Money Market Instruments

Money Market instruments include the debt of securities that are supposed to be redeemed within the very short period and there is no risk of default.

Features of Money Market Instruments

  • Highly liquid and can be encashed easily.
  • Very close substitutes for money.
  • Very low-risk securities.
  • Short-term debt Instruments.

10 Popular Types of Money Market Instruments

1. Treasury Bills – (T-Bills)

Treasury bills are issued by the central government. It is known to be one of the safest instrument available. However, since treasury bills carry 0 risks and therefore the return one gets is not very attractive. Treasury bills come with different maturity periods like 3 months, 6 months and 1 year and are circulated by primary and secondary market both. Treasury bills are issued by the central government at the lesser price than their face value and interest earn by the buyer will be the difference of the maturity value of the instruments and the buying price of the bill which is decided with the help of biding, done via auction. Currently, there are three types of treasury bills issued by the government of India which are 91-days, 182-days, 364-days treasury bills.

2. Certificate of Deposits (CDs)

Certificate of Deposits i.e CDs is a money market instruments which is issued in Dematerialized form against funds deposited in the bank for a specific period. Now, CDs are issued by scheduled commercial banks and select financial institution in India which are allowed by RBI within the limit. First announced in 1989 by RBI, certificate of deposits have become of preferred investment choice of organizations. In terms of short terms surplus investment as they carry low risk while providing interest rate which is higher those provided by treasury bills.

Certificate of Deposits is also relatively liquid which is an added advantage especially for issuing banks. Like treasury bills, CDs are also issued at the discounted price and their tenure ranges between the span of 7-days to 1-year. However, banks issues CDs for durations ranging for 3-months, 6-months, and 12-months. They can be bought by individuals, corporates, and NRIs too.

3. Commercial Papers (CPs)

Commercial paper is an unsecured short-term debt instrument issued by a corporation typically for a financing of account receivables, inventories or meeting short-term liabilities. It features a fixed maturity of periods which can range anywhere from 1-270 days. They are highly popular in countries like Japan, United Kingdom, United States etc.

Commercial Papers promise higher returns as compare to treasury bills and are automatically not as secure in comparison. Commercial Papers are actively traded in the secondary market. All commercial papers issuers have to get the credit rating from leading organizations as credit by SEBI.

4. Repurchase Agreements (Repo)

Repurchase Agreements called repo or reverse repo is the transaction of short terms loans in which two parties agree to sell and repurchase the sell securities. They are usually used for overnight borrowing. Repo or reverse repo transaction can be done only between parties approved by RBI. And in only RBI approved securities like Government of India, State Government Securities, T-bills, corporate bonds etc.

Under Repurchase Agreement, the seller sells specified securities within the agreement to repurchase the same at a mutually decided future date and price. Similarly, a buyer purchased securities within the agreement to resell the same to the seller on an agreed date at a predetermined price. Such transaction is called Repo.

5. Banker’s Acceptance

It is basically documented promising future payment which is guaranteed by a commercial bank.  Bill may be drawn, for example by an exporter on the importer who in turns gets guarantee by their countries commercial bank sold by the exporter on the open market at discount to cash in the money immediately.

Similar to Treasury Bill, banker acceptance often use in money market funds and specified the details of the repayment like amount to be repaid, date of repayment and details of the individuals to which the repayment is due. Banker’s Acceptance featured maturity period ranging from 30-180 days mostly. They have low credit risk because they are back by the importer, importer-bank and the imported goods as well.

6. Call and Notice Money 

It means a loan for very short period i.e 1-14 days. Loans are repayable on the demand at the options of either the lender or borrower. Call money is a money at call, call money market is a market where short-term surplus funds commercial bank and other financial institutions are traded. Call money market is the highly liquid market and there is no collateral involved and accounts for the large share of total turnover of the money market.

  7. Commercial Bill

Commercial Bill arises out of trade transaction when goods are sold on credit the seller draws a bill on the buyer for the due amount. Buyer accepts it, agree to pay amount after specific periods to person mention in the bill, or to the bearer of the bill. It is drawn for the short period ranging from 3-6 months. These bills are transferable by endorsement and delivery and can be discounted or rediscounted. In Bill market, the bill of exchanges is bought and sold. Commercial banks, co-operative banks, financial institutions, mutual funds etc. can be participated in this market.

Thus, the seller can get paid immediately by discounting the bills with commercial banks or other financial intermediaries. At maturity, the intermediaries claim the amount of money from the person who has excepted the bills. The very similar concept as banker acceptance. Banker Acceptance is majorly used for export-import transactions whereas commercial bills are used for local transactions.

8. Collateralized Borrowing and Lending Obligation (CBLO)

It is an instrument in the CBLO market. CBLO market is a money market segment operated by clearing co-operation of India which is CCIL. In the CBLO market, financial entities can avail short terms loans by providing prescribed securities as collateral. In terms of functioning and objective CBLO market is similar to Call Money Market. It is discounted money market instruments available in the electronic book-entry form for the maturity period ranging from 1 day to 1 year.

In the CBLO market, members of this market can borrow land funds against the collateral of eligible securities. Eligible securities are central government securities including treasury bills and such other securities as specified by CCIL. Borrowers in CBLO have to deposit the required amount of eligible securities with the CCIL. For trading, CCIL matches the borrowing and landing orders submitted by the members. And borrowers have to pay interest to the lenders in accordance with the bid. CBLO has a maximum share of transactions currently among all money market instruments.

9. Money Market Mutual Funds

It provides safety, liquidity, and returns. Money Market Mutual Funds are formed with collect the small savings of a large number of savers and invest them in these markets. SEBI regulates these money market mutual funds and they revise the guidelines from time to time relating to the maximum limit of investments.

10. Bill Rediscounting Scheme

This is the money market scheme where banks can rediscount the trade bills they have discounted to certain institutions. This instrument promotes liquidity in the commercial bill market. Here the sellers draw a bill exchange and buyer accept it.

Suppose when X sells on credit and X needs money in the meantime. It may approach the bank for discounting the bill and seller gets the money. Now the bank which has discounted the bill may require getting it rediscounted with some other bank to get the fund. This is called bill rediscounting. Bank has a facility to rediscount bills with the RBI and other approved institution like LIC, GIC, UNICL, UIIC etc.

Also, read: Complete Information on Reverse Mortgage







My name is Manoj Prasad and I am the founder of this website( I always love to learn new things through different sources and whenever I get time, I shared those new things with my friends, family and with you.


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