Money Market: Instruments, Functions and Operations

Money Market: Instruments, Functions and Operations

• It provides facilities for allocation of short term funds through money market instruments.
• It helps the government to meet its deficits through non inflationary financial sources such as treasury bills.
• It makes available sufficient finance to the trade and industry

• It ensure an equilibrium between the demand and supply of money and short term funds
• It promotes economic growth
• It provides a mechanism for Reserve Bank of India (RBI) to implement monetary policy

• Call Money– is also referred to as the money at call. It deals with very short term funds, and is demanded extremely short durations from a few hours to 1 day
• Notice Money– for borrowing and lending operations of 2 to 14 days.
• Term Money– Lending and borrowing of funds beyond 14 days

• They are the government securities (G-Sec) issued by RBI on behalf of the central government to meet its fiscal deficits.
• The maturity period of these securities varies from 14 days to 364 days.
• Treasury bills are further classified into two types viz. ordinary/regular treasury bills and ad hoc treasury bills.

• It refers to the bill of exchange which is used to finance the short term working capital requirements of any business.
• These are negotiable and self-liquidating financial instruments , in which the seller is the drawer while the buyer is the drawee.

• CMBs are issued by the government of India in consultation with the Reserve Bank of India (RBI) to meet its short term cash requirements.
• The maturity period of these bills is less than 91 days

• Certificate of Deposit (CD) is an agreement between the depositor and the bank where a predetermined amount of money is fixed for a specific time period
• It is issued in dematerialised (Demat) form
• When it matures, the principal amount along with the interest earned is available for withdrawal

• CP is a short-term debt instrument issued by companies to raise funds generally for a time period up to one year.
• It is an unsecured money market instrument issued in the form of a promissory note and was introduced in India in 1990.
• The minimum maturity period of commercial paper is for 7 days and a maximum of 1 year.

• The repo rate/ the repurchase rate is the rate at which RBI lends money to banks, when banks face shortage of funds.
• These are short-term, usually overnight borrowings.
• The opposite of repo rate is reverse repo rate-it is the rate at which RBI borrows funds from other banks for the short term