Money market is an important part of economy. It plays very significant functions. However, market is for short term monetary transaction. And it provides facility for adjusting liquidity to banks, business. In addition, like non-banking financial institutions (NBFs) and other financial firms. See function of money market. Hence, check money market examples
Money market vs capital market
Similarly, money market is place for short term lending and borrowing with year. It deals in short term debt finance and investments. On other hand, Capital market refers to stock market. But share and bonds of companies are trade on recognized stock exchanges. And individual players cannot invest in money market as value of investment is large.
On other hand, in capital market anybody can make investments through broker. But, stock market is associate with high risk. And high return as against money market is more secure. Further, in case of money market transaction deals on phone or through electronic systems. Hence, capital market can trade through recognized stock exchanges only.
Money Market Instruments
Investment in money market is done throughout money market instruments. Therefore money market instrument meets short term borrower’s necessities. And it provides liquidity to lenders. Moreover, see objectives of money market. Check types of money market securities. Hence, see list of money market funds.
Types of Money Market Instruments
Similarly, money market instruments provide tools by which you can operate in money market. Therefore main instruments of money market in India are Treasury Bills. In addition, like Commercial Paper, Certificate of Deposit, Call money, Repurchase Agreements and Bankers Acceptance.
Treasury bills are one of safest money market instruments. And also know as Zero Coupon Bonds. But these instruments are short term borrowing with maturity period of less than one year. Hence, returns are not that attractive. Further T-Bills are circulated by both primary and secondary markets. Hence, in India any person includes Individuals, firms, companies, corporate bodies. In addition, like trusts and Institutions can purchase T-Bills
In addition, they come with 3-month, 6 month and 1 year maturities. Therefore this instrument is issued by RBI on behalf of Central Government. For fulfill short term requirements of funds. And they are issued at discount and are paid at par. However, low risk also means low return. Moreover, these are issued at discount to face value.
However, they are highly liquid and no risk. And buy value of T-Bill is determined by bidding process through auctions. At present, Government of India issues three types of treasury bills through auctions. Such as 91-day, 182-day and 364-day. Moreover, difference between issue and redemption price is interest payable.
Hence, they are sold by tender in weekly lots. But T-Bills are available for minimum amount of Rs 25,000 and in multiples thereof.
Commercial Paper (CP) is a short term unsecured promissory note. But with maturity period of 15 days to one year. Therefore Commercial paper is low-cost choice to bank loans. It is issued by corporate and financial institutions at discount value on face value. They are issued with fixed maturity from one to 270 days.
However, commercial papers return is high as compare to T-Bills. So it is easy to find buyers for firms with high credit ratings. These are issued for purpose of accounts receivables and inventories. Hence, these securities are actively traded in secondary market.
Repurchase Agreements are also called as Repo or Reverse Repo is short term loans. And that buyers and sellers agree for selling and repurchasing. But these transactions can be done only between parties approved by RBI. In addition, it allowed only between RBI approved securities. Like state and center government securities, T-Bills, PSU bonds and corporate bonds.
On other hand, repurchase agreement is sold by sellers with promise of purchasing. In other words, buyer will also purchase securities and other instruments. And with promise of selling they back to seller.
Bankers Acceptance is like short term investment plan. it is created by non-financial firm by guarantee from bank. And, bank guarantees that buyer will pay to seller at future date. Probably, firm can draw such bill. But these securities come with maturities between 30 and 180 days. Hence, most common term for these instruments is 90 days.
Certificate of Deposit
Certificates of deposit are short term instruments. They issued by commercial Banks and financial Institutions to individuals, corporations and companies. But they are unsecured and negotiable. Therefore when they have tight liquidity position banks issued such instruments. Because, of slow growth of bank deposits but demand for credit is high.
Further, Certificate of Deposit is like promissory note. And it issued by bank in form of certificate. But these certificate bears maturity date, value and fixed rate of interest. Therefore these certificates are available 3 months to 5 years tenure. Moreover, returns on certificate of deposits are higher than T-Bills. Hence, they carry higher level of risk.
It is short term finance used for interbank transactions. And it has one day to fifteen days maturity period. But all commercial banks are required to maintain cash balance. It is known as Cash Reserve Ratio (CRR). However, RBI keeps on changing this ratio from time to time. In addition, like day to day and sometimes from hour to hour.
However, call money is facility under which banks borrow money from each other. To maintain CRR at rate of interest known as Call Rate. Hence, increase in call money rates increase demand for other short term instruments.
This bill is exchange of bill used to finance credit sales of firms. It is short term, negotiable and self liquidity instruments. In case of goods sold on credit on specific date in future buyer is liable to make payment. Therefore if this bill is accepted by buyer it becomes marketable instrument is called trade bill. Further, if you wants funds before maturity date. You can bet bill discounted from bank.
Finally, see advantages and disadvantages of money market MF. However, check best money market mutual fund. Therefore see features of money market mutual fund. And see money market vs capital market.