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Money Market | Definition, Features, Functions, Instruments, Components, Advantages & Disadvantages

Money Market

What is Money Market ?

The money market is an important segment of the financial market, wherein funds are either lend or borrowed for a short-term tenure, usually for a period not exceeding one year. It is done through the financial instruments of rather a short-term maturity. It is an institutional set up, which offers a meeting ground for (i) the entities having surplus funds for a short period, and (ii) entities which are in need of short-term funds.

The borrowing and lending takes place through the highly liquid financial instruments having a short maturity period, which may be as short as one day, and extend up to weeks or months but within one ´year. Examples of such instruments are bill of exchange, bankers' acceptance, treasury bills, certificate of deposits, commercial papers, etc. They are also referred to as 'near money'.

Definition of Money Market

Reserve Bank of India describes the Money Market as :
"The center for dealings, mainly of a short term character, in monetary assets; it meets the short-term requirements of borrowers and provides liquidity or cash to the lenders".

According to Crowther :
"The money market is the collective name given to the various firms and institutions that deal in the various grades of near money".

According to the McGraw Hill Dictionary of Modern Economics :
"Money market is the term designed to include the financial institutions which handle the purchase, sale, and transfer of short-term credit instruments. The money market includes the entire machinery for the channelizing of short-term funds. Concerned primarily with small business needs for working capital, individuals' borrowing, and government short-term obligations, it differs from the long-term or capital market which devotes its attention to dealings in bonds, corporate stocks and mortgage credit".

The money market in our country is essentially a part of the banking system, in which the participants take part in lending and borrowing of short-term funds, through the use of financial instruments mentioned in the above paragraph. It (the market) is also considered as the business starting instrument, especially in Indian context. It is one of the major sources for raising short-term funds to finance the areas of agricultural and manufacturing activities undertaken by the entrepreneurs. The Indian money market has shown remarkable progress during the last few years.

The operations of the Indian money market are regulated by the Central Bank of the country, viz. Reserve Bank of India. Such regulations pertain to taking decision and controlling the level of money that needs to be pumped into the economy, and also the industries to which money needs to be diverted. Direct control of such kind encourages the banks to ensure adequate flow of funds to the industries/companies, which have the potential to generate more jobs and better cash circulation.

Functions of Money Market 

Money markets play an important role in monetary and economic arena of a country, as evident from the following :
  • Maintenance of monetary stability in the system by keeping a balance between the demand for money and its supply for the monetary transactions of short-term nature.
  • Money market acts as a stimulant for the economic growth by ensuring that adequate funds are made available to entrepreneurs engaged in various economic in different sectors, like agriculture, MSME, etc.
  • Supporting trade and industry by extending provisions of sufficient funds to them, including credit facilities in the form of bill-discounting.
  • Money market is a facilitator of implementing the Monetary Policy of the country's central bank. It has got an inbuilt mechanism of ensuring implementation of the monetary policy in an efficient manner.
  • In the process of capital formation, money market plays a vital role. It channelizes the household savings and investments for short term investments in its financial instruments, such as treasury bills, commercial papers, certificate of deposits, etc.

Features of Money Market 

Indian money market is characterized by the following qualities :

1)Highly Organised Commercial Banking System : 
Commercial banking network forms an important component of the money markets in India. Existence of a well-structured banking network is indicative of an evolved money market. The level of development of a banking system is in direct proportion to the level of involvement of the money market. In a developed money market, the commercial banks' linkage with other components of the market on one hand and linkage with the Central bank of the country on the other is very robust.

2) An Apex Central Bank : 
Money market of a country is considered to be well developed, if it has the support and backing of a country's Central Bank, which in Indian context is Reserve Bank of India (RBI). The RBI acts as a facilitator, regulator, and supervisor as far as the monetary and banking system of the country is concerned. It is also empowered to exercise control over the other participants of the money market.

3) Adequate Availability of Credit Instruments : 
Availability of a variety of various credit instruments such as promissory notes, bill of exchange, treasury bills, short-period government bonds, etc. is yet another feature of a developed money market.

4) Number of Dealers : 
The dealers and brokers. play an important role in facilitating the trading activities (buying and selling of financial instruments) in a money market. Adequate number of such dealers/brokers as well as that of financial instruments is an absolute necessity for a market to be considered as a developed one. Lack of sufficient number of dealers in a money market is an indication that the market is yet to be developed.

5) Existence of a Large Number of Sub-Markets : 
A well-established money market is characterized by the presence of a number of sub-markets, e.g. call money market, bill market, collateral market. acceptance market, etc., specializes in facilitating specific activities. More the number of such specialized sub-markets, higher are the level of development of the money market.

6) Proper Co-ordination among Sub-Markets : 
In order to ensure that the entire money market operates in a cohesive and coordinated manner, is necessary that different sub-markets of a developed money market function inter dependently and not on a standalone basis.

7) Integrated Interest Structure : 
For the money market to be a developed one, the interest structure needs to be well-coordinated and integrated. Any change in interest rate structure of the country, as indicated by the Central Bank, should be transmitted promptly in the market and its impact needs to be visible.

8) Responsive : 
Any national or global event of political or economic significance impacts the money market, and this is reflected in the form of some response on the part of the money market. The magnitude of response depends upon the scale of importance attached to the specific event.

