1. Money Market
Define
As per RBI definitions “A market for short terms financial assets that are
close substitute for money, facilitates the exchange of money in primary
and secondary market”.
The money market is a mechanism that deals with the lending and
borrowing of short term funds (less than one year). A segment of the
financial market in which financial instruments with high liquidity and very short
maturities are traded. It doesn‟t actually deal in cash or money but deals with substitute
of cash like trade bills, promissory notes & govt papers which can converted into cash
without any loss at low transaction cost.
Features of Money Market
 It is a market purely for short-terms funds or financial assets called
near money.
 It deals with financial assets having a maturity period less than one
year only.
 In Money Market transaction can not take place formal like stock
exchange, only through oral communication, relevant document and
written communication transaction can be done.
 Transactions have to be conducted without the help of brokers.
 It is not a single homogeneous market, it comprises of several
submarket like call money market, acceptance & bill market.
 The components of Money Market are the commercial banks,
acceptance houses & NBFC (Non-banking financial companies).

2. Importance of Money Market
A developed money market plays an important role in the financial system
of a country by supplying short-term funds adequately and quickly to trade
and industry. The money market is an integral part of a country‟s economy.
Therefore, a developed money market is highly indispensable for the rapid
development of the economy. A developed money market helps the
smooth functioning of the financial system in any economy in the following
ways:
 Development Of Trade And Industry: Money market is an
important source of financing trade and industry. The money market,
through discounting operations and commercial papers, finances the
short-term working capital requirements of trade and industry and
facilities the development of industry and trade both – national and
international.
 Development Of Capital Market: The short-term rates of interest
and the conditions that prevail in the money market influence the
long-term interest as well as the resource mobilization in capital
market. Hence, the development of capital depends upon the
existence of a development of capital money market.
 Smooth Functioning of Commercial Banks: The money market
provides the commercial banks with facilities for temporarily
employing their surplus funds in easily realisable assets. The banks
can get back the funds quickly, in times of need, by resorting to the
money market. The commercial banks gain immensely by
economizing on their cash balances in hand and at the same time
meeting the demand for large withdrawal of their depositors. It also
enables commercial banks to meet their statutory requirements of
cash reserve ratio (CRR) and Statutory Liquidity Ratio (SLR) by
utilishing the money market mechanism.
 Effective Central Bank Control: A developed money market
helps the effective functioning of a central bank. It facilities effective

3. implementation of the monetary policy of a central bank. The central
bank, through the money market, pumps new money into the
economy in slump and siphons if off in boom. The central bank, thus,
regulates the flow of money so as to promote economic growth with
stability.
 Formulation Of Suitable Monetary Policy: Conditions prevailing
in a money market serve as a true indicator of the monetary state of
an economy. Hence, it serves as a guide to the Government in
formulating and revising the monetary policy then and there
depending upon the monetary conditions prevailing in the market.
 Non-Inflationary Source Of Finance To Government: A
developed money market helps the Government to raise short-term
funds through the treasury bills floated in the market. In the absence
of a developed money market, the Government would be forced to
print and issue more money or borrow from the central bank. Both
ways would lead to an increase in prices and the consequent
inflationary trend in the economy.
Functions of the money Market
The functions of the money Market are:
 It acts as an equilibrating mechanism to even out short-term
surpluses and deficits.
 Provides a focal point for RBI‟s intervention to bring about changes in
liquidity and cost of credit in the economy.
 Provides access to short-term finds at market cleared prices.
Classification of money Market
The instruments of Money Market fall under the broad heads shown below:

4. Money Market
Govt. & Semi-Govt. Inter Bank Inter
Call Money Corporate
(a) Auction Treasury Private
Market Investment
Bills of 91 days, & Deposits
& 364 days.
(b) Govt. Securities
of Short-term
duration of upto
one year.
(c) Repos
a) Commercial & trade
(d) UTI Units
Bills
(e) P.S.U Bonds.
b) Commercial Paper
c) Certificate of Deposits
d) Participation
Certificates
e) Factorisation Bills
Composition of money market
The money market is not a single homogeneous market. It consists of a
number of sub-markets which collectively constitute the money market.
There should be competition within each sub-market as well as between
different sub-markets. The following are the main sub-markets of a money
market:
 Call Money Market.
 Commercial Bills Market or Discount Market.
 Acceptance Market.
 Treasury bill Market.

