Money Market Instruments in India

The Indian money market features a variety of sophisticated short-term debt instruments designed to suit different borrower needs and risk appetites. In this chapter, we examine the five foundational instruments prescribed in the DAVV BBA syllabus.

1. Overview of Primary Money Market Instruments

┌────────────────────────────────────────────────────────────────────────┐
│                   INDIAN MONEY MARKET INSTRUMENTS                      │
├─────────────────┬──────────────────┬─────────────────┬─────────────────┤
│ 1. Treasury     │ 2. Commercial    │ 3. Certificates │ 4. Call/Notice  │
│    Bills        │    Paper (CP)    │    of Deposit   │    Money        │
│ (Govt of India) │ (Blue-chip Cos)  │ (Banks & DFIs)  │ (Inter-bank)    │
└─────────────────┴──────────────────┴─────────────────┴─────────────────┘
                                   │
                     ┌─────────────┴─────────────┐
                     │ 5. Commercial Bills /     │
                     │    Trade Bills / TREPS    │
                     └───────────────────────────┘

2. Detailed Study of the 5 Core Instruments

1. Treasury Bills (T-Bills)

• Issuer: Reserve Bank of India on behalf of the Central Government of India to finance short-term fiscal deficits.
• Credit Risk: Zero default risk (Sovereign guarantee of the Government of India).
• Maturity Tenors:
  • 91-day T-Bills (auctioned weekly)
  • 182-day T-Bills (auctioned fortnightly)
  • 364-day T-Bills (auctioned fortnightly)
• Mechanism: Issued at a discount to face value and redeemed at full face value on maturity.
  • Example: A 91-day T-Bill with a face value of Rs. 100 may be issued at an auction price of Rs. 98.20. On day 91, the government pays back Rs. 100. The difference of Rs. 1.80 is the investor’s interest earnings (yield).
• Minimum Investment: Rs. 10,000 and in multiples of Rs. 10,000 thereafter (recently opened to retail citizens via the RBI Retail Direct portal).

2. Commercial Paper (CP)

• Introduced in India: 1990 following the Vaghul Committee recommendations.
• Issuer: Highly rated corporate entities, Non-Banking Financial Companies (NBFCs), and All-India Financial Institutions.
• Legal Form: An unsecured promissory note issued to raise working capital directly from the market.
• Eligibility Criteria:
  • Tangible net worth of the company must be at least Rs. 4 crores.
  • Must obtain a minimum credit rating of A2 (or equivalent) from an approved SEBI rating agency (CRISIL, ICRA, CARE).
• Maturity Period: Minimum 7 days to a maximum of 1 year.
• Denomination: Minimum denomination of Rs. 5 lakhs and multiples thereof.

3. Certificates of Deposit (CD)

• Introduced in India: 1989.
• Issuer: Scheduled Commercial Banks and select All-India Financial Institutions (SIDBI, EXIM Bank).
• Nature: A negotiable, transferable promissory note representing a fixed deposit of large funds with a commercial bank.
• Maturity Period:
  • Issued by Banks: Minimum 7 days to maximum 1 year.
  • Issued by Financial Institutions: Minimum 1 year to maximum 3 years.
• Denomination: Minimum denomination of Rs. 5 lakhs and multiples thereof.
• Key Difference from Standard Bank FD: Traditional FDs are non-negotiable and cannot be traded in the secondary market. In contrast, CDs are freely transferable by endorsement and delivery, making them highly liquid.

4. Call Money and Notice Money

• Nature: The inter-bank market where commercial banks borrow and lend funds to manage daily statutory requirements (CRR and SLR).
• Tenor:
  • Call Money: Funds borrowed or lent for 1 day (overnight).
  • Notice Money: Funds borrowed or lent for periods between 2 days and 14 days.
  • Term Money: Borrowing for periods between 15 days and 1 year.
• Participants: Exclusively Scheduled Commercial Banks, Cooperative Banks, and Primary Dealers. Non-bank institutions are barred to protect financial stability.
• Call Rate: The interest rate charged in this market. It is extremely volatile and reacts instantly to system-wide liquidity shortages or surpluses.

5. Commercial Bills (Trade Bills)

• Nature: Negotiable instruments drawn by a seller of goods (drawer/creditor) on a buyer of goods (drawee/debtor) for trade credit.
• Usance Period: Usually 30 days, 60 days, or 90 days.
• Discounting Process:
  • A manufacturer delivers goods to a retailer and writes a 90-day bill of exchange.
  • The manufacturer needs immediate cash, takes the accepted bill to their bank, and discounts it.
  • The bank deducts a small discounting fee and credits the net amount instantly.
  • At day 90, the bank collects the full face value directly from the retailer.

Bonus Modern Instrument: TREPS (Tri-Party Repo)

• Managed by the Clearing Corporation of India (CCIL).
• A repo contract where a third neutral party (CCIL) acts as an intermediary between borrowing and lending entities, providing collateral management, automated margining, and guaranteed settlement.

3. Comprehensive Comparison Table

4. Summary for BBA Exams

• T-Bills: Short-term sovereign debt; 91, 182, and 364-day tenors; zero credit risk; sold at discount.
• Commercial Paper (CP): Unsecured promissory note by top corporates; min Rs. 5 lakhs; 7 days to 1 year; requires minimum A2 rating.
• Certificates of Deposit (CD): Negotiable, tradable bank fixed deposits; min Rs. 5 lakhs; 7 days to 1 year.
• Call / Notice Money: Inter-bank liquidity tool; Call is overnight (1 day); Notice is 2 to 14 days.
• Trade Bills: Bill discounting enables suppliers to receive instant cash on commercial invoices.