Main instruments of money market in India are: 1. Treasury Bills 2. Commercial Paper 3. Call Money 4. Certificate of Deposit 5. Commercial Bills!
1. Treasury Bills:
Treasury bills, also known as Zero Coupon Bonds are the instrument of short term borrowing with maturity period of less than one year.
This instrument is issued by Reserve Bank of India on behalf of the Central Government for fulfilling short term requirements of funds. They are issued at discount and are paid at par.
This difference between the issue and the redemption price is the interest payable. They are highly liquid and no risk of default of payment is there. They are issued of Rs.25, 000 or in multiples thereof.
For example, suppose an investor purchases a 108 days Treasury bill for Rs. 138,000 having face value of Rs. 1, 50, 000. On maturity, he receives Rs. 1, 50,000. The difference of Rs. 12, 000 in the issue and redemption price is the interest received by him.
2. Commercial Paper:
Commercial Paper (CP) is a short term unsecured promissory note with maturity period of 15 days to one year. Since it is unsecured, it is issued by the large and creditworthy companies to meet their short term fund requirements.
Commercial Paper is issued at discount and redeemed at par. It is negotiable and transferable by endorsement. The funds raised through Commercial Paper can be used for fulfilling seasonal and working capital need. For example, for meeting the floatation cost at the time of issue of shares and debentures i.e. Bridge Financing.
3. Call Money:
Call Money is short term finance used for interbank transactions. It has a maturity period of one day to fifteen days. All the commercial banks are required to maintain cash balance which is known as Cash Reserve Ratio (CRR).
The Reserve Bank of India keeps on changing this ratio from time to time thus affecting the availability of funds, for providing loans, with the banks. Call money is a facility under which banks borrow money from each other to maintain CRR at rate of interest known as Call Rate.
This rate keeps on changing from day to day and sometimes from hour to hour. The relationship between call rates and other short term instruments such as commercial papers, certificates of deposit etc. is an inverse relationship. An increase in call money rates increases the demand for other short term instruments.
4. Certificate of Deposit:
Certificates of deposit are short term instruments issued by commercial banks and financial institutions to the individuals, corporations and companies. They are unsecured and negotiable. Such instruments are usually issued by banks when they have a tight liquidity position because of slow growth of bank deposits but the demand for credit is high.
5. Commercial Bills:
Commercial bill is a bill of exchange used to finance the credit sales of firms. It is a short term, negotiable and self liquidity instrument. In case of goods sold on credit, the buyer is liable to make the payment on a specific date in future.
The seller could either wait till the maturity date or can draw a bill of exchange. When this bill is accepted by the buyer it becomes a marketable instrument and is called a trade bill. If the seller wants the funds before the maturity date, he can get the bill discounted from the bank. When a commercial bank accepts a trade bill it becomes a commercial bill.