Instruments of Money Market

Following are the instruments which are traded in money market:

Call and Notice Money Market:

• The market for extremely short-period is referred as call money market.
• Deals in short term finance with a maturity period from one day to 14 days.
• Both Lenders and Borrowers: Commercial banks, both Indian and foreign, co-operative banks, Discount and Finance House of India Ltd (DFHI), Securities trading corporation of India (STCI).
• Only Lenders: Life Insurance Corporation of India (LIC), Unit Trust of India (UTI), National Bank for Agriculture and Rural Development (NABARD).
• Call Rate / Money Rate: A high volatile interest rate. The call money rate is determined by demand and supply of short term funds.
• The major call money markets are in Mumbai, Kolkata, Delhi, Chennai, Ahmadabad.

Treasury Bill Market (T - Bills):

• This market deals in Treasury Bills of short term duration issued by RBI on behalf of Government of India.
• Three types of treasury bills are issued through auctions, namely 91 day, 182 day and 364day treasury bills.
• State government does not issue any treasury bills.
• Interest is determined by market forces. 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.
• T-bills are highly liquid, readily available; there is absence of risk of default. Commercial Banks, Primary Dealers, Mutual Funds, Corporate, Financial Institutions, Provident or Pension Funds and Insurance Companies can participate in T-bills market.

Commercial Bills:

• Commercial bills are short term, negotiable and self liquidating money market instruments with low risk.
• 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.
• The commercial bills are purchased and discounted by commercial banks and are rediscounted by financial institutions like EXIM banks, SIDBI, IDBI etc.
• RBI have introduced an innovative instrument known as “Derivative Usance Promissory Notes” with a view to eliminate movement of papers and to facilitate multiple rediscounting.

Certificate of Deposits (CDs):

• CDs are issued by Commercial banks and development financial institutions.
• CDs are unsecured, negotiable promissory notes issued at a discount to the face value.
• The scheme of CDs was introduced in 1989 by RBI. The main purpose was to enable the commercial banks to raise funds from market.
• 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.
• CDs can be issued at discount to face value. They are freely transferable but only after the lock-in-period of 45 days after the date of issue.
• In India the size of CDs market is quite small.
• In 1992, RBI allowed four financial institutions ICICI, IDBI, IFCI and IRBI to issue CDs with a maturity period of one year to three years.

Commercial Papers (CP):

• 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.

The 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.
• In November 1996, RBI introduced Reverse Repo. It means buying a security on a spot basis with a commitment to resell on a forward basis.
• Reverse Repo transactions are affected with scheduled commercial banks and primary dealers.
• In March 2003, to broaden the Repo market, RBI allowed NBFCs, Mutual Funds, Housing Finance and Companies and Insurance Companies to undertake REPO transactions.