Money Market Instruments2 min read

Money market is a market for overnight to short-term funds (up to 1 years) and for short-term money and financial assets that are close substitutes for money, that is, financial assets that can be quickly converted into cash with minimum transaction cost and without loss in value.

The following are the Money Market Instruments-

  • Commercial Bill – A commercial bill is a short-term negotiable and self-liquidating instrument. It is written instrument containing an unconditional order signed by the maker (seller of goods), directing the buyer to pay a certain amount of money only to a particular person or to the bearer of the instrument. The bills can be discounted in the Bill Discount Market.
  • Bills Rediscounting – It is a money market instrument, has not become popular in India in spite of several measures, including abolition of stamp duty, taken by the RBI to develop build finance. The main factors hindering the development of the bill finance/culture are:-system of cash credit, small size of foreign trade, absence of specialised discounting institutions, lack of an active secondary market and so on.
  • Treasury Bill – A T-bill is an instrument of short-term borrowing by the government of India to bridge seasonal/temporary gaps between receipts and expenditure. It is issued by the RBI on behalf of the government. The features of T-bills are – negotiability, issued a discount and redemption at par on maturity, high liquidity, low transaction cost, absence of default risk, eligibility for inclusion in the SLR and transaction through SGL account. T-bills as zero-coupon bonds issued by the RBI on behalf of the government, in the form of a promissory note. It presently issues T-bills in two maturities – 91 days and 364 days.
  • Call / Notice Money Market – It deals with overnight/one-day (call) money and notice money for up to 14 days. Call money is required by banks to meet their CRR requirements on a reporting Friday. The interest rate paid on call loans is known as the call rate.
  • Commercial Paper – A CP is a short-term, unsecured, negotiated instrument consisting of a promissory note with fixed maturity. As a short-term instrument, CP offers several advantages to the issue was as well as to the investors, such as simplicity, flexible maturities, low-cost, high credit standing, high liquidity, high return and so on.
  • Certificate of Deposit– A CD is a negotiable money market instrument, issued in a demat form or as a promissory note for funds deposited at a bank/other eligible FIs for a specified time period. The framework of the issue of CDs in India as prescribed by the RBI.