India Money Market
India Money Market is a monetary system in which short-term money lending is included. Financial institutions use money market instruments to finance short-term monetary requirements of various sectors such as agriculture, finance and manufacturing. In the past 20 years, India's money market performance has been excellent.
Central bank of the country - the Reserve Bank of India (RBI) has always been playing the major role in regulating and controlling the India money market. The intervention of RBI is varied - curbing crisis situations by reducing the cash reserve ratio (CRR) or infusing more money in the economy.
Money market instruments take care of the borrowers' short-term needs and render the required liquidity to the lenders. The varied types of India money market instruments are treasury bills, repurchase agreements, commercial papers, certificate of deposit, and banker's acceptance.
Treasury Bills (T-Bills) -
Treasury bills are short-term financial instruments issued by the central bank of the country. This is one of the safest money market instruments because it is devoid of market risk, though return on investment is not so big. Treasury bills are broadcast by primary and secondary markets as well. The maturity period for treasury bills is 3 months, 6 months and 1 year, respectively.
Repurchase Agreements -
Repurchase agreements are also called repos. Repos are short-term loans that buyers and sellers agree upon for selling and repurchasing. Repo transactions are allowed only among RBI-approved securities like state and central government securities, T-bills, PSU bonds, FI bonds and corporate bonds. Repurchase agreements, on the other hand, are sold off by sellers, held back with a promise to purchase them back at a certain price and that too would happen on a specific date. The same is the procedure with that of the buyer, who purchases the securities and other instruments and promises to sell them back to the seller at the same time.
Commercial Papers -
Commercial papers are usually known as promissory notes which are unsecured and are generally issued by companies and financial institutions, at a discounted rate from their face value. The fixed maturity for commercial papers is 1 to 270 days. The purposes with which they are issued are - for financing of inventories, accounts receivables, and settling short-term liabilities or loans. The return on commercial papers is always higher than that of T-bills. Companies which have a strong credit rating, usually issue CPs as they are not backed by collateral securities.
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