Money Market in India

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There are two kinds of markets where borrowing and lending of money takes place between fund scarce and fund surplus individuals and groups. The markets catering the need of short term funds are called Money Markets while the markets that cater to the need of long term funds are called Debt Markets.

The term ‘Money Market’, according to the Reserve Bank of India, is used to define a market where short-term financial assets are traded. These assets are a near substitute for money. So, essentially, the money market is an apparatus which facilitates the lending and borrowing of short-term funds, which are for a duration of under a year. Short maturity period and high liquidity are two characteristic features of the instruments which are traded in the money market. The nature of the money market transactions is such that they are large in amount and high in volume. Thus, the entire market is dominated by few of large players. The key players in the organized money market include Governments (Central and State), Mutual Funds, Corporates, Commercial / Cooperative Banks, Public Sector Undertakings (PSUs), Insurance Companies, Non-Banking Financial Companies (NBFCs) & Discount and Finance House of India (DFHI). We know about rest, let us give a brief about DFHI.

DFHI was incorporated in March 1988. The main objective of this money market institution is to facilitate smoothening of the short-term liquid­ity imbalances by developing an active secondary market for the money market instruments. DFHI participates in transactions in all the market segments, it borrows and lends in the money market, purchases and sells treasury bills sold at auctions, commercial bills, CDs and CPs. DFHI quotes its daily bid (buying) and offer (selling) rates for money market instruments to develop an active secondary market for all these.

The money market conditions largely reflect the expectations of the market towards the RBI policy rate in the near term. As per standard theory, money market rates for a specific time duration is the sum of future short-term rates, term premium and risk premium.

Types of Money Markets

Money Market types

The money market is a part of the larger financial market and consists of numerous smaller sub-markets like bill market, acceptance market, call money market, Notice Money Market, Term Money Market, CBLO, Commercial Bills Market etc.

  • Bill Market is the market where Govt Issued Treasury Bills are issued & sold.
  • Commercial Bills Market – In this market instruments like CPs, CDs and Commercial Bills are issued & traded. We will talk about these instruments in part 2 of the video.
  • Acceptance Market – Acceptance market is the financing of commercial transactions, most of which are usually import/export businesses, by using bankers acceptances. Banker Acceptance is a money market instrument which is issued at a discount, and paid in full when it becomes due. Bankers acceptances have low credit risk because they are backed by the importer, the importer’s bank, and the imported goods. We will discuss more about it.
  • The call money market (CMM) the market where overnight (one day) loans can be availed by banks to meet liquidity. Banks who seeks to avail liquidity approaches the call market as borrowers and the ones who have excess liquidity participate there as lenders. This market is used by banks to maintain their daily CRR & SLR ratios.
  • Notice Money Market- In Call money market, if money is lent for a day it is called call money (money at call) or overnight money. On the other hand, if it is for a period of more than one day and less than 14 days, it is called notice money or money at short notice. And more than 15 days, it is Term Money Market.
  • CBLO (Triparty Repo) – The Collateralized Borrowing and Lending Obligation (CBLO) market is a money market segment operated by the Clearing Corporation of India Ltd (CCIL). In the CBLO market, financial entities can avail short term loans by providing prescribed securities as collateral. In terms of functioning and objectives, the CBLO market is almost similar to the call money market. The uniqueness of CBLO is that lenders and borrowers use collateral for their activities. For example, borrowers of fund have to provide collateral in the form of government securities and lenders will get it while giving loans.  There is no such need of a collateral under the call money market.
  • Repo Market – Repurchase Options or in short Repo market, which enables collateralised short term borrowing and lending through sale/purchase operations in debt instruments. This is an instrument used by the Central Bank and banking institutions to manage their daily / short term liquidity. I am sure you have heard Repo Rate & Reverse Repo Rate fixed by RBI from time to time. It basically means at what interest rate central bank will lend & borrow money respectively from other banks.

Money market deals are not carried out in money / cash, but other instruments like trade bills, government papers, promissory notes, etc. Also, money market transactions cannot be done via brokers but have to be carried out via mediums like formal documentation, oral or written communication.

This chart shows the stats of Money market instrument on 3rd Dec, 2018. You can get this chart daily from RBI website. It shows the volume of trade in a particular instrument and what was the rate of interest.

Money market ops RBI 3rd Dec

Characteristics of Money Market Instruments

Money market instruments allow governments, financial organizations and businesses to finance their short-term cash requirements. Some of the notable characteristics of money market instruments are as follows.

  • Short Term – All the Money market instruments have maturity period of minimum 1 day and max 1 year.
  • Liquidity– Money market instruments are highly liquid because they are fixed-income securities which carry short maturity periods of a year or less.
  • Safety– Issuers of money market instruments have strong credit ratings, which automatically means that the money instruments issued by them will also be safe.
  • Discount Pricing – Another important characteristic feature of money market instruments is that they are issued at a discount on their face value.

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