Money Market

Money Market and its Instruments
Money Market: Money market means market where money or its equivalent can be traded.
Money is synonym of liquidity. Money market consists of financial institutions and dealers in
money or credit who wish to generate liquidity. It is better known as a place where large
institutions and government manage their short term cash needs. For generation of liquidity, short term borrowing and lending is done by these financial institutions and dealers. Money Market is part of financial market where instruments with high liquidity and very short term maturities are traded. Due to highly liquid nature of securities and their short term maturities, money market is treated as a safe place. Hence, money market is a market where short term obligations such as treasury bills, commercial papers and banker’s acceptances are bought and sold.
Benefits and functions of Money Market: Money markets exist to facilitate efficient transfer of short-term funds between holders and borrowers of cash assets. For the lender/investor, it provides a good return on their funds. For the borrower, it enables rapid and relatively inexpensive acquisition of cash to cover short-term liabilities. One of the primary functions of money market is to provide focal point for RBI’s intervention for influencing liquidity and general levels of interest rates in the economy. RBI being the main constituent in the money market aims at ensuring that liquidity and short term interest rates are consistent with the monetary policy objectives.
Money Market & Capital Market: Money Market is a place for short term lending and borrowing, typically within a year. It deals in short term debt financing and investments. On the other hand, Capital Market refers to stock market, which refers to trading in shares and bonds of companies on recognized stock exchanges. Individual players cannot invest in money market as the value of investments is large, on the other hand, in capital market, anybody can make investments through a broker. Stock Market is associated with high risk and high return as against money market which is more secure. Further, in case of money market, deals are transacted on phone or through electronic systems as against capital market where trading is through recognized stock exchanges.
Money Market Futures and Options: Active trading in money market futures and options
occurs on number of commodity exchanges. They function in the similar manner like any other
futures and options.
Money Market Instruments: Investment in money market is done through money market
instruments. Money market instrument meets short term requirements of the borrowers and
provides liquidity to the lenders. Common Money Market Instruments are as follows:
 T reasury Bills (T-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 the returns are not
so attractive. It is available both in primary market as well as secondary market. It is a
promise to pay a said sum after a specified period. T-bills are short-term securities that
mature in one year or less from their issue date. They are issued with three-month, six-month
and one-year maturity periods. The Central Government issues T- Bills at a price less than
their face value (par value). They are issued with a promise to pay full face value on maturity.
So, when the T-Bills mature, the government pays the holder its face value. The difference
between the purchase price and the maturity value is the interest income earned by the
purchaser of the instrument. T-Bills are issued through a bidding process at auctions. The bid
can be prepared either competitively or non-competitively. In the second type of bidding,
return required is not specified and the one determined at the auction is received on maturity.
Whereas, in case of competitive bidding, the return required on maturity is specified in the
bid. In case the return specified is too high then the T-Bill might not be issued to the bidder.
At present, the Government of India issues three types of treasury bills through auctions,
namely, 91-day, 182-day and 364-day. There are no treasury bills issued by State
Governments. Treasury bills are available for a minimum amount of Rs.25K and in its
multiples. While 91-day T-bills are auctioned every week on Wednesdays, 182-day and 364-
day T-bills are auctioned every alternate week on Wednesdays. The Reserve Bank of India
issues a quarterly calendar of T-bill auctions which is available at the Banks’ website. It also
announces the exact dates of auction, the amount to be auctioned and payment dates by
issuing press releases prior to every auction. Payment by allottees at the auction is required to
be made by debit to their/ custodian’s current account. T-bills auctions are held on the
Negotiated Dealing System (NDS) and the members electronically submit their bids on the
system. NDS is an electronic platform for facilitating dealing in Government Securities and
Money Market Instruments. RBI issues these instruments to absorb liquidity from the market
by contracting the money supply. In banking terms, this is called Reverse Repurchase
(Reverse Repo). On the other hand, when RBI purchases back these instruments at a specified
date mentioned at the time of transaction, liquidity is infused in the market. This is called
Repo (Repurchase) transaction.
continued tomorrow----
Topics of tomorrows will be

Repurchase Agreement
Commercial Papers

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