Money Market: Short-Term Funding, Instruments, and Functions

Introduction

• Deals with borrowing and lending of short term credit/loan generally with a time period of less than or equal to 1 year.
• It provides a mechanism for the Reserve Bank of India (RBI) to implement monetary policy.
• RBI is the regulator of money markets irrespective of securities being government securities or corporate securities. 

Functions of the Money Market

• Short-Term Funding Allocation: It provides facilities for the allocation of short-term funds through money market instruments.
• Facilitating Government Deficit: It helps the government to meet its deficits through noninflationary financial sources such as treasury bills.
• Finance to Trade: It makes available sufficient finance to the trade and industry
• It ensures an equilibrium between the demand and supply of money and short-term funds
• It promotes economic growth
• It provides a mechanism for the Reserve Bank of India (RBI) to implement monetary policy.

Government-Issued Money Market Instruments and Financial Mechanisms

• Treasury bills: Short-term securities that mature in one year or less from their issue date; 
  • These are zero coupon securities and pay no interest. 
  • They are issued at a discount and redeemed at the face value at maturity; 
  • Presently issued in three tenors, namely, 91-day, 182-day and 364-day.
  • It is mandatory to open a Demat account for a retail investor to invest in ‘Treasury Bills’ and ‘Government of India Debt Bonds’ in the primary market.[UPSC 2021]
• Cash Management Bills (CMB): Issued by the GOI in consultation with the RBI to meet its short-term cash requirements. 
  • The maturity period  is less than 91 days.

Corporate-Issued Money Market Instruments and Financial Mechanisms

• Certificates of Deposits (CD) [UPSC 2020]
  • A time deposit with a bank and issued by Commercial Banks excluding Regional Rural Banks and Local Area banks and Financial institutions like IFCI 
  • Banks resort to CD when the deposit growth is sluggish but credit demand is high.
• Tradeable and transferable.
  • Have a minimum amount of Rs 1 lakh and multiples thereof.
  • Loans cannot be granted against certificate of deposits 
  • Commercial Paper [UPSC 2020]
  • An unsecured, short-term loan,  typically for financing accounts receivable and inventories; Issued at a discount to face value.Entities which can issue CP
  • Companies, including Non-Banking Finance Companies (NBFCs) and All India Financial Institutions (AIFIs).
  • Co-operative societies/unions, government entities
  • Trusts
  • limited liability partnerships and any other body corporate having presence in India with a net worth of ₹ 100 crore or higher.
  • Can be issued for maturities between a minimum of 7 days and a maximum of up to one year from the date of issue ; No approval from RBI is required to issue CP ; Minimum rating required is A-3.
• Commercial Bill: 
  • Issued by the seller(drawer) on the buyer (drawee) for the value of goods delivered by him.
  • These Bills are of 30 days, 60 days or 90 days maturity.
• Call Money:  Deals with very short-term funds, and is demanded extremely short durations from a few hours to 1 day. [UPSC 2020]
• Notice Money: for borrowing and lending operations of 2 to 14 days.
• Term Money: Lending and borrowing of funds beyond 14 days.
• Inter-Corporate Deposit Market: It is an unsecured loan extended by one corporation to another.
• Discount and Finance House of India (DFHI): Established: by RBI in 1988; 
  • Plays an important role in developing an active secondary market in Money Market Instruments.

Conclusion

• The money market serves as a crucial component of the financial market, facilitating the efficient allocation of short-term funds through various instruments such as treasury bills, commercial paper, certificates of deposit, and repurchase agreements. 
• These instruments provide avenues for investors to park surplus funds and for borrowers, including governments and financial institutions, to meet their short-term funding needs. 
• The money market plays a vital role in maintaining liquidity, supporting economic activity, and contributing to overall financial stability.