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Types of Money Market Instruments in India

Types of Money Market Instruments in India

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Published by: premji0085 on Sep 29, 2010
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Types of Money Market Instruments in India
The money market is a monetary system of lending and borrowing of short-termfunds. After the globalization initiative in 1992, India has witnessed a growth in itsmoney markets. Financial institutions have been employing money marketinstruments to finance the short-term monetary requirements of industries suchas agriculture, finance and manufacturing. The money markets have performedwell in the past 20 years.The Reserve Bank of India (RBI) has been playing the key role of regulator andcontroller of such money markets. The RBI intervenes regularly to curb crisissituations, such as liquidity crunching in the markets, by reducing the cashreserve ratio (CRR) or by pumping in more money.
Types of Money Market Instruments in India
1.Money market instruments provide for borrowers' short-term needs andgives needed liquidity to lenders. The types of money market instruments aretreasury bills, repurchase agreements, commercial papers, certificate of deposit, and banker's acceptance.
Treasury Bills (T-Bills)
2.Treasury bills began being issued by the Indian government in 1917. Theyare short-term instruments issued by the Reserve Bank of India. They areone of the safest money market instruments because they are risk free, butthe returns from this instrument are not very large. The primary as well as thesecondary markets circulate this instrument. They have 3-month, 6-monthand 1-year maturity periods. T-bills are issued with a separate price from their face value. The face value is achieved upon maturity, as is the interestearned on the buy value. The buy value is set by a bidding process inauctions.
Repurchase Agreements
Repurchase agreements are also known as repos. They are short-termloans that buyers and sellers agree to sell and repurchase. As of 1992, repotransactions are allowed only between RBI-approved securities such as stateand central government securities, T-bills, PSU bonds, FI bonds andcorporate bonds. Repurchase agreements are sold by sellers with a promiseof purchasing them back at a given price and on a givendatein the future.The buyer will also purchase the securities and other instruments in therepurchase agreement with a promise of selling them back to the seller.
Commercial Papers

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