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Money Market – The market for
borrowing and lending short term funds
is called the money market. The
Government, banks and other financial
institutions are the main players in the
•Money Market Participants:-
(i) Government - Government is an active money market
player and in most economies, it constitutes the biggest
borrower. It needs to borrow funds mainly when the
budgeted expenditure goes beyond the budgeted revenues.
(ii) Central bank – The central bank of a country generally
operates in the money market on behalf of the
government. It issues government securities based on the
present and future requirements of the government and
the market conditions.
(iii) Banks - Banks play a significant role in the money market
operations. Banks mobilize deposits and utilize the same
for credit accommodations.
(iv) Financial Institutions – Like banks, financial institutions also
undertake lending and borrowing of short-term funds. Due to
the large volumes these FIs transact in, they have a significant
impact on the money market.
(v) Corporate Units – Corporates also transact in the money
market mostly to raise short-term funds for meeting their
working capital requirements. This segment partly utilizes both
the organized and unorganized sector of the money market.
(vi) Other institutional bodies- (MFs, FIIs) – The level of
participation of these players varies largely depending on the
regulations. For instance, the level of participation of the FIIs in
the Indian money market is restricted to investment in
government securities only.
(vii) Discount and Acceptance Houses – These players acts as
intermediaries in the money market. Discount houses perform
the function of the discounting/re-discounting the commercial
bills and T-Bills. Acceptance houses are specialized agencies
which accept the bills of exchange on behalf of their clients for
(viii) Market makers(Primary Dealers) – Primary dealers are
some of the intermediaries that act as underwriters to the
government securities and also have the option to be their
* Money Market Instruments –
1. Treasury bills
Purpose – Treasury bills are raised to meet the short-term
funds required by the Government of India. T-bills also enable
the RBI to perform Open Market Operations (OMO) which
indirectly regulate money supply in the economy.
Form – T-bills are issued either in the form of promissory note
or credited to investors SGL account. For every class, a
standardized format is used.
Size – Treasury bills are issued for a minimum amount of Rs
25000 and in multiples of 25000 thereof. T-bills are issued at a
discount and are redeemed at par.
2. Commercial Paper(CP)
Meaning - Commercial Paper are short-term, unsecured
promissory notes issued at a discount to face value by well-
known companies that are financially strong and carry a high
credit rating. They are sold directly by the issuers to the investor,
or else placed by borrowers through agents like merchant banks
and security houses.
Features of CP :-
* They are negotiable by endorsement and delivery like pro-
notes and hence are highly flexible instruments.
*The maturity varies between 15 days to a year.
* They normally have buy-back facility; the issuers or dealers can
buy-back the CP if needed.
3. Certificate of Deposits(CDs)
Definition – Certificate of Deposits are issued by banks in the
form of usance promissory notes. These bank deposits are
negotiable, and are in marketable form bearing specific face
value and maturity. They are transferable from one party to the
other unlike term deposits. Due to their negotiable nature,
these are also known as Negotiable Certificate Of
Subscribers - CDs are available for subscription for Individuals,
Corporations, Companies, Trusts, Funds, Associations, etc. Non-
resident Indians can also subscribe to these instruments, but
only on repatriable basis, which cannot be endorsed to another
NRI in the secondary market.
Features of CDs :-
1. CD is a document of title to a time deposit and is distinct
from conventional time deposit with respect to negotiability
2. The liquidity and marketability features are considered the
hallmarks of CDs.
3. CDs are issued at a discount to face value.
4. CDs are freely transferable by endorsement and delivery.
5. CDs attract stamp duty and there is no grace period, as in
the case of bill financing.
4. Money Market Mutual Funds(MMMFs) - MMMFs are mutual
funds that invest primarily in money market instruments of
very high quality and of very short maturities. MMMFs were
set up to make available the benefits of investing in money
markets to small investors. MMMFs can be set up by
commercial banks, the RBIs and public financial institutions
either directly or through their existing mutual funds
Earlier these funds were regulated by
the RBI . However, the RBI withdrew its guidelines w.e.f March
7, 2000 and now they are governed by the SEBI.
* Indian Money Market – The Indian Money market can be
classified into organized and unorganized sectors. The
unorganized sector consists of money lenders, chit funds, and
indigenous bankers. The organized sector comprises
commercial bank in India- both public sector and private sector
banks and foreign banks. The Reserve Bank of India, the apex
bank, is the regulator of the money market in India. The open
market operation of the RBI provides signals for other
segments of the financial system regarding the future
monetary and credit policy of the apex bank.
*The sub-markets in the Indian money Market- The money
market in India is composed of several sub- markets like call
money market and bill market.