9) Remittance Facilities : 
Existence of a convenient and cost-effective remittance facility is a hallmark of a developed money market. Smooth functioning of a developed money market is not possible in the absence of such infrastructure.

10) Other Factors :
Some factors, other than those discussed in the above points, are also considered as salient characteristics of a developed money market. These factors may relate to volume of the trade, stability of the political conditions, etc.

Structure and Components of Money Market

Various components of the money market in India may be broadly grouped into two categories viz. (i) organized or authorized segments and (ii) unorganized or unauthorized segments. Following. table reflects the detailed organizational structure of the Indian money market :

Structure and Components of Money Market 

1) Organized Money Market : 
Components of the organized money market consists of certain institutions, which function under the control and regulations of Government. They are as under:

i) Reserve Bank of India : 
The central bank of the country, viz. Reserve Bank of India is the apex body of the Indian money market. Commercial banks can park their surplus funds with RBI and they can also borrow from RBI for a short period.

ii) Commercial Bank : 
Commercial banks, which include SBI & its associate banks, other public sector banks, private sector banks, Regional Rural Banks (RRBs), etc., are the major players of the Indian money market. They can borrow or lend monies for short-term among-st each other, either directly or through a financial instrument, when they require short-term funds or when they have surplus funds for a short period.

iii) Co-operative Banks : 
Co-operative banks are also an important constituent of the Indian money market. They have a three-tier organizational set-up, with the State Co operative Bank as the apex body at the State level, followed by the District Co-operative Banks at District level. At the lowest level of the set-up are rural primary co-operative banks and urban co-operative banks. The role played by the co-operative banks in the money market is similar to that of the commercial banks.

2) Unorganized Money Market : 
The unorganized money market consists of entities, which do not come under the control and regulation of Government. They are mostly non-banking financial intermediaries, indigenous bankers and money lenders predominantly operating in rural areas and small towns, although some of them have registered their presence even in big cities. Their lending activities are restricted to the borrowers from communities of farmers, artisans, small traders and small-scale manufacturers, which do not have an easy access to the organized sector of the money market. Various components of the unorganized money market have been discussed in the following points:

i) Indigenous Bankers : 
Indigenous bankers are individuals or private firms, who operate like a bank, i.e. they accept deposits and grant loans. They are out of the purview of any regulation or control of any authority whatsoever. With the increase in the outreach of commercial and co-operative banks, the number of indigenous bankers is dwindling day-by-day.

ii) Unregulated Non-Bank Financial Intermediaries : 
Non-bank financial intermediaries are also not regulated or supervised by any authority. They operate in the market as loan or finance companies. Their sources of funds include deposits accepted from public, borrowings from various sources, and other receipts, whereas they deploy their funds as lending to wholesale traders, retailers, artisans, and other self-employed people, etc. at a high rate of interest (at times as high as 48%).

iii) Money Lenders : 
Money lenders are yet another group representing unorganized sector of the Indian money market. They specialize in extending loans to small borrowers, such as marginal and small farmers, agricultural laborers, artisans, factory and mine workers, low paid 'staffs, small traders, etc. The rate of interest charged by them is also very high. In addition, they are infamous for indulging in various unethical practices to cheat their borrowers, who happen to be illiterate/semi literate, by falsifying the loan records - maintained by them. Money lenders may be classified into the following three categories : 
  1. Professional money lenders, who have expertise in the field and are engaged exclusively in the business of money lending.
  2. Nomadic -money lenders, who are engaged in the business of money lenders as their secondary activity, for example Kabulis and Pathans.
  3. Non-professional money lenders.

Advantages of Money Market 

A well-developed money market of a country is beneficial to various segments of its economy in the following manner :

1) Source of Capital : 
Through the various financial instruments, viz. treasury bills, commercial papers, certificate of deposits, etc., the money market is in a position to make available short term funds for the trade and industry.

2) Ideal Investment : 
Money market is a short-term investment destination for its participants. They can invest their surplus funds, available for a short period, in any of the money market instruments. Such instruments are also eligible, for making investment into, for meeting statutory reserve requirements for commercial banks.

3) Effective Monetary Management : 
A developed and efficient money market also acts as a medium through which the monetary policy of the country's central bank, viz. RBI may be implemented successfully. It, thus, facilitates transmission of the policy of RBI in respect of its monetary management of the country as a whole.

4) Economic Development : 
Money market is a vital component of the monetary system prevailing in a country. It plays a significant role in the overall economic development of a country. Its efficiency and the country's fast economic development, in fact, go together.

5) Efficient Banking System : 
The efficiency and effective functioning of a country's financial and banking systems, to a large extent, depends upon the manner in which the money market functions. A well-evolved money market ensures that the banking and financial systems run in a hassle-free manner.

6) Facilitating Trade : 
Trade and industries are benefited from the money market in the following manner :
  • A payment mechanism is offered by the money market, which enables the traders and industrialists to transfer money promptly (even huge amounts).
  • Working capital needs of a business entity can be effectively met through the money market, which facilitates their day-to-day production and marketing activities.
  • Money market provides short-term investment opportunity for its participants in the instruments, which are highly liquid and as such can be converted into money, when required, without any loss of time.

