Money Market and its

instruments
 What is Money market?
• Money market basically refers to a section of the financial market where financial
instruments with high liquidity and short-term maturities are traded.

• Money market has become a component of the financial market for buying and
selling of securities of short-term maturities, of one year or less, such as treasury
bills and commercial papers.

how quickly a financial

- Trading in the Money Market is conducted over the
asset or security can be
converted into cash telephone, followed by written confirmation through e-
without losing significant mails, texts from the borrowers and lenders.
value.
• Excess funds are deployed in the Money Market, which in turn is availed of to meet
temporary shortages of cash and other obligations.

• Money market consists of various financial institutions and dealers, who seek to borrow or
loan securities. It is the best source to invest in liquid assets.
 MONEY MARKET
INSTRUMENTS
Money Market instruments mainly include Government securities, securities
issued by private sector and banking institutions –

1. – Government Securities
2. – Repo Market
3. – Money at Call and Short Notice
4. – Bills Rediscounting
5. – Money Market Mutual Funds
6. – Call Money Market and Short-term Deposit Market
7. – Treasury Bills
8. – Certificates of Deposits
9. – Inter-Corporate Deposits
10. – Commercial Bills
11. – Commercial Paper
 Money Market
Participants
Reserve Bank of India (RBI)
• RBI is the most important participant of money market which takes requisite measures to implement monetary policy of
the country.

• RBI regulates the money market in India and injects liquidity in the banking system, when it is deficient or contracts, the
same in opposite situation .

Scheduled Commercial Banks (SCBs)

• SCBs form the nucleus of money market.

• While a portion of these deposits is invested in medium and long-term Government securities and corporate shares
and bonds, they provide short-term funds to the Government by investing in the Treasury Bills
banks which are included in the second schedule of RBI Act 1934 

Co-operative Banks:
Function similarly as the commercial banks
All banks registered under the Cooperative Societies Act, 1912
 Money Market
Participants
Financial and Investment Institutions
• These institutions (e.g. LIC,UTI,GIC, Development Banks etc.) have been allowed to participate in the call money
market as lenders only.

Corporates
• Companies create demand for funds from the banking system.
• They raise short-term funds directly from the money market by issuing commercial paper.
• Moreover, they accept public deposits and also indulge in inter-corporate deposits and investments.

Mutual Funds
• Mutual funds also invest their surplus funds in various money market instruments for short periods.
• They are also permitted to participate in the Call Money Market.
• Money Market Mutual Funds have been set up specifically for the purpose of mobilisation of short-term funds for
investment in money market instruments.
 Money Market
Participants
Discount and Finance House of India
• At present DFHI participates in the inter-bank call/notice money market and term deposit market, both as lender
and borrower. It also rediscounts 182 Days Treasury Bills, commercial bills, CDs and CPs.
 GOVERNMENT
SECURITIES

• The Reserve Bank of India issues securities on behalf of the Government. The term Government
Securities includes Central Government Securities, State Government Securities and Treasury Bills.

• These are instruments issued by the government to borrow money from the market.

• Depending upon the expiry date, government securities are divided into short term and long term
securities. Short term government securities are Treasury bills. They have a maturity of less than one
year. There are three main treasury bills in India – 91 day, 182 day and 364 day.
 Treasury Bills
• Treasury Bills are one of the most popular money market instruments issued by the
Reserve Bank of India on behalf of the Government of India.

• T- Bills are generally issued to ward off short-term mismatches in receipts and
expenditure.

• Therefore, the purpose of issuing Treasury Bills is to tackle short term liquidity
problems.

• Treasury bills are generally issued at discount and redeemed at par.

• The difference between the issued amount and the redemption amount is the amount of
interest which is to be paid to the holder of the treasury bills.

• Thus, the TBs are short-term promissory notes issued by Government of India at a
discount.

• More relevant to the money market is the introduction of 14 days, 28 days, 91 days and
364 days TBs on auction basis.
 CALL MONEY AND
NOTICE MONEY
• Call money market, or inter-bank call money market, is a segment of the
money market where scheduled commercial banks lend or borrow on call
(i.e., overnight) or at short notice (i.e., for periods upto 14 days) to manage
the day-to-day surpluses and deficits in their cash-flows.

• The borrower/lender must convey his intention to repay/recall the amount

borrowed/lent with at least 24 hours notice.
Features
– Interest is calculated on Actual / 365 day basis.
– Interest payable to be rounded off to the nearest rupee.

