Money Market

• Money market is a market where people and institutions borrow and lend short-term funds.
• It deals in “near money” – short-term instruments like trade bills, government securities and promissory notes.
• These instruments are highly liquid, have low risk and can be easily sold.
• Their maturity period is up to one year.

• Deals in monetary assets that mature in one year or less.
• Uses unsecured but lower-risk, highly liquid short-term instruments.
• Helps to raise funds to meet temporary cash needs and obligations.
• Main participants: RBI, commercial banks, NBFCs, state governments, big companies and mutual funds.

1. Treasury Bill

• Short-term borrowing instrument of the Government of India.
• Promissory note with maturity of less than one year.
• Issued by RBI on behalf of the central government; highly liquid.
• Minimum amount Rs 25,000 and in multiples of Rs 25,000.
• Also called Zero-Coupon Bond; very low risk with assured return.
• Maturity: from 14 days to 364 days.

2. Call Money

• Used by commercial banks for interbank transactions.
• Helps banks meet cash reserve requirements by borrowing from each other.
• Maturity is less than 15 days.
• Interest on call money is called call rate, which changes daily.
• Call rate has an inverse relationship with instruments like CPs and CDs.
• When call rate rises, other money market instruments become cheaper and their demand increases.

3. Commercial Paper

• Short-term unsecured money market instrument introduced in India in 1990.
• Negotiable and transferable promissory note.
• Maturity: 15 days to 1 year.
• Used mainly by large, creditworthy companies for bridge financing.
• Acts as an alternative to bank loans and capital market borrowings.
• Companies pay lower interest than market rates; can be used to meet flotation cost on long-term borrowings.

4. Commercial Bill

• Source of short-term finance for credit sales.
• Used to finance working capital needs.
• Negotiable instrument.
• Seller (drawer) draws a bill and buyer (drawee) accepts it; after acceptance it becomes tradable.
• Seller can discount the bill with a commercial bank before maturity; this is called discounting of a bill.

5. Certificate of Deposit

• Negotiable, unsecured instruments in bearer form.
• Issued by commercial banks and financial institutions to individuals, companies and corporations.
• Used in times of tight liquidity to meet credit demand.
• Maturity: 91 days to 1 year.
• Banks are not allowed to discount these instruments.

• Money market is for short-term funds and near money instruments.
• All money market instruments have maturity of one year or less.
• Instruments are highly liquid, less risky and easily tradable.
• Key participants include RBI, banks, NBFCs, governments, big companies and mutual funds.
• Main instruments: Treasury bills, call/notice money, commercial papers, commercial bills and certificates of deposit.
• Call rate affects demand for other money market instruments through an inverse relationship.