Money Market Instruments

The money market is the core platform for the central bank's monetary operations. It deals with short-term funds with maturities ranging from overnight to one year, involving instruments considered close substitutes for money. For JAIIB candidates, this topic is crucial as money market instruments form the foundation of bank treasury operations, liquidity management, and monetary policy transmission.

The money market performs three major functions:

1. Balances demand and supply of short-term funds
2. Facilitates borrowers and lenders to meet their short-term funding and investment needs at a market-driven price
3. Provides a channel for central bank intervention to regulate liquidity levels and costs, thereby transmitting monetary policy signals to the broader economy

The central bank's goal is to align money market rates with the policy rate.

The call/notice/term money market deals with very short-term liquid financial assets that can be quickly converted into cash at low cost. This market mainly enables short-term lending and borrowing between banks and institutions (like Primary Dealers) on an unsecured basis.

Institutions with surplus funds lend to those facing temporary shortages.

Treasury Bills are short-term bearer discount securities issued by the Government of India (through RBI) as a means of meeting its cash requirements.

Key Features:

• Issued at a discount to face value and redeemed at par (no periodic interest)
• The difference between issue price and face value = return to the investor
• Eligible investors: Resident individuals, entities, State Governments, companies, corporate bodies, trusts, NRIs, OCIs, and FPIs (subject to FEMA compliance)
• Securities with maturities of 5 years or more are Government Bonds (G-Secs), NOT T-Bills

• Short-term negotiable money market instruments
• Can be issued by scheduled commercial banks and select All-India Financial Institutions
• Cannot be issued by: Cooperative Banks and Regional Rural Banks (RRBs)

• Unsecured money market instrument issued as a promissory note
• Minimum maturity: 7 days; Maximum maturity: 1 year
• Placed on the market either directly or through specialised intermediaries
• Minimum required credit rating: A2 (as per SEBI's rating definitions)
• Issuers with total CP issuance of Rs. 1,000 crore or more per year must obtain ratings from at least two SEBI-registered CRAs

Repo (Repurchase Agreement): Rate at which RBI lends short-term money to banks against government securities.

Reverse Repo: An instrument for lending funds by purchasing securities with an agreement to resell on a mutually agreed future date at an agreed price (including interest).

• A repo contract where a third entity (tri-party agent) acts as intermediary
• Agent handles: collateral selection, payment and settlement, custody and management
• Introduced on November 5, 2018
• CBLO was discontinued from November 2018 (replaced by TREPS)

Part of the traditional money market; involves rediscounting of eligible commercial bills.

State Development Loans (SDLs) belong to the capital market, not the money market.

The major institutional providers of credit in India are:

• Tax on all transactions done on stock exchanges
• Came into effect from October 1, 2004 (Finance Act, 2004)
• Reduced to 0.1% on cash delivery transactions (Budget 2013-14)

• Trades executed during the day are settled based on net obligations for the day
• Presently settled on T+2 basis (trades on Monday settled on Wednesday)

Financial markets perform the following key functions:

The foreign exchange market has several unique features:

• High liquidity: Currencies can be bought and sold instantly at current market prices, attracting global investors
• Promptness: Operates 24 hours a day; participants can respond to events immediately
• Flexibility: Investors choose the duration of positions
• Low cost: Generally no service charges except the bid-ask spread
• Uniform pricing: Most trades executed at uniform prices
• Market trends: Currencies follow identifiable trends over extended periods

1. Call Money = 1 day; Notice Money = 2-14 days; Term Money = 14 days to 1 year
2. T-Bills: 91, 182, and 364 days; issued at discount, redeemed at par
3. SDLs are NOT money market instruments — they belong to the capital market
4. Commercial Paper: Unsecured, 7 days to 1 year, minimum rating A2
5. CDs can be issued by scheduled commercial banks and select AIFIs; NOT by cooperative banks or RRBs
6. TREPS replaced CBLO from November 2018; uses tri-party agent for collateral management
7. Three money market functions: Balance demand/supply, facilitate borrowers/lenders, channel for central bank intervention
8. Forex settlement: Cash=T+0, Tom=T+1, Spot=T+2, Forward=beyond T+2
9. Zero-coupon bonds: Issued at discount, no periodic interest, single bullet payment
10. Rolling settlement: T+2 basis in India
11. STT: 0.1% on cash delivery transactions (from Budget 2013-14)
12. CP issuers with Rs. 1,000 crore+ annual issuance need ratings from 2 SEBI-registered CRAs