7) Helpful to Government : 
Money market. facilitates the short-term borrowing programs of Government, as the treasury bills are floated, subscribed, and traded in the money market.

Disadvantages of Money Market 

Despite the advantages of Indian money market mentioned above, it also suffers from the following deficiencies :

1) Limited Transactions : 
There are certain restraints as regards the number of transactions undertaken by a market participant. Such restrictions relate to deposits as well as withdrawals; normally three deposits and three withdrawals are permitted for individual participant. This limitation acts as a deterrent in the development of money market.

2) Potential Loss of Investment : 
Participants of money market invest in the market through banks. If due to some unforeseen circumstances, a bank is compelled to wind up its business, there is a possibility that the investor may lose all the money or a part thereof. This risk of losing money is always lurking in the minds of investors despite the DICGC guarantee available for a limited amount of 1,00,000 (Rupees one lakh).

3) Interest Rate Fluctuation : 
Wavering interest rate is another risk, which the participants money market are exposed to. Movement of interest rates may be in favor or they may be against the investors/borrowers. There is absolutely no safeguard against the adverse movement of interest rates.

4) Easy Access : 
It may sound ironical, but it is a fact that a stress-free access the money market account may prove to be a possible disadvantage. This is in the sense that the tendency of impulsive expenditures is, at times, quite over-powering.

5) Minimum Balance Requirements : 
Most of the banks stipulate a minimum balance to be maintained by their constituents in a money. market account. The chances of going the balance below the required level are high, especially in cases where the money market. account is linked with a checking account as overdraft protection.

Participants in Indian Money Market

Money market is characterized by the voluminous transactions involving substantial amounts. The number of money market players is limited but they are very active and in a dominant position. Some of the significant market participants are as follows : 

1) Reserve Bank of India (RBI) : 
Central bank of the country, i.e., RBI is the key participant of the money market. It is responsible for the formulation and implementation of the monetary policy of the country. With a view to injecting liquidity in the market or using the same from the system, it has got a number of instruments at its disposal. Bank rate, repo mechanism, CRR, etc. are some of them, which are put to use, as and when required, by the central bank from time to time.

2) Schedule Commercial Banks (SCBs) : 
Scheduled Commercial Banks form the core of the money market, as they are the most. prominent players in short-term borrowing as well as short-term lending. Household savings of the people find their way to banks in the form of deposits, a part of which is utilized by the banks for onward lending to the business entities for meeting their short-term working capital requirements. Deployment of the remaining funds is done by way of investment in Government securities (medium to long-term), treasury bills (short-term), equities and bonds issued by corporate, etc.

3) Cooperative Banks : 
Participation of cooperative banks in the money market is similar to that of scheduled commercial banks.

4) Financial and Investment Institutions : 
Certain financial and investment institutions like Life Insurance Corporation of India, Unit Trust of India, General Insurance Company, development banks, etc. are also active players in the money market. However, their role is restricted in the market as lender only; they are not permitted to borrow.

5) Corporate : 
Participation of companies in the money market is manifold : 
  • Demand of funds is generated by them through the banking system, 
  • One of the money market instruments, viz. Commercial Papers (CPs) are issued by the corporate, 
  • They accept public deposits and also undertake activities like inter corporate deposits (ICDs) and investments.

6) Mutual Funds : 
Mutual Funds, as part of their investment activities, prefer to invest in various money market instruments, especially if their investment horizon is for a short period. They are also permitted, in addition to the SCBs, to participate in the call money market. Money Market Mutual Funds (MMMFs) have been created with the specific purpose of mobilizing short-term funds to be invested in various money market instruments. They have played a significant role in the evolution of the Indian money market.

7) Discount and Finance House of India (DFHI) :
The Discount and Finance House of India Limited (DFHI) was promoted in the year 1988 by the Reserve Bank of India in collaboration with public sector banks and all India financial institutions (AIFII) with a view to popularizing short-term money market instruments, and thereby deepening and widening the Indian money market. The present activities of DFHI includes :
  • Participation in the inter-bank call/notice money market and term deposit market, as a lender as well as a borrower, 
  • Re-discounting of instruments like 182 days treasury bills, commercial bills, Certificates of Deposits (CDs) and Commercial Papers (CPs).

Recent Developments in Indian Money Market 

On the recommendations of S. Chakravarty Committee and Narasimhan Committee, the RBI has initiated a number of reforms : 

1) Deregulation of Interest Rates : 
RBI has deregulated interest rates. Banks have been advised to ensure that the interest rates changed remained within reasonable limits. From May 1989, the ceiling on interest rates call money, inter-bank short-term deposits, bills re-discounting and inter-bank participating was removed and rates were permitted to be determined by market forces.

2) Reforms in Call and Term Money Market : 
To provide more liquidity RBI liberalized entry in to call money market. At present Banks and primary dealers operate as both lenders and borrowers. Lenders other than UTI and LIC are also allowed to participate in call money market. operations. RBI has taken several steps in recent years to remove constrains in term money market. In October 1998, RBI announced that there should be no participation of non-banking institutions in call/term money market operations and it should be purely an inter bank market.

3) Introducing New Money Market Instruments : 
In order to widen and diversify the Indian Money Market, RBI has introduced many new money market instruments like 182 days. Treasury bills, 364 days Treasury bills, CD3 and CPs. Through these instruments, the government, commercial banks, financial institutions and corporate can raise funds: through money market. They also provide investors additional instruments for investments.

