Money Market: Instruments, Functions and Operations
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Money Market: Short-Term Credit and High Liquidity Instruments
- Money market refers to a section of the financial market where financial instruments with high liquidity and short-term maturities are traded.
- It deals with borrowing and lending of short term credit/loan generally with a time period of less than or equal to 1 year.
Functions of the Money Market in Economic Growth and Monetary Policy Implementation
- 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
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- 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
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Various Money Market Instruments for Monetary Management and Short-Term Financing
| Call money/ Term money market/ Notice money |
- 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
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| Treasury bill |
- 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.
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| Commercial 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.
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| Cash management bills(CMBs) |
- 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
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| Certificates of Deposits (CDs) |
- 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
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| Commercial papers (CPs) |
- 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.
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| Repo / Reverse Repo Market |
- 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
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Money Market Terms: From Waterfall Approach to Money Market Mutual Funds
- Waterfall approach- for the valuation of money market and debt securities.
- Money Market Mutual Funds (MMMF) are short-run liquid investments which invest in high-quality money market instruments such as Treasury Bills (T-Bills), Repurchase Agreements (Repos), Commercial Papers and Certificate of Deposits. It is an open-ended mutual fund.
