Money Market
Introduction:
A well organised money market is the basis for an effective monetary policy. The
smooth functioning of money market ensures the flow of funds to the most important uses. The
money market is a market for overnight to short-term funds, and for short term money and
financial assets that are close substitutes for money. “Short-term”, in the Indian context, generally
means a period up to one year; “close substitute for money” denotes any financial asset that can
be quickly converted into money with minimum transaction cost and without loss in value.
Meaning of Money Market:
The term money market refers to the institutional facilities or arrangements
available for borrowing and lending of short term funds. In other words, the money market
comprises of all the facilities for borrowing and lending money for a short period. Thus, money
market refers to money for short term funds.
Definition of Money Market:
According to G. Crowther, “The money market is the collective name given to the
various firms and institutions that deal in the various grades of near-money”.
According to the Reserve Bank Of India the money market, “is the centre for
dealings, mainly of a short term character, in money assets; it meets the short term requirements
of most of the borrowers and provides liquidity or cash to the lenders. It is the place where short
term surplus investible funds at the disposal of the financial and other institutions and individuals
are bid by borrowers, again comprising institutions and individuals and also the government.”
Features of Money Market:
The few most important features of money market are as follows:
1. Short period: In the money market the operations (raising and development of funds) are for a
short duration (normally up to one year), in the capital market they are for longer
durations/periods
2. Source of working capital: As a corollary, the money market is the institutional source of
working capital to the industry, the focus of the capital market being on financing fixed
investments.
3. Large number of participants: Moreover, there are large numbers of participants in the money
market. In fact, the larger the number of participants, the greater the depth of the market.
4. Wholesale market: In addition, the money market is a wholesale market. The volume of
funds/financial assets representing the money traded in the market is very large, which
underscores the needs for the skilled professional operators.
5. Same day settlement: Also, unlike the other markets (exchanges), trading in the money market
in conducted on the telephone, followed by the written confirmation from both the borrowers and
the lenders.
6. Flexibility: Due to greater flexibility in the regulatory framework, there is a greater scope for
innovative dealings..
7. Sub-markets: Finally the money market consists of a number of interrelated sub-markets such
as the call market, the commercial bill (bill) market, the Treasury bill market, the commercial paper
market, the certificates of deposit market and so on.
The important functions of money market are as follows:
1. It provides an outlet to commercial banks and non banking financial companies to park
their short-term funds.
2. It provides funds for industry, trade and commerce.
3. It supplies short-term funds to the government.
4. It facilitates successful functioning of the central bank.
5. It helps in the development of the capital market.
Difference between Money Market and Capital Market:
Money Market
Capital Market
1. Market for short term loans.
1. Market for long term loans.
2. Deals in near money assets.
2. Deals in shares and
Debentures.
3. Includes commercial banks.
3. Includes share market too.
4. Loans maximum for 6
Months.
4. Loans for long Period.
5. Transactions in short term
Instruments.
5. Deals in long term
Instruments.
6. Arranges small amount of
Funds.
6. Arranges large amount of
Funds.
7. Funds supplied for working
Capital.
7. Funds supplied for fixed
Capital.
8. Rate of interest generally low.
8. Rate of interest generally high.
Reserve Bank Of India
The RBI, as the central bank of the country, is the nerve centre of the financial and monetary
system and the main regulator of the banking system. As the apex institution, it has been guiding,
monitoring, regulating, controlling and promoting the banking as well as the financial system. The
RBI is the most important constituent of the money market organisation.
Instruments:
1. Call/Notice Money Market: The component of the money market in India deals with the
(borrowed and lent) overnight/one-day (call) money and notice money for period up to 14
days. It primarily serves the purpose of balancing the short-term liquidity position of banks.
The call money market is a market for short term funds repayable on demand and with
maturity period varying between one day to a fortnight. When money is borrowed/lent for
a day, it is known as call money. When money is borrowed/lent for more than a day and up
to 14 days, it is known as notice money. No collateral security is required to cover these
transactions. It is basically an over-the-counter (OTC) market without the intermediation of
brokers. Call money is required by banks to meet their CRR requirement.
2. Treasury bills: Treasury bills of the Central Government have been issued since the
inception of the Bank. They were issued for 91 days. The sales were occasionally suspended.