4) Repo : 
Repos were introduced in 1992 to do away. With term fluctuations in liquidity of money market. In 1996 reverse repos were introduced RBI has been using Repo and Reverse repo operations to influence the volume. of liquidity and to stabilize term rate of interest or call rate. Repo rate was 6.75% in March 2011 and reverse repo rate, was 5.75%.

5) Refinance by RBI : 
The RBI uses refinance facilities to various sectors to meet liquidity shortages and control the credit conditions. At present two schemes of refinancing are in operations: Export credit refinance and general refinance. RBI has kept the refinance rate linked to bank rate.

6) MMMFs : 
Money Market Mutual Funds were introduced in 1992. The objective of the scheme was to provide an additional short-term avenue to the individual investors. In 1995, RBI modified the scheme to allow private sector. organisation to set up MMMFs. So far, three MMMFs have been set up one each by IDBI, UTI and one in private sector.

7) DFHI : 
The Discount and Finance House of India was set up on 25th April 1988. It buys bills and other short term paper from banks and financial institutions. Bank can sell their short term securities to DFHI and obtain funds in case they need them, without distributing their investments.

8) Clearing Corporation of India Limited (CCIL) : 
CCIL was registered in 2001 under the Companies Act, 1956 with the State Bank of India as Chief Promoter. CCIL clears all transaction in government securities and repose reported on NDS (Negotiated Dealing System) of RBI and also Rupee/U.S.$ foreign exchange spot and forward deals.

9) Regulation of NBFCs : 
In 1997, RBI Act was amended and it provided a comprehensive regulation for Non-Bank Financial Companies (NBFCs) sector. According to amendment, no NBFC can carry on any business of a financial institution including acceptance of public deposit, without obtaining a Certificate of Registration from RBI. They are required to submit periodic returns to RBI.

10) Recovery of Debts : 
In 1993 for speedy recovery of debts, RBI has set up special Recovery Tribunals. The Special Recovery. Tribunals provides legal assistance to banks to recover dues.

11) Merging of Banks : 
On September 4, 1993 Government of India merged the New Bank of India with Punjab National Bank.

12) Issue an Order Sanctioning and to Introduce Bill: 
On July 24, 2008 Govt. of India decided to issue an order sanctioning the Scheme of Acquisition of State Bank of Saurashtra by State: Bank of India and to introduce Bill : 
  • Repealing the State Bank of Saurashtra Act, 1950 in the Parliament.
  • To make consequential amendments in the State Bank of India (Subsidiary Banks) Act, 1959 to remove references to State Bank of Saurashtra wherever it occurs in the State Bank of India (Subsidiary) Banks Act, 1959 The Bill is called State Bank of India (Subsidiary Banks) Amendment Bill, 2008. State Bank of Saurashtra merged on 13 August, 2008.

13) Approving the Merger of its Subsidiary : 
On June 20, 2009 the State Bank of India (SBI) board has approved the merger of its subsidiary, the State Bank of Indore, with itself. This would be the second acquisition by SBI of a subsidiary bank after the merger of State Bank of Saurashtra. The State Bank of Indore board, too, has approved the merger proposal. SBI holds 98.3% in the bank, and the balance 1.77% is owned by individuals, who held the shares prior to its takeover by the government.

Money Market Instruments 

Financial instruments, which are generally common in the Indian money market, have been depicted in the following chart. Types of Money Market Instruments are as follows :

Types of money market

Bill of Exchange

Bill of exchange is also a money market instrument. which is in the form of an order in writing by the drawer of the to the drawee for the payment of money to the payee. A typical bill of exchange is the cheque, drawn by a customer (drawer), defined as bill of exchange, on his banker (drawee) and payable by the hanker to the payee on demand. Bills of exchange are mostly used in international trade. They are in the shape of written orders by a bank's constituent to his hank directing it to pay the bearer of the bill of exchange an amount as specified in that order on a date indicated in the said order. A bill of exchange, also referred to as a commercial bill, is characterized by its short tenure, negotiability, and self-liquidating nature.

A Bill of Exchange as defined under Section 5 of the Negotiable Instruments Act, 1881 is "an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the hearer of the instrument". Three parties, as indicated in the following points, are involved in a bill of exchange :

1) Drawer : 
Drawer of a bill of exchange is the person who writes/draws the bill.

2) Drawee : 
Once the bill of exchange is drawn by the drawer, it is required to be accepted by the person on whom the bill is drawn. Such a person (the acceptor) is referred to as the drawee.

3) Payee : 
Payee is the person, mentioned by the drawer in the bill of exchange, to whom (or to whose order) the money indicated of the instrument is payable.

Features of Bill of Exchange

A bill of exchange is expected to exhibit the following salient features :

1) It must be in Writing : 
A bill of exchange needs to be necessarily in writing.

2) Order to Pay : 
Bill of exchange is an order from the drawer to the drawee to pay money the payee. This is the basic characteristic of a bill of exchange. Here the term 'order' need not be taken in a literal sense to be a command. It is a sort of request or direction, indicating the drawer's intent to ensure payment to the payee by the drawee. In this regard, a moderate level of politeness is acceptable, but excessive politeness is unwarranted, as it may lack the element of order.