5. Instrument of Money Market
A variety of instrument are available in a developed money market. In India
till 1986, only a few instrument were available. They were
 Treasury bills
 Money at call and short notice in the call loan market.
 Commercial bills, promissory notes in the bill market.
New instrument
Now, in addition to the above the following new instrument are available:
 Commercial papers.
 Certificate of deposit.
 Inter-bank participation certificates.
 Repo instrument
 Banker's Acceptance
 Repurchase agreement
 Money Market mutual fund
Call/Notice Money Market: The money that is lent for one day in this
market is known as "Call Money" ", and if it exceeds one day (but less
than 15 days) it is referred to as "Notice Money". The core of the Indian
money market structure is the inter-bank call mm which is centralized
primarily in Mumbai, but with sub-mkts in Delhi, Calcutta, Chennai and
Ahmadabad. Moreover, current and expected interest rates on call money
are the basic rates to which other money mkts and to some extent the govt.
securities market are anchored. The activities in the call money are
confined generally to inter-bank business, predominately on a over night
basis, although a small amount of business, known as notice money was

6. also transacted side by side with call money with a maximum period of 14
days. The participants in the mkts are Commercial banks, co-operative
banks and primary dealers who can borrow and lend funds. Large mutual
funds promoted by nationalized banks, pvt. Sector mutual funds and all
India financial institutions can participate in the mkt. as lenders only.
Corporate entities having bulk lendable resources of minimum of Rs.
5crores per transactions have been permitted to lend in call money through
all primary dealers provided they do not have any short-term borrowings
from banks. Brokers are not permitted in the market. Interest rate in the
mkt. is mkt. driven and is highly sensitive to the forces of demand and
supply. Within one fortnight, rates are known to have moved as high as
and/or touch levels as low as 0.50% to 1% Intra-day variations as also
quite large. Hence, the participants in the mkts are exposed to a high
degree of interest rate risk.
For many years, while a set of institutions like SBI,UTI, LIC, GIC, etc.
continue to be lenders, some banks which have limited branch network are
regular borrowers.
Inter-Bank Term Money Mkt.: This mkt. which was exclusively for
commercial banks and co-operative banks has been opened up for select
All India Development Financial Institutions in October, 1993. The DFIs are
permitted to borrow from the mkt. for a maturity period of 3 to 6 months
within the limits stipulated by RBI for each institution. The interest rates in
the mkt. are driven. Is per IBA ground rules, Lenders in the mkt. cannot
prematurely recall these funds and as such this instrument is not liquid. The
mkt. is predominately 90-days mkt. The mkt. has shown a lot of
transactions following withdrawal of CRR/SLR on liabilities of the banking
system.
Certificate of Deposits: CDs are similar to the traditional term deposits but
are negotiable and can be traded in the secondary mkt. The CDs are

