Types of Money Market Instruments in India

The money market is a monetary system of lending and borrowing of short-term

funds. After the globalization initiative in 1992, India has witnessed a growth in its
money markets. Financial institutions have been employing money market
instruments to finance the short-term monetary requirements of industries such
as agriculture, finance and manufacturing. The money markets have performed
well in the past 20 years.

The Reserve Bank of India (RBI) has been playing the key role of regulator and
controller of such money markets. The RBI intervenes regularly to curb crisis
situations, such as liquidity crunching in the markets, by reducing the cash
reserve ratio (CRR) or by pumping in more money.
Types of Money Market Instruments in India

1. Money market instruments provide for borrowers' short-term needs and

gives needed liquidity to lenders. The types of money market instruments are
treasury bills, repurchase agreements, commercial papers, certificate of
deposit, and banker's acceptance.

Treasury Bills (T-Bills)

2. Treasury bills began being issued by the Indian government in 1917. They
are short-term instruments issued by the Reserve Bank of India. They are
one of the safest money market instruments because they are risk free, but
the returns from this instrument are not very large. The primary as well as the
secondary markets circulate this instrument. They have 3-month, 6-month
and 1-year maturity periods. T-bills are issued with a separate price from their
face value. The face value is achieved upon maturity, as is the interest
earned on the buy value. The buy value is set by a bidding process in
auctions.

Repurchase Agreements

3. Repurchase agreements are also known as repos. They are short-term

loans that buyers and sellers agree to sell and repurchase. As of 1992, repo
transactions are allowed only between RBI-approved securities such as state
and central government securities, T-bills, PSU bonds, FI bonds and
corporate bonds. Repurchase agreements are sold by sellers with a promise
of purchasing them back at a given price and on a given date in the future.
The buyer will also purchase the securities and other instruments in the
repurchase agreement with a promise of selling them back to the seller.

Commercial Papers
4. Commercial papers are promissory notes that are unsecured and issued
by companies and financial institutions. They are issued at a discounted rate
of their face value. They have a fixed maturity of 1 to 270 days. They are
issued for financing of inventories, accounts receivables, and settling short-
term liabilities or loans. Commercial papers yield higher returns than T-bills.
They are usually issued by companies with strong credit ratings, as these
instruments are not backed by collateral. They are usually issued by
corporations to raise working capital and are actively traded in the secondary
market. Commercial papers were first issued in the Indian money market in
1990.

Certificate of Deposit

5. A certificate or deposit is a short-term borrowing note, like a promissory

note, in the form of a certificate. It enables the bearer to receive interest. It
has a maturity date, a fixed rate of interest and a fixed value. It usually has a
term between 3 months and 5 years. The funds cannot be withdrawn on
demand, but it can be liquidated on payment of a penalty. The returns are
higher than T-bills as the risk is higher. Returns are based on an annual
percentage yield (APY) or annual percentage rate (APR). In APY, interest is
gained by compounded interest calculation, whereas in APR simple interest
calculation is done to calculate the return.The certificate of deposit was first
introduced to the money market of India in 1989.

Banker's Acceptance

6. A banker's acceptance is a short-term investment plan created by a

company or firm with a guarantee from a bank. It is a guarantee from the
bank that a buyer will pay the seller at a future date. A good credit rating is
required by the company or firm drawing the bill. The terms for these
instruments are usually 90 days, but this period can vary between 30 and 180
days. Companies use the acceptance as a time draft for financing imports,
exports and other trade