3) Unconditional Order : 
No condition should be associated with the order to pay in a bill of exchange. Whatever may be the circumstances, the bill must be paid to the payee by the drawee as per the order of the drawer. Any condition attached with a bill of exchange makes the instrument null and void.

4) Signature of the Drawer : 
A bill of exchange. must be signed by its drawer. In the absence of a proper signature of the drawer, an instrument rendered invalid/unacceptable in law. However, if the signature is obtained even subsequent to the issue of a bill of exchange, it is acceptable. 

5) Drawee : 
A bill of exchange must contain the name of a drawee/acceptor, who is responsible for the payment to the payee In the absence of drawee's name, the instrument is considered flawed.

6) Parties : 
There are three parties to a bill of exchange, viz. the drawer, the drawee (acceptor) and the payee. They are required to be specifically mentioned in the instrument without any room of doubt.

7) Certainty of amount : 
The amount mentioned in a bill of exchange should be definite without any ambiguity. 

8) Payment in kind is not valid : 
The order to make payment should be in terms of money only. A bill of exchange containing an order to pay anything in kind would render the instrument invalid.

9) Stamping : 
In terms of the Indian Stamp Act, a bill of exchange is required to be duly stamped. Failure to comply with this statutory requirement makes the instrument mull and void.

10) Cannot be made Payable to bearer on Demand : 
A bill of exchange is not permitted to be drawn as payable to the bearer on demand.

Advantages of Bill of Exchange 

Due to the following benefits of the hills of exchange, they are considered as one of the most popular instruments of credit, and are used in business transactions on a regular basis:

1) Framework for Relationships : 
A bill of exchange is a tool, which offers a platform for smooth business transactions between a seller and buyer and/or creditor and debtor on mutually agreed terms.

2) Certainty of Terms and Conditions : 
Various terms and conditions i.e. date, amount, place of payment, amount of interest to be paid, etc. in respect of a bill of exchange are definite and known to all the concerned parties, as such details are clearly mentioned in the instrument Therefore, there is no ambiguity in the minds of debtor or creditor.

3) Convenient Means of Credit : 
Extending credit in the form of bill of exchange is very convenient for the seller of goods (creditor), the date of payment is known to him and he is sure to get the payment on due date. He has an option of getting i payment immediately by discounting the instrument or endorsing the same in favor of a third party. As far as the buyer of goods (debtor) is concerned, he gets the convenience of buying goods on credit and making the payment after the period of credit

4) Conclusive Proof : 
Any business transaction taking place through the medium of bill of exchange is a documentary proof of the credit transaction having taken place, that the buyer has purchased goods from the seller on credit and he is bound to make the payment after the credit period is over. Legally, the buyer (debtor) cannot refuse to make payment on due date, and if he does so, the seller (creditor) has legal recourse against him. All he has to do is to approach a Notary and get a certificate from him to make it a conclusive evidence of the transaction.

5) Easy Transfer-ability : 
A debt, represented by a bill of exchange, can be transferred by way of endorsement and delivery of the instrument in favor of a third party.

Call and Notice Money Market 

Call money market is a place where borrowings and lending take place for a very short period, ranging between overnight and fortnight. The amounts lent or borrowed in this market are considered to be highly liquid, as they can be recalled/repaid at the option of either the lender or the borrower.

Call money market is dominated by the banks, who may be either lenders or borrowers. Majority of the participants (approximately 80%) are Public Sector Banks, remaining 20% of the participants are private sector banks and foreign banks. The size of the Indian call money market is between 0,000 million to 70,000 million. Non-bank entities (financial institutions such as IDBI, LIC, GIC, etc.) also participate in this market, but only as lenders. However, their role as a lender is very significant, as approximately 80% funds needed by the call money market are replenished by these non-bank entities, which are generally pulled with funds.

Features of Call Money Market 

The salient features of call money market are as under :
  • Banks and other non-bank financial institutions can manage their funds through the call money market by deploying surplus funds or by borrowing for meeting their short-term financial requirements.
  • Banks, including the primary dealers are permitted to access the market for borrowing or lending in order to manage their statutory obligation, i.e. Cash Reserve Requirement (CRR).
  • Certain financial entities like specified All-India Financial Institutions (AIFI), mutual funds, LIC, GIC, etc are entitled to participate in the market only as lender (they can't borrow from the market).
  • As far as borrowing and lending activities together are concerned, only the banks a considered to be full-fledged participants in the money market, and as such it is considered as inter-bank market. Other participants, Le. non-banking entities have limited role to play in the market.
  • Interest rates in the call money market are fast changing and decided on day-to day basis by the market forces.
  • As all the transactions (borrowings and lending) are short-term in nature, all the participants need to maintain current accounts with Reserve Bank of India.
  • Money market is the most preferred avenue for the placement of surplus funds for a short period, especially for the lenders with stable influx of funds.

