Money Market: All you need to know about
The money market refers to trading in very short-term debt investments. At the wholesale level, it involves large-volume trades between institutions and traders.
1-2 Questions about the financial organizations like Money Market are asked in the government exam in the General Awareness section. Here we are providing the complete information regarding the Money Market in India.
Money related Complete Information will be very helpful in the General awareness section in different competitive exams like Bank, SSC, Railways, etc.
- Financial markets in every economy have two separate segments.
- Short-term funds are for a period of 364 days (Money market).
- Long term funds are for above 364 days (Capital Market).
Note : Chakravarthy committee (1985) for first time underlined the need of an organised money market and Vahul Committee (1987) laid the blueprint for that.
Instruments of Money Market
- Treasury Bills
- Commercial Paper
- Commercial Bill
- Call Money
- Certificate of Deposits
- Cash Management Bills (CMBs)
- Issued by RBI on behalf of govt.
- Govt uses them to meet their short-term liquidity crunch.
- T-bills are sovereign zero risk instruments.
- At present, 3 types of T-bills are there: 91-day, 182-day, 364-day.
- State govt. cannot issue T-bills.
- They are issued by Market Stabilization Scheme (MSS).
- Available for a minimum amount of Rs. 25000 or in multiples of that.
- Interbank market where funds are borrowed and lent for 1 day or less.
- The money that is lent for one day in this market is known as “Call Money“, and if it exceeds one day (but less than 15 days) it is referred to as “Notice Money“.
- Duration varying from 1 to 14 days, it is called Call money Market.
- Mutual funds, scheduled commercial & cooperative banks act as both borrowers and lenders.
- LIC, GIC, NABARD, IDBI act only as lenders.
Certificate of Deposit (CDs)
- Issued by scheduled commercial banks and other financial institutions.
- RRBs and local area banks can not issue CDs.
- Issued at a discount to face value, the discount rate is negotiated between issuer and investor.
- Minimum amount to be Rs. 1 lac.
- CDs issued by banks have a maturity period: 15 days to 1 year.
- CDs issued by selected FIs have maturity period: 1 year to 3 years.
- Can be issued to individuals or firms.
Commercial Paper (CP)
- These are unsecured promissory* notes issued by large corporates, primary dealers, satellite dealers and all India FIs.
- Maturity period is between 7 days up to 1 year from date of issue.
- Minimum amount to be invested is Rs. 5 lacs or multiples of that.
- CPs need to have a credit rating from a credit rating agency.
Commercial Bills (CBs)
- Negotiable instruments which are issued by all India FIs, NBFCs, SCBs, Merchant banks & Mutual funds.
- Drawn by seller on the buyer (buyer gives seller), hence also called trade bills.
Cash Management Bills (CMBs)
- It’s a comparatively new short-term instrument issued by RBI on behalf of Govt.
- Issued to meet temporary mismatches in cash flow of Govt.
- They resemble T-bills in character but are issued for less than 91 days only.
Money Market FAQs
Q. What is Money Market?
Ans. The money market refers to trading in very short-term debt investments. At the wholesale level, it involves large-volume trades between institutions and traders.
Q. How many instruments of Money Market?
Ans. Six type of instruments of Money Market
Certificate of Deposits
Cash Management Bills (CMBs)
Q. Who should invest in Money Market Instruments?
Ans. Investors looking to park their money for short-term, and earn fixed income on the same can consider investing in money market instruments mentioned above.
Q. What is the importance of the money market in the economy?
Ans. The money market is important for the economy as it paves the way for business houses and corporations to park their temporary cash surplus, or raise short term debt through issuance of corporate bonds.
Q. Who regulates the money market in India?
Ans. Currently, the Reserve Bank of India and the Securities and Exchange Board of India (SEBI) regulate the money market in the country.
Q. How are Government Securities (G-secs) such T-Bills issued?
Ans. G-Secs are issued by the Reserve Bank of India through auctions, on its electronic platform called E-Kuber.
Q. When does the RBI conduct auctions for T-Bills?
Ans. The RBI generally conducts auctions every Wednesday, to issue T-bills with 91 days, 180 days and 364 days maturity. The central bank issues a quarterly calendar of issuance of T-bills.
Q. Who is eligible to invest in Commercial Papers (CPs)?
Ans. Individuals, corporate bodies (either registered or incorporated in India), banking companies, unincorporated bodies, Non-Resident Indians (NRIs) and Foreign Institutional Institutions (FIIs) can invest in CPs. SEBI sets up the limits on investment by FIIs from time-to-time.
Q. For what amount, can a Commercial Paper (CP) be issued?
Ans. A CP is issued in denominations of Rs. 5 lakh or its multiples, thereof.
Q. What is Treasury bills or T-bills ?
Ans. Treasury bills or T-bills, which are money market instruments, are short term debt instruments issued by the Government of India and are presently issued in three tenors, namely, 91 day, 182 day and 364 day. Treasury bills are zero coupon securities and pay no interest.
Q. What is Call Money Market?
Ans. The call money market is an essential part of the Indian Money Market, where the day-to-day surplus funds (mostly of banks) are traded. The money that is lent for one day in this market is known as “Call Money”.
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