There are two kinds of markets where borrowing and lending of money takes place between fund scarce and fund surplus individuals and groups. The markets which cater to the need of short term funds are called Money Markets while the markets that cater to the need of long term funds are called Capital Markets.
Thus, money markets is that segment of financial markets where borrowing and lending of the short-term funds takes place. The maturity of the money market instruments is one day to one year. In our country, Money Markets are regulated by both RBI and SEBI. Money markets are also sometimes called discount markets.
How Money markets are different from capital markets?
While money markets are markets for short term fund needs; capital markets are markets for long term funds, debts, equity, shares etc.
Segments of money markets in India
Money Market in India is divided into unorganized sector and organized sector. The Unorganized market is old Indigenous market which includes indigenous bankers, money lenders etc. Organized market includes Governments (Central and State), Discount and Finance House of India (DFHI), Mutual Funds, Corporate, Commercial / Cooperative Banks, Public Sector Undertakings (PSUs), Insurance Companies and Financial Institutions and Non-Banking Financial Companies (NBFCs). Organized Money Market is regulated by RBI as well as SEBI.
Various instruments of Money Markets
The organized money market in India is not a single market but is a conglomeration of markets of various instruments, which are called Sub-markets of Money Market. These include Call Money / Notice Money / Term Money Market, Treasury Bills, Commercial Bills, Certificates of Deposits, Commercial Bills, Commercial Papers, Money Market Mutual Funds and Repo / Reverse Repo. The most active segment of the money market is “Overnight Call market” or repo.
Call Money, Notice Money and Term Money Markets
Call Money, Notice Money and Term Money markets are sub-markets of the Indian Money Market. These refer to the markets for very short term funds. Call Money refers to the borrowing or lending of funds for 1 day. Notice Money refers to the borrowing and lending of funds for 2-14 days. Term money refers to borrowing and lending of funds for a period of more than 14 days.
Why the call / notice money market is called Inter-Bank Market?
In India, 80% demand comes from the public sector banks and rest 20% comes from foreign and private sector banks. Then, around 80% of short term funds are supplied by Financial Institutions such as IDBI and Insurance giants such as LIC. Rest 20% of the short term funds come from the banks. In this way, major players in call / notice money markets are banks and financial institutions, which are both lenders and borrowers. Due to this, the call / notice money market is also called Inter-Bank Market.
Interest rates in call / notice money markets
Call Money / Notice Money market is most liquid money market and is indicator of the day to day interest rates. If the call money rates fall, this means there is a rise in the liquidity and vice versa. Interest Rates in Call / Notice Money Markets are market determined i.e. by the demand and supply of short term funds. The intervention of RBI is prominent in the short term funds money market in India and it can influence the rates prominently.
MIBOR refers to Mumbai Interbank Offer Rate. It is the standard reference of interest rates in call / notice money markets in India. It is the average of the call money rates offered by a set of specific banks on a given day. MIBOR is calculated by the NSE (National Stock Exchange) after taking quotes from a specific set of Banks. MIBOR serves as a benchmark to which various entities in the market benchmark their short term interest rates.