Advantages of Call Money Market 

Call money market is extremely useful and beneficial for its participants in view of the following : 
  • Banks, including the primary dealers access the market for borrowing or lending with a view to managing their cash on a daily basis and also to manage their statutory obligation pertaining to Cash Reserve Requirement (CRR).
  • It offers a convenient platform for its participants for investing/lending their surplus funds on a short-term basis. Their short-term funds requirements may also be fulfilled by way of borrowing from the market.
  • Certain financial entities like specified All-India Financial Institutions (AIFI), mutual funds, LIC, GIC, etc. are allowed to access the market only. as lenders (and not as borrowers).
  • Call money market is moving towards becoming an exclusive inter-bank market.
  • With a view to ensuring promptness and efficiency in the settlement of transactions, there is a stipulation for the participants to maintain current accounts with the Reserve Bank of India.
  • Interest rates in the call money market are not prescribed; they are variable and decided by the market forces.
  • Participants with surplus funds available for a short period, find money market as the most attractive destination. It suits the lenders with stable influx of funds.

Commercial Papers (CPs)

Commercial Papers (CPs) are money market debt instruments in the form of unsecured promissory notes, which can be issued by distinguished corporate with good market reputation. Generally, banks, insurance companies, unit trust and firms the potential i of a are investors CPs. Minimum face value in a commercial paper is kept at 25 lac. Such are issued papers 1 by the companies with a view to meet the demand arising out of seasonal working capital requirements, which are of short-term nature. The issuer of Commercial Papers has an option to sell them directly or indirectly (through some agency).

Features of Commercial Papers 

The salient features of commercial papers are follows :

1) Nature : 
Commercial Papers are debt instrument which are unsecured and issued in the form promissory notes by renowned companies having a good market reputation. Holders of CP redeem the instrument at par on maturity. The are certain conditions which are required to be fulfilled by a company desirous of issuing Ch The tangible net-worth of such company should not be less than Rs.4 crore. Its working capital (fund-based) limit should also be more than Rs.4 crore, which makes the company eligible for issuing commercial papers up to 100% of its fund-base working capital limits CPs may be issued wit face value of Rs.5 lakh and multiple thereof a discount. CPs is subjected to applicable stamp duty. The companies need not approach the RBI for prior approval of the issue of CPs. Similarly, underwriting is also optional for the commercial papers issuing company. However, CP issuing company required to bear all the expenses pertaining to in issue, c.g. dealer's fees, rating agency fee charges for provision of stand-by facilities, etc Commercial Papers route for raising funds provides an opportunity for the corporate (with good rating) to borrow directly from the market It also takes the pressure off the bank funds for small and medium sized borrowers.

2) Market : 
CPs issued by top-rated corporate (private as well as public sectors) is are viewed at preferred investment opportunities by prospective investors. The Commercial Papers Market s considered a well-developed one. With effect from September 1996, Primary Dealers (PDs) were also allowed by RBI to issue CPs for supplementing their resources. As a result of this initiative taken by RBI, CP market gained further popularity.

3) Rating : 
The issuing companies are required to grade their CPs as per the instructions of RBI, IL facilitates the decision making exercise to be taken by the prospective investors as per the grade allocated by the issuer: higher the grading, better is the quality of the instrument.

4) Interest Rates : 
As the interest rates are decided by the market forces, they keep on changing frequently. The factors responsible for determining the interest rates include rating of the instrument, economic phase, the present rate of interest CPS market and call money market, conditions prevailing in the foreign exchange market, etc.

5) Marketability : 
The interest rates prevailing in the call money market and foreign exchange market are two important factors impacting the marketability of CPs. CPS demand increases if the interest rates in the other markers are unfavorable, and vice versa Investors tend to get attracted to call money market and foreign exchange market, if the interest rates ruling therein are attractive.

6) Maturity : 
With a view to making the Commercial Papers more attractive and giving a boost to CP market, the minimum maturity period of CPs was brought down in phases from 3 months to the present 15 days.

7) CPs in Lien of Working Capital: 
This is another measure taken by RBI to boost the CP market. The credit policy announced by RBI permits an automatic restoration of working capital limits on the repayment of CP by well-rated corporate. Similarly, short-term working capital loans may also be replaced by cheaper commercial papers.

Advantages of Commercial Papers 

Commercial Papers are beneficial for the investors as well as the corporate issuing them, as evident from the following :

1) Convenience and Simplicity : 
The raising of funds through Commercial Paper by corporate is the biggest benefit to its credit as it is very convenience and simple to understand. 

2) Liberty of Raising Funds : 
The corporate have the liberty of raising funds from the money market, through the issue of CPs, whenever they Find market favorable for doing so.

3) Raising Out of Scope : 
CP holders may use the instrument for raising funds from the inter corporate market - a market which is out of the purview of any regulatory/monetary authority.

4) Low-cost and Better Rate of Interest :
Commercial Papers offer an opportunity for the corporate, to raise funds at low-cost and for the a better rate of interest.

Treasury Bills (T-Bills)

Treasury bills are finance bills issued in the form of promissory notes by the Government of India on discount for a fixed short period (not more than one year). They contain a promissory clause to pay the amount stated in the instrument to the bearer thereof. By their very nature they are highly liquid, as they can be bought and sold freely in the "Treasury Bills Market".

Although all the money market instruments are characterized by their marketability, the treasury bills. are considered to be the most marketable out of all the money market securities. T-bills are the most sought after instrument because of their inbuilt simplicity (short tenure and convenience) in undertaking their transactions. For an individual investor, they offer an affordable investment opportunity.
Treasury Bills issued by the Government of India are of three types according to their tenures, they are 91 day, 182-day and 364-day. T-Bills are issued through the process of auction on weekly basis. Whereas the auction of 91 day T-Bills takes place every Wednesday, T-Bills of 182 day and 364 day duration, are auctioned on Wednesdays of every alternate week.

