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
  • 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.

Repurchase Agreement
  • 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.

 


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