MONEY MARKET

It is not a single market but a

collection of markets for several
instruments.
Main players are: RBI, DFHI, Mutual
Funds, Banks, Corporate Investors,
Non-Banking finance companies,
State government, Primary Dealers,
Public Sector Undertakings, NRIs
and Overseas corporate bodies.

Functions of Money
Market

A balancing mechanism to even out the

demand for and supply of short-term
funds.
A focal point for central bank intervention
for influencing liquidity and general level
of interest rates in the economy.
Reasonable access to suppliers and users
of short-term funds to fulfill their
borrowings & investment requirements.

Money Market
Instruments

Treasury Bills (T-bills)

Call/Notice money market
Certificates of Deposit (CD)
Commercial Paper
Commercial Bills (CB)

KEY TERMINOLOGIES

MONEY MARKET MUTUAL FUNDS

(MMMFs) : It mobilises savings from
small investors and invest them in a
short-term debt instruments or
money market instruments.
Discount & Finance House of India
( DFHI):

KEY TERMINOLOGIES

Cash Reserve Ratio (CRR): a portion

of deposits (as cash) which banks
have to keep/maintain with the RBI.
Statutory Liquidity Ratio (SLR):
banks are required to invest a
portion of their deposits in
government securities as a part of
their statutory liquidity ratio (SLR)
requirements.

KEY TERMINOLOGIES

Repo (Repurchase) Rate: It is the rate at which

banks borrow funds from the RBI to meet the gap
between the demand they are facing for money
(loans) and how much they have on hand to lend.
Reverse Rapo Rate : The rate at which RBI
borrows money from the banks (or banks lend
money to the RBI) is termed the reverse repo
rate.
Bank Rate: This is the rate at which RBI lends
money to other banks (or financial
institutions).The bank rate signals the central
banks long-term outlook on interest rates. If th

Prime Lending Rate: It is the minimum

lending rate charged by the bank from its
best corporate customers or prime
borrowers.
Liquidity Adjustment Facility (LAF):
Providing various general and sector
specific refinance facilities to the
commercial banks i.e. Export Credit
Refinance (ECR) and Collateralized
Lending Facility (CLF).

Treasury Bills

A short term promissory notes issued

by the Central Government to tide
over short-term liquidity shortfalls.
A negotiable security, highly liquid,
absence of default risk, assured yield
and are eligible for inclusion in the
securities for SLR purpose.
Issued for maturities of 91, 182 & 360
days.

Types of Auctions in TBills

Multiple
Price
Auction

UniformPrice
Auction

Commercial Papers

Unsecured promissory note issued

by highly rated companies.
Issuing company should get itself
rated by approved rating agencies.
Minimum period 7 days & maximum
1 year.
Issued at a discount & the discount
is determined by market forces.

Certificates of Deposits

Unsecured, negotiable, short-term

instruments in bearer form.
Issued by Commercial Banks and
development financial institutions.
Time deposit of specific maturity.
Issued by banks during the period of
tight liquidity, at relatively high
interest rate

Commercial Bills

It is a short-term, negotiable and

self-liquidating instrument with low
risk.
Transferable by endorsement and
delivery.

Call/Notice Money
Market

It is a market for very short-term

funds repayable on demand and with
a maturity period varying between
one day to fortnight.
Money is borrowed to maintain
minimum level of CRR.
Call rate is determined by market
forces of demand & supply.