7. negotiable term-deposits accepted by commercial bank from bulk
depositors at mkt related rates. The CDs can be issued by scheduled
commercial banks (excluding RRBs) at a discount to face value for a period
from 91 days to one year. Banks are to observe CRR and SLR. It is
marketable after 45 days.
In India, CDs are being issued since 1989 by banks, either directly to the
investors or through the dealers. CDs are documents of title to time
deposits with banks. They are Interest bearing, maturity dated obligations
of banks and are technically a part of bank deposits. They represent bank
deposit account which are transferable. CDs are marketable or negotiable
short-term instruments in bearer form and are known as Negotiable
Certificates Of Deposits. They represent securitized ad tradeable term
deposits. CDs are high cost liability and are issued only when deposit
growth is sluggish but credit demand is high.
It is a bearer security and there is a single payment, principal and interest,
at the end at the maturity period. The minimum CD should be for Rs.1crore,
later lowered to Rs. 50L and in multiples of Rs. 25L, later lowered to Rs.
10Lakhs and additional amount in multiples of Rs.5 lakh each. They are
issued on discounting basis. Banks cannot discount them or negotiate
them.
CDs are pertimmed to be issued during 1991-92 by the All India Financial
Institutions like IDBI, ICICI, IFCI, etc. . The maturity period for them may
range from 1 year to 3 years and the RBI may fix an aggregate limit for
them. There is no ceiling interest rate on them.
Participation Certificates: As in the case of certificates of deposits,
participation certificates are also issued by banks for period ranging from 3
months to 6 months or upto a maximum period of one year. The Inter-bank
participation certificate (IBPCs) is short-term instruments to even-out the
short-term liquidity within the banking system. The IBPCs is issued against
an underlying advance, classified standard and the aggregate amount of

8. participation in any account time issue. Two types of such certificates are
being developed:
91 days participate certificates involving no transfer of the
underlying asset risk to the borrower but subject to a ceiling
rate of 12.5%.
91 to 180 days participate certificates bearing full risk on the
underlying asset but not requiring statutory reserves unlike in
the Vaghul committee and subject to a floor rate of 14%
The first one is unsecured debt, but securitized for the purpose of
negotiation an development of Secondary market. The second one which
may extend upto one year is more risky and carry a higher return.
Commercial Paper (CP): CP is a short-instrument of raising funds by a
company. Originally CP is carved out of the bank cash credit limits and
there was surety that on maturity, it would be repaid out of bank credit limit.
CP is an unsecured debt instrument in the form of a promissory note issued
by highly rated borrowers for tenors ranging between 15 days and one
year. CP can be issued for maturities between a minimum of 15 days and a
maximum upto one year from the date of issue.
Thus, CP is a short term unsecured promissory note issued by highly
quality corporate bodies to directly to investors to fund their business
activities. It is generally issued at a discount freely determined by the
market to major institutional investors and corporations either directly by
issuing corporation or through a dealer bank. CP is issued to and held by
individuals, banking companies, other corporate bodies registered or
incorporated in India and unincorporated bodies, Non-Resident Indians
(NRIs) and Foreign Institutional Investors (FIIs).
The CP is a new money market instrument introduced by the RBI. A Co.
with a net worth of more than Rs.10 Crores (later reduced to Rs.4 crores)

9. can issue a commercial paper. Its maximum permissible bank finance
(MPBF) for working capital requirements should not less than Rs. 25 crores
(later reduced to Rs.4 crores). It should have a current ratio of 1.33:1 and a
credit rating of excellent should be secured from the CRISIL. The maturity
period should be 3-6 months and the issue should be for a minimum of
Rs.1Crore (later reduced to Rs.25lakh) and in multiples of Rs.25lakhs (later
reduced to Rs.5lakhs).
Treasury Bills (T-Bills): Treasury bills of the Central govt. have been
issued since the inception of the bank. Treasury bills, commonly referred to
as T-Bills are issued by Government of India against their short term
borrowing requirements with maturities ranging between 14 to 364 days.
All these are issued at a discount-to-face value. For example a Treasury bill
of Rs. 100.00 face value issued for Rs. 91.50 gets redeemed at the end of
it's tenure at Rs. 100.00.
They offer short-term investment opportunity to financial institutions, banks
under the normal borrowing programme of the central govt. and mkt.
stabilization scheme (MSS). They were issued for 91 days. Banks, Primary
Dealers, State Governments, Provident Funds, Financial Institutions,
Insurance Companies, NBFCs, FIIs (as per prescribed norms), NRIs &
OCBs can invest in T-Bills.
T-Bills are so popular among money market instruments because of
affordability to the individual investors. They are negotiable securities and
since they can be rediscounted with the bank, they are highly liquid. The
other features are absence of default risk, easy availability, assured yield,
low transaction cost etc.. They were
 91 days
 182 day
 364 day.

