Money market instruments have a maturity of one year or less. Both safe and non-safe
A variety of instruments are traded in the money market. The main instruments of money market are: (1) Treasury bill, (2) Commercial paper, (3) Certificate of deposit, (4) Commercial bill (5) Call/notice money.
- Treasury Bills: Treasury bills are short-term financial instruments issued by the Reserve Bank of India on behalf of the Government of India. Treasury bills are an important component of money markets all over the world. The government borrows money for a short period of time through treasury bills. Cash has the property of liquidity as the maturity date of treasury bill is 91 days or 182 days or 364 days. Treasury bills are zero coupon bonds, as no interest is paid on treasury bills. Excess is released and returned at original cost. D. Eg, if a treasury bill of Rs 25,000 is issued for ₹ 23,500 and the principal amount of ₹ 25,000 is paid to the investor at maturity, the difference between the two amounts is called the return to the investor. Treasury Bills are also known as ‘T-Bills’.
- Commercial Papers (Commercial Papers): Commercial papers have become very popular worldwide after 1980s. The Reserve Bank of India first issued commercial paper in January 1990. Commercial paper is an unsecured and short-term promissory-like document. It is a means of obtaining short-term funds. Corporate entities with high creditworthiness that have strong financial position issue. Is a transferable instrument, hence subject to replacement.
Companies and financial institutions can issue for a minimum term of seven days and a maximum of one year. Commercial paper is controlled by the Reserve Bank of India. It is issued in denominations of ₹ 5 lakh and above and is also known as finance paper, industrial paper and corporate paper.
- Certificate of Deposits : Certificate of Deposit is an unsecured, negotiable and short term instrument of finance. Schedules may be issued by commercial banks and financial institutions. A certificate of deposit is completely different from a Fixed Time Deposit Receipt deposited in a bank. Certificate of Deposit is transferable and salable; Whereas Fixed Term Deposit Receipts are non-transferable and cannot be sold. Schedule merchant banks are free to issue as per their requirement subject to certain conditions. The value of the certificate of deposit should be at least ₹ 1 lakh.
- Commercial Bills: When goods are purchased on credit, the seller
A merchant writes a commercial bill on a buyer of goods on credit. Commercial bills are negotiable and business
arising out of transactions. There is an unconditional order to pay a certain amount in full. There are many types of commercial bills. Like, bill of exchange, dowry, inland bill, demand bill, foreign bill etc.
When the seller writes on the buyer, this bill becomes a ‘Trade Bill’ and when the merchant bank accepts this bill, this bill becomes a ‘Commercial Bill’. A merchant bank passes this bill in excess. If the bank needs money, it can re-extend to the financial institutions. Commercial bills are usually for 30, 60 or 90 days.
- Call and Notice Money: Commercial banks have to maintain a minimum cash balance, called cash reserve, as per Reserve Bank regulations. A bank borrows money from another bank to maintain a minimum cash balance. All banks have to maintain a cash reserve ratio. For this reason the call money market has become an important component of the money market. The call money market consists of call money and notice money. No deduction is required for call money and notice money.
- Call Money: When money is lent or borrowed for a single day, it is called call money. Call Money is a same day transaction. Since mostly banks participate in the call money market, it is called ‘Inter-Bank-Call Money Market’.
As per Reserve Bank rules, all commercial banks have to maintain a cash reserve ratio. Hence a bank that is short of cash borrows money from another bank that has excess cash. In short, a day loan means call money.
