The money market is a critical segment of the financial system where short-term debt instruments are traded. These instruments typically have maturities of up to one year and are considered low-risk investments offering high safety and liquidity. The money market plays a vital role in helping governments, corporations, and financial institutions manage their short-term funding requirements efficiently, while offering investors modest returns with minimal risk.
Key Features and Participants
The money market facilitates the borrowing and lending of funds for short periods, typically ranging from overnight to one year. Participants in this market include:
- Banks
- Financial institutions
- Corporations
- Government bodies
The market helps balance the demand and supply of short-term funds, thereby contributing to overall financial stability.
Common Money Market Instruments
- Certificate of Deposit (CD)
A CD is a negotiable money market instrument issued by banks. It represents a time deposit that guarantees repayment of the principal along with a pre-agreed interest rate at maturity. - Commercial Paper (CP)
CP is a short-term, unsecured promissory note issued by large, creditworthy corporations to meet immediate liquidity needs. It is issued at a discount to face value and redeemed at face value upon maturity. Maturities typically range from overnight up to 270 days.
Note: CP carries higher credit risk compared to bank deposits or government securities.
- Treasury Bills (T-Bills)
T-Bills are short-term debt securities issued by the Government of India to meet temporary funding requirements. They are issued at a discount and redeemed at face value upon maturity. - Repo (Repurchase Agreement) Market
Also known as ready forward contracts, repo transactions involve the sale of securities with an agreement to repurchase them at a predetermined date and price. It serves as a collateralized short-term borrowing mechanism. - Collateralized Borrowing and Lending Obligation (CBLO)
CBLO is a money market instrument operated by the Clearing Corporation of India Ltd. (CCIL). It allows financial entities to borrow and lend funds on a collateralized basis.
Types of Money Market Transactions Based on Tenor
- Call Money (Overnight Money Market)
This refers to borrowing and lending for one working day. It is used by banks to manage daily liquidity requirements. - Notice Money Market
The tenor in this market ranges from 2 to 14 days. It is used for slightly longer-term liquidity adjustments. - Term Money Market
This market covers transactions with maturities ranging from 15 days to one year. It supports medium-term funding needs of financial institutions.
Role of Commercial Paper in Wholesale Money Market
In the wholesale segment, commercial paper is widely used due to its:
- Attractive returns compared to bank time deposits or T-Bills
- Flexible maturities (overnight to 270 days)
However, investors should note that CP involves higher default risk than government or bank-issued instruments.
Money Market Mutual Funds (MMMFs)
Money market mutual funds aim to maximize short-term income by investing in a diversified portfolio of money market instruments. These funds are suitable for investors with an investment horizon of up to one year, offering potentially better returns than bank fixed deposits of similar duration.
Regulatory Oversight and Reporting
All money market lending and borrowing activities must be reported in real-time to the Reserve Bank of India (RBI) through the Negotiated Dealing System (NDS)—an electronic platform that ensures transparency and regulatory compliance in the market.
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