CH4: MONEY MARKET

What is Money Market ?

Money market is for short term funds with maturity ranging from overnight to 1 year, whereas, capital markets are for long term funds with maturity more than an year. The main objective of central bank is to align money market rates with the key policy rates. RBI governs money market. The entities permitted to participate both as lender/borrower in money market are scheduled commercial banks(except RRBs), Cooperative banks other than land development banks and primary dealers.

Money Market Period of Lending
Call Money 1 day
Notice Money 2days to 14 days
Term Money

> 14 days

Money Market Instruments

1) Treasury Bills

  • Issued by Govt of India.
  • 91-day, 182-day, 364-days T bills are the variants.
  • Only a few institutions like state government and central bank of Nepal are allowed to participate in T bills auctions.
  • Minimum Rs. 25000

2) Certificate of Deposits (CDs)

  • Tenor of issue can range from 7 days to 1 year.
  • CDs can be issued to individuals, corporations, companies, trusts, funds, association etc.,
  • CDs are issued by commercial banks and financial institutions.
  • Minimum Rs. 1 lakh.

3) Commercial Paper

  • Issue in the form of prommisory note.
  • Corporates, primary dealers and all india financial institutions can issue
  • The minimum credit rating should be P-2 of CRISIL.
  • Tenor – 7 days to 1 year.
  • Minimum Rs. 5 Lakhs or multiples thereof.

4) Collateralized Borrowing and Lending Obligation (CBLO)

  • CBLO facilitates borrowing and lending for various tenors, from overnight up to a maximum of one year, in a fully collateralised environment.
  • Eligible securities are Central Government securities including Treasury Bills as specified by CCIL from time to time.
  • Operated by Clearing Corporation of India Ltd.

Lets Sum Up

  • Money market is for short term funds with maturity ranging from overnight to 1 year.
  • T Bills are issued by govt of India.
  • Certificate of Deposit is issued by commercial banks and financial institutions.
  • Commercial paper is issued by corporate entities.
  • CBLO facilitates borrowing and lending in a fully collateralised environment.

References:

  • “Principles & Practices of Banking”, Tata McGraw-Hill, New Delhi.
  • My Virtual Guru – http://www.mrunal.org
  • “Indian Economy “, Sankarganesh Karuppiah, Kavin Mukul Publications.

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