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

April 3, 2024 755 0

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
  • Financial market brings buyers and sellers together to trade in financial assets such as stocks, bonds, commodities, derivatives and currencies. 
  • It has Money market, Capital Market and Forex Market as its components.

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.
Instruments of Money Market (Short term Debt Instruments)

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.
  • Repo Market: Rate at which RBI lends money to banks, when banks face shortage of funds. 
    • These are short-term, usually overnight borrowings. (when RBI purchases G-Secs, money supply increases in the economy- UPSC 2012)
  • Reverse Repo Market: Rate at which RBI borrows funds from other banks for the short term.
  • Ways and Means Advances (WMA): Borrowing by the Govt.(Increases money supply- UPSC 2012) from the RBI to meet temporary cash flow mismatches; 
    • Repayable in each case not later than three months from the date of the making of the advance.
  • The London Interbank Offered Rate (LIBOR) is a benchmark interest rate at which major global banks lend to one another in the international interbank market for short-term loans.
  • Mumbai Interbank Offer Rate (MIBOR):  An overnight rate; MIBOR is now an interest rate at which the majority of banks can borrow funds from other banks in the India Interbank market.

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.
Terms associated with Money Market

  • Waterfall Approach: For the valuation of money market and debt securities.
  • Money Market Mutual Funds (MMMF): Short-run liquid investments which invest in highquality money market instruments such as Treasury Bills (T-Bills), Repurchase Agreements (Repos), Commercial Papers and Certificate of Deposits. An open-ended mutual fund.
  • The ‘Negotiated Dealing System-Order Matching’ is a government securities trading platform of the Reserve Bank of India.
  • Central Depository Services Ltd was promoted by BSE Ltd. jointly with leading banks such as State Bank of India, Bank of India, Bank of Baroda, HDFC Bank, Standard Chartered Bank and Union Bank of India. [UPSC 2021]

 

Must Read
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Upsc Notes  Upsc Blogs 
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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.
Related Articles 
Indian Economy: Evolution Basics of Money
Banks in India Financial Market
Indian Insurance Sector Financial Inclusion

 

 Final Result – CIVIL SERVICES EXAMINATION, 2023.   Udaan-Prelims Wallah ( Static ) booklets 2024 released both in english and hindi : Download from Here!     Download UPSC Mains 2023 Question Papers PDF  Free Initiative links -1) Download Prahaar 3.0 for Mains Current Affairs PDF both in English and Hindi 2) Daily Main Answer Writing  , 3) Daily Current Affairs , Editorial Analysis and quiz ,  4) PDF Downloads  UPSC Prelims 2023 Trend Analysis cut-off and answer key

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 Final Result – CIVIL SERVICES EXAMINATION, 2023.   Udaan-Prelims Wallah ( Static ) booklets 2024 released both in english and hindi : Download from Here!     Download UPSC Mains 2023 Question Papers PDF  Free Initiative links -1) Download Prahaar 3.0 for Mains Current Affairs PDF both in English and Hindi 2) Daily Main Answer Writing  , 3) Daily Current Affairs , Editorial Analysis and quiz ,  4) PDF Downloads  UPSC Prelims 2023 Trend Analysis cut-off and answer key

Quick Revise Now !
AVAILABLE FOR DOWNLOAD SOON
UDAAN PRELIMS WALLAH
Comprehensive coverage with a concise format
Integration of PYQ within the booklet
Designed as per recent trends of Prelims questions
हिंदी में भी उपलब्ध
Quick Revise Now !
UDAAN PRELIMS WALLAH
Comprehensive coverage with a concise format
Integration of PYQ within the booklet
Designed as per recent trends of Prelims questions
हिंदी में भी उपलब्ध

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