Before getting into the topic straight away, let us revisit some of the basic features of money markets.
There is no precise definition of the money markets but the phrase is usually applied to buying and selling of debt instruments maturing in a year or less.
Somewhat similar to bond investors, money market investors are extending credit, without taking any ownership in the borrowing entity or any control over management. However bond issuers typically raise money to finance investments that will generate profits – or in the case of government issuers, public benefits – for many years in to the future. Issuers of money market instruments are usually more concerned with cash management or with financing their portfolios of financial assets.
A well functioning money market facilitates the development of market for longer term securities. Money markets attach a price to liquidity, the availability of money for immediate investment. The interest rates for extremely short term use of money serve as benchmarks for longer term financial instruments.
If the money markets are active, or liquid, borrowers and investors always have the option of engaging in a series of short term transactions rather than in longer term transactions and this usually hold down longer term rates.
In the absence of active money markets to set short term rates, issuers and investors may have less confidence that longer term rates are reasonable and greater concern about being able to sell their securities they choose.
The following table captures the products and participants that are active in Indian money markets.
|Call Money||Overnight||Scheduled commercial banks (excluding RRBs), co-operative banks, primary dealers (PDs)|
|Notice Money||2 to 14-days||Scheduled commercial banks (excluding RRBs), co-operative banks, primary dealers (PDs)|
|Term Money||15-days to 1-year||Banks, all-India financial institutions & PDs|
|Certificates of Deposit||Minimum 7-days||Scheduled commercial banks (excluding RRBs & Local Area Banks) & select all-India financial institutions|
|Commercial Paper||Minimum 7-days||Corporates, all-India financial institutions & PDs.|
|Forward Rate Agreements/
Interest Rate Swaps
|Contracts are available for maturities
|Scheduled commercial banks, PDs & all-India financial institutions|
|Bills Rediscounting||Banks, PDs, select all-India financial institutions,
insurance companies & mutual funds
|Repurchase Agreements – Market Repo||1-day to 1-year||Banks, PDs, all-India financial institutions, insurance companies, mutual funds & listed corporates|
|Repurchase Agreements – RBI Repo||1-day||Banks and PDs|
|Treasury Bills||91, 182 & 364-days||Banks, PDs, financial institutions & other non-bank entities.|
|91 to 180-days||Scheduled commercial banks|
|CBLO||1-day to 1-year||Scheduled commercial banks, Cooperative banks, PDs, select all-India financial institutions, insurance
companies, mutual funds & other corporates
PS: In our forthcoming posts, we will individually discuss these products in greater detail.