The document discusses the money market, which provides short-term borrowing and lending between financial institutions, corporations, and governments. It describes the key functions of the money market in providing liquidity and facilitating monetary policy. Some of the main features highlighted include transactions occurring without brokers between players like banks for maturities under one year. Common money market instruments explained are treasury bills, commercial paper, certificates of deposit, call money, banker's acceptances, and repurchase agreements.
2. INTRODUCTION TO MONEY MARKET
• Money market is component of financial system where money or its
equivalent assets can be traded. Money here represents liquidity.
• It is place where public, large corporates and government manage
their short term cash needs.
• Short term borrowing and lending is done by financial institutions and
dealers with liquid instruments having short term maturities (fortnight to
one year).
• Thus, money market is a market where short term obligations such as
treasury bills, commercial papers and bankers acceptances are bought
and sold.
3. FUNCTIONS OF MONEY MARKET
• It provides an efficient market of short-term borrowing and lending to
meet urgent requirements
• It brings liquidity in the financial system
• It enables development of trade and industry
• It helps in efficient functioning of commercial banks
• It facilitates formulation of suitable monetary policy
4. FEATURES OF MONEY MARKET
• It is a market purely for short-term funds having a maturity period less
than one year only.
• Transactions have to be conducted without the help of brokers.
• It comprises of several sub-market like call money market, acceptance
bill market, treasury bill market etc.
• The players in the money market include commercial banks,
government, corporates and NBFC (Non-Banking Financial
Companies).
• Transactions take place through phone i.e., oral communication.
Relevant documents and written communications can be exchanged
subsequently. There is no formal place like stock exchange as in the
case of a capital market.
5. MONEY MARKET INSTRUMENTS
• TREASURY BILLS - Treasury Bills, one of the safest money market
instruments, are short-term borrowing instruments of the Central Government
of the Country issued through the Central Bank (RBI in India). They are zero
risk instruments, and hence provide low returns. They are issued with three-
month, six-month and one-year maturity periods. T- Bills are issued at a price
less than their face value (par value). They are issued with a promise to pay
full face value to holder on maturity.
• COMMERCIAL PAPERS - It is a short term unsecured promissory note issued
by corporate and financial institutions at a discounted value on face value.
They are usually issued with fixed maturity between 1 to 270 days and for
financing of accounts receivables, inventories and meeting short term
liabilities. Returns are higher as compared to T-bills since risk is also higher.
6. MONEY MARKET INSTRUMENTS
• CERTIFICATE OF DEPOSIT – It is a short term borrowing more like a bank
term deposit account. It is a promissory note issued by a bank in form of a
certificate entitling the bearer to receive interest. The certificate bears the
maturity date, the fixed rate of interest and the value. Its term generally ranges
from three months to five years. The returns on certificate of deposits are
higher than T-Bills because it assumes higher level of risk
• CALL MONEY - It is market where overnight loans can be availed by banks to
meet liquidity. Banks who seeks to avail fund approaches call market as
borrower and one who have excess fund participate as lenders. Banks can
avail call money to meet their reserve requirement or any shortfall in cash.
Loan provided for 2 to 14 days is called notice money.
7. MONEY MARKET INSTRUMENTS
• BANKER’S ACCEPTANCE– It is simply a bill of exchange drawn by a person
and accepted by a bank. It is a buyer’s promise to pay to the seller a certain
specified amount at certain date. The same is guaranteed by the banker of the
buyer in exchange for a claim on the goods as collateral. The banker’s
acceptance is very safe security and is used as a money market instrument.
The most common term for these instruments is 90 days. However, they can
vary from 30 days to180 days.
• REPURCHASE AGREEMENTS– Repurchase transactions, called Repo or
Reverse Repo are transactions or short term loans in which two parties agree
to sell and repurchase the same security. They are usually used for overnight
borrowing. Repo/Reverse Repo transactions can be done only between the
parties approved by RBI and in RBI approved securities.