All about Money Market Instruments in India

The Money Market is a short-term debt investment in trading. It involves huge-scale trades between institutions and traders. The retail level of the Money Market involves mutual funds trade purchased by Money Market Accounts and Individual Investors. The issuer’s financial instruments with short-term maturity are used to raise capital. They are called Money Market Instruments. They act as debt security which offers fixed interest rates and is unsecured. The Money Market instruments possess a high credit rating, ensuring the issuers park their money for the short term and earn fixed returns. 

 

Features of Money Market Instruments 

• High-liquidity 

The essential feature of financial assets is high liquidity. It helps to generate a fixed income for the investor. Also, the short-term maturity gives way to high liquidity. The money market instruments are close substitutes for money. 

 

• Secure investment 

The financial instrument is one of the most secure investment arenas in today’s market. The issuers of money market instruments possess a high credit rating. Hence the returns are fixed, and there is a lower risk of losing your invested capital. 

• Fixed returns

The Money Market offers discounts to the face value. Therefore, the investor gets his advance during the maturity period. It helps the individuals select the instrument per their needs and investment horizon. 

 

Purpose of Money Market 

 

• Maintain liquidity in the market 

The essential function of the Money Market is to uphold liquidity in the economy. The money market instruments play a significant role in the monetary policy framework. The Reserve Bank of India uses short-term securities to obtain liquidity in the market within the required range. 

 

• Provides funds 

The Money Market provides an excellent chance for individuals, banks and small and big corporations to borrow money at short notice. The institutions can borrow money by selling any other money market instruments. They can also finance their short-term needs. The institutions can borrow money from markets instead of banks. Since the process is convenient and the interest rates are lower than commercial loans. According to the Reserve Bank of India’s guidelines, the commercial banks can also employ money market instruments to maintain the minimum cash reserve ratio. 

 

• Utilisation of surplus funds 

The Money Market paves the way for the investors to dispose of their surplus funds. It helps to retain their liquid nature and obtain substantial profits simultaneously. The Money Market channels the savings of investors into investment channels. The investors include banks and non-financial corporations. They have both the state and local government banks and corporations. 

 

• Aids in financial ability 

Financial mobility is an essential aspect of the overall development of our economy. The money market assists in economic mobility through an easy transfer of funds from one sector to another. It also ensures a transparent process during transactions. It promotes the industrial and commercial development of the country. Hence, it is necessary to have high financial mobility. 

 

• Helps in monetary policy 

The monetary policies helped to develop the money market of the Reserve Bank of India. The transactions in the money market have an impact on the short-term interest rate. The short-term interest rates provide a view of the country’s present monetary and banking nature. It will help the Reserve Bank of India to develop monetary policies and long-term interest rates. Further, it helps in building a suitable banking policy.  

 

Types of Money Market Instruments 

 

• Treasury bills 

The Reserve Bank of India issues Treasury Bills (T-Bills). They are issued to raise money on behalf of the Central Government of India. The Treasury Bills have short-term maturities up to one year, the highest. They are given in three different maturity periods, i.e. 91 days T-Bills, 182 days T-Bills and 1-year T-Bills. Also, they provide a discount to the face value. The investor earns the face value amount at the time of maturity. The prime difference between initial value and face value is the returns earned by the investor. The T-bills come across as the safest short-term fixed-income investments since they have Indian government support. 

 

• Commercial papers

Huge companies and businesses issue assurance notes to raise money to meet their short-term needs. These are known as Commercial Papers (CPs). The firms own a high credit rating. The Commercial Papers are unsecured, and the organisation’s credibility is the security of the financial instrument. The Commercial Papers are issued by corporates, primary dealers, and All India Financial institutions. The papers have a fixed maturity period ranging from seven to two hundred and seventy days. But the investor can trade this instrument in the secondary market. They also provide high returns when compared to treasury bills. 

 

• Certificates of deposits 

Banks and financial institutions issue Certificates of Deposits (CDs). It provides fixed-rate interests on the invested amount. The value of the principal amount invested is the main difference between Certificates of Deposits and Fixed Deposits. The Certificates of Deposits are issued for a large amount of money ranging from one lakh or more than that. There is also a restriction on the minimum investment amount, making Certificates of Deposits popular amongst organisations rather than individuals. It is for those who want to hold their amount for a short duration and earn interest simultaneously. The maturity term of Certificates of Deposits issued by the bank ranges from seven days to one year. The other financial institutions offer Certificates of Deposits for one to three years. 

 

• Repurchase agreements 

Repurchase Agreements are also known as buybacks or repos. It is a formal agreement formed between two parties. In this instrument, one party sells a security to another. It is said to be a Sell-Buy transaction where assurance is made of giving it back in the future to the buyer. The seller purchases the security at a predetermined time and amount. It also includes the interest rate at which the buyer agreed to buy the security. Repo Rate is the rate of interest charged by the buyer for accepting to obtain the protection. They come in handy when the seller wants funds for a short duration. The seller can sell the securities and receive the funds to dispose of. Through this, the buyer gets a chance to earn decent returns on the invested money. 

 

• Banker’s acceptance 

The financial instrument developed by a corporation or individual under the bank’s name is called Banker’s Acceptance. The issuer must pay the instrument holder on a set date. The date may range from 30 to 180 days, beginning from the date of issue of the instrument. The banker’s acceptance is a secure financial instrument since the commercial bank guarantees the payment. It is issued at a lower price, and the actual cost is paid at maturity to the holder. The profit gained by the investor is the difference between the two. 

 

Reforms in the Indian Money Market 

• Evolution of Money Market Instruments
• Institutional Development
• Money Market Mutual Funds 
• De-regulation of Interest Rates
• Re-introduction of 182 days Treasury Bills  
• Permission to Foreign Institutional Investors (FIIS)

 

Benefits of Money Market Instruments 

The Money Market is essential for the smooth functioning of a modern economy. 

 

• Savings rate 

The money market accounts can yield high savings interest rates. The amount you earn each year can be higher than the traditional savings account. Hence, the money market assists you in gaining more than a savings account. 

 

• Safety 

 The money market offers low-risk savings options. The Federal Deposit Insurance Corporation secures several Money Market Accounts. In this way, the money is safe and protected by the Government. The money market offers you a Safety Net. 

 

• Flexibility 

The Money Market Accounts provide quick access to your money through withdrawals, transactions, and writing checks. Some of the banks even offer ATM access with debit and credit cards. 

 

• Easy accessibility 

The Money Market Accounts offer immediate access to funds when you are in need. The money is not locked, so you can easily avail yourself of the emergency funds. 

 

FAQs 

Who can invest in Money Market instruments?

Investors who want to park their money for a short term earn fixed income on the same.

Who is in charge of regulating the Money Market in India?

The Reserve Bank of India and the Securities and Exchange Board of India regulate the Money Market.

Are the Money Market instruments risk-free in India?

No. The instruments are not risk-free because of the bankruptcy conditions in banks and mega-corporations.

When does the Reserve Bank of India conduct auctions for Treasury Bills?

The Reserve Bank of India conducts auctions every Wednesday.

At what amounts are Commercial Papers issued?

They are issued in multiples of Rs 5 Lakh.