The money market instrument is a marketplace for trading in short-term debt investments considered low-risk investments with high safety. It is primarily used by governments and corporations to keep their cash flow steady, and for investors to make a modest profit. The money market ensures a balance between the demand for short-term funds and their supply.
A money market is a place where banks and other financial institutions trade in short-term debt securities such as commercial paper (CP), certificate of deposits CDs repo market (ready forward contracts), treasury bills (TBs), Collateralized Borrowing and Lending Obligations (CBLO), etc. The money market provides a platform for financial institutions to borrow and lend money for a short term of up to one year.
A certificate of Deposit is a money market instrument issued by a bank that guarantees repayment of principal along with a pre-specified interest rate.
A Commercial Paper is a fixed-income security issued by large corporations to meet short-term liquidity obligations. It is floated at a discount and redeemed at face value on maturity.
‘ Call money or Overnight money market’, ‘Notice money market’, and ‘ Term money market’:
The surplus money held by a bank or financial institution more than day-to-day needs utilised for money market operations. Similarly, they borrow through the money market from other institutions to tide over their asset-liability mismatch. The money market is classified into ‘overnight money market’, ‘Notice money market’, and ‘term money market’ based on the tenor of lending and borrowing transactions.
When the tenor of the transactions is one working day such a market is referred to as a ‘Call Money market‘ or ‘overnight money market’ whereas the tenor in ‘notice money market’ starts from 2 days to 14 days. The term money market refers to borrowing and lending when the tenor of the transaction is between 15 days to one year.
In the wholesale market, commercial paper is a popular borrowing mechanism because the interest rates are higher than for bank time deposits or Treasury bills, and a greater range of maturities is available, from overnight to 270 days. Commercial Paper is a fixed-income security issued by large corporations to meet short-term liquidity obligations. It is floated at a discount and redeemed at face value on maturity. However, the risk of default is significantly higher for commercial paper than for bank or government instruments.
A money market mutual fund tries to offer the highest short-term income by maintaining a well-diversified portfolio of money market instruments. Investors having a short investment horizon of up to one year may invest in these funds. These schemes tend to give better returns than Bank Fixed Deposits of similar duration
All the lending and borrowing transactions of the money market are required to be reported instantly to RBI through the electronic platform Negotiated Dealing System (NDS).
Please read related articles on money market instruments
Different types repos in money market
Certificate of deposit in money market
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