Money Market Instruments
There are many kinds of Instruments available in Money Market. In India, till 1986, only a few instruments were available. They were as follows:
(i) Treasury Bills in the Treasury Market
(ii) Money at Call and Short Notice in the Call Loan Market
(iii) Commercial Bills and Promissory Notes in the Bill Market
Now in addition to the above, the following new instruments come into existence:
(i) Commercial Papers
(ii) Certificate of Deposits
(iii) Inter-Bank participation Certificates.
(iv) Repo Instruments.
These instruments are brieflty highlighted in this chapter.
A market for the purchase and sale of Treasury Bills is known as a “Treasury Bills Market”.
Treasury bills are very popular and enjoy a higher degree of liquidity since they are issued by the Government. A Treasury bill is nothing but a promissory note issued for a specified period stated therein. The Government promises to pay the specified amount mentioned therein to the bearer of the instrument on the due date. The period does not exceed a period of one year.
Treasury Bills incorporate the following general features.
2. Finance Bills
4. Vital Source
5. Monetary Management
Treasury Bills are issued to the public and other financial institutions for meeting the short-term financial requirements of the Central Government. These bills are freely marketable and they can be bought and sold at any time and these bill are tradable in secondary market as well.
On the basis of periodicity, Treasury Bills may be classified into three. They are:
1) 91 days Treasury Bills
2) 182 days Treasury Bills and
3) 364 days Treasury Bills
Ninety one days Treasury Bills are issued at a fixed discount rate of 4 per cent as well as through auctions. The RBI holds 91 days and 182 Treasury Bills and they are issued on tap basis throughout the week. 364 days Treasury Bills do not carry any fixed rate. The discount rate on these bills are quoted in auction by the participants and accepted by the authorities. Such a rate is called cut off rate.
Certificate of Deposits are short-term deposit instruments issued by banks and financial institutions to raise large sums of money. Certificate of Deposits are issued in the form of usance promissory notes. They are easily convertible in nature and are in marketable form having particular face value and maturity. The Certificate of Deposit is transferable from one party to another. Due to their negotiable feature, they are also known as negotiable certificate of deposit.
The Issuers of Certificate of Deposits are Commercial Banks, Financial Institutions, etc.,
Certificate of Deposits are available for subscription by individuals, corporations, trusts, associations and NRIs. It is a document of title to a time deposit. It is a bearer certificate and is negotiable in the market.
1. Document of title to time deposit
2. It is unsecured negotiable instruments.
3. It is freely transferable by endorsement and delivery.
4. It is issued at discount to face value.
5. It is repayable on a fixed date without grace days.
A bill of exchange issued by a commercial organization to raise money for short- term needs. These bills are of 30 days, 60 days and 90 days maturity.
The Commercial Bill is an instrument drawn by a seller of goods on a buyer of goods. It possesses the advantages like self-liquidating in nature, recourse to two parties, knowing exact date of transactions, transparency of transactions etc.,
The features of the Commercial Bills are as follows:
8. Credit Rating
a. Demand Bills
A demand bill is one wherein no specific time of payment is mentioned. So, demand bills are payable immediately when they are presented to the drawee.
b. Clean bills and documentary Bills
Bills that are accompanied by documents of title to goods are called documentary bills. Clean bills are drawn without accompanying any document.
E.g. Railway Receipt and Lorry Receipt
c. Inland bills and Foreign Bills
Bills that are drawn and payable in India on a person who is resident in India are called inland bills. Bills that are drawn outside India and are payable either in India or outside India are called foreign bills.
d. Indigeneous Bills
The drawing and acceptance of indigenous bills are governed by native custom or usage of trade.
e. Accommodation Bills
Accommodation bills are those which do not arise out of genuine trade of transactions.
A market whereby the Government or gilt-edged securities can be bought and sold is called ‘Government Securities Market’.
Government securities are issued for the purposes of refunding the maturing securities, for advance refunding securities, which have not yet matured and for cash financing, i.e., raising fresh cash resources.
Government Securities plays a significant role in the Indian Money Market. The characteristics of Government Securities are discussed below:
Government securities are issued by agencies such as Central Government, State Governments, semi-government authorities like local Government authorities, e.g. municipalities, autonomous institution such as metropolitan authorities, port trusts etc.,
2. RBI Special Role
RBI takes a special and an active role in the purchase and sale of these securities as part of its monetary management exercise.
3. Nature of Securities
Securities offer a safe avenue of investment through guaranteed payment of interest and repayment of principal by the Government.
4. Liquidity Profile
The liquidity profile of gilt-edged securities varies. Accordingly liquidity profile of securities issued by Central Government is high.
5. Tax Rebate
A striking feature of these securities is that they offer wide-range of tax incentives to investors. This has made these securities very popular for this benefit.
As each sale and purchase has to be negotiated separately, the Gilt-Edged Market is an Over-The-Counter Market. The Government securities market in India has two segments namely primary market and secondary market.
The securities of Central and State Government take such forms as inscribed stock or stock certificate, promissory note and bearer bond.
The participants in Government securities market include the Government sector comprising Central and State Governments whose holdings represent governmental transfer of resources.
Although the secondary market for Government securities is narrow, small and less active, banks and corporate holders who purchase and sell Government securities on the stock exchanges participate in trading.
10. Issue Mechanism
The Public Debt Office (PDO) of the RBI undertakes to issue government securities.
11. Issue opening
A notification for the issue of the securities is made a few days before the public subscription is open.
12. Grooming Gradual
Acquisition of securities nearing maturity through the stock exchanges by the RBI in order to facilitate redemption is described as ‘grooming’.
The purchase of one security against the sale of another security carried out by the RBI in the secondary market as part of its open market operations is described as ‘Switching’.
A method of trading whereby merchants bid against one another and where the securities are sold to the highest bidder is known as ‘auctioning’
London Money Market is the oldest, most developed and leading MoneyMarket in the world.
New York Money Market is ranked as the second well-developed Money Market in the world next only to the London Money Market.
For Own Thinking
If you earn money, which investment plan would you like?
1. Mutual Funds
4. Treasury Bill
5. Commercial Bill
6. Certificate of Deposit Why? Give reasons.
Certificate of Deposits
For Future Learning
How to Invest Money in Money Market Funds?
Gathering information about Money Market Funds
Learn about money market
Understand the goal of money market funds.
Learn the disadvantages of money market funds.
Investing in Money Market Funds
Understand the different types of Money Market Funds
Understand the purpose of Money Market Funds
Compare past yields
Buying and Tracking of Money Market Funds