Money Market Instruments

3. Money Market Instruments

The money market functions through a defined set of short-term instruments, each suited to a slightly different borrower and purpose. The instruments prescribed for this chapter are:

1. Treasury Bills (T-Bills). A short-term instrument issued by the Government of India (through the RBI) to meet its own short-term borrowing needs, issued at a discount to its face value and redeemed at full face value on maturity — the difference is the investor's return, since a Treasury Bill carries no separate, stated rate of interest. T-Bills are issued for standard maturities of 91 days, 182 days and 364 days, and are regarded as the safest of all money-market instruments because they carry a sovereign (government) guarantee.

2. Commercial Paper (CP). An unsecured, short-term promissory note issued by large, financially strong, highly rated companies to raise funds directly from the money market — usually to meet their working-capital requirement — as a cheaper alternative to short-term bank borrowing. Like a Treasury Bill, Commercial Paper is issued at a discount to its face value and redeemed at face value; since it is unsecured, only companies of established creditworthiness (backed by a credit rating) can issue it.

3. Certificate of Deposit (CD). A short-term, negotiable, unsecured instrument issued by commercial banks and certain financial institutions in return for a fixed deposit of money for a specified period, at a specified rate of interest — in effect a bank's own fixed deposit made transferable and tradeable before its maturity, unlike an ordinary fixed deposit receipt.

4. Call Money (and Notice Money). The market for extremely short-term borrowing and lending BETWEEN banks (and, for notice money, certain financial institutions) to meet each other's day-to-day, even day-to-day and overnight, shortfalls in statutory reserve requirements. "Call money" is repayable on demand, literally on a single day's notice or even the same day; "notice money" covers a slightly longer period, up to fourteen days. The interest rate here is called the call rate, and it moves quickly to reflect the tightness or looseness of short-term liquidity in the banking system.

5. Commercial Bills (Bills of Exchange). A short-term, negotiable instrument drawn by a seller of goods (the drawer) on the buyer (the drawee), directing the buyer to pay a stated sum either on demand or after a specified short period, typically arising directly out of a genuine trade transaction on credit. A seller who needs funds before the bill's own due date can get it discounted with a bank, which pays the seller the bill's value (minus a discount) immediately and itself collects the full amount from the buyer on the due date.

| Instrument | Issued by | Nature | Typical maturity |

|---|---|---|

| Treasury Bill | Government of India (via RBI) | Issued at a discount, sovereign-guaranteed | 91 / 182 / 364 days |

| Commercial Paper | Large, highly rated companies | Unsecured promissory note, issued at a discount | Typically 7 days to 1 year |

| Certificate of Deposit | Commercial banks / financial institutions | Negotiable, interest-bearing deposit receipt | Typically 7 days to 1 year (banks) |

| Call / Notice Money | Banks (and select financial institutions), among themselves | Repayable on demand (call) or short notice | 1 day (call) up to 14 days (notice) | …