7:40 am - Monday October 23, 2017

Structure of Money markets in India

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.

Product Tenor Participants
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

upto 10-years

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.
Inter-bank Participation

Certificates

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.

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