Money Market: Money Market is the part of financial
market where instruments with high liquidity and very short-term maturities are
traded. It's the place where large financial institutions, dealers and
government participate and meet out their short-term cash needs. Due to highly
liquid nature of securities and their short-term maturities, money market is treated
as safe place.
Role of Reserve Bank of India:The Reserve Bank of
India (RBI) plays a key role of regulator and controller of money market. The
intervention of RBI is varied – curbing crisis situations by reducing key
policy rates or curbing inflationary situations by rising key policy rates such
as Repo, Reverse Repo, CRR etc.
Short Term Deposit: In deposit terminology, the
term Short Term Deposit refers to an amount of money placed in a bank or
financial institution for a term no longer than one year. A Short Term Deposit
will usually earn a fixed rate of interest.
Note: Short Term
Deposits are also known as time or term deposits, with perhaps the most popular
name being short term certificates of deposit or CDs.
- > Call Money: Call Money’ is the
borrowing or lending of funds for 1day.
- > Notice Money: Money borrowed or lend for
period between 2 days and 14 days it is known as ‘Notice Money’
- > Term Money: Term Money refers to
borrowing/lending of funds for period exceeding 14 days
Money Market Instruments: Money Market Instruments
provide the tools by which one can operate in the money market. Money market
instrument meets short term requirements of the borrowers and provides
liquidity to the lenders.
The most common money
market instruments are Treasury Bills, Certificate of Deposits, Commercial
Papers, Repurchase Agreements and Banker's Acceptance.
1. Treasury Bills (T-Bills): Treasury Bills are
one of the safest money market instruments as they are issued by Central Government.
At present, the Government of India issues three types of treasury bills
through auctions, namely, 91-day, 182-day and 364-day. There are no treasury
bills issued by State Governments.
Amount: Treasury bills are available for a minimum amount of Rs.25,000
and in multiples of Rs. 25,000. Treasury bills are issued at a discount and are
redeemed at par
2. Commercial Paper (CP) - Commercial Paper (CP) is an
unsecured money market instrument issued in the form of a promissory note.
Who can issue CP - Corporates, primary
dealers (PDs) and the All-India Financial Institutions (FIs) are eligible to
issue CP.
Minimum and maximum period of maturity for CP: CP
can be issued for maturities between a minimum of 7 days and a maximum of up to
one year from the date of issue. However, the maturity date of the CP should
not go beyond the date up to which the credit rating of the issuer is valid.
In what denominations a CP that can be issued: CP
can be issued in denominations of Rs.5 lakh or multiples thereof.
Who can invest in CP: 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.
3. Certificate of Deposit (CD) is a negotiable
money market instrument and issued in dematerialised form or as a Usance Promissory
Note against funds deposited at a bank or other eligible financial institution
for a specified time period.
Who can issue CD: CDs can be issued by
(i) scheduled
commercial banks {excluding Regional Rural Banks and Local Area
Banks}; and
(ii) select All-India
Financial Institutions (FIs) that have been permitted by RBI to raise
short-term resources within the umbrella limit fixed by RBI. Minimum and
maximum period of maturity for CD: The maturity period of CDs issued by banks
should not be less than 7 days and not more than one year, from the date of
issue.
Note: The FIs (Financial
Institutions) can issue CDs for a period not less than 1 year and not exceeding
3 years from the date of issue.
Minimum Size of Issue and Denominations:
Minimum amount of a CD should be Rs.1 lakh, i.e., the minimum deposit that
could be accepted from a single subscriber should not be less than Rs.1 lakh,
and in multiples of Rs. 1 lakh thereafter.
4. 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.
5. 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.