Instruments of the Money Market

A student of Secretarial Practice should be able to identify and explain the principal instruments through which short-term funds actually change hands in the money market. Five are of particular importance for this Std 12 syllabus.

Call Money (also called call/notice money) is money borrowed or lent for a very short period, typically overnight but sometimes up to fourteen days ('notice money'). It is the market through which banks lend to, and borrow from, one another to meet their day-to-day statutory reserve and liquidity requirements — a bank with a temporary cash surplus at the end of the day lends it in the call market, while a bank with a temporary shortfall borrows there, rather than approaching the Reserve Bank of India directly for every small fluctuation. The rate of interest at which such funds are lent is called the call rate, and it is highly sensitive to the day-to-day liquidity conditions in the banking system.

Treasury Bills (T-Bills) are short-term government securities issued by the Reserve Bank of India on behalf of the Government of India to meet the government's short-term borrowing requirement. They are issued at a discount to their face value and repaid at face value on maturity, the difference being the investor's return; no separate interest is paid. Treasury Bills are currently issued with maturities of 91 days, 182 days, and 364 days, and, since they carry a sovereign (government) guarantee, they are regarded as one of the safest, most risk-free instruments available in the entire financial market.

Commercial Paper (CP) is an unsecured, short-term promissory note issued by large, financially sound and creditworthy companies (and certain other eligible entities) to raise funds directly from the market for their working-capital needs, rather than borrowing from a bank. It is issued at a discount and, being unsecured, is available only to issuers with a good credit rating; its maturity in India ranges from a minimum of seven days up to a maximum of one year.

Certificate of Deposit (CD) is a negotiable, unsecured money-market instrument issued by scheduled commercial banks and certain financial institutions in exchange for funds deposited with them for a fixed period. Unlike an ordinary fixed deposit receipt, a certificate of deposit is issued in dematerialised (electronic) form and, being negotiable, can be transferred to another investor before maturity, which gives the original depositor an exit route the ordinary fixed deposit does not provide. Maturities generally range from seven days to one year for those issued by banks, and up to three years for those issued by financial institutions. …