The money market refers to trading in very short-term debt investments, short-term debt instruments are traded on the money market. It involves an ongoing exchange of funds between businesses, governments, banks, and other financial institutions for terms that can range from one night to as long as a year.
The money market comprises banks and financial institutions as intermediaries, 20 of them are primary dealers in treasury securities. Interbank clean and repo-based lending, BB's repo, reverse repo auctions, BB bills auctions, and treasury bills auctions are primary operations in the money market, there is also active secondary trade in treasury bills (up to 1-year maturity).
1. Certificate of deposit: It is a negotiable term deposit accepted by commercial banks. It is usually issued through a promissory note. CDs can be issued to individuals, corporations, trusts, etc. Also, the CDs can be issued by scheduled commercial banks at a discount. And the duration of these varies between 3 months to 1 year. The same, when issued by a financial institution, is issued for a minimum of 1 year and a maximum of 3 years. It functions similarly to a fixed deposit, but with better negotiating power and more flexible liquidity conditions.
2. Commercial Paper: Corporates issue CDs to meet their short-term working capital requirements. Hence serves as an alternative to borrowing from a bank. Also, the period of commercial paper ranges from 15 days to 1 year. This money market product functions as a promissory note created by a business or organization to raise short-term capital. It is an unsecured instrument, meaning there is no connected collateral.
3. Treasury bills: Treasury Bills are one of the most popular money market instruments. They have varying short-term maturities it can only be issued by a nation's central government, when necessary, funds are needed to fulfill its immediate obligations. These do not pay interest but do allow for capital gains because they can be bought at a discount and paid in full when they mature. Due to the government's backing of Treasury Bills, there is very little risk.
4. Repurchase Agreements: Repurchase agreements are short-term borrowing instruments in which the issuer receiving the funds makes a promise to pay it back or repurchase it in the future. Government securities are typically traded under repurchase agreements.
5. Banker's Acceptance: In the financial industry, this popular money market product is exchanged. With a signed promise of future repayment, a loan is issued to the designated bank after a banker's acceptance. Bankers' acceptances (BAs) are financial instruments that arise out of commercial transactions and are essentially a guarantee by a bank to make payment.
6. Call Money: Call money refers to deposits or borrowings made overnight that mature automatically the next working day. It is a short-term loan that can be repaid immediately and is utilized for interbank trades. Call money is a crucial element of the money market. It has a number of unique qualities, including being a vehicle for managing funds for a very little period of time, an easy transaction to reverse, and a way to manage the balance sheet. Dealing in call money gives banks the chance to make interest on their excess cash.
7. Short Notice Money: It refers to transactions involving money that last longer than overnight but less than 14 days (maturity of 2 days to 14 days). Both call money and short notice money are short-term loans between financial institutions, hence they are comparable. Short notice loans are repaid up to 14 days after the lender gives notice
The
interest rates in the market are market-driven and hence highly sensitive to
demand and supply. Also, the interest rates have been known to fluctuate by a large
% at certain times.