Money market

The essentials

The money market is the market for short-term funds that deals in monetary assets whose period of maturity is up to one year. These instruments are close substitutes for money. Major participants include the Reserve Bank of India (RBI), commercial banks, non-banking finance companies, state governments, large corporate houses and mutual funds. The money market has no single physical location; dealings take place over the telephone and electronically.

Key points

• Treasury bill: a short-term borrowing instrument of the Government of India, issued by the RBI on its behalf, with maturity of less than one year. It is issued at a discount and redeemed at par, so it is also called a zero-coupon bond.
• Commercial paper: a short-term, unsecured promissory note issued by large and creditworthy companies, with a maturity ranging from about 15 days to one year. It is often used for bridge financing (meeting floatation costs before raising long-term funds).
• Call money: short-term finance repayable on demand, with a maturity of one day to fifteen days, used mainly for interbank transactions. The interest paid is the call rate.
• Certificate of deposit: an unsecured, negotiable, short-term instrument in bearer form, issued by commercial banks and development financial institutions.
• Commercial bill: a bill of exchange used to finance the working capital needs of firms. A trade bill accepted by a commercial bank becomes a commercial bill, which can be discounted with a bank.
• Money market instruments generally offer high liquidity, low risk and lower returns.

Exam tips

• Remember which instrument is issued by whom: treasury bills by the RBI for the government, commercial paper by companies, certificates of deposit by banks.
• Call money is the shortest-term instrument.

Common mistakes

• Saying commercial paper is secured. It is unsecured.
• Saying treasury bills pay regular interest. They are issued at a discount and redeemed at face value.