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
- Commercial Papers (CPs)
- Certificate of Deposits (CDs)
- Treasury Bills (T-Bills)
- Commercial Bills (CBs)
- Call Money
- 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:
siesce.edu.in
[PDF] Money Market Operations
scripbox.com
Money Market Instruments - Meaning, Types, Objectives & Features
www.toppr.com
Money Market: Meaning, Instruments, Bills, Certificates, Solved ...