This article is authored by Ashme andrews, assistant professor
Money Market is a segment of the financial market in India where borrowing and lending of short-term funds take place. The maturity of money market instruments is from one day to one year. In India, this market is regulated by both RBI (the Reserve bank of India) and SEBI (the Security and Exchange Board of India). The nature of transactions in this market is such that they are large in amount and high in volume. Thus, we can say that the entire market is dominated by a small number of large players.
Objectives of the money market in India
- Facilitate a parking place to employ short-term surplus funds.
- Aid room for overcoming short-term deficits.
- To enable the Central Bank to influence and regulate liquidity in the economy through its intervention in this market.
- Help reasonable access to users of short-term funds to meet their requirements quickly, adequately and at reasonable costs.
Segments of the Indian money market
The Indian money-market has the following two segments. The existence of the unorganized market, though illegal, yet operates. However, we that is out of the scope of the present article. So we will concentrate exclusively on the organized money-markets in India. Wherever, in the blog article or elsewhere in the site we refer money-markets, it is in organized money-market only.
1. Unorganized money-market
The unorganized money market is an old and ancient market, mainly it made of indigenous bankers and money lenders, etc.
2. Organized money-market
The organized money market is that part which comes under the regulatory ambit of RBI & SEBI. Governments (Central and State), Discount and Finance House of India (DFHI), Mutual Funds, Corporate, Commercial or Cooperative Banks, Public Sector Undertakings, Insurance Companies, and Financial Institutions and Non-Banking Financial Companies (NBFCs) are the key players of the organized Indian money market.
Structure of organized money market of India
The organized money market in India is not a single market. It is a combination of markets of various instruments. The following are the instruments that are integral parts of the Indian money market system.
1. Call money or notice money
Call money, notice money, and term money markets are sub-markets of the Indian money market. These markets provide funds for very short-term. Lending and borrowing from the call money market for 1 day.
Whereas lending and borrowing of funds from notice money market are for 2 to 14 days. And when there are borrowing and lending of funds for the tenor of more than 14 days, it refers to “Term Money”.
2. Treasury bills
The Bill market is a sub-market of this market in India. There are two types of the bill in the money market. They are treasury bills and commercial bill. The treasury bills are also known as T-Bills, T-bills are issued by the Central bank on behalf of Government, whereas Commercial Bills are issued by Financial Institutions.
Treasury bills do not yield any interest, but it is issued at discount and repaid at par at the time of maturity. In T-bills there is no risk of default; it is a safe investment instrument.
3. Commercial bills
Commercial bill is a money market instrument which is similar to the bill of exchange; it is issued by a Commercial organization to raise money for short-term needs. In India, the participants of the commercial bill market are banks and financial institutions.
4. Certificate of deposits
Certificate of Deposits also known as CDs. It is a negotiable money market instrument. It is like a promissory note. Rates, terms, and amounts vary from institution to institution. CDs are not supposed to trade publically neither it is traded on any exchange.
In general institutions issue certificate of deposit at discount on its face value. The banks and financial institutions can issue CDs on a floating rate basis.
5. Commercial paper
The commercial paper is another money market instrument in India. We also call commercial paper as CP. CP refers to a short-term unsecured money market instrument. Big corporations with good credit rating issue commercial paper as a promissory note. There is no collateral support for CPs. Hence, only large firms with considerable financial strength can issue the instrument.
6. Money market mutual funds (MMMFs)
The money-market mutual funds were introduced by RBI in 1992 and since 2000 they are brought under the regulation of SEBI. It is an open-ended mutual fund which invests in short-term debt securities. This kind of mutual fund solely invests in instruments of the money market.
7. Repo and the reverse repo market
Repo means “Repurchase Agreement”. It exists in India since December 1992. REPO means selling a security under an agreement to repurchase it at a predetermined date and rate. Those who deal in government securities they use the repo as an overnight borrowings.
Money Market is important for the economic growth of the country. It fulfills the finance needs of the trade and industry as & when required. For getting the short-term funds of the commercial banks, the money market furnishes the beneficial channels. By selling the treasury bills, the government can quickly raise the short-term capital from the market with a low rate of interest. It helps the RBI to formulate and implement the monetary policies, and to accomplish its open market operations on a large scale. It helps the RBI to regulate the funds in the market and provides commercial papers for rediscount.