What is meant by 'Money Market'? Explain any two instruments used in Money Market.
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Money Market is a market for short-term funds which deals in monetary assets whose period of maturity is upto one year.
Following are the money market instruments:
(a) Call Money: Call money is short-term finance repayable on demand with a maturity period of one day to fifteen days used for inter-bank transactions. It is primarily used by Commercial Banks to maintain a minimum cash balance known as cash reserve ratio (CRR) as stipulated by the RBI.
(b) Treasury Bills: Treasury bills (T-Bills) are issued by the Reserve Bank of India on behalf of the government of India as a short-term liability, and sold to the banks and to the public. The issue period ranges from 14 to 364 days. T-Bills are negotiable instruments, i.e., they are freely transferable. They are issued at a discount and redeemable at par.
(c) Trade Bills/Commercial Bills: Trade bills are bills drawn by one business firm on another to finance credit sales. They are self liquidating as the drawee has to honour them on the date of maturity. They are freely marketable. If sellers require funds before the maturity, he can get it discounted with the bank. It is known as commercial bill after acceptance of the trade bill by a Commercial Bank.
(d) Commercial Paper: A commercial paper is an unsecured promissory note, issued by a corporate firm with a fixed maturity period which varies from 15 days to 12 months. Since a CP is unsecured, it is issued only by a highly creditworthy, reputed leading firms. The original purpose of commercial paper is to provide short-term funds for seasonal and working capital.
(e) Certificate of Deposit: They are unsecured short-term negotiable instruments issued in bearer form. It is issued by the banks against deposits kept by companies and institutions. The tenure ranges from 91 days to one year. It helps to mobilise large amount of money for short period.
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