<<23VME3C403>>
<<Financial Institutions and Markets>>
<<unit No 3>>
<< Money Market>>
• Introduction to short-term lending & borrowing mechanism, meaning
of money market, Instruments traded in the money market,
Participants in the money market, Functions of money market.
• Learning Outcome: Assess money market instruments and their
significance.
Introduction to the Money Market
• Deals with short-term borrowing and lending (≤ 1 year)
• Provides liquidity to financial institutions
• Supports day-to-day cash flow needs of banks, companies
• Crucial part of the financial system
Features of the Money Market
•Deals in short-term instruments (≤ 1 year)
•High liquidity and low default risk
•Large volume transactions
•No physical location – operates digitally
Objectives of the Money Market
•Provide short-term liquidity
•Channel idle funds into productive use
•Maintain monetary stability
•Support central bank operations and monetary policy
Treasury Bills (T-Bills)
•Issued by the Government of India
•Short-term instruments (91, 182, 364 days)
•Zero-coupon securities — issued at discount, redeemed at face
value
•Safest money market instrument
Call Money and Notice Money Market
•Call Money: Overnight borrowing/lending between banks
•Notice Money: Short-term borrowing (2–14 days)
•Used to maintain daily liquidity
•Regulated by RBI
Commercial Paper (CP)
•Unsecured short-term debt issued by corporations
•Maturity ranges from 7 days to 1 year
•Used to raise working capital
•Only issued by highly-rated companies
Certificates of Deposit (CDs)
•Issued by banks to depositors for a fixed term
•Tradable in the money market
•Higher interest than savings accounts
•Maturity from 7 days to 1 year
Repo and Reverse Repo Agreements
•Repo = Selling securities with agreement to repurchase
•Reverse repo = Buying with agreement to resell
•Used by RBI to control liquidity
•Forms backbone of monetary operations
Participants in the Money Market
•RBI, commercial banks, and cooperative banks
•NBFCs, mutual funds, and insurance companies
•Large corporates and financial institutions
•Each participant has specific roles and goals
Functions of the Money Market
•Maintains liquidity in the economy
•Assists RBI in monetary policy execution
•Provides investment avenues for short-term funds
•Ensures financial system stability
Advantages of the Money Market
•Provides liquidity to banks and corporates
•Facilitates short-term funding at low cost
•Supports monetary stability
•Helps in interest rate discovery
Limitations of the Money Market
•Not accessible to small investors
•High-volume, wholesale transactions only
•Limited instruments for medium-sized enterprises
•Vulnerable to policy shifts and rate volatility
Regulation of the Money Market in India
•Regulated primarily by RBI
•SEBI regulates mutual fund participation
•Guidelines for instruments, participants, and risk limits
•Ensures transparency and financial stability
Recent Trends in the Indian Money Market
•Increased use of digital trading platforms
•Growth in mutual fund and corporate participation
•Rising demand for ultra-short-term instruments
•RBI promoting transparency and liquidity
Role of Technology in the Money Market
• Introduction of e-Kuber and online auction platforms
• Automation in treasury management systems
• Mobile-based money market access for institutions
• Enhanced speed, transparency, and efficiency
Link Between Money Market and Capital Market
•Money market deals in short-term funds; capital market in long-
term
•Both support liquidity and funding
•Investors often switch between markets
•RBI and SEBI coordinate regulation
Role of Money Market During Financial Crises
•Provides emergency liquidity to financial institutions
•Helps maintain confidence in the system
•RBI uses money market tools to stabilize the economy
•Crucial during events like COVID-19 or economic slowdowns
Case Study – How a Bank Uses the Money Market
•Bank faces short-term cash shortfall
•Borrows in call market or issues CDs
•Invests surplus in T-Bills or repos
•Money market balances inflow and outflow daily
Career Opportunities in the Money Market
•Treasury operations in banks and corporates
•Mutual fund money market desk
•RBI and regulatory roles
•FinTech platforms for short-term investment