1. Call Money Market – One of the important sub-market of the
money market in India is the call money market. This market is
for very short- term funds which is also termed money at call or
short notice. These market comprises two segments – the call
money market and overnight market.
2. Bill Market – Bills are the promise to pay a fixed amount of
money by a particular company or the Government and may be
transacted in the bills market or discount markets . It deals
with short-term bills which are generally of 3 months duration.
These are mainly of two types – Bills of exchange and finance
* Indian Money Market Instruments:-
1. Call Money or Notice – These funds represent borrowings
made for a period of one day up to a fortnight.
2.Term Money- Short-term funds having a maturity of 15 days
and over are categorized as term money.
3. Treasury Bills- T-Bills are issued to enable the Government to
tide over short-term liquidity requirements with maturities
varying from a fortnight to a year.
4. Certificate of Deposits – Banks issue CDs to raise short-term
funds having a maturity of 15 days to a 1 year. They are issued
to individuals/corporates/institutions etc.
5. Participants Certificates (PCs)- To ease the bank’s liquidity, they share
their credit assets with other banks by issuing Participation Certificates.
These certificates are also known as Inter Bank Participations(IBPs).
6. Commercial Papers (CPs) – Commercial Papers (CPs) are promissory
notes with fixed maturity, issued by highly rated corporates.The maturity
period varies from 15 days to a year
7.Bills of Exchange – It is a financial instrument that facilitates funding of a
trade transactions. It is a negotiable instrument and hence is easily
8.Money Market Mutual Funds- In april 1992, the Government of India
introduced money market mutual funds in the Indian money market.
MMMFs provide an avenue to the retail investor to invest in the money
9. Repo Transaction – It is basically a contract that is entered
into by two parties which may include the RBI, a Bank or a
NBFC. The Government of India introduced these instruments in
the year 1992.
* Features and weakness of the Indian Money Market:-
1.Existence of unorganized Money Market – In India, the semi-
urban and rural areas are still dominated by the indigenous
bankers and money lenders. The unorganized and organized
money markets exists side by side in India.
2. Absence of integration – There is no proper co-ordination or
co-operation among different segments of the money market.
3. Diversity of Interest Rates – Indian Money Market is
prevalence of too many interest rates- the borrowing rate of
Government of India, the deposit and lending rate of
commercial banks and co-operative banks and the lending rates
of discount finance house, etc.
4. Seasonal nature of Indian Money Market – A striking feature
of the Indian money market has been the seasonal shortage of
funds in some particular months of the year.
5. Volatile Nature of Call money market – This segment of
Indian money market is highly volatile. The volatility in the call
rates has risen in recent years.
6.Underdeveloped Bill Market – The Bill market in India is
underdeveloped. In spite of certain measures taken by the RBI,
it has not been developed.
7. Absence of a well organized Banking System – The absence
of banking facilities to the rural masses is due to slow branch
expansion in the country, and this is a matter of concern.
8. Lack of Instruments – Even during the 80’s, the Indian money
market did not have sufficient number of short-term money
market instruments .But now new instruments have been
introduced like 182-day T-bills, 364-day T-bills, commercial
Papers, Certificates of deposits.
* The Bill Market In India:-
A bill market trades in short-term bills, which are generally of
3 months duration. There are mainly two types of bills – bills
of exchange and finance bills. There are two segments of the
a. Commercial Bills Market – Commercial bills and bank credit
are important sources of finance to a firm.
b. Treasury Bill Market – The treasury bills are raised to meet
the short-term funds required by the Government of India.
* Origin of bill Market :-
The bill market first originated in London. By 19th Century,
London had developed a successful market in commercial bills.
Gradually it was developed in England and in other countries
* Bill Market Scheme,1952:-
The RBI’s efforts to develop a bill market in India provided the
impetus to introduce the “Bill Market Scheme” in january 1952.
Here, the RBI provided advances to scheduled banks in the
form of loans against their promissory notes supported by 90
days t-bills or promissory notes.
* New Bill Market Scheme,1970:-
Section 17(2)(a) of the Reserve Bank Of India Act, declared the
New Bill Market Scheme following the recommendations of the
M Narismham Committee from 1st November, 1970. Under this
Scheme, the RBI rediscounted actual trade bills.
The new Bill Market Scheme,1970 was a
big leap forward to the development of a bill market in India. It
was the first genuine effort to develop market for trade bills.
Future Prospects for the Bill Market in India:-
The bill market in India is still in the developing stage. It depends
on whether trade and industry recover their receivables and
whether or not the payers of dues are prepared to accept the
discipline of bills.
The progress of the Bill Market in India is hindered by the
1. Large parties who expect special incentives may not be
prompt in repaying their dues.
2. Weak parties might keep asking for more time to their
3. Public sector enterprises and Government departments who
are found to be delaying payments on account of procedural