Definition of Money Market

• Money Market = Segment of the financial market where short-term (≤ 1 year) high liquidity instruments are traded.
• Deals in securities like:
  • Treasury Bills
  • Commercial Papers
  • Certificates of Deposit
  • Call Money

Features of Money Market

• Short maturity (1 day to 1 year)
• High liquidity
• Low risk
• Wholesale market (institutions dominate)
• No fixed physical location

Importance of Money Market

1. Development of Trade & Industry

• Provides short-term working capital
• CPs, bill discounting → quick funds

2. Development of Capital Market

• Short-term interest rates influence long-term rates
• Liquidity conditions affect investment climate

3. Smooth Functioning of Commercial Banks

• Banks park surplus funds
• Helps meet:
  • CRR
  • SLR
• Liquidity adjustment

4. Effective Central Bank Control

• Enables the Reserve Bank of India to implement monetary policy efficiently

5. Indicator of Monetary Conditions

• Call money rate and repo rate reflect liquidity conditions

6. Non-Inflationary Government Financing

• Govt raises funds via Treasury Bills
• Avoids deficit monetisation

Structure of Indian Money Market

A. Unorganised Money Market

• Indigenous bankers
• Moneylenders
• Chit funds
• Poor regulation

B. Organised Money Market

• Regulated by RBI
• Institutional participants

Major Money Market Instruments in India

 Treasury Bills (T-Bills)

• Issued by the Central Government
• Maturity:
  • 91 days
  • 182 days
  • 364 days
• Zero-coupon (issued at a discount)
• Eligible for SLR

Used for short-term fiscal deficit financing

Certificates of Deposit (CDs)

• Introduced: 1989
• Issued by banks & financial institutions
• Negotiable
• Maturity:
  • Banks: 7 days–1 year
  • FIs: 1–3 years

Commercial Papers (CPs)

• Introduced: 1990
• Issued by corporate houses
• Unsecured promissory note
• Requires credit rating (CRISIL, ICRA etc.)
• Maturity: 7 days–1 year

Commercial Bills

• Used in trade financing
• Discounted by banks
• Replaced the old Bill Market scheme (1952)

Call Money Market

• Inter-bank overnight market
• Duration:
  • 1 day (Call money)
  • Up to 14 days (Notice money)
• Interest rate is closely linked with the Repo Rate

Participants:

• Borrowers & lenders: Scheduled Commercial Banks
• Only lenders: LIC, NABARD etc.

Money Market Mutual Funds (MMMFs)

• Introduced: 1992
• Short-term investment avenue
• Regulated by:
  • RBI (earlier)
  • Now, mainly Securities and Exchange Board of India

Repo & Reverse Repo

Under Liquidity Adjustment Facility (LAF):

Repo

• Banks borrow from the RBI
• Sell govt securities with a repurchase agreement

Reverse Repo

• RBI borrows from banks
• Absorbs liquidity

Key tool of monetary policy

Cash Management Bills (CMBs)

• Introduced: 2009
• Short-term (<91 days)
• Used for temporary cash mismatch
• Similar to T-bills
• Eligible for SLR

Comparison: Money Market vs Capital Market

Basis	Money Market	Capital Market
Maturity	≤ 1 year	> 1 year
Risk	Low	Higher
Liquidity	High	Moderate
Instruments	T-bills, CP, CD	Shares, Bonds

Monetary Policy Linkages

• Repo rate affects the call money rate
• Liquidity deficit/surplus is visible in the money market
• Important for inflation control