Money Market -it's Meaning and Instruments

Money Market deals in short-term securities meant for use up to one year. It includes all organizations and institutions which deal in short period debts.

Meaning of Money Market:

It includes wholesale transactions which take place between financial institutions and companies. It is the pillar of the Global Financial System that deals in short-term funds. And maintains appropriate liquidity in the market. It has no geographical location.

For Example loans, credit card receivables, residential/commercial mortgage loans, and similar financial assets.

Definition:

The term ‘Money Market’ is used to define a market where short-term financial assets with a maturity of up to one year are traded. The assets are a close substitute for money and support money exchange carried out in the primary and secondary market.

-The Reserve Bank of India

Instruments of Money Market:

Commercial Papers, Certificates of Deposits, Treasury Bills (T-Bills) Treasury bills or T- Bills and many more are the instruments of Money Market which are explained as follows:

1. T-bills(Treasury Bills): 

These are short-term borrowing instruments used by the company. The Indian government issues these bills at a discount for 14 days to 364 days.

A company, firm, or person can purchase Treasury bills and are issued in lots of ₹ 25,000 for 14 days & 91 days and ₹ 1,00,000 for 364 days. These instruments are issued at a discount and repaid at par at the time of maturity. 

2. Commercial Bills

Commercial bills work more like the bill of exchange. Business units issue them to meet their short-term finance requirements. These instruments provide the best liquidity. These can be easily transferred from one person to another.

3. Certificate of Deposit

A certificate of deposit is a negotiable term deposit that is accepted by Commercial Banks. It is usually issued throughout a Promissory Note. CDs can be issued to individuals, corporations, trusts, etc.

4. Commercial Paper

Some Business units issue CP’s to meet their short-term working capital requirements. . The period of commercial paper is from 15 days to 1 year.

The Reserve Bank of India makes policies related to the issue of CP’s. Thus, a company requires RBI‘s approval prior to issue a Commercial Paper in the market. Also, these have to be issued at a discount to face value. And the discount rate depends upon the market. The denomination and the size is:

Minimum size – Rs. 5 lakhs

Maximum size – 100% of the issuer’s working capital

5. Call Money

Where Scheduled commercial banks lend or borrow on short notice (say a period of 14 days)then it is known as call money. It is concerned to manage day-to-day cash flows. The interest rates are market-driven and thus highly sensitive to demand and supply. Sometimes, the interest rates also fluctuate by a large percentage.

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