10. Repurchase agreement (Repos): A major development in the govt.
securities mkt. is the introduction of repurchase facility. Repo is a form of
overnight borrowing and is used by those who deal in government
securities. They are usually very short term repurchases agreement, from
overnight to 30 days of more. The short term maturity and government
backing usually mean that Repos provide lenders with extremely low risk.
Repos are safe collateral for loans. Now Repo mkt. is used to control
liquidity in the system. It is a transaction in which two parties agree to sell
and repurchase the same security. Under such an agreement the seller
sells specified securities with an agreement to repurchase the same at a
mutually decided future date and a price. The Repo/Reverse Repo
transaction can only be done at Mumbai between parties approved by RBI
and in securities as approved by RBI (Treasury Bills, Central/State Govt
securities).
Banker's Acceptance: A banker‟s acceptance (BA) is a short-term credit
investment created by a non-financial firm. BA‟s are guaranteed by a bank
to make payment. Acceptances are traded at discounts from face value in
the secondary market. BA acts as a negotiable time draft for financing
imports, exports or other transactions in goods. This is especially useful
when the credit worthiness of a foreign trade partner is unknown.
Gilt edged securities: The term government securities encompass all
Bonds & T-bills issued by the Central Government, and state governments.
These securities are normally referred to, as "gilt-edged" as repayments of
principal as well as interest are totally secured by sovereign guarantee.
Money Market Mutual Funds (MMMFs)
MMMFs enable small investors to participate in the money mkt. . The
investors can realize through MMMFs, a market-related yield. The RBI

11. outlined in April 1991, a broad framework for setting up MMMFs and
followed it up by setting up a task force to work out operating guidelines.
The RBI announced the guidelines in 1992.
The MMMFs can be set up by scheduled commercial banks and public
financial institutions. They are allowed( 2nd November, 1999) to be set up
as a separate entity n the form of a „Trust‟. Only individuals can subscribe
to MMMFs. The minimum lock-in period is 15 days. There should be no
guarantee of minimum return. Reserve requirements will not apply to
MMMFs.
The portfolio of MMMFs consists of short-term money mkt. instruments.
Investors can obtain a yield close to money mkt. rates by investing in
MMMFs. MMMFs can invest in rated corporate bonds with a residual
maturity up to one year within the ceiling for CP.
Effective from 23 November 1995, the pvt. Sector was allowed to set up
MMMFs. The size of MMMF and limits on invt. By MMMFs were de-
regulated. The scheme of MMMF was made flexible in April 1996 by
bringing it on par with all other mutual funds by allowing invt. By corporates
and others. By reducing the minimum lock-in period to 15 days from 9May
1998, the scheme was made more attractive. MMMFs are also permitted to
offer cheque writing facility to investors. On 7th March 2000, MMMFs were
brought within the purview of SEBI regulations. Banks and FIs were
required to seek clearance from the RBI for setting up MMMFs.
Secondary market for money market instruments.
The Discount and Finance House of India.( DFHI ) has been seeking to
develop an active secondary market for the money market instruments and
integrate various segments of the market in order to facilitate the
smoothening of short-term liquidity imbalances. The daily average lending
was Rs.1,156 crore in 1996-97.

12. The Securities Trading Corporation of India (STCI), as a PD (Primary
dealers ) deals in treasury bills. STCI has an initial capital of Rs.100 crore
and the ownership includes the RBI, Comm. And Co-operative Banks,
Financial institutions, mutual funds and PSUs. In 1998-99, STCI had a mkt.
share of 28% in primary mkt. and 26% in secondary mkt., the highest
among all PDs.
PARTICIPANTS IN MONEY MARKET
The major players in this market are:
 Banks.
 Financial Instruments.
 Primary dealers.
Some restriction in participation e.g. call money market is open to only
banks.
Major participants: Central Govt., State Govt., PSUs, Scheduled
Commercial Banks, Corporates, Provident Funds, GICs, LIC, Mutual
Funds, NBFCs, Primary Dealers.
(1) Central Govt:
Issues Dated Govt. Securities & Treasury Bills With Zero Credit Risk
(Sovereign).
Coupon Bearing And Non Coupon (Zero) Bearing Bonds.
Fixed Coupon And Floating Rate.
Benchmark For Other Financial Instruments.
AverageDailyTradedVolumesVaryFromRs.3000-10000Crores.
(2) State Govt:
Issue state development loans-medium/ long term bonds of State
Govts.
Securities issued by the RBI on behalf of the State Govt.

