Indian Money Market: Bird Eye View

CA Dr. Dheeraj Sharma

Money Market:

Money Market is the part of financial market where instruments with high liquidity and very short-
term maturities are traded. It is the market where short term investible funds are demanded by
borrowers comprising companies and government. Money market instruments have maturity period
of less than one year.

According to the Reserve Bank of India, "The money market is the center for dealing mainly of short
term character, in monetary assets; it meets the short term requirements of borrowers and provides
liquidity or cash to the lenders. It is a place where short term surplus investible funds at the disposal
of financial and other institutions and individuals are bid by borrowers, again comprising institutions
and individuals and also by the government."

In India, money market consist two sectors:

Functions of Money Markets:

Money market is an important part of the economy. It plays very significant functions. As mentioned
above it is basically a market for short term monetary transactions. Thus it has to provide facility for
adjusting liquidity to the banks, business corporations, non-banking financial institutions (NBFs) and
other financial institutions along with investors.

The major functions of money market are given below:

1. To maintain monetary equilibrium. It means to keep a balance between the demand for and
supply of money for short term monetary transactions.
2. By providing profitable investment opportunities for short term funds it helps to profit of
investors.
3. To promote economic growth. Money market can do this by making funds available to various
units in the economy such as agriculture, small scale industries, etc.
4. Money Market helps to avoid wide fluctuations in interest rates.
 5. To provide help to Trade and Industry. Money market provides adequate finance to trade and
industry. Similarly it also provides facility of discounting bills of exchange for trade and industry.
6. To help in implementing Monetary Policy. It provides a mechanism for an effective
implementation of the monetary policy.
7. To help in Capital Formation. Money market makes available investment avenues for short
term period. It helps in generating savings and investments in the economy.
8. Money market provides non-inflationary sources of finance to government. It is possible by
issuing treasury bills in order to raise short loans. However this does not leads to increases in
the prices.
Apart from those, money market is an arrangement which accommodates banks and financial
institutions dealing in short term monetary activities such as the demand for and supply of money.

Money Market Instruments:

Call/Notice money is an amount borrowed or lent on demand for a very short period. If the period is
more than one day and up to 14 days, it is called ‘Notice money’ otherwise the amount is known as
‘Call Money’.
Call money participants include, those who can both borrow as well as lend in the market- RBI (through
LAF) Banks, PDs and those who can only lend Financial Institutions- LIC, UTI, GIC, IDBI, NABARD, ICICI
and mutual fund etc.

Treasury Bills:

Treasury Bills are one of the safest money market instruments as they are issued by Central
Government. They are zero-risk instruments, and hence returns are not that attractive. T-Bills are
circulated by both primary as well as the secondary markets. They come with the maturities of 3-
month, 6-month and 1-year. The Central Government issues T-Bills at a price less than their face value
and the difference between the buy price and the maturity value is the interest earned by the buyer
of the instrument. The buy value of the T-Bill is determined by the bidding process through auctions.

At present, The Government of India issues three types of treasury bills through auctions, namely, 91-
day, 182-day and 364-day.

Term Money
Term Money market is an inter bank market for deposits of maturity beyond 14 days. Desire for fixed
interest rate and declining spread in lending operations are playing major role in development of the
term money market. The Discount and Finance House of India Ltd. (DFHI) is putting an all efforts to
activate this market.

Ready Forward/Repos and Reverse Repos:

Ready forward or Repos or Buyback deal is a transaction in which two parties agree to sell and
repurchase the same security. Under such an agreement, the seller sells specified securities with an
agreement to repurchase the same at a mutually decided future date and a price. Similarly, the buyer
purchases the securities with an agreement to resell the same to the seller on an agreed date in future
at a prefixed price.

Inter Corporate Deposits:

An Inter Corporate Deposit is an unsecured loan extended by one corporate to another. Corporate
having surplus funds lend to another corporate. Reserve Bank of India permits Primary dealers to
accept Inter Corporate Deposits up to fifty percent of their Net Worth and that also for a period not
less than 7 days. Primary Dealers cannot lend money in the Inter Corporate Deposit Market.

Commercial Papers:

Commercial Paper is the short term unsecured promissory note issued by corporate and financial
institutions at a discounted value on face value. They come with fixed maturity period ranging from 1
day to 270 days. These are issued for the purpose of financing of accounts receivables, inventories and
meeting short term liabilities.
The returns on commercial papers are higher as compared to T-Bills so as the risk as they are less
secure in comparison to these bills. It is easy to find buyers for the firms with high credit ratings. These
securities are actively traded in secondary market.

Certificate of Deposit:

Certificate of Deposit is like a promissory note issued by a bank in form of a certificate entitling the
bearer to receive interest. It is similar to bank term deposit account. The certificate bears the maturity
date, fixed rate of interest and the value. These certificates are available in the tenure of 3 months to
5 years. The returns on certificate of deposits are higher than T-Bills because they carry higher level
of risk.