Topic 01 of 5 · Chapter 06 · Indian Economy
Money Market — Instruments & Participants
Treasury Bills, Commercial Papers, Certificates of Deposit, Call Money — all money market instruments explained.
📋 In This Article
1. What is Money Market?
The money market is a market for short-term funds — borrowing and lending for periods up to one year. It deals in highly liquid, low-risk instruments.
⭐ Money Market vs Capital Market:
• Money Market: Short-term (up to 1 year); high liquidity; low risk; instruments: T-bills, CPs, CDs
• Capital Market: Long-term (more than 1 year); lower liquidity; higher risk; instruments: shares, bonds, debentures
• Money Market: Short-term (up to 1 year); high liquidity; low risk; instruments: T-bills, CPs, CDs
• Capital Market: Long-term (more than 1 year); lower liquidity; higher risk; instruments: shares, bonds, debentures
2. Money Market Instruments
| Instrument | Issuer | Maturity | Key Feature |
|---|---|---|---|
| Treasury Bills (T-Bills) | Government of India | 91, 182, 364 days | Zero coupon; issued at discount; safest instrument |
| Commercial Paper (CP) | Corporates, FIs | 7 days to 1 year | Unsecured; issued at discount; minimum ₹5 lakh |
| Certificate of Deposit (CD) | Banks, FIs | 7 days to 1 year | Issued by banks to raise funds; negotiable |
| Call Money | Banks | 1 day (overnight) | Banks borrow/lend overnight; rate = call money rate |
| Notice Money | Banks | 2-14 days | Short-term borrowing between banks |
| Term Money | Banks | 15 days to 1 year | Longer-term inter-bank borrowing |
| Repo/Reverse Repo | RBI/Banks | Overnight to 14 days | RBI’s key monetary policy tool |
💡 Treasury Bills — Example
The government needs ₹100 crore for 91 days. It issues a 91-day T-Bill.
Face value: ₹100 crore
Issue price: ₹98 crore (issued at discount)
After 91 days, government pays back ₹100 crore
Investor’s profit: ₹2 crore (the discount = interest)
Face value: ₹100 crore
Issue price: ₹98 crore (issued at discount)
After 91 days, government pays back ₹100 crore
Investor’s profit: ₹2 crore (the discount = interest)
T-Bills are the safest investment because they are backed by the government. That’s why they are called “risk-free” instruments.
3. Participants in Money Market
- Reserve Bank of India (RBI): Regulates money market; conducts OMOs (Open Market Operations)
- Commercial Banks: Major participants; borrow and lend in call money market
- Government: Issues T-Bills to meet short-term cash needs
- Corporates: Issue Commercial Papers to raise short-term funds
- Mutual Funds: Invest in money market instruments (liquid funds)
- Primary Dealers: Underwrite government securities; market makers
4. Key Points for Exam
🔑 Must-Remember Facts
- Money market = short-term funds (up to 1 year)
- T-Bills issued by: Government of India; maturities: 91, 182, 364 days
- T-Bills = zero coupon; issued at discount
- Commercial Paper issued by: corporates; minimum ₹5 lakh
- Certificate of Deposit issued by: banks
- Call Money = overnight borrowing between banks
- RBI regulates money market through OMOs (Open Market Operations)
- Safest money market instrument: Treasury Bills
- CBLO = Collateralised Borrowing and Lending Obligation (replaced by TREPS)