Settlement
The borrower of funds will collect the cheque and hand over the deposit receipt to
the lender on the value date of the deal. On the due date, the lender will give back
the deposit receipt to and collect the cheque from the borrower.
 TERM
Money lent for a fixed tenor of 15 days MONEY
or more is called Term Money.

Features
– Interest to be calculated on Actual / 365 day basis.
– Interest payable to be rounded off to the nearest rupee.
– Periodicity for payment of interest can be Quarterly/Half Yearly/on
redemption, as agreed to at the time of the deal.
- Premature cancellation after 14 days can be done by mutual consent on
mutually agreed terms.
– No loan/overdraft can be granted against Term Money.
Settlement
- The borrower of funds will collect the cheque and hand over the deposit
receipt to the lender on the value date of the deal.
- On the due date, the lender will give back the deposit receipt to and collect
the cheque from the borrower.
 Commercial Bills (CBs)
 A commercial bill is one which arises out of a genuine trade transaction, i.e. credit transaction.

 When the goods are sold, the seller draws a bill of exchange (BOE) on the buyer to pay a certain amount
on a particular date.

 The buyer then accepts the BOE, signs it and sends it to the seller. The seller on the maturity date presents
the BOE to the buyer and collects its payment. Thus, These bills are known as trade bills.

 It is a basically a negotiable instrument and issued for a short period generally ranging from 3 to 6
months.
 Trade bills are called commercial bills when they are accepted by commercial banks.

 If the bill is payable at a future date and the seller needs money during the currency of the
bill, he may approach his bank to discount the bill.

 The maturity proceeds or face value of a discounted bill from the drawee is received by the
bank.

 If the bank needs funds during the currency of bill, it can rediscount the bill that has been
already discounted by it in the commercial bill rediscount market at the available market discount
rate.
 BILL REDISCOUNTING SCHEME (BRD)

 The RBI introduced the Bills Market scheme (BMS) in 1952 and the scheme was later
modified into the New Bills Market Scheme (NBMS) in 1970.

 Under the scheme, commercial banks can rediscount the bills, which were originally
discounted by them, with approved institutions.

 Approved institutions- Commercial Banks, Insurance Companies, Development Financial

Institutions, Mutual Funds, Primary Dealers, etc.
 Certificate of Deposits (CDs)
 The CDs are negotiable term-deposits accepted by commercial bank from bulk depositors at
market related rates.

 CDs are usually issued in demat form or as a Usance Promisory Note.

 An Usance Promissory Note is a promissory note which is payable after a predecided

definite period.
 All scheduled banks (except RRBs and Local Area Banks) are eligible to issue CDs. It can be
also be issued by select all India Financial Institutions.

 They can be issued to individuals, corporates, trusts, funds and associations.

 NRIs can also subscribe to CDs but on non-repatriable basis only. In secondary markets such
CDs cannot be endorsed to another NR.
 Certificate of Deposits (CDs)

Denomination Transferability Reserve Requirements

The CDs can be issued for CDs issued in physical form Banks have to maintain
minimum amount of 1 are freely transferable by appropriate reserve
lakhs to a single investor endorsement and delivery. requirements, i.e., Cash
and multiples of 1 lakh Procedure of transfer of Reserve Ratio (CRR) and
thereafter. There is, dematted CDs is similar to Statutory Liquidity Ratio
however, no limit on the any other demat securities. (SLR), on the issue price
total quantum of funds There is no lock in period of the CDs.
raised through CDs. for the CDs.
 Commercial Paper
 CPs are unsecured and negotiable promissory notes issued by high rated corporate
entities to raise short-term funds for meeting working capital requirements directly from
the market instead of borrowing from banks.

 Its period ranges from 7 days to 1 year. CP is generally issued at discount to face value
and is transferable by endorsement and delivery. The issue of CP seeks to by pass the
intermediary role of the banking system through the process of securitisation.

 It partly replaces the working capital limits enjoyed by companies with the commercial
banks and there will be no net increase in their borrowing by issue of CP.
 CP can be issued in denominations of Rs.5 lakh or multiples thereof.

 Individuals, banking companies, other corporate bodies (registered or

incorporated in India) and unincorporated bodies, Non-Resident Indians (NRIs)
and Foreign Institutional Investors (FIIs) etc. can invest in CPs. However,
investment by FIIs would be within the limits set for them by Securities and
Exchange Board of India (SEBI) from time-to-time.

 CP can be issued either in the form of a promissory note or in a dematerialised

form through any of the depositories approved by and registered with SEBI.

 Banks, FIs and PDs can hold CP only in dematerialised form.