Instruments of Money Market

Call Money: it is a loan instrument which deals for a period ranging between one day and overnight to 14 days. It is an inter-bank instrument. It is also called as Overnight borrowing market. It is mostly used by banks to cover the cash reserve ratio requirement with the RBI for an overnight.  It is the most appropriate indicator of liquidity in the market. Scheduled commercial banks (excluding RRBs), co-operative banks (other than Land Development Banks) and Primary Dealers (PDs), are permitted to participate in call/notice money market both as borrowers and lenders.

Notice money: If the financial institutions need funds for more days, it can avail money through notice market. Here, the loan is provided from two days to fourteen days.

Term Money: Term Money’ refers to borrowing/lending of funds for period exceeding 14 days.

Treasury bills: it is the short-term liability of the government of India. They are used by the government to fulfil the short-term liquidity requirements up to a period of 364 days. Except the RBI no other institution owns treasury bills. It is issued in the form of zero-coupon securities and pays no interest. This is used to reduce the money supply in the Economy. This is regarded as the safest form of investment because government is the issuing authority. T-bills are issued on discounted price and when it matured it gets the face value of bill.

For e.g., Face value of T-bill – Rs.1000 you buy at discount price say Rs.900. At the time of maturity, you get Rs.1000 – Rs.100 works as interest / return when you get. It can be bought by individuals and commercial banks.

Types of treasury bills:

• 91-day treasury bill (i.e., its period of maturity is 91 days)
• 182 days treasury bill
• 364-day treasury bill
• 14 days (intermediate TBs)
• 14 days (auction able TBs)

Only the first 3 varieties are used in India.

Certificate of Deposits: It is a negotiable certificate issued by a bank to depositors of funds which remain in deposit for a specified period.  It is issued by Financial Institutions like all banks except Local banks and RRB & NBFC and it is issued for a specific Purpose. It requires minimum investment amount is Rs.1 lakh and can be invested in multiples of 1 lakh only.  It has fixed maturity date, interest rate, and Restrict access to funds until the maturity date of investment.

Commercial paper: It is an instrument with corporate houses for raising short term funds. It is issued by corporate companies to raise money. Minimum of Rs.5lakhs and further multiples of Rs.5lakhs. It is unsecured, short term debt instrument, like promissory note.

Promissory note (P-notes) is nothing, but it contains a written promise by issuer to pay sum of money to payee/buyer at a specified future date. It is easily traded in market.

Commercial bill: it is a bill drawn from one merchant firm on another. It is issued by All India financial Institutions, NBFCs, Scheduled commercial banks, cooperative banks, mutual funds etc.

Way and mean Advances: RBI gives temporary loan facilities to the centre and state government as a banker to government. This temporary loan facility is called way and mean advances. (i.e.) for temporary mismatches in the Receipt and payment of the government.