Brief Notes on Money Market

There are two types of markets where money can be borrowed and lent. The money market is only for short-term investments, whereas the Debt Market or Capital Market is for long-term investments. The products utilised in money market trading have a short maturity time and high liquidity, which are two of the most important attributes. The central and state governments, banks, insurance firms, non-banking financial institutions, public sector undertakings (PSUs), and the Discount and Finance House of India are all possible participants in the money market. All of these players require short-term cash, and the money market is the best place to find it.

Types of Money Market

Before we jump into the different types of money markets, let’s first make sure that we understand fundamentally what a money market is? Money markets are deposits of funds that banks and corporations lend to one another and also other players mentioned above.

There are basically seven types of money markets, although depending on what factors we take into consideration, the exact number of markets can differ. 

However, the below seven are considered standard types of money markets.

• Bill Market: A bill is a promise to pay the amount agreed upon by the drawer (one who borrows money) and the drawee (one who lends the money). The bill market generally has a maturity of three months.

• Commercial Bill Market: Similar to the bill market, a commercial bill market generally caters to corporations and banks, and governments don’t participate in this.

• Acceptance Market: Commonly used in import and export, the acceptance market allows international goods traders to use credit as a payment option. Here, the buyer agrees to pay the seller at a future date. Hence the seller provides the buyer with a credit. This entire process comes under the acceptance market, as the seller has accepted the payment without actually receiving it.

• Call money market: This is the shortest term of investment, as the maturity period for this type is only one day! This is used mostly by financial institutions and trust funds where they borrow and lend money at interbank rates. Interbank rates are simply the interest charged on short-term loans made between financial institutions. The maturity period for this type of market can be as low as one day, and they are no more than a week or a fortnight at most.

• Notice money market: Similar to the call money market, the notice money market is also best apt for financial institutions. However, the notice money market is a term used to define those money markets which have a maturity period of one to fourteen days.

• Term money market: This is again very similar to the call money market and the notice money market. The only difference is that here the financial institutions borrow and lend money with a maturity period of more than fourteen days.

• Collateral Borrowing and Lending Obligations (CBLO): CBLOs are more legally restricted than other types of money markets. The collateral borrowing and lending obligations are a money market instrument that is mostly used by large institutions and usually deal with very large sums of money. Due to its large size overall, legality plays a major role, and hence, it is called an obligation for the borrower to pay back the lender.

Now that we have understood what is a money market and also what are the different types of it, we can move ahead and learn more about its functions in the money market.

Functions of Money Market

The money market performs several functions for the economy of a nation as a whole. However, the money market also helps in the development of the following pointers as well:

1. Commerce & trade
2. Earn interest on short term funds
3. Removes the necessity of borrowing from the RBI
4. Helps govt to borrow short-term funds
5. Implementation of monetary policy
6. Aids financial mobility
7. Promotes liquidity & safety
8. Monitors RBI control liquidity in the economy

Instruments of Money Market

Different countries have different instruments of money marketing, and in India, there are five major instruments, as mentioned below:

• Treasury bills (T-bills): These are short-term debt instruments issued by the Central Government. These are issued in three tenors, namely, 91 days, 182 days, and 364 days. The minimum amount of issue is ₹10,000, and as they are an instrument of the money market, the maturity period is very short.

• Certificates of Deposits (CDs): This is sold by banks, private or public, which has a fixed interest rate and is only slightly different from a savings account.

• Commercial Papers (CPs): Just like our regular currency notes are all promissory notes, i.e., it is a proof of promise that the governor of RBI, which is India’s central bank, Commercial Papers or CPs are also promissory notes used without the boundaries of a nation and can be transacted in the international market.

• Repurchase Agreement (REPO): This is usually an overnight deal, where a dealer sells government securities to investors and keeps a cut from the profits of the investor. These are one of the safest investments to make as they are backed by the central government. This is a short-term agreement to sell government securities.

• Banker’s Acceptance: This money market instrument is also a promised future payment by the bank. Here, the payment is accepted and guaranteed by the bank.

Conclusion and Key Takeaways

• Money markets are short-term investments, best suitable for banks and financial institutions.
• There are different types of money markets catering to the different niches of investors.
• Investing in the money market is very safe and brings desirable returns on your investments.
• The investments are backed by the RBI, so the investor can never lose their money.
• The investor has several options when it comes to which instrument to use in order to invest in the money market.