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Money market
Money market basically refers to a section of the financial market where financial instruments with high liquidity ,High denominations , Low returns ,extraordinary safe and short-term maturities are traded.
Liquidity-
Money market deals with buying and selling of securities of short-term maturities, of one year or less, such as treasury bills and commercial papers.
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Q.What is meaning of money market? (please answer in 1or2 lines)( MPPSC MAINS- 2016) |
What is the platform for trading?
Over-the-counter trading is done in the money market and it is a wholesale process.
Money market gives lesser return to investors who invest in it but provides a variety of products.
G-Sec is the new app launced by RBI for above purpose.
Who regulates MM in India ?
In India, the RBI is the regulator of both the money market and banking.
Diffrence between Money Market & Share Market ?
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Particulars |
Money Market |
Stock Market |
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Maturity of the instruments |
The money market instruments carry a maturity period of less than a year. |
However tradable in the short term, stocks create wealth creation when invested for a number of years. |
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Financing needs |
These instruments are used to fund the short-term needs of the borrower. |
Used for long-term fund requirements. |
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Types of instruments |
It has instruments like T-bills, certificate of deposits, inter-bank call money, etc. |
It’s a stock of an independently listed company |
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Degree of risk |
Risk is comparatively lower due to the short-term maturity period |
Risk is higher. |
-The money market is a subsection of the fixed income market (Bonds).
-Money market securities are essentially IOUs issued by governments, financial institutions, and large corporations.
-How to get Access to Money Market?
The easiest way for us to gain access to the money market is through a broker or by using money market mutual funds.
Some money market instruments, like treasury bills, may be purchased directly.
Primary goals of the money market-
-Providing short-term financing to borrowers such as private investors, governments, and others at a reasonable cost.
-Lenders benefit from liquidity because money market securities are short-term.
-Money market provides working capital requirements.
-It is a major source of government funding for both domestic and foreign trade.
-Provides an opportunity for banks to lodge their excess funds.
Types Of Money Market Instruments-
1-Treasury Bills (T-Bills)
Who Issues T.Bills ?
Issued by the Central Government, Treasury Bills are known to be one of the safest money market instruments available.
Also known as Zero-Coupon Bonds.
Risk involved?
Treasury bills carry zero risk.
Treasury bills are issued by the Central government at a lesser price than their face value.
The interest earned by the buyer will be the difference of the maturity value of the instrument and the buying price of the bill
What Is the Maturity Period of T.Bills ?
Currently, there are 3 types of treasury bills issued by the Government of India via auctions, which are 91-day, 182-day and 364-day treasury bills.
Can the state govt issue treasury bills?
The State governments do not issue any treasury bills.
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Government Securities (G-Secs)- G-Securities are tradable debt instruments issued by the Central or State governments in order to borrow money from the public to finance their fiscal deficit. Example- 1- T-Bills - 2-Cash management bills - Cash Management Bills (CMBs) are short-term bills issued by the Central Government to meet its immediate cash requirements. The RBI issues the bills on behalf of the government. As a result, CMBs are short-term money market instruments that assist the government in meeting short-term cash flow mismatches. 3- Dated g-Security – Maturity of 5-40 years 4- State development loans- Bond issued by state governments to fund their fiscal deficit. Each state can borrow up to a set limit. SDLs pay interest on a half-yearly basis and repay the principal amount on maturity. These bonds are issued generally for 10-year . -State Governments only issue bonds or dated securities, known as State Development Loans (SDLs). |
2-Certificate of Deposits (CDs)
Who issues COD?
A Certificate of Deposit or CD, functions as a deposit receipt for money which is deposited with a financial organization or bank.
CD is only issued for a larger sum of money.
Certificate of Deposit is freely negotiable.
Intrest rate higher than T.B. –
Certificate of Deposit carry low risk while providing interest rates which are higher than those provided by Treasury bills and term deposits.
What Is the Maturity Period of C.D.?
Like treasury bills, CDs are also issued at a discounted price and their tenor ranges between a span of 7 days up to 1 year.
3-Commercial Papers (CPs)
Who issues CP’s-
Commercial Papers can be issued by highly rated companies with the purpose of raising capital to meet requirements directly from the market.
Commercial paper is usually Unsecured , issued at a discount from face value. It reflects prevailing market interest rates.
What are the denominations of CPs?
A commercial paper, is issued for investments of at least ₹5 lakhs and in multiples of ₹5 lakh, thereafter.
(For certificate of deposit requires a minimum investment of ₹1 lakh)
What Is the Maturity Period of CP’s?
CPs usually feature a fixed maturity period which can range anywhere from 1 day up to 270 days.
Difference between CD vs Commercial PaperThere are two differences between commercial paper and a CD. -A CD is issued by financial institutions and banks. Commercial papers are issued by primary dealers, large corporations and All-India Financial Institutions. - A certificate of deposit requires a minimum investment of ₹1 lakh and thereafter permits multiples of it. A commercial paper, on the other hand, is issued for investments of at least ₹5 lakhs and in multiples of ₹5 lakh, thereafter. |
4-Repurchase Agreements (Repo)-
Between whom Repo agreement takes place?
Repo transactions can only be carried out between RBI approved parties .
Transactions are only permitted between securities approved by the RBI like treasury bills, central or state government securities, corporate bonds and PSU bonds.
What is the Maturity Period of Repo?
Repurchase Agreements/ Repo loans of a short duration often with a tenor of overnight to 48 hours.
5-Banker's Acceptance (BA)
What is BA?
Banker's Acceptance is a document promising future payment which is guaranteed by a commercial bank.
Banker's Acceptance specifies the details of the repayment like the amount to be repaid, date of repayment and the details of the individual to which the repayment is due.
What is the Maturity Period of Banker's Acceptance (BA)?
Banker's Acceptance features maturity periods ranging between 30 days up to 180 days.
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Q- Consider the following markets: 1. Government Bond Market 2. Call Money Market 3. Treasury Bill Market 4. Stock Market How many of the above are included in capital markets? (UPSC Pre-2023) [a] Only one [b] Only two [c] Only three [d] All four Answer- (b) Only two -Only two of the above markets are included in the capital market, that is Government Bond Market and the stock market. Q- With reference to the Indian economy, consider the following statements : (IAS Pre 2020) 2-Certificate of Deposit is a long-term instrument issued by RBI to corporations. 3-Call Money' is a short-term finance used for interbank transactions. 4-Zero-Coupon Bonds' are the interest bearing short-term bonds issued by the Scheduled Commercial Banks to corporations. Which of the statements given above is/are correct? - Zero coupon bonds- Treasury Bills or T-bills are also known as Zero-Coupon Bonds, which are short-term government securities . -They are issued by Reserve Bank of India (RBI) on behalf of the Government of India that pays no interest. -Zeros, as they are sometimes called, are bonds that pay no coupon or interest payment. With a zero, instead of getting interest payments, a buyer buys the bond at a discount from the face value of the bond and are paid the face amount when the bond matures. |
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