Indian Money Market and Types of Instruments in Indian Money Market

Introduction to Money Market

• Money market is short-term market and handles instrument from 1 day to 1 year.
• It is mostly used by Government, Banks and other corporate entities to fulfil short-term requirements of funds.
• In India, this market is used by RBI for transmission of its monetary policy direction by changing various ratios, increasing & decreasing of policy rates, etc.
• Globally, money market is used by central banks to moderate money supply in the economy through banking channel. Liquidity is typically pushed through banking system by central banks at the time of stress, against eligible collaterals.
• Participants in the Indian money market include: Public Sector Banks, Private Sector Banks, Foreign Banks, Co-operative Banks, Financial Institutions, Insurance Companies, Mutual Funds, Primary Dealers, Bank cum Primary Dealers, Non-Banking Financial Companies (NBFCs), etc.

Types of Instruments in Money Market

Money market is typically divided into two segments

• Borrowing and Lending segment with or without collaterals

1. Call Money

2. Notice MoneY

3. Term MoneY

4. Market Repo (G-Sec)

5. TREP (Triparty Repo)

6. Corporate Bond Repo (CBR)

• Asset Market involving purchase and sale of such instruments.

1. Cash Management Bills (CMBs)

2. Treasury Bills (T-Bills)

3. Commercial Papers (CPs)

4. Certificate Of Deposit (CDs)

(Note: – This are explained below)

Call Money

• The call money market is an avenue for unsecured lending and borrowing of funds.
• This market is a purely interbank market in India restricted only to Scheduled Commercial Banks (SCBs) and the Primary Dealers (PDs).
• Call money transactions are reported on the Reserve Bank of India which is managed by CCIL and are predominantly overnight.

Notice Money

• This is an extension of the interbank call market with uncollateralized lending and borrowing of funds for a period beyond overnight and up to 14 days.
• Notice Money transaction is reported to RBI and managed by CCIL.

Term Money

• This is an extension of the interbank call market for uncollateralized lending and borrowing of funds for a period between 15 days and 1 year.
• Notice Money transaction is reported to RBI and managed by CCIL.

Market Repo (G-Sec)

• Repo is a money market instrument, which enables collateralised short term borrowing and lending through sale/purchase operations in debt instruments.
• In other words, refers to borrowing funds via sale of securities with an agreement to repurchase the same at a future date with the interest for the borrowings incorporated in the repurchase price (i.e. Zero Coupon bonds)
• Reverse repo is the exact opposite transaction which is essentially a collateralized lending of funds.
• RBI regulates the repo market in India and major participants are Scheduled Commercial Banks, Primary Dealers, Mutual Funds, NBFCs, Financial Institutions, Insurance Companies, etc.

Triparty Repo (TREP)

• Triparty repo is a type of repo contract with a third party intermediary between the borrower and lender known as the Triparty Agent (TPA).
• The TPA does the collateral selection, payment and settlement, custody and management during repo period.
• RBI has authorised CCIL to act as TPA.

Corporate Bond Repo (CBR)

• Corporate Bond repo was introduced by RBI in 2010 and the eligible securities for CBR include:
  • Listed corporate bonds and debentures,
  • CPs and CDs,
  • Units of Debt ETFs.

Treasury Bills (T-bills)

• Treasury bills or T-bills are used for short term borrowing by the Government of India and are considered to be a part of the money market as they mature within a year from issue.
• These are basically zero coupon securities which are issued at a discount and are redeemed at par.
• Tenor of T-Bills are fixed as 91, 182, 364 days.

Cash Management Bills (CMBs)

• Essentially very short term T-bills, Cash Management Bills (CMBs) are issued by the Government of India to fund the temporary mismatches in its cash flow.
• CMBs have maturities less than 91 days.
• This is issued to absorb excess liquidity in the system after auction for usual Treasury Bills on weekly basis.

Commercial Papers (CPs)

• A Commercial Paper (CP) is used by Indian corporates to raise short-term unsecured funds.
• CPs are also discounted instruments like T-bills and are issued for ₹5 lakh and multiples thereof for maturities between 7 days and one year.
• CP issuances are governed by RBI regulations.

Certificate of Deposits (CDs)

• Certificate of Deposits are issued by Banks raising wholesale deposits from depositors.
• These are tradable instruments as Banks taking such deposits also pay the required stamp duly.
• CDs are issued for ₹1 lakh and in multiples of ₹1 lakh thereafter, for maturities of 7 days to one year by banks and for 1 year to 3 years by FIs.
• A Certificate of Deposit (CD) is issued against funds deposited at a bank or eligible Financial Institutions (FIs).

Conclusion: The Indian money market plays a pivotal role in the financial ecosystem by offering various instruments that cater to short-term funding needs. Instruments like Call Money, Treasury Bills, and Commercial Papers provide flexibility and liquidity to participants, including banks, corporate entities, and financial institutions. Understanding these instruments is essential for managing short-term financial requirements and leveraging the market’s potential for economic stability. The proactive management and participation in the money market contribute significantly to the efficient functioning of the broader financial system.