Money Market Instruments: Overview and Key Types

Money Market Instruments

The money market instruments are crucial tools in financial markets for short-term borrowing and lending, typically with maturities ranging from one day to one year.

Important Money Market Instruments

1. Commercial Papers (CPs)
2. Certificate of Deposits (CDs)
3. Treasury Bills (T-Bills)
4. Commercial Bills (CBs)
5. Call Money
6. Repurchase Agreements (REPOs)

Key Points:

• Sub-markets of Money Market:
  • These instruments are traded in specific sub-markets like call money market, commercial bills market, discount market, acceptance market, treasury bill market, and certificate of deposits market.

Commercial Papers (CPs)

• Definition:
  • An unsecured promissory note issued by a company, approved by the RBI, with fixed maturity.
• Introduction:
  • Introduced in India in 1990 as a tool for companies to meet short-term financial needs.
• Maturity Period:
  • Ranges from 7 days to one year.
  • Negotiable via endorsement and delivery.
• Issuance:
  • Issued at a discount on face value, indicating it's a payable debt instrument.
  • Used by credit-worthy companies for short-term finance, primarily for working capital needs.
  • Total CP issuance must remain within the working capital limits set by banks or financial institutions.
• Eligible Issuers:
  • Highly rated corporates (CRISIL P-2 or equivalent).
  • Primary dealers and financial institutions have access to this mechanism.
  • Minimum issue size is ₹5 lakhs and must be in multiples thereof.
• Major Issuers:
  • Manufacturing companies, leasing and finance companies, mutual funds, and other financial institutions primarily issue CPs.

Additional Insights:

• RBI (Reserve Bank of India):
  • India’s central bank, responsible for issuing CP guidelines.
• CRISIL Rating:
  • A credit rating agency in India; CRISIL P-2 indicates a strong capacity to meet financial commitments.

Using these instruments, companies efficiently manage their liquidity and meet short-term obligations in financial markets.

Extended readings: