Introduction and Structure of Money Market

Money Market refers to the segment of the financial market where short-term borrowing and
lending of funds take place. It primarily deals with highly liquid and low-risk instruments that
have maturities typically ranging from overnight to one year.

Objectives of Money Market

1. Short Term Financing
2. Liquidity Management
3. Low risk investments
4. Benchmark interest rate

Structure of Money Market

1. Organised Money Market
● This sector of the money market in India is characterised by registration,
approval, and license from market regulators.
● It is called organised because it is systematically coordinated by the RBI and
other market regulators.
● Major participants in the Organized Money Market in India include – the RBI,
banks, NBFCs, Mutual Funds, Insurance Companies, etc.

2. Unorganised Money Market

● This sector of the money market in India refers to the one that is not registered
and not regulated.
● It is called unorganised because it is not systematically coordinated by the RBI
or any other market regulator.
● Major participants in the Unorganized Money Market in India include – Local
Moneylenders, Chit Funds, etc.

Major Instruments of Money Market

1. Call Money or Money at Call

● Call Money refers to interbank borrowing and lending for a very short period, typically
overnight to upto 14 days.
● The Call Money or Money at Call enables banks and financial institutions to manage
their short-term liquidity requirements.
● The rate at which money is borrowed in these markets is called the Call Money Rate.
 ○ The Call Money Rate keeps changing on an hourly basis, depending on the
demand and supply.
● Call Money Market has 2 segments:

Call Market or Overnight Market

It refers to the market for borrowing and lending of money between banks for 1 day.

Short Notice Market

It refers to the market for borrowing and lending of money between banks for upto 14 days.

2. Treasury Bills
● Treasury Bills or T-Bills refer to short-term securities issued by the RBI on
behalf of the Central Government.
● They act as short-term fundraising tools for the government.
● Treasury Bills (T-Bills) are one of the two types of Government Securities
(G-Secs).
○ One other type of Government Securities (G-Secs) is Government Bonds,
which have a maturity period of more than 1 year and hence are Capital
Market instruments.

Functions of T-bills

● Treasury bills are issued at a discount to the original value and the buyer gets the
original value upon maturity.
○ For example, a Rs 100 treasury bill can be availed of at Rs 95, but the buyer is
paid Rs 100 on the maturity date. This is called redemption at par or face value.
○ Thus, they are non-interest bearing i.e. 0 coupon or 0 interest, and hence are
also called 0 coupon bonds.
● Being backed by the Government, these bills are considered risk-free and are highly
liquid.
● These bills are issued only by the Central Government (through the RBI).
○ The State Governments do not issue T-Bills.
● Instead of direct selling, T-Bills are auctioned in the market, wherein each buyer
submits their bids and the bill is sold to the buyer willing to pay the highest price.
○ The option of bidding ensures the highest revenue for the government as well
as transparency in the issuing process.
● T-Bills are available for a minimum amount of ₹ 25,000 or in multiples of ₹ 25,000.
● As of now, there are 3 types of T-Bills auctioned by the RBI:
○ 91-day T-Bills – Have a maturity period of 91 days.
○ 182-day T-Bills – Have a maturity period of 182 days.
○ 364-day T-Bills – Have a maturity period of 364 days.
● T-Bills can be used by the Banks for:
○ Keeping as part of their SLR requirements.

As of now, there are 3 types of T-Bills auctioned by the RBI:

○ 91-day T-Bills – Have a maturity period of 91 days.

○ 182-day T-Bills – Have a maturity period of 182 days.
○ 364-day T-Bills – Have a maturity period of 364 days.
● T-Bills can be used by the Banks for:
○ Keeping as part of their SLR requirements.
○ Providing as collateral to the RBI for getting loans under Repo.

3. Cash Management bills

● Similar to T-Bills, CMBs are also short-term securities sold by the RBI on behalf
of the Central Government, but with a maturity period of less than 91 days.
● It is also aimed at meeting the short-term cash flow mismatches of the
Government of India.
● Similar to T-Bills, CMBs are also issued at a discount to the face value through
auctions by the RBI.
● Banks are allowed to keep CMBs to meet their SLR requirements.

4. Ways and Means Advances (WMAs)

● Way and Means Advances (WMAs) are temporary loans or overdraft facilities
extended by the RBI to the Governments.
● This facility is available to both Central Government as well as State
Governments.
● WMA was introduced as per an agreement between the RBI and the
Government of India under Section 17(5) of the RBI Act.
● They replaced the Ad-hoc T-Bills, which were earlier used by the Government
to meet short-term expenditure for a particular purpose.
 ● WMAs are not considered as a source of finance for the government. Rather,
they are aimed to bridge the time interval of mismatch between the
government’s expenditures and expected receipts.
● If the government avails immediate cash from the RBI under normal WMA, it
has to return the amount within 90 days. In case the WMA repayment surpasses
90 days, it is treated as an overdraft.
● For the normal WMA, the rate of interest charged by the RBI is the Repo Rate.
For the overdraft, the rate of interest is (Repo Rate + 2%).

5. Certificate of Deposits (CDs)

● Certificate of Deposit (CD) is a security issued by the Scheduled Commercial
Banks (SCBs) and some other Financial Institutions (FIs) that have been
permitted by the RBI to raise short-term funds.
○ Note: Cooperative Banks and Regional Rural Banks (RRBs) are not
allowed to issue Certificates of Deposit (CDs).
● Certificates of Deposit (CDs) should be issued in multiples of ₹1 lakh, with a
minimum amount of ₹1 lakh.
● They are issued at a discount on face value and are redeemed at par or face
value.
● Their maturity period is, usually, more than 7 days and less than 1 year.
● Withdrawal of a CD before the maturity date results in a penalty.
● Banks are not allowed to provide loans against the CDs.

6. Commercial Paper (CP)

● Commercial Paper (CP) is a type of unsecured, short-term debt instrument
issued by large Corporations, Primary Dealers, and Financial Institutions (FIs).
● The eligible institutions may issue Commercial Papers (CPs) to finance their
short-term needs, such as inventory management, meeting payroll expenses,
funding new projects, etc.
● A Commercial Paper is issued as an unsecured promissory note and is placed
privately.
● They should be issued in multiples of ₹5 lakh, with a minimum amount of ₹5
lakh.
● Their maturity period is a minimum of 7 days and a maximum of upto 1 year.
 7. Commercial Bill or Trade Bill
● Commercial Bill (CB) is a negotiable instrument drawn by the seller or buyer of
goods/services for the value of goods/services delivered.
● Commercial Bills (CBs) act as a way for a seller (drawer) to extend credit to a
buyer (drawee) for goods or services purchased.
● When a Commercial Bill gets accepted by a Commercial Bank, it is called a
Trade Bill.
○ Note: A Commercial Bill or Trade Bill is discounted by the Commercial
Bank first. The Bank, then, gets it re-discounted by the RBI.

Capital Market - Capital Market: Meaning, Structure, Instruments, Roles & More