13. Auction based issues. Not actively traded as most of these securities
are held to maturity - small issue sizes.
The major buyers are Banks, LIC and Provident funds
The spreads are generally in the range of 25-40 basis over the
corresponding G-sec yield.
(3) CENTRAL BANK (RBI)
Over-all regulation of the market.
Ensuring adequate liquidity & money supply through interventions.
Operates in Money market generally on behalf of Govt.
As merchant banker to Govt, decides how best to raise/maintain Govt
borrowings economically.
Maintain short term interest rates
Maintain price stability
Ensure adequate flow of credit for economic growth
MANAGING LIQUIDITY, INTT RATE MONEY SUPPLY BY RBI
Reserve requirements (CRR & SLR)
Liquidity Adjustment Facility (LAF) - Repo & Reverse Repo
Interest rates (Bank Rate, Repo Rates)
Open Mkt Operation
Refinance - quantum, intt rate & period
(4) PSUs:
Issue bonds (taxable & tax free ).
Issue CPs .
Generate cash surpluses and invest in FDs, CDs, ,T-Bills.
Some PSUs active in G.Sec also.
(5)SCHEDULED COM. BANKS:
Issue CDs (unsecured & negotiable)
Period 7 days to one year
Participate in overnight call & term markets – both as lenders &
borrowers.
Banks use these funds for liquidity mgt. Call money very important to
manage CRR commitments..
Banks invest in Govt Sec to maintain SLR & invest surplus funds

14. Invest in PSU bonds as investors of surplus..
Take trading position in G-Sec and PSU bonds to profit from rate
volatility..
Participate in forex markets and derivative market for covering
merchant txns and for risk mgt.
(6) PRIMARYDEALERS:
PDs conceived and permitted by RBI in 1995.
Registered with RBI.
ROLE:
Deal in Govt securities both in primary & capital markets.
Commit participation as Principals in Govt issues through bidding in
auctions.
Underwrite issues and support development of underwriting and
market making for govt securities outside RBI.
Offer firm buy-sell / bid ask quotes for T. Bills & dated Govt
securities to improve secondary market trading system. Help price
discovery, enhance liquidity & turnover and widen the investor base.
Strengthen the infrastructure in securities to make it vibrant, liquid
and broad based.
To make PDs an effective conduit for RBI to conduct open market
operations.
(7) CORPORATES (private):
Issue CPs & debentures to finance projects.
Debentures could be fully / partly convertible or non-convertible.
Bonds could be secured or unsecured.
Interest could fixed or floating .
Some corporate are very cash rich and active investors in FD,
CDs,TT. Bills & other debt instruments .
(8) PROVIDENTPROVIDENTFUNDSFUNDS::
Invest their funds in short term and long term instruments as
per their internal guidelines .
Apart from G.Sec, they invest in State Development Loans, bonds of
PSUs/FIs.
PFs can also invest in private sector bonds which are rated by at
least two rating agencies at acceptable rating.

15. (9) GENERAL INSURANCE COMPANIES:
Have to maintain certain amt of funds in approved investment.
Also invest in G-Sec, bonds, money market as lendersl.
(10) LIC:
Invest in G-Sec, bonds, & money market
Certain pre-determined thresholds to invest in different categories.
(11) MUTUAL FUNDS:
Required to invest in money market & debt instruments.
Pattern/quantum of investment vary as declared in schemes.
(12) NBFCs:
Required to investment minimum 15% in SLR investments.
Park their surplus funds in securities/debts to earn income.