Features of T-Bills 

The salient features of treasury bills (T-Bills) are as under :

1) Issuer : 
Government of India resort to the issue of T-Bills with a view to manage a temporary mismatch between its receipts (revenue as well as capital) and expenditure. Subscribers of such bills are individuals and institutions, who find such instruments attractive enough to invest their surplus funds for a short period. 

2) Finance Bills : 
Treasury Bills do not represent any genuine trade transactions. They are, therefore, purely finance bills.

3) Liquidity : 
Although Treasury Bills are highly liquid, they are not sell-liquidating (which is the characteristics of genuine trade bills).

4) Vital Source : 
Treasury Bills are one of the most preferred routes for the Government of India for raising short-term funds. 

5) Monetary Management : 
Central Bank of the country (RBI) uses the Treasury Bills as one of its vital tools for injecting liquidity in the market as part of its responsibility for the monetary management.

Advantages of T-Bills

T-Bill, as one of the most important money market instruments, is advantageous to the Central Bank of the country (RBI), and other market participants in the following manner.

1) Liquidity : 
High liquidity of treasury bills makes them a popular instrument for various market players like the DFHI, STCI, commercial banks, etc. Besides it is a good source of short-term funds for the Government India. T-Bills' liquidity is additionally enhanced in view of the bank that RBI is always willing to buy/discount them.

2) No Default Risk : 
In view of supporting of the Central Government in the form of guarantee, the risk of default by the issuer (which is none other than the Government itself) remains totally eliminated.

3) Low Cost : 
DFHI offers two-way quote every day, with a thin margin, in respect of treasury bills, which makes their transaction cost at a lower level.

4) Safe Return : 
Treasury bills are a safe investment choice for the short-term investors, with a stable and assured rate of return, as the discount rates of TBs are not volatile. Instead of keeping a high level of idle cash, the investors prefer to keep them at the lowest, and invest the balance in TBS, which are considered as money equivalent (due to their high liquidity).

5) No Capital Depreciation : 
Possibilities of capital depreciation in the case of T-Bills are almost negligible, in view of their being highly liquid, safe and yielding better returns.

6) Funds Mobilization :
For the Central Government, T-Bills offer an ideal money market instrument raising short-term funds, which they need quite often for bridging the budgetary gap, which is transitory in nature.

7) Better Spread : 
T-Bills are not only auctioned on a fortnightly basis, but they are also available on tap basis. Investors find this a great help for appropriate spread of asset mix with various maturity periods.

8) Perfect Hedge : 
T-Bills may also be used as a protective mechanism against the interest rate instabilities and fluctuations prevailing in the call money markets.

Certificates of Deposits (CDs)

Certificates of Deposits (CDs) are yet another money market instrument issued by Commercial Banks (CB) and Development Financial Institutions (DFIs). They are unsecured, negotiable and short term in nature, which are payable to the beater. CDs are different from the Term Deposit in as much they involve creation of paper and are transferable between various owners before maturity. Further, they generally bear a higher rate of interest, when compared with the FDs. There exists a market for trading in CDs, which is termed as "Certificate of Deposit Market'. However, the secondary market activities in respect of CDs are limited, due to the fact that such instruments are generally held till maturity. Most of the banks resort to CDs route for borrowing in a scenario, where there is a mismatch in credit demand (which tends to be high) and incremental deposits (which tends to be rather low).

Issue of Certificate of Deposits (CDs) by a CB/DFI is subject to various guidelines and directives issued by RBI from time to time. The genesis of introduction of CD scheme by RBI may be traced back to the period when the deregulation of interest rates on deposits was taking place. Initially, the scheme envisaged issue of CDs by any scheduled commercial bank or cooperative bank (excluding land development banks) for a maturity period ranging between three months and one year. Designated Development Financial Institutions were permitted to issue CDs for a maturity period ranging between one year and three years.

Features of Certificate of Deposits 

The salient features of Certificate of Deposits (CDs) are as follows :

1) Negotiable Instruments : 
Certificates of Deposits are issued at discount to the face value at market rates by Commercial Banks (CBS) and Development Financial Institutions (DFIs). Due to the negotiable nature of CDs, various provisions of Negotiable Instruments Act, 1881 are applicable to them. 

2) Maturity : 
The minimum and maximum maturity periods of CDs are 15 days and one year respectively. 

3) Nature : 
CDs are promissory notes with fixed maturity period, and as such they can be negotiated by endorsement and delivery.

4) Ideal Source : 
CDs offer a good and safe investment opportunity for prospective investors. as their issuers, viz. commercial hanks/specified financial institutions are responsible for their timely payments.

Advantages of Certificate of Deposits 

Following advantages in favor of the Certificates of Deposits (CDs) makes them an attractive investment option :

1) Better Return : 
Returns available from the investment in CDs are more than those available from saving banks account in a bank

2) Safe Return : 
Safety of investment and assured returns are twin benefits of Certificate of deposits. It is especially meant for those investors who are interested in returns as good as those available from the equity market, but without the struggling of that market.

