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Types of Money Market Instruments

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20 views2 pages

Types of Money Market Instruments

Uploaded by

Chinmai Chelboina
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Types of Money Market Instruments

The following are the types of money market instruments that every investor must be aware
of before making a decision.

Treasury Bills
One of the safest money market instruments is Treasury Bills. This is a short-term borrowing
instrument that has been issued by the RBI for the Central Government NOTE STATE
GOVERNMENT cannot issue treasury bills. They are an ideal zero-risk instrument. However,
the returns may not be so attractive. It is accessible to both, the primary and the secondary
Market. Treasury Bills are essentially a promise to pay a certain determined amount after a
pre-determined time period. These bills are short-term securities and mature in a year or
less from their date of issue. Typically, they are issued with a maturity period that lasts for 3
months, 6 months and 1 year.

Repurchase Agreements/ Repo Transaction/ Reverse Repo Transaction


Repo Transactions are short-term loan transactions where two parties agree to sell and
repurchase the same security. This is generally used for overnight borrowing and lending.
These transactions may only be executed by parties who are approved by the RBI and
through RBI-approved securities. Under such an agreement, the seller agrees to sell specific
securities under the condition that the same would be repurchased at a mutually
determined price and date. Hence, the transaction is called a Repo Transaction when viewed
from the perspective of the seller, and Reverse Repo when seen from the buyer’s point of
view.

Commercial Papers (CPs)


Commercial Papers are considered to be cost-effective alternatives to bank loans. It can be
defined as a short-term unsecured promissory note issued by financial and corporate
institutions at a value lesser than the actual face value. They are generally issued with a fixed
maturity that ranges between 1 to 270 days. They are used to finance accounts receivables,
inventories and meets short-term liabilities. They yield a much higher return when
compared to Treasury Bills. However, security is less, and the chances of default are quite
negligible. Commercial Papers are not considered zero-risk instruments. Only entities with
high quality in credit ratings would find buyers easily as they are not backed by any
collateral.
Certificate of Deposits (CDs)
It is considered a short-term borrowing and in many ways is similar to a bank term deposit
account. Certificates of Deposits are promissory notes issued in the form of a certificate by
the bank. CDs entitle the bearer to receive interest by a bank. However, CDs have a maturity
date along with a value and a fixed rate of interest. It can be issued in any given
denomination, and are stamped and transferred through endorsement. The term of a CD
ranges from 3 months to 5 years although restricts the holder to withdraw any funds on
demand. However, the funds can be withdrawn on payment of a specific penalty. The
returns on such MMIs are higher than Treasury Bills as it involves a higher level of risk.

Call money market


The call money market (CMM) the market where overnight (one day) loans can be availed
by banks to meet liquidity. Banks who seeks to avail liquidity approaches the call market as
borrowers and the ones who have excess liquidity participate there as lenders. The CMM is
functional from Monday to Friday. Banks can access CMM to meet their reserve
requirements (CRR and SLR) or to cover a sudden shortfall in cash on any particular day.
Effectively, the Call Money Market is the main market-oriented mechanism to meet the
liquidity requirements of banks.
Notice money market
The call money is usually availed for one day. If the bank needs funds for more days, it can
avail money through notice market. Here, the loan is provided from two days to fourteen
days.
Cash Reserve Ratio (CRR)
The Cash Reserve Ratio in India is decided by RBI’s Monetary Policy Committee in the
periodic Monetary and Credit Policy. The Reserve Bank of India takes stock of the CRR in
every monetary policy review, which, at present, is conducted every six weeks. CRR is one of
the major weapons in the RBI’s arsenal that allows it to maintain a desired level of inflation,
control the money supply, and also liquidity in the economy. The lower the CRR, the higher
liquidity with the banks, which in turn goes into investment and lending and vice-versa.
Higher CRR can also negatively impact the economy as lesser availability of loanable funds,
in turn, slows down investment. It thereby reduces the supply of money in the economy.

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