MONEY MARKET

By,
Harsha Vardhana. P
 Definition
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.
 Description
• Money market consists of negotiable instruments such as treasury
bills, commercial papers. and certificates of deposit. It is used by
many participants, including companies, to raise funds by selling
commercial papers in the market. Money market is considered a
safe place to invest due to the high liquidity of securities.
• The money market is an unregulated and informal market and not
structured like the capital markets, where things are organised in a
formal way. Money market gives lesser return to investors who
invest in it but provides a variety of products.
Importance OF Marketing
 Financing trade – Money market plays crucial role in
financing both internal as well as international trade.
Commercial finance is made available to the traders
through bills of exchange, which are discounted by the
bill market.
 Financing industry – Money market helps in securing
the short-term loans to meet their working capital
requirements through the system of finance bills ,
commercial papers, etc.
 Profitable investment – Money market enables
the commercial banks to use their excess reserves
in profitable investment.
 Self-sufficiency of commercial bank –
Developed money market helps the commercial
banks to become self-sufficient.
 Help to central bank – It smoothens the
functioning and increases the efficiency of central
bank.
 MONEY MARKET
INSTRUMENTS
 Call money market
 Commercial paper
 Treasury bills
 Commercial bills
 Certificate Of Deposits
 Money Market Mutual Funds
 The Repo Market
 Discount And Finance House Of India
1) Call And Notice Money Market
The market for extremely short-period is referred as call money
market. Under call money market, funds are transacted on overnight
basis. The participants are mostly banks. Therefore it is also called
Inter-Bank Money Market. Under notice money market funds are
transacted for 2 days and 14 days period. The lender issues a notice
to the borrower 2 to 3 days before the funds are to be paid. On receipt
of notice, borrower have to repay the funds. In this market the rate at
which funds are borrowed and lent is called the call money rate.
 COMMERCIAL PAPERS
Commercial Papers were introduced in
January 1990. The Commercial Papers can
be issued by listed company which have
working capital of not less than Rs. 5
crores. They could be issued in multiple of
Rs. 25 lakhs. The minimum size of issue
being Rs. 1 crore. At present the maturity
period of CPs ranges between 7 days to 1
year.
CPs are issued at a discount to its face
value and redeemed at its face value.
 COMMERCIAL BILLS
• A bill of exchange is drawn by a seller on the buyer to make
payment within a certain period of time. Generally, the maturity
period is of three months. Commercial bill can be resold a number
of times during the usance period of bill.
• - Commercial bills are short term, negotiable and self
liquidating money market instruments with low risk.
• Commercial bill can be resold a number of times during the usance
period of bill.
 TREASURY BILLS (t-bills)
• Commercial bill can be resold a number
of times during the usance period of bill.
• Treasury bills are available for a minimum
amount of Rs. 25,000 and in multiples of
Rs. 25,000. Periodic auctions are held for
their Issue.
• At present three types of treasury bills
are issued through auctions, namely 91
day, 182 day and364day treasury bills.
• Interest is determined by market forces
 CERTIFICATE OF DEPOSIT (CD)
• The scheme of CDs was introduced in 1989
by RBI. The main purpose was to enable
the commercial banks to raise funds from
market.
• CDs are unsecured, negotiable promissory
notes issued at a discount to the face
value.
• CDs are issued by Commercial banks and
development financial institutions.
• At present, the maturity period of CDs
ranges from 3 months to 1 year. They are
issued in multiples of Rs. 25 lakh subject to
a minimum size of Rs. 1 crore.
MONEY MARKET MUTUAL FUNDS (MMMFs)

• - A Scheme of MMMFs was introduced by

RBI in 1992. The goal was to provide an
additional short-term avenue to
individual investors.
• A money market fund (also
called a money market mutual
fund) is an
open-ended mutual fund that invests
in
short-term debt securities
 REPO MARKET
• Repo was introduced in December 1992. Repo is a repurchase
agreement. It means selling a security under an agreement to
repurchase it at a predetermined date and rate.
• Repo transactions are affected between banks and financial
institutions and among bank themselves, RBI also undertake
Repo.
UNORGANIZED MONEY MARKET
The unorganized money market mostly finances short-term
financial needs of farmers and small businessmen. The main
constituents of unorganized money market are:-
• Indgenious Bankers
• Money Lenders
• Non Banking Financial Companies (NBFCs)
 Indigenous bankers
• Indigenous bankers are individuals or private firms who receive
deposits and give loans and thereby operate as banks. IBs accept
deposits as well as lend money. They mostly operate in urban areas,
especially in western and southern regions of the country.
• Further their lending operations are completely unsupervised and
unregulated.
 MONEY LENDER
(MLs) They are those whose primary business is money lending.
Money lending in India is very popular both in urban and rural
areas. Interest rates are generally high. Large amount of loans are
given for unproductive purposes. The operations of money
lenders are prompt, informal and flexible. The borrowers are
mostly poor farmers, artisans, petty traders and manual workers.
 Non Banking Financial Companies
• Chit funds: are savings institutions. It has regular members who make
periodic subscriptions to the fund. The beneficiary may be selected by
drawing of lots. Chit fund is more popular in Kerala and Tamilnadu. RBI has
no control over the lending activities of chit funds.
• Nidhis: -Nidhis operate as a kind of mutual benefit for their members only.
The loans are given to members at a reasonable rate of interest. Nidhis
operate particularly in South India.
• Finance Brokers:- They are found in all major urban markets specially in
cloth, grain and commodity markets. They act as middlemen between
lenders and borrowers. They charge commission for their services.
 Players of money market
• Government - The government is the most active player and the
largest borrower in the money market.
• Reserve bank of India - The unorganised money market comes
under the direct regulation of RBI. It plays the role of merchant
bankers to the government.
• Commercial bank - Commercial bank lending and undertaking of
short –term funds and have major impact on interest structure and
liquidity position.
• Financial institution-They lend money to banks by
rediscounting bills of exchange.
• Corporate firms – It operates in money market to raise short-
term funds to meet their working capital requirements.
• Dealers- It is the intermediaries of the money market. It is
introduced by RBI for developing an active secondary market
for government securities.