Key Money Market Terminology

The most important money market concepts are listed below:

Repo Rate

Repo Rate is the fixed interest rate at which the RBI provides short-term funds to banks (or other eligible institutions) against government securities as collateral. When a bank needs overnight or short-term funds, it can go to RBI and enter into a repo transaction: it sells securities to RBI with a promise to buy them back later, paying interest at the repo rate. The repo rate is a benchmark policy rate – changes in it influence overall interest rates in the economy.

For example, an increase in the repo rate typically leads banks to raise their own lending rates (loans become costlier) and vice versa. Outside RBI policy, the term “repo rate” can also refer to the prevailing interest rate in the market for general repo transactions between any two parties for a given collateral and tenor.

Reverse Repo Rate

This is the counterpart to the repo rate in the RBI policy framework. The Reverse Repo Rate is the rate at which banks can deposit their surplus funds with the RBI on a short-term basis (usually overnight) and receive government securities as collateral. It’s essentially the interest rate banks earn for parking money with RBI.

The reverse repo rate is typically set lower than the repo rate because RBI wants to encourage banks to lend to the market rather than leave too much idle with the central bank. It serves as the floor for the overnight interest rate corridor – banks normally wouldn’t lend to others at a rate lower than what they could get risk-free from RBI. An increase in the reverse repo rate can entice banks to park more funds with RBI (draining liquidity from the market), whereas a decrease has the opposite effect.

Bank Rate

The bank rate is a traditional tool of monetary policy, defined as the rate at which RBI is willing to lend to banks for the long term, without any collateral under the lender-of-last-resort facility. Historically, the bank rate was used to signal the direction of interest rates and was linked to various interest rates in the economy.

In today’s framework, the bank rate is largely symbolic, as short-term repo operations have taken center stage. However, the bank rate is still published by RBI and is typically aligned with the MSF rate (and thus slightly above the repo rate). It has some technical uses: for example, penalties on banks (like for missing CRR/SLR requirements) or the interest charged on refinance to state financial corporations are often specified as “bank rate + penalty.” For exam purposes, note that bank rate now changes automatically with MSF rate adjustments and is not used for daily liquidity operations.

Cash Reserve Ratio (CRR)

CRR is the percentage of a bank’s net demand and time liabilities (essentially, total deposits and certain other liabilities) that must be kept as cash with the RBI. For instance, if CRR is 4% and a bank has ₹100 crore in NDTL, it must keep ₹4 crore on deposit with RBI. This amount cannot be used by the bank for lending or investment. CRR serves two purposes: it ensures banks have a minimum cushion of liquidity, and it is a direct lever for RBI to modulate the money supply.

A change in CRR has an immediate effect on the banking system’s available funds. CRR deposits earn no interest, meaning CRR imposition imposes a cost on banks. It’s a blunt tool but very powerful in tightening or easing overall liquidity. At present, CRR is maintained fortnightly (with daily minimum requirements) and RBI can alter it via notification (usually, changes are announced in policy reviews).

Statutory Liquidity Ratio (SLR)

SLR is the percentage of a bank’s net demand and time liabilities that must be invested in specified liquid assets. Typically, these assets are government securities (central and state), and can also include cash, gold, and unencumbered approved securities. For practical purposes, banks keep the bulk of SLR in the form of government bonds and T-bills.

Suppose SLR is 18% and a bank has ₹100 crore NDTL, it must hold ₹18 crore in SLR securities. These securities are often kept in the bank’s SLR portfolio and can also be used for repo borrowing if needed (thus providing liquidity in times of need). SLR not only ensures banks always have a reserve of safe assets, but it also creates a captive demand for government debt. Over time, RBI has reduced SLR to free up more resources for credit, but it remains a crucial prudential requirement. Banks cannot lend out the SLR quota; if they fall below SLR at any day’s end, they face penalties.

Liquidity Adjustment Facility (LAF)

The LAF is the operational procedure through which RBI conducts daily liquidity management. It was introduced as part of reforms to provide a formal mechanism for injection and absorption of liquidity. The LAF has two legs: repo auctions (for injecting funds into the banking system) and reverse repo auctions (for absorbing funds), usually on an overnight basis.

Under normal conditions, banks and PDs submit bids to borrow (or lend) money at the repo (or reverse repo) rate, and RBI allocates funds accordingly (usually fully honoring requests at the fixed rate, up to a limit).

The LAF helps in steering the overnight interest rates. If the market is very liquid, more banks will participate in reverse repo (parking funds), and if tight, more will use repo (borrowing). RBI can fine-tune by conducting additional variable-rate term repo or reverse repo auctions of different tenors as needed. Essentially, the LAF is the “facility” through which the announced policy rates are actualized in the market daily.

Marginal Standing Facility (MSF)

The MSF is a window for banks to borrow from RBI overnight, even when they’ve exhausted their normal quota under LAF or don’t have sufficient securities above the SLR requirement. Banks can dip into their SLR holdings (up to a certain percentage of NDTL) to avail funds at the MSF rate. The MSF rate is typically 0.25% (25 basis points) higher than the repo rate.

This facility was set up to prevent situations where overnight rates shoot up wildly if a few banks are desperately short of funds – now they have a ceiling rate (MSF rate) at which they can get money from RBI.

