Money Market Instruments

Today, money market in India is not an integrated unit and has two segments—Unorganised Money Market and Organised Money Market

  • Before the government started the organised development of the money market in India, its unorganised form had its presence since the ancient times—its remnant is still present in the country
  • Their activities are not regulated like the organised money market, but they are recognised by the government

Reasons for persistence of Unorganised Money Market in India

  • Lack of penetration and presence of the instruments of the organised money market
  • There are many needful customers in the money market who are currently outside the purview of the organised money market
  • Entry to the organised money market for its customers is still restrictive in nature— not allowing small businessmen

The unorganised money market in India may be divided into three differing categories:

Unregulated Non-Bank Financial Intermediaries

      • These are functioning in the form of chit funds, nidhis (operate in South India, which lend to only their members) and loan companies
      • They charge very high interest rates (i.e., 36 to 48 per cent per annum), thus, are exploitative in nature and have selective reach in the economy

Indigenous bankers

      • These receive deposits and lend money in the capacity of an individual or a private firms.
      • The non-homogenous groups under this category include Gujarati Shroffs, Multani or Shikarpuri Shroffs, Marwari Kayas, Chettiars

Money Lenders

      • They constitute the most localised form of money market in India and operate in the most exploitative way

Since the government started developing the organised money market in India (mid-1980s), we have seen the arrival of a total of eight instruments designed to be used by different categories of business and industrial firms; the description of which are as follows:

Treasury Bills

  • This instrument of the money market though present since Independence got organised only in 1986
  • They are used by the Central Government to fulfil its short-term liquidity requirement up to the period of 364 days
  • Presently, only the 91-day TBs, 182-day TBs and the 364-day TBs are issued by the government
  • The TBs other than providing short-term cushion to the government, also function as short-term investment avenues for the banks and financial institutions, besides functioning as requirements of the CRR and SLR of the banking institutions

Certificate of Deposit(CDs)

  • Organised in 1989, these are used by banks and issued to the depositors for a specified period ranging less than one year, and are negotiable and tradable in the money market
  • Since 1993, the RBI has allowed the financial institutions such as IFCI, IDBI, IRBI (IIBI since 1997) and the Exim Bank to operate in this space, and these can issue CDs for the maturity periods above one year and up to three years.

Commercial Papers(CPs)

  • Organised in 1990 it is used by the corporate houses in India
  • The CP issuing companies need to obtain a specified credit rating from an agency approved by the RBI (such as CRISIL, ICRA, etc)

Commercial Bill(CB)

  • Organised in 1990, a CB is issued by the All India Financial Institutions (AIFIs), Non-Banking Finance Companies (NBFCs), Scheduled Commercial Banks, Merchant Banks, Co-operative Banks and the Mutual Funds
  • It replaced the old Bill Market available since 1952 in the country.

Call Money Market(CMM)

  • This is basically an inter-bank money market where funds are borrowed and lent, generally, for one day—that is why this is also known as over- night borrowing market (also called money at call)
  • Fund can be borrowed/raised for a maximum period up to 14 days (called short notice)
  • Borrowing in this market may take place against securities or without securities
  • Rate of interest in this market ‘glides’ with the ‘repo rate’ of the time
  • The scheduled commercial banks, co-operative banks operate in this market as both the borrowers and lenders while LIC, GIC, Mutual Funds, IDBI and NABARD are allowed to operate as only lenders in this market

Money Market Mutual Funds

  • Popular as Mutual Funds (MFs) this money market instrument was introduced/organised in 1992 to provide short-term investment opportunity to individuals
  • Since March 2000, MFs have been brought under the preview of SEBI, besides the RBI.
  • At present, a whole lot of financial institutions and firms are allowed to set up MFs, viz., commercial banks, public and private financial institutions and private sector companies.

Repos and Reverse Repos

  • Repo allows the banks and other financial institutions to borrow money from the RBI for short-term (by selling government securities to the RBI)
  • In reverse repo, the banks and financial institutions purchase government securities from the RBI (basically here the RBI is borrowing from the banks and the financial institutions)
  • These instruments have emerged as important tools in the management of the monetary and credit policy in recent years

Cash Management Bill (CMB)

  • This has been introduced since August 2009 to meet the temporary cash flow mismatches of the government
  • The Cash Management Bills are non-standard and discounted instruments issued for maturities less than 91 days
  • The CMBs have the generic character of Treasury Bills (issued at discount to the face value); are tradable and qualify for ready forward facility; investment in it is considered as an eligible investment in government securities by banks for SLR