3) Good Long Term Effect : 
The long-term impact of the Certificate of Deposits is safely coupled with rich returns for the investors looking for these traits in their long-term investment options.

Inter Corporate Deposits (ICDs)

Inter Corporate Deposits represent the unsecured loans, which are granted by one company to another. This instrument is used by the companies. to accommodate each other, a company, having surplus funds, extends loan to another company, which is in the needs of funds. Further, a well-rated company, even if it does not have surplus funds, is allowed to borrow from the banking system for further lending to another company in the ICD market. The interest rates prevailing in this market are comparatively higher, due to the reason that for the "lending corporate the cost of funds is at a higher level. In addition, as the inter corporate deposits are unsecured in nature, they carry an inbuilt risk with them. As a consequence, the element of risk-premium is also taken into account while deciding the rates of interest.

The tenure of ICD is generally 90 days, although they may be issued for a period ranging from one day to one year. The Inter Corporate Deposits market is not that transparent in as much as some element of confidentiality is maintained by each broker with regard to his clients (both lenders and borrowers), which are not shared with other brokers. They are apprehensive of sudden fall int interest rates, if such information is not kept secret. Personal contacts play an important role behind the activities of borrowing and lending in this market.

Features of Inter Corporate Deposits

The salient characteristics of Inter Corporate Deposits are as follows : 
  • It offers a convenient and hassle-free source of short-term finance from one day to one year.
  • Processes involved in borrowing and lending are very simple.
  • Interest rates on ICDs are variable depending up on the amount and tenure involved in the deposit.
  • Borrowing through this route is fraught with risk of uncertainty, as the amount may be called-back by the lender at any time by giving a short notice.
  • Inter Corporate Deposits are out of the purview of any statute/regulation.
  • The entire Inter Corporate Deposits market functions on the foundation of personal contacts.
  • Lending in the ICD market is associated with high risk and high returns.
  • Borrowing from Inter Corporate Deposits market is useful for tiding over temporary financial constraints.

Advantages of Inter Corporate Deposits 

Inter Corporate Deposits are beneficial for the borrowers s well as lenders of the Inter Corporate Deposits market in the following manner :
  • It offers an opportunity for the deployment of surplus funds lying with a corporate for a short period.
  • Short-term financial crunch may be overcome by a corporate.
  • Procedure involved in lending/borrowing in the form of ICDs is very convenient for both the corporate.

Money Market Mutual Funds 

Money Market Mutual Funds (MMMFs) constitute a category of open-ended mutual funds, which specializes in channelizing investors' funds to the short-term money market instruments. These instruments, like other money market instruments, provide a high level of liquidity and safety of investments. Therefore, Money Market Mutual Funds are also rightly referred to as Liquid Mutual Funds'. Investment in a MMMF is considered to be the safest of all other mutual funds. The only risk they are exposed to pertains to interest rate variations. The investment portfolio of a MMMF typically consists of investment in "Treasury Bills","Commercial Papers" and "Certificate of Deposit".

A money market mutual fund may be viewed as a substitute of bank savings, with the only theoretical difference being absence of Government insurance in the case of a MMMF. Practically, a money market mutual fund is almost as good as a bank deposit as far as safety of funds is concerned. As regards return on investment. MMMF is definitely a better option, because of accrual of better income in the form of dividends, while the principal amount remains intact. The risk arising out of inflationary forces is the only risk an investment in MMMF is exposed to, which can impact the purchasing powers of investors negatively. Financial framework of a country's economy is based on two markets/pillars viz. stock market and money market. The idea of money market mutual fund is historically considered to be even older than some of the stock exchanges.

The operation of a MMMF scheme is simple and unsophisticated. Its shares, referred to as units, are subscribed by the prospective investors. The funds so channelized are invested in the most appropriate money market instruments, like treasury bills. commercial papers, certificates of deposits, etc. Such instruments may either be retained till their maturity or they may be traded from time to time depending upon the market conditions. These funds are managed by individuals having highest level of competence and professionalism. Out of all other mutual funds, MMMF is considered to be the safest one, which gives better returns The investor is assured earning a stable and sustainable return on the investments made by him, as the MMMF remain immune to the economic instabilities and volatilities. 

Features of Money Market Mutual Funds 

The distinguishing characteristics of the money market mutual funds are as follows :

1) Diversification : 
The portfolio of a money market mutual fund is required to be well diversified. Its investment in a specific instrument cannot exceed more than 5% of the total value of that money market mutual fund.

2) Maturity : 
There exists a ceiling with regard to the period for which the investments can be made by a MMMF, which is 397 days at present

3) Credit Quality : 
A minimum of 5% of the total investment needs to be in short-term categories of funds.

Advantages of Money Market Mutual Funds 

Money Market Mutual Funds are well-regulated entities with following additional advantages of making investments in such funds :

1) Safety : 
For an investor, especially those who are risk-averse, safety of their funds is foremost in their minds before making any investment. This aspect is fully taken care of by a MMMF. Even in comparison of other mutual funds, they are viewed to be the safest by all classes of investors, and as such most preferred ones.

2) Return on Investment : 
These funds get a stable but conservative type of income on the amount received from the investors, and invested by them in money market instruments. The income received is generally reinvested by purchasing a new fund.

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