Money Market Instruments in India - Meaning, Types & Uses

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According to the Reserve Bank of India, Money Market is a market in which short-term financial assets can be traded. These assets can be used as a substitute for money, and they facilitate the exchange of funds in both the primary and second markets. The term "short-term" usually refers only to loans that last for less than a year. The money market is an instrument that facilitates borrowing and lending of short-term funds. Money Market Instruments can be used to help one trade in the money market. This article will discuss Money Market Instruments as well as the different aspects.


Money Market

Money Market is only one part of a larger financial market. It also includes smaller sub-markets like the acceptance market, bill market and call money market. Two characteristics of instruments traded on the Market include:

• The Short Maturity Period
• High liquidity

Deals in Money Market cannot be made or paid in cash/money. Instead of liquid finances, instruments such as Treasury Bills and Promissory notes, Government Papers, etc., can be used.
Transactions in Money Market must be done through formal documentation, oral and written communication. Brokers are not allowed to conduct it. The money market is dependent on institutions such as commercial banks, acceptance houses and non-banking financial companies (NBFCs).


Objectives of the Money Market

These are just a few of the many essential goals that the Money Market maintains in the overall economy.
• Money Markets are not only useful for storing short-term surplus funds, but they also help to reduce short-term deficits.
• It allows short-term fund users the ability to meet their needs at a fair price.
• It assists the Reserve Bank of India (RBI), the central bank of India, in regulating the liquidity of financial assets.
• The Market is a tool for developing trade and industry, as well as other markets like the Capital Market.
• It facilitates the smooth operation of commercial banks.
• The Money Market is a key component of designing effective monetary policies.


Money Market Instruments

The Money Market Instruments play a vital role in the operation of the Money Market. These instruments can be used to help one trade in the money market. These instruments serve two purposes: they allow borrowers to meet short-term needs and provide liquidity for lenders. Repurchase Agreements (Treasury Bills), Banker's Acceptances, Commercial Papers, Certificate of Deposits, and Banker's Acceptance are some of the most popular money market instruments.


MMI Characteristics

Money Market Instruments are available to finance short-term cash needs for businesses, governments and other financial institutions. These are the most prominent features of Money Market Instruments.
Safety: Money market instruments are safer than shares or mutual funds. This is their main advantage. Money market instruments can also provide decent rates of return over the life of the investments.
Liquidity: High liquidity: Money Market Instruments are highly liquid. Investors can reap the rewards of the market's liquidity in a very short time. They can choose the right instruments to suit their needs.
Yield: Money Market Funds offer great flexibility in regards to investments, as they can be issued or withdrawn for short periods.

 

Types of MMI

Before making a decision, investors should be familiar with the following types of money market instruments:

Treasury Bills

Treasury Bills are one of the most secure money market instruments. This short-term borrowing instrument was issued by the RBI to the Central Government. These instruments are ideal for zero-risk. The returns might not be as attractive, however. Both the primary and secondary markets can access it. Treasury bills are basically a promise to pay a specified amount within a predetermined time frame. These bills can mature within a year of their issue date. They are typically issued with a maturity period of 3 months, 6 month, or 1 year.

Repurchase Agreements/ Repo Transaction/Reverse Repo Transaction

Repo Transactions are short term loan transactions in which two parties agree to sell or repurchase the same security. This can be used to lend or borrow overnight. These transactions can only be completed by parties that have been approved by the RBI. The seller agrees that certain securities will be sold under the condition that they are repurchased at a mutually agreed price and date. The transaction is referred to as a Repo Transaction if it is viewed from the perspective the seller and a Reverse Repo if it's viewed from that of the buyer.

Commercial Papers (CPs)

The cost-effective alternative to bank loans is commercial papers. A short-term, unsecured promissory notes issued by corporate and financial institutions with a face value less than the actual face. They have a fixed maturity of between 1 and 270 days. They can be used to finance inventories, accounts receivables and short-term liabilities. They have a higher return than Treasury Bills. But, they are less secure and have a lower chance of default. Commercial Papers cannot be considered as zero-risk instruments. Because they are not backed with collateral, only entities with high credit ratings will find buyers.

Certificate of Deposits (CDs)

This is a short-term borrowing account that is in many ways similar to a bank deposit account. The bank issues certificates of deposit, which are promissory notes in the form a certificate. A CD entitles the bearer to receive interest from a bank. CDs come with a maturity date and a fixed interest rate. They can be issued in any denomination and stamped with endorsement. A CD can be used for 3 to 5 years, but the holder cannot withdraw funds at any time. The funds can be withdrawn upon payment of a penalty. Because it involves higher risk, the MMIs have higher returns than Treasury Bills.

Banker's acceptance (BA)

A Banker's acceptance is a short-term credit investment made by a non-financial company. Banks often guarantee this to make payments. It is simply a bill of exchange that has been signed by the individual and approved by a bank. The buyer promises to pay the seller a certain amount by a specified date. The buyer's banker promises the same. A claim on the goods can be used as collateral. To trade the BA, the person making the bill must have outstanding credit ratings. A BA term is generally 90 days. They can vary from 30 days to 180.

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