Money Market Instruments

 

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Money Market Instruments

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Commercial Papers (CPs)

> Commercial Paper (CP) is an unsecured promissory note, approved by RBI.
 

> It was introduced in India in 1990.
 

> It can be traded in Over the Counter (OTC) market.
 

> CP is issued at a discount to face value as may be determined by the user and is freely transferable.
 

> The maturity profile of CP is: 

_ Minimum period: 7 days 

_ Maximum period: 1 year

 

> Major issuers 

_ Manufacturing companies 

_ Leasing and finance companies 

_ Mutual funds and financial institutions

 

> Any of the following entities can invest in commercial papers: 

_ Individuals 

_ Banking companies 

_ Other corporate bodies (registered or incorporated in India) and unincorporated bodies 

_ Non-Resident Indians (NRIs) 

_ Foreign Institutional Investors (FIIs) etc.

_ CP can be issued in denominations of Rs.5 lakh or multiples thereof.
 

 

Certificate of Deposits (CDs)
_ Certificate of Deposit (CD) is a negotiable money market instrument
_ Issued in dematerialised form against funds deposited at a bank or other eligible financial institution for a specified time period. 

_ It was introduced in India in 1989 by RBI.

 

 CDs can be issued by: 

1. Scheduled commercial banks {excluding Regional Rural Banks and Local Area Banks} 

2. Selected All-India Financial Institutions (FIs) that have been permitted by RBI
 

CDs can be issued to:
_ Individuals
_ Corporations
_ Companies (including banks and PDs)
_ Trusts
_ Funds
_ Associations
_ Non-Resident Indians (NRIs)
_ Maturity - 7 days to 1 year (1-3year FI) 

 

 

Treasury Bills (T-Bills)

 
> Treasury bills are money market instruments issued by RBI on the behalf of central Government as a promissory note with guaranteed repayment at a later date.
 

> To bridge the deficit between the revenue and expenditure in the budget.
 

> They are issued at a discount to the published nominal value of government security (G-sec). 

 

_ 14-day treasury bill 

_ 91-day treasury bill 

_ 182-day treasury bill 

_ 364-day treasury bill
 

> Zero risk instruments
 

> Participants
_ RBI 

_ Commercial banks
_ State govt.
_ Financial institutions
_ Provident fund
_ Mutual fund
_ Foreign bank etc.
 

 

 

Commercial Bills
> A Commercial Bill is one which arises out of a genuine trade transaction, i.e. credit transaction.
> As soon as goods are sold on credit, the seller draws a bill on the buyer for the amount due.
> The buyer accepts it immediately agreeing to pay the amount mentioned therein after a certain specified date.
> It is drawn always for a short period ranging between 30 days and 90 days.
 

 

 

Call/Notice Money
 

> Loan for a very short period (1 - 14 days) 

 

> If money is lent for a day it is called call money / money at call / overnight money
 

> If it is for a period of more than one day and less than 14 days, it is called notice money or money at short notice.
 

> Participants -Scheduled commercial banks (excluding RRBs), co-operative banks (other than Land Development Banks) and Primary Dealers (PDs).
 

> Eligible participants are free to decide on interest rates in call/notice money market.
 

> Deals are conducted both on telephone and NDS call system
 

> Highly liquid 

 

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