Money Market and Instruments

Money Market Instruments

Money market instrument meets short term
requirements of the borrowers and provides liquidity
to the lenders.

The money market provides very short-term funds to

corporations, municipalities and the government.
Money market securities are debt issues with
maturities of one year or less.

The most common money market instruments are

Treasury Bills, Certificate of Deposits, Commercial
Papers, commercial Bills, Repurchase Agreements and
Banker's Acceptance to name a few.
 Treasury Bills (T-Bills):
One of the safest money market instruments as they are
issued by Central Government.
They are zero-risk instruments, and hence returns are not that
attractive.
T-Bills are circulated by both primary as well as the secondary
markets.
They come with the maturities of 3-month, 6-month and 1-year
The Central Government issues T-Bills at a price less than their
face value and the difference between the buy price and the
maturity value is the interest earned by the buyer of the
instrument.
The buy value of the T-Bill is determined by the bidding process
through auctions.
At present, the Government of India issues three types of
treasury bills through auctions, namely, 91-day, 182-day and
364-day.
Certificate of Deposits (CDs):

Certificate of Deposit is like a promissory

note issued by a bank in form of a
certificate entitling the bearer to receive
interest.
It is similar to bank term deposit account.
The certificate bears the maturity date,
fixed rate of interest and the value.
These certificates are available in the
tenure of 3 months to 5 years.
The returns on certificate of deposits are
higher than T-Bills because they carry
higher level of risk.
 Commercial Papers (CPs):

Commercial Paper is the short term unsecured

promissory note issued by corporate and financial
institutions at a discounted value on face value.
They come with fixed maturity period ranging from 1 day
to 270 days.
These are issued for the purpose of financing of accounts
receivables, inventories and meeting short term
liabilities.
The return on commercial papers is higher as compared
to T-Bills so as the risk as they are less secure in
comparison to these bills. It is easy to find buyers for the
firms with high credit ratings.
These securities are actively traded in secondary market.
 Repurchase Agreements (Repo):

Repurchase Agreements which are also called as Repo or

Reverse Repo are short term loans that buyers and sellers
agree upon for selling and repurchasing.
Repo or Reverse Repo transactions can be done only
between the parties approved by RBI and allowed only
between RBI-approved securities such as state and
central government securities, T-Bills, PSU bonds and
corporate bonds.
They are usually used for overnight borrowing.
Repurchase agreements are sold by sellers with a promise
of purchasing them back at a given price and on a given
date in future. On the flip side, the buyer will also
purchase the securities and other instruments with a
promise of selling them back to the seller.
 Banker's Acceptance:

Banker's Acceptance is like a short term investment plan

created by non-financial firm, backed by a guarantee
from the bank.
It's like a bill of exchange stating a buyer's promise to
pay to the seller a certain specified amount at a certain
date. And, the bank guarantees that the buyer will pay
the seller at a future date. Firm with strong credit rating
can draw such bill.
These securities come with the maturities between 30
and 180 days and the most common term for these
instruments is 90 days.
Companies use these negotiable time drafts to finance
imports, exports and other trade.
Bills Rediscounting
Bill as an instrument provides short term
liquidity to the suppliers in need of funds. Bill
financing seller drawing a bill of exchange & the
buyer accepting it, thereafter the seller
discounting it, say with a bank.

Hundies, an indigenous form of bill of exchange,

have been popular in India, but there has been
a general reluctance on the part of the buyers
to commit themselves to payments on maturity.
Hence the Bills have been not so popular.
Government Securities
Government Securities are securities issued by the
Government for raising a public loan or as notified in the
official Gazette. G-secs are sovereign securities mostly
interest bearing dated securities which are issued by RBI on
behalf of Govt. of India(GOI).
GOI uses these borrowed funds to meet its fiscal deficit,
while temporary cash mismatches are met through treasury
bills of 91 days.
G-secs consist of Government Promissory Notes, Bearer
Bonds, Stocks or Bonds, Treasury Bills or Dated Government
Securities.
Government bonds are theoretically risk free bonds, because
governments can, up to a point, raise taxes, reduce
spending, and take various measures to redeem the bond at
maturity
Call Money
Money at call is a loan that is repayable on
demand, and money at short notice is
repayable within 14 days of serving a notice.
The participants are banks & all other Indian
Financial Institutions as permitted by RBI.

The market is over the telephone market, non

bank participants act as lender only. Banks
borrow for a variety of reasons to maintain
their CRR, to meet their heavy payments, to
adjust their maturity mismatch etc.
Inter Bank Participation Certificates
With a view for providing an additional instrument for evening
out short-term liquidity within the banking system, two types
of Inter-Bank Participations (IBPs) were introduced, one on
risk sharing basis and the other without risk sharing.
These are strictly inter-bank instruments confined to
scheduled commercial banks excluding regional rural banks.
The IBP with risk sharing can be issued for 91-180 days.
Under the uniform grading system introduced by Reserve
Bank for application by banks to measure the health of bank
advances portfolio,
The rate of interest is left free to be determined between the
issuing bank and the participating bank subject to a minimum
14.0 per cent per annum. The aggregate amount of such IBPs
under any loan account at the time of issue is not to exceed
40 per cent of the outstanding in the account.
Money market Mutual fund
A money market fund is a mutual fund that invests
solely in money market instruments. Money market
instruments are forms of debt that mature in less
than one year and are very liquid.
Treasury bills make up the bulk of the money market
instruments. Securities in the money market are
relatively risk-free. Money market funds are
generally the safest and most secure of mutual fund
investments.
The goal of a money-market fund is to preserve
principal while yielding a modest return by investing
in safe and stable instruments issued by
governments, banks and corporations etc
Inter Corporate 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.
Gilt edged Govt Securities
These are issued by governments such as Central
Government, State Government, Semi Government
authorities, City Corporations, Municipalities, Port trust, State
Electricity Board, Housing boards etc.
The gilt-edged market refers to the market for Government
and semi-government securities, backed by the Reserve
Bank of India(RBI). Government securities are tradable debt
instruments issued by the Government for meeting its
financial requirements.
The term gilt-edged means 'of the best quality'. This is
because the Government securities do not suffer from risk of
default and are highly liquid (as they can be easily sold in
the market at their current price).
The open market operations of the RBI are also conducted in
such securities.