and between 2 days and 14 days which is known as notice money. Term money refers to borrowing/lending of funds for a period exceeding 14 days. The interest rates on such funds depends on the surplus funds available with lenders and the demand for the same which remains volatile. The trades are conducted both on telephone as well as on the NDS Call system, which is an electronic screen based system set up by the RBI for negotiating money market deals between entities permitted to operate in the money market. The settlement of money market deals is by electronic funds transfer on the Real Time Gross Settlement (RTGS) system operated by the RBI. The repayment of the borrowed money also takes place through the RTGS system on the due date of repayment. (To view ongoing rates, search on Google : India Call Money Closing)

  • Intercorporate Deposits:

    An ICD is an unsecured loan extended by one corporate to another. This market allows corporates with surplus funds to lend to other corporates. Also the better-rated corporates can borrow from the banking system and lend in this market. As the cost of funds for a corporate is much higher than that for a bank, the rates in this market are higher than those in the other markets. Also, as ICDs are unsecured, the risk inherent is high and the risk premium is also built into the rates. The tenor of ICD may range from 1 day to 1 year, but the most common tenor of borrowing is for 90 days. The market of inter-corporate deposits maintains secrecy. The brokers in this market never reveal their lists of lenders and borrowers, because they believe that if proper secrecy is not maintained the rate of interest can fall abruptly.

    The market of inter-corporate deposits depends crucially on personal contacts. The decisions of lending in this market are largely governed by personal contacts.

  • Repo :

    Repo is a money market instrument, which enables collateralised short term borrowing and lending through sale/purchase operations in debt instruments. Under a repo transaction, a holder of securities sells them to an investor with an agreement to repurchase at a predetermined date and rate. In the case of a repo, the forward clean price of the bonds is set in advance at a level which is different from the spot clean price by adjusting the difference between repo interest and coupon earned on the security. In the money market, this transaction is nothing but collateralised lending as the terms of the transaction are structured to compensate for the funds lent and the cost of the transaction is the repo rate .In other words, the inflow of cash from the transaction can be used to meet temporary liquidity requirement in the short term money market at comparable cost. Repo period could be overnight term, open or flexible. Overnight repos lasts only one day. If the period is fixed and agreed in advance, it is a term repo where either party may call for the repo to be terminated at any time although requiring one or two days’ notice. Though there is no restriction on the maximum period for which repos can be undertaken generally term repos are for an average period of one week. (View Ongoing Rate)

    Above note is a result of publicly available information!!

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