What is Money Market?

A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded

Money markets exist to facilitate efficient transfer of short-term funds between holders and borrowers of cash assets. For the lender/investor, it provides a good return on their funds. Provide focal point for RBIs intervention for influencing liquidity and general levels of interest rates in the economy

Treasury Bill (T Bill)

Repurchase Agreement (Repo or Reverse Repo) Commercial Paper Call Money Commercial Bill

Treasury Bills one of the safest money market instruments, Short term (mature in one year or less from their issue date) borrowing instruments. Available both in Primary market as well as Secondary market T Bills are issued with three-month, six-month & oneyear maturity periods. The Central Government (RBI in India) issues T- Bills at a price less than their face value (par value). They are issued with a promise to pay full face value on maturity. At maturity of T-Bills, the government pays the holder its face value. The difference between the purchase price & the maturity value is the interest income earned by the purchaser of the instrument.

T-Bills are issued through a bidding process at auctions.

At present, the Government of India issues three types of treasury bills through auctions, 91-day, 182-day and 364-day. Treasury bills are available for a minimum amount of Rs.25K and in its multiples. 91-day T-bills are auctioned every week on Wednesdays. 182-day and 364-day T-bills are auctioned every alternate week on Wednesdays.

Repurchase transactions, called Repo or Reverse Repo are transactions or short term loans in which two parties agree to sell and repurchase the same security. They are usually used for overnight borrowing.

Repo/Reverse Repo transactions can be done only between the parties approved by RBI and in RBI approved securities viz. GOI and State Govt. Securities. Under Repurchase agreement the seller sells specified securities with an agreement to repurchase the same at mutually decided future date and price.

The buyer purchases the securities with an agreement to resell the same to the seller on an agreed date at a predetermined price, This transaction is called a Repo when viewed from the perspective of the seller of the securities and Reverse Repo when viewed from the perspective of the buyer of the securities
The lender or buyer in a Repo is entitled to receive compensation for use of funds provided to the counterparty. Effectively the seller of the security borrows money for a period of time (Repo period) at a particular rate of interest mutually agreed with the buyer of the security who has lent the funds to the seller.

Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note. Introduced in India in 1990 with a view to enabling highly rated corporate borrowers to diversify their sources of short-term borrowings and to provide an additional instrument to investors. Subsequently, primary dealers and all-India financial institutions were also permitted to issue CP to enable them to meet their short-term funding requirements for their operations.

Corporates, primary dealers (PDs) and the All-India Financial Institutions (FIs) are eligible to issue CP.
CPs are issued in the denomination of Rs. 5 Lakhs and the multiple of Rs.5 Lakhs. 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. The usage of CP is limited to only blue chip companies.

Money loaned by a bank, must be repaid on demand. Call money does not have to follow a fixed schedule Brokerages use call money as a short-term source of funding to cover margin accounts or the purchase of securities. The funds can be obtained quickly.

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. 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 shortterm resources within the umbrella limit (fixed time period by RBI)

Banks have the freedom to issue CDs depending on their funding requirements.
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.

CDs can be issued to individuals, corporations, companies (including banks), trusts, funds, associations, etc. Non-Resident Indians (NRIs) but only on nonrepatriable basis, which should be clearly stated on the Certificate. Such CDs cannot be endorsed to another NRI in the secondary market.

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. The FIs can issue CDs for a period not less than 1 year and not exceeding 3 years from the date of issue. CDs in physical form are freely transferable by endorsement and delivery. There is no lock-in period for the CDs.

Banks/FIs cannot grant loans against CDs. Furthermore, they cannot buy-back their own CDs before maturity. However, the RBI may relax these restrictions for temporary periods through a separate notification.