Treasury bills are claim against the government. They are negotiable securities and since
they can be rediscounted with the Bank they are highly liquid. Their other features are:
 Absence of default risk
 Easy availability
 Assured yield
 Low transaction cost
 Eligibility for inclusion in the securities for SLR purposes and
 Negotiable capital depreciation
There were 14 days, 91 days and 364 days treasury bills in vogue in 1997. They are
not issued in scrip form. The purchases and sales are affected through the Subsidiary
General Ledger Account.
3. Term Money Market: The term money market in India has been dormant. The factors that
have inhibited the development of term money market are statutory pre-emptions on
interbank liabilities, regulated interest rate structure, high degree volatility in the call
money rates, availability of sector specific refinance, cash credit system of financing,
absence of Asset Liability management practices among banks and inadequate
development of money market instruments. RBI has gradually removed most of the
constraints in the past decade. The volume of transactions has picked up in response to
policy measures to develop the market segments.
4. Certificate of Deposits (CD): CDs are similar to the traditional term deposits but are
negotiable and can be traded in the secondary market. It is often a bearer security and
there is a single payment, principal and interest, at the end of the maturity period. The bulk
of the deposits have very short duration of 1.3 or 6 months. For long term CDs there is a
fixed coupon or a floating rate coupon. For CDs with floating rate coupons, the life of CD is
subdivided into sub periods of usually 6 months. Interest is fixed at the beginning of each
period and is based on LIBOR or US Treasury Bill rate or prime rate.
In India Certificate of deposits are being issued since 1989, by banks, either directly to the
investors or through the dealers. CDs are documents of title to time deposits with banks.
CDs are marketable or negotiable short- term instruments in bearer form and are known as
Negotiable Certificates of Deposit.
5. Commercial Paper: Commercial Paper was introduced in January 1990, to enable highlyrated corporate borrowers to diversify their sources of short-term borrowings and also
provide an additional instrument to the investor. The guidelines issued by the RBI regulating
the issue of commercial paper apply to all non-financial companies.
Issue of commercial paper: Commercial paper can be issued by a company whose,
I. Tangible net worth (paid up capital plus free reserve) is not less than Rs.5 crores;
II. Fund-based working capital limits are not less than Rs.4 crores;
III. Shares are listed on a stock exchange.
6. Commercial Bill Market: Trade bills are drawn by the seller (drawer) on the buyer (drawee)
for the value of goods delivered to him. Commercial banks as a part of the working capital
limits grant a component for discounting such bills. Normally, 20 percent margin is kept and
the trade bill when presented by the constituent enjoying working capital credit limits along
with bill limit component, the bank discounts the bill and credits the proceeds to his
account. These bills can be for 30 days, 60 days or 90 days depending on the credit
extended in the industry to which the constituent belongs. Interest is charged for the time it
takes to collect the bill.
7. Money Market Mutual Funds: Money Market Mutual Funds (MMMFs) enable small
investors to participate in the money market. The investors can realise through MMMFs,
market-related yield.
The MMMFs can be set up by scheduled commercial banks and public financial institutions.
They are allowed to be set up as a separate entity in the form of Trust. Only individuals can
subscribe to MMMFs. The minimum lock-in period is 15 days. There should be no guarantee
of minimum return. Reserve requirements will not apply to MMMFs.
The portfolio of MMMFs consists of short-term money market instruments. Investors can
obtain a yield close to money market rates by investing in MMMFs.
MMMFs are also permitted to offer cheque writing facility to investors. MMMFs were
brought within the purview of SEBI regulations. Banks and FIs were required to seek
clearance from RBI for setting up MMMFs.
8. Repos/ Reverse Repos: Repos/ reverse repos is a transaction in which two parties agree to
sell and repurchase the same security. The seller sells specified securities, with an
agreement to repurchase the same at a mutually decided future date and price. Likewise,
the buyer purchases the securities, with an agreement to resell the same to the seller on an
agreed date and at a predetermined price. The same transaction is repo from the view point
of the seller of the securities and reverse repo from the view point of the buyer of the
securities.
9. RBI Repos: With the objectives of improving short-term management of liquidity in the
system and to even out interest rates in the call/notice money market, Reserve Bank of
India has been undertaking repos (through auctions) since December 1992. Only banks and
institutions having current account and SGL Account with RBI at Mumbai were eligible to
participate in the repos auctions. The repos were described to be in the form of sale of
dated government securities by the RBI for very short periods with a confirmed buy-back
provision. Shorter period repos provide greater maneuverability to Reserve Bank in deciding
the quantum of liquidity to be absorbed and the repo rate depending upon demand and
supply conditions.
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