Instruments of the Money Market

The Indian money market's organised sector trades a specific set of short-term instruments, each suited to a slightly different borrower and purpose. The five most important are call/notice money, Treasury Bills, Commercial Paper, Certificates of Deposit, and Commercial Bills.

• Call money / Notice money — the shortest of all money market instruments: banks borrow and lend among themselves for a single day (call money) or for periods up to fourteen days (notice money), mainly to meet reserve requirements or unexpected cash shortfalls. The interest rate on such borrowing, the call rate, is highly sensitive to overall liquidity conditions and is closely watched by the RBI as a real-time indicator of how tight or easy money is in the banking system.
• Treasury Bills (T-Bills) — short-term borrowing instruments issued by the RBI on behalf of the Government of India to meet the government's short-term cash needs. T-Bills are issued for standard maturities of 91, 182, and 364 days, sold through periodic auctions at a discount to their face value and redeemed at full face value on maturity — the difference is the investor's return, since T-Bills carry no separate coupon/interest payment. Because they carry a sovereign (government) guarantee, T-Bills are considered virtually risk-free and are among the most liquid instruments in the market.
• Commercial Paper (CP) — an unsecured promissory note issued by large, financially sound companies (subject to a minimum credit-rating requirement) to raise short-term working-capital funds directly from investors, typically at a lower cost than a bank loan. Like a T-Bill, CP is issued at a discount to face value and redeemed at par; maturities generally range from a few days up to one year.
• Certificate of Deposit (CD) — a negotiable receipt issued by scheduled commercial banks and select financial institutions against funds deposited with them for a fixed period. Unlike an ordinary fixed deposit, a CD is transferable/negotiable before maturity, which gives the depositor an added avenue for liquidity. Bank-issued CDs typically run from a few days up to one year.
• Commercial Bills (Bills of Exchange) — a trade-related instrument arising directly out of a genuine credit sale of goods. The seller (the drawer) draws a bill on the buyer (the drawee), who accepts it and promises to pay the stated amount after a fixed period (commonly up to 90 days). The seller need not wait until the bill's maturity to receive funds — the bill can be sold ('discounted') to a bank before maturity, in exchange for its value minus a discount charge, giving the seller immediate working capital.

| Instrument | Issued by | Typical maturity | Nature |

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