Money Market is a financial market where short-term financial assets having liquidity of one year or less are traded on stock exchanges. The securities or trading bills are highly liquid. Also, these facilitate the participant’s short-term borrowing needs through trading bills. The participants in this financial market are usually banks, large institutional investors, and individual investors.
There are a variety of instruments traded in the money market in both the stock exchanges, NSE and BSE. These include treasury bills, certificates of deposit, commercial paper, repurchase agreements, etc. Since the securities being traded are highly liquid in nature, the money market is considered as a safe place for investment.
The Reserve Bank controls the interest rate of various instruments in the money market. The degree of risk is smaller in the money market. This is because most of the instruments have a maturity of one year or less.
Some of the common instruments of the money market are as follows:
1. Call Money: The money borrowed or lent on demand for a short period of time (generally one day) is known as Call Money. The term of the call money does not include Sundays and other holidays. It is used mostly by banks. It means that when one bank faces a temporary shortage of cash, then the bank with surplus cash lends the former bank with money for one or two days.
2. Treasury Bills (T. Bills): On behalf of the Government of India, Treasury Bills are issued by the Reserve Bank of India (RBI). With the help of T. Bills, the Government of India can get short-term borrowings, as they are sold to the general public and banks.
3. Commercial Bills: Commercial Bills also known as Trade Bills or Accommodation Bills are the bills drawn by one organisation on another. Commercial Bills are the common instruments of the money market, which are used in credit sales and purchases.
4. Commercial Paper (C.P.): An unsecured promissory note issued by private or public sector companies with a fixed maturity period varying from 15 days to one year is known as a Commercial Paper.
