The Money Market is a segment of the financial market where borrowing and lending of short-term funds (for a period of up to one year) takes place. It’s a market for wholesale funds, primarily used by banks, large corporations, and the government to manage their day-to-day liquidity needs.
Key Instruments of the Money Market
1. Treasury Bills (T-Bills)
Short-term debt instruments issued by the Government of India to finance its short-term funding requirements.
- Key Feature: They are considered the safest instrument in the money market as they are backed by the government. They are zero-coupon securities, meaning they are issued at a discount to their face value and redeemed at par. The difference is the investor’s return.
- Maturity: Issued in three tenors: 91 days, 182 days, and 364 days.
2. Commercial Paper (CP)
A short-term, unsecured promissory note issued by large, creditworthy corporations to raise funds for their short-term needs, like working capital.
- Key Feature: Since it is unsecured, only companies with a high credit rating can issue CPs. It is also issued at a discount and redeemed at face value.
- Maturity: Ranges from a minimum of 7 days to a maximum of one year.
3. Certificate of Deposit (CD)
A time deposit instrument issued by commercial banks and select financial institutions to raise money for a fixed period.
- Key Feature: Unlike a regular Fixed Deposit, a CD is a negotiable instrument, meaning it can be sold in the secondary market before maturity.
- Maturity:
- For Banks: 7 days to 1 year.
- For Financial Institutions: 1 year to 3 years.
4. Call Money / Notice Money / Term Money
A market for very short-term borrowing and lending between banks to manage their day-to-day cash reserves (CRR).
- Key Feature: The interest rate in this market, known as the Call Rate, is highly volatile and reflects the overall liquidity condition in the banking system.
- Maturity:
- Call Money: For one day (overnight).
- Notice Money: For 2 to 14 days.
- Term Money: For 15 days to 1 year.
Summary of Money Market Instruments
| Instrument | Issued By | Tenor / Maturity | Key Feature |
| Treasury Bill | Government of India | 91, 182, 364 days | Safest instrument, Zero-coupon |
| Commercial Paper | Large Corporations | 7 days to 1 year | Unsecured, for working capital |
| Certificate of Deposit | Banks & FIs | 7 days to 1 year (Banks) | Negotiable time deposit |
| Call/Notice Money | Inter-bank market | 1 day to 14 days | For managing bank reserves |
Difference between money market and capital market
| Basis of Difference | Money Market | Capital Market |
|---|---|---|
| Definition | Deals with short-term funds (≤ 1 year) | Deals with long-term funds (> 1 year) |
| Purpose | Provides short-term liquidity | Provides long-term capital for growth |
| Duration | Less than 1 year | More than 1 year |
| Instruments | Treasury Bills, Commercial Paper, Certificates of Deposit, Call Money, Repo | Shares, Debentures, Bonds, Mutual Funds, IPOs |
| Risk & Return | Low risk, low return | Higher risk, potentially higher return |
| Participants | RBI, Banks, Financial Institutions, Corporates, Government | Investors, Companies, Stock Exchanges, SEBI |
| Market Type | Unorganized/Over-the-counter (OTC) market | Organized market via Stock Exchanges |
| Liquidity | Highly liquid | Comparatively less liquid |
| Regulator | RBI (Reserve Bank of India) | SEBI (Securities and Exchange Board of India) |