Money Market

The Money Market is a market for lending and borrowing of short-term funds. It deals in funds and financial instruments having a maturity period of one day to one year. It covers money and financial assets that are close substitutes for money. The instruments in the money market are of short term nature and highly liquid.

Organized Money Market Instruments and Features

• Call and Notice Money Market: Under call money market, funds are transacted on overnight basis. Under notice money market funds are transacted for the period between 2 days and 14 days. Generally, banks rely on the call money market where they raise funds for a single day. The main participants in the call money market are commercial banks (excluding RRBs), cooperative banks and primary dealers.
• Treasury Bills (T-Bills): T-Bills are short-term securities issued by RBI on behalf of Government of India. They are the main instruments of short term borrowing by the Government. At present, the Government of India issues three types of treasury bills through auctions, namely – 91 days, 182-day and 364-day treasury bills.
• Commercial Bills: Commercial bill is a short-term, negotiable, and self-liquidating instrument with low risk. They are negotiable instruments drawn by a seller on the buyer for the value of goods delivered by him. Such bills are called trade bills. When trade bills are accepted by commercial banks, they are called commercial bills. Generally, the maturity period is upto 90 days. During the usage period, if the seller is in need of funds, he may approach his bank for discounting the bill.
• Certificates of Deposits (CDs): CDs are unsecured, negotiable promissory notes issued at a discount to the face value. They are issued by commercial banks and development financial institutions. CDs are marketable receipts of funds deposited in a bank for a fixed period at a specified rate of interest.
• Commercial Papers (CPs): CPs is an unsecured money market instrument issued in the form of a promissory note with fixed maturity. They indicate the short-term obligation of an issuer. They are quite safe and highly liquid. They are generally issued by the leading, nationally reputed, highly rates and credit worthy large manufacturing and finance companies is the public as well as private sector.
• Money Market Mutual Funds (MMMFs): RBI introduced MMMFs in April 1992 to enable small investors to participate in the money market. MMMFs mobilize savings from small investors and invest them in short-term debt instruments or money market instruments such as call money, repos, treasury bills, CDs and CPs.

Unorganized Sector of Indian Money Market

• Indigenous Bankers: They are financial intermediaries which operate as banks, receive deposits and give loans and deals in ‘hundies’. The ‘hundi’ is a short-term credit instrument. It is the indigenous bill of exchange. The rate of interest differs from one market to another and from one bank to another.
• Money Lenders: They are those whose primary
• business is money lending. Money lenders predominate in villages. However, they are also found in urban areas. Interest rates are generally high. Large amount of loans are given for unproductive purposes. The borrowers are generally agricultural labourers, marginal and small farmers, artisans, factory workers, small traders, etc.
• Financial Intermediaries: They consist of Chit Funds, Nidhis, Loan companies and others.
• Chit Funds: They are saving institutions. The members make regular contribution to the fund. The collected funds are given to some member based on previously agreed criterion (by bids or by draws). Chit Fund is more famous in Kerala and Tamil Nadu.
• Nidhis: They deal with members and act as mutual benefit funds. The deposits from the members are the major source of funds and they make loans to members at reasonable rate of interest for the purposes like house construction or repairs. They are highly localized and peculiar to South India. Both chit funds and Nidhis are unregulated.
• Finance Brokers: They are found in all major urban markets especially in cloth markets, grain markets and commodity markets. They are middlemen between lenders and borrowers.