Money Market Instruments in India – Difference and Types

Money Market Instruments in India

Money Market Instruments in India

RBI allowed the issue of CPs in 1989. The CP is a short-term negotiable instrument, consisting of usance primary notes with a fixed maturity, indicating the short-term obligation of an issuer. Companies as a means of raising the short-term debt issue it. It is issued at a discount to face value basis but can also be issued in interest-bearing form.

The issuer promises the buyer a fixed amount at a future date but pledges no assets. A CP, as a short-term financial instrument, has several advantages to the issuer. It involves very little documentation. It is flexible in terms of maturity. It is unsecured. There are no limitations on the end use of the funds used in this manner. They are negotiable and transferable instruments and are highly liquid.

The participants in money market instruments are the corporate bodies, banks, mutual funds, UTI, LIC, GIC and others who have surplus funds and are on a lookout for opportunities for short-term investments. The DFHI also operates both in the primary and secondary markets for CPs by quoting its bid and offering prices. The CP market is fairly popular these days, however, a secondary market in these is yet to develop.

Certificate of Deposits

A CD is a document title to a time deposit and can be distinguished from the conventional time deposit in respect of its free negotiability and hence marketability. CD’s are a marketable receipt of funds deposited in a bank for a fixed period at a specified rate of interest. They are bearer instruments and are readily negotiable.

As per the RBI scheme, the CD can be issued only by scheduled commercial banks at a discount rate from the face value, and the discount rate can be freely determined. It means that there is no restriction on the rate of interest that can be paid to a depositor. The CD can be issued to individuals, corporates, companies, trust funds, association and so on. The NRI’s can also subscribe to them, but only on the non-repatriable basis.

The banks are required to maintain the usual SLR and CRR on the issue price of CD’s, nor -buy them back prematurely. They are freely transferable by endorsement and delivery after 45 days from the date of issue and are in the form of usance promissory note payable on a fixed date without any grace period. The maturity period of CD’s is 3-12 months. However, six all India financial institutions are allowed to issue CDs with the maturity of 1 to 3 years.

RBI Guidelines

• The denomination of CDs is to be in the multiples of Rs. 5 lakhs, subject to a minimum size of an issue to a single investor being 25 lakhs.

• The maturity period to range from 3 months to one year.
• They are freely transferable by endorsement and delivery after the initial lock in a period of 45 days.
• Premature buyback is not permitted.
• The Development Financial Institutions can issue CDs with the maturity period of more than one year.

Commercial Bills Market in money market instruments

Section 5 of negotiable instruments act defines Bill of Exchange as follows: “An instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of a certain person or to the bearer of the instruments.” Commercial bill market is an important source of short-term funds for trade and industry.

Commercial banks play a significant role in this market. It is observed that in spite of many advantages offered by bills finance most businesses in India prefer cash credit as the preferred way of financing their working capital requirements. Even banks seem to be happy providing cash creditor in case of large borrowers, working capital term loans.

Thus, there is an absence of bills culture in India. The bills rediscounting market among the banks are very shallow. Though the RBI has allowed the Development Financial institutions to rediscount bills discounted by the commercial banks, this market has not yet developed.

New Bill Market Scheme 1970 Following the recommendations of M. Narasimhan study group, RBI announced new bill market scheme. Under this scheme

  1.  All eligible banks can offer bills of exchange for rediscount.
  2. The bills of exchange have to be genuine trade bills.
  3. The bill should not have a maturity time of more than 90 days, but may in exceptional cases, have usance up to 120 days and when it is offered to the Reserve Bank for rediscount its maturity should not exceed 90 days.
  4. The bills should have at least two good signatures, one of which should be that of a licensed scheduled bank.
  5. It excludes bills arising out of the sale of such commodities as may be indicated by RBI from time to time.
  6. The banks can retire the bills before due dates at their option. In such cases discount charged will be refunded on pro-rata basis. The banks do not need to physically lodge the bills with the RBI for getting them re discounted.

Money Market Mutual Funds in Money Market Instruments

To enable the small investors to participate in the money market, a money market mutual fund is a conduit through which they can earn market-related yield. MMMFs invest the funds collected from the investors in instruments like

a) Treasury bills and Government securities.
b) Call/Notice money,
c) Commercial bills,
d) Commercial paper,
e) Certificate of deposit.

They are free to determine the extent of their investments in each of the above instruments; in accordance with the guidelines laid down by the RBI. Repos and Reverse Repos Repo/ready forward/purchase (buy-back) transactions/deal is an agreement between a seller and buyer stipulating the sale and later repurchase of securities at a particular price and a date. It is essentially a short-term loan to the seller with securities issued as collateral. Similarly, the buyer purchases securities with an agreement to sell the same to the seller on an agreed date in future at a prefixed price. For the buyer of the securities, it is a reverse repo deal.

In a standard ready forward transaction (repo) when a bank sells securities to another bank, it simultaneously enters into a contract with the latter to repurchase them at a predetermined date and price in future. Both sale and repurchase prices are determined prior to entering into a deal.

Interested in opening an online trading account with Zerodha with lowest brokerage:Click Here

Start your Journey to become a Successful Trader. Open a trading account on India's No.1 Broking Company. Enquire from the below form.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>