Question

Discuss briefly the instruments of money market.

Answer 1

• Money market is a market for short term assets or instruments, whose maturity period is one year or less. Both, secured and unsecured instruments are traded in money market.
• The main instruments of money market are as follows:
  1. Treasury bills
  2. Commercial papers
  3. Certificate of deposits,
  4. Commercial bills and
  5. Call/Notice money

1. Treasury bills:

• When the central government is in need of funds for short term, it issues treasury bills into the financial market.
• A treasury bill is a short term financial instrument (government security). It is issued by Reserve Bank of India on behalf of Government of India.
• Treasury bill is an important component of money market all over the world.
• Treasury bill is also known as ‘T-Bills’.

2. Commercial paper:

• The way central government issues T-bills to fulfill its financial needs, commercial papers are issued by large private corporations having very high and strong reputation as well as financial credit in the market.
• Banks, large private institutions, etc. can issue commercial papers.
• Commercial paper is an unsecured and short term document just like a promissory note.
• Commercial papers can be issued for minimum seven days and maximum one year. It is regulated by Reserve Bank of India.

3. Certificate of deposits:

• A certificate of deposit (CD) is a money market instrument to procure short term finance from people.
• CD can be issued to individuals, firms, companies, etc. by scheduled commercial banks and financial institutions.
• Minimum amount of CD is ₹ 1 lakh. The banks pay a specific interest on these CDs.

4. Commercial bills:

• When a buyer purchases goods on credit, the seller draws a commercial bill on buyer. It is an unconditional order to pay specified amount of goods in full.
• Commercial bill is negotiable and arises out of business transactions.
• There are many types of commercial bills such as exchange bill, hundi, inland bill, demand bill, foreign bill, etc.

5. Call and notice money: Call money:

• In day to day transactions it is quite likely that each bank faces a shortage of money even for as short as 24 hours or even lesser. In such cases the bank may borrow money from another bank at an interest rate which is determined by the shortage of money or say demand or supply pattern in the market.
• This money is known as ‘Call money’ or ‘Inter-bank-call money’.
• Notice money: When money is borrowed or lent for 2 to 14 days, it is called notice money.