Money market instruments are financial contracts that are traded in the money market for periods of less than a year.
Money market instruments include call money, repos, T- Bills, Cash Management Bills, Commercial Paper, Certificate of Deposit and Collateralized Borrowing and Lending Obligations (CBLO).
Must read: Money Market : Classification, Instruments, Significance, Advantages and Disadvantages
Must read: Difference between Money Market and Capital Market
Call money market
Call money market is a market for uncollateralized lending and borrowing of funds. This market is predominantly overnight and is open for participation only to scheduled commercial banks and the primary dealers.
Repo market
Repo or ready forward contact is an instrument for borrowing funds by selling securities with an agreement to repurchase the said securities on a mutually agreed future date at an agreed price which includes interest for the funds borrowed.
The reverse of the repo transaction is called ‘reverse repo’ which is lending of funds against buying of securities with an agreement to resell the said securities on a mutually agreed future date at an agreed price which includes interest for the funds lent.
Predominantly, repos are undertaken on overnight basis, i.e., for one day period.
The repo market is regulated by the Reserve Bank of India.
All the repo market transactions should be traded/reported on the electronic platform called the Clearcorp Repo Order Matching System (CROMS).
RBI has permitted select entities (scheduled commercial banks excluding RRBs and LABs, PDs, all-India FIs, NBFCs, mutual funds, housing finance companies, insurance companies) to undertake repo in corporate debt securities.
Triparty Repo
“Tri-party repo” means a repo contract where a third entity (apart from the borrower and lender), called a Tri-Party Agent, acts as an intermediary between the two parties to the repo to facilitate services like collateral selection, payment and settlement, custody and management during the life of the transaction.
Treasury Bills (T-bills)
Treasury bills or T-bills, which are money market instruments, are short term debt instruments issued by the Government of India and are presently issued in three tenors, namely, 91 day, 182 day and 364 day.
Treasury bills are zero coupon securities and pay no interest. Instead, they are issued at a discount and redeemed at the face value at maturity.
For example, a 91 day Treasury bill of ₹100/- (face value) may be issued at say ₹ 98.20, that is, at a discount of say, ₹1.80 and would be redeemed at the face value of ₹100/-. The return to the investors is the difference between the maturity value or the face value (that is ₹100) and the issue price.
Cash Management Bills (CMBs)
In 2010, Government of India, in consultation with RBI introduced a new short-term instrument, known as Cash Management Bills (CMBs), to meet the temporary mismatches in the cash flow of the Government of India. The CMBs have the generic character of T-bills but are issued for maturities less than 91 days.
Commercial Paper (CP)
Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note and held in a dematerialized form through any of the depositories approved by and registered with SEBI.
A CP is issued in minimum denomination of ₹5 lakh and multiples thereof and shall be issued at a discount to face value.
Options (call/put) are not permitted on a CP.
Companies, including NBFCs and AIFIs, other entities like co-operative societies, government entities, trusts, limited liability partnerships and any other body corporate having presence in India with net worth of ₹100 cr or higher and any other entities specifically permitted by RBI are eligible to issue Commercial papers subject to conditions specified by RBI.
Certificate of Deposit (CD)
Certificate of Deposit (CD) is a negotiable money market instrument and issued in dematerialised form or as a Usance Promissory Note, for funds deposited at a bank or other eligible financial institution for a specified time period. Banks can issue CDs for maturities from 7 days to one year whereas eligible FIs can issue for maturities from 1 year to 3 years.
Collateralized Borrowing and Lending Obligations (CBLO)
CBLO is a money market instrument that represents an obligation between a borrower and a lender.
The instrument works like a bond where the lender buys the CBLO and a borrower sells the money market instrument with interest.
The term, the interest rate, and the specifics of the CBLO are often all negotiable between the two parties.
A CBLO is much like a Treasury bill or very short term market instrument; the primary difference is a CBLO entails collateral in the transaction.
CBLOs are operated by the Clearing Corporation of India Ltd. (CCIL) and the Reserve Bank of India (RBI).
CBLOs allow short-term loans to be secured by financial institutions, helping to cover their transactions. To access these funds, the institution must provide eligible securities as collateral—such as Treasury Bills that are at least six months from maturity.
For furthur information: External link: https://www.imf.org/external/pubs/ft/fandd/2012/06/basics.htm
PRACTICE QUESTIONS
QUES . With reference to the Indian economy, “Collateral Borrowing and Lending Obligations” are the instruments of: UPSC 2024
(a) Bond market
(b) Forex market
(c) Money market
(d) Stock market
Ans (c)
