Money market is one where short term monetary assets are dealt in to raise short term money requirements/ to park short term monetary surpluses.
Money Markets were set on the recommendations of Three Committees :- a) Chakravarthy committee (1985) - for first time underlined the need of an organised money market b) Vahul Committee (1987) - laid the blueprint for that. c) The Narasimham Committee II (1998) - also concurred the Vahul committee.
Following are the important money market instruments:-
Treasury Bills (T-Bills):
Treasury as in government treasury. Introduced for the first time in 1917.
- Issued by – RBI on behalf of Central government.
- Purpose – To meet the short term liquidity needs of the central government.
- Maturity – In India the maturity period of T- bills are less than one year.
- Types – Currently there are three types of T – bills that are active, 91 day T -bills, 182 day T – bills and 364 day T- bills.
- Amount – Treasury bills are available for a minimum amount of Rs.25,000 and in multiples of Rs.25,000.
- Who can Invest in them? – Individuals, Banks, Trusts, Firms and other Institutions.
Commercial Papers (CP):
First introduced in 1990.
- Purpose – To enable highly rated agencies to diversify their resources for short term requirements.
- Maturity: A minimum of 7 days and a maximum of up to one year from the date of issue.
- Types: They are issued in the form of Promissory Notes or in D – mat form.
- Amount: Can be issued at not less than 5 lakhs and multiples thereafter.
- Nature: These are unsecured instruments as these are not backed by any security. The return on commercial papers is usually higher than T-bills.
- Who can invest in them? – Individuals, Banking Companies, NRIs and others.
- Eligibility to issue CPs: All corporate are not eligible to issue Commercial papers, only who met certain defined criteria by RBI are eligible to issue Commercial papers.
Certificate Of Deposit (CDs) :
- Purpose: Issued in lieu of funds deposited at a specific bank.
- Eligibility to issue CDs: All scheduled commercial banks (except – RRBs & Local area Banks) and selected All-India Financial Institutions (FIs) that have been permitted by RBI to raise short-term resources.
- Amount: Minimum should be Rs.1 lakh, i.e., the minimum deposit that could be accepted from a single subscriber should not be less than Rs.1 lakh, and in multiples of Rs. 1 lakh thereafter.
- Maturity: a) By Banks – Not less than 7 days and not more than one year, from the date of issue. b) By FIs – Not less than 1 year and not exceeding 3 years from the date of issue.
- Discount Rate: Issued at a discount to face value, the discount rate is negotiated between issuer and investor.
Call Money/Money at short notice:
- Call Money: Inter bank market where funds are borrowed and lent for 1 day or less.
- Notice Money: If its lent for more than 1 day and up to 14 days, it is called notice money.
- Participants: Mutual funds, scheduled commercial & cooperative banks act as both borrowers and lenders.
- Lenders: LIC, GIC, NABARD, IDBI & they act only as lenders.
- Bankers Acceptance is also a money market instrument to meet short term liquidity requirement .
- In this company provides bank guarantee to seller to pay amount of goods purchased at agreed future date.
- In case buyer fails to pay on agreed date , seller can revoke bank guarantee . It is usually used to finance export and import.
- It is money market instrument .In this, one party sell its asset usually government securities to other party and agreed to buy this asset on future agreed date .
- The seller pays an interest rate, called the repo rate,when buying back the securities.
Bond or Debt
- Bond market is also known as Debt market.
- A debt instrument is used by government or organization to generate funds for longer duration.
- This gives no owner ship right. A person receives fixed rate of interest on debt instrument.
- If any company or organization want to raise money for long term purpose without diluting his ownership that it is known as Debentures.