For example, if the repo is 6% and MSF is 6.25%, no bank should need to pay more than ~6.25% overnight because they can always borrow from RBI at that rate against securities. MSF borrowing is usually a last resort (hence marginal), used sparingly because it’s costlier than market funds, but it provides confidence to the system that liquidity is available.

Open Market Operations (OMO)

OMOs refer to the outright purchase or sale of government securities by the central bank to control the money supply. Unlike repo/reverse repo which are short-term and reversible, OMOs permanently add or drain base money.

When RBI conducts an OMO purchase, it buys government bonds from the market, which increases the reserves (cash) in the banking system (and thus increases banks’ ability to lend or invest). An OMO sale does the opposite, taking away reserves in exchange for bonds. OMOs are often used for longer-term liquidity management or to signal a stance.

They can also influence yields on government securities (thereby affecting borrowing costs for the government and corporates via interest rate transmission). For example, a series of OMO purchases (injecting liquidity) might lower short-term interest rates and also cap long-term yields, aiding economic growth. Conversely, OMO sales might help cool an overheating economy by pulling out money. OMOs are announced publicly and are a key part of RBI’s toolkit.

Primary Dealer (PD)

A Primary Dealer is a specialized financial institution authorized by RBI to act as an underwriter in primary auctions of government securities and as a market maker in the secondary market. PDs can be standalone entities or bank subsidiaries. Their obligations include bidding for a certain percentage in every G-sec auction (underwriting commitment), providing two-way quotes in the market for government securities and T-Bills (ensuring liquidity), and achieving a minimum turnover ratio. In return, PDs have privileged access to certain facilities: they can participate in LAF, avail extra liquidity support from RBI if needed, and they earn underwriting commission. In the money market context, PDs are active participants in call and repo markets too, since dealing in T-bills and repos is part of their operations. For example, if a PD buys a lot of T-bills in an auction, it might finance that holding by borrowing in the call/repo market. PDs thus help connect the government securities market with the broader money market and ensure that RBI’s monetary policy actions are transmitted through market rates efficiently.

Treasury Bills (T-Bills)

T-Bills are short-term government securities issued for maturities of up to one year (in India: 91, 182, 364 days). They are zero-coupon instruments – issued at a discount and redeemed at face value. The yield (return) on a T-bill is determined by the difference between the face value and the issue price. T-Bills are often used as the risk-free reference rate for short-term, since they are backed by the government. Banks, PDs, insurance companies, and mutual funds are large holders of T-bills. In terms of terminology, note that when someone says a “91-day T-bill yield”, they’re referring to the annualized yield corresponding to its current market price. T-bills play a role in monetary policy as well – for instance, RBI might do OMO with T-bills or use them for MSS.

Commercial Paper (CP)

As described earlier, CP is a short-term unsecured promissory note issued by corporations, financial institutions, and PDs. In terminology, CPs are identified by their tenor and issuer, like “ABC Corp 3-month CP”. They are typically issued in demat form now. The interest rate on CP is usually quoted as a discount rate. One might hear “CP rates have gone up” meaning corporations are having to issue CP at higher yields due to tighter liquidity or risk perception. In exam terms, remember CP is for companies what CD is for banks – both are negotiable short-term instruments but different issuers.

Certificate of Deposit (CD)

A CD is a negotiable certificate issued by a bank acknowledging a deposit for a fixed term with an interest to be paid. In terminology, CDs might be referred by term and issuer, like “3-month CD rate” often reflects the going rate at which top banks are issuing 90-day CDs. It’s an important indicator of short-term interest rates in the market (much like CP rate). Keep in mind the difference: CD is a bank’s liability (like a short-term bond from a bank), whereas CP is a corporate’s liability.

Call/Notice Money Rate

This is the interest rate paid on call money (overnight funds) and notice money (2-14 days funds). There can be a slight distinction in rates; however, generally when people talk about the call rate, they imply the overnight rate. The call rate is published by the FBIL (Financial Benchmarks India Pvt. Ltd.) based on actual trades (Mumbai Interbank Overnight Rate – MIBOR – is an example of an overnight benchmark).

Notice money rate would refer to the rate for, say, a 7-day or 10-day money deal, which usually is a bit higher than overnight since the lender’s money is locked in for longer. These rates fluctuate daily. A significantly high call rate (relative to repo) indicates liquidity tightness; a very low call rate might indicate surplus liquidity or low credit demand.

Collateralized Borrowing and Lending Obligation (CBLO)/Tri-party Repo

These terms relate to secured lending arrangements in the money market. CBLO was a product introduced by CCIL where lenders and borrowers could lend/borrow against collateral held by CCIL, with an obligation structure ensuring repayment. CBLO was popular among non-bank entities for overnight and short-term lending as it offered the safety of collateral without direct dealing in securities. Tri-party Repo (TREPS) is the modern equivalent that replaced CBLO. In a tri-party repo, a third-party agent (like CCIL) takes care of the collateral management between the borrower and lender.

The terms “CBLO rate” or now “TREPS rate” refer to the interest rate at which these secured overnight funds are dealt. often, it tracks close to the repo rate, but market demand/supply can make it vary. For example, mutual funds might lend huge amounts on TREPS, driving the rate down on certain days. Understanding tri-party repo is relevant as it broadens the concept of repo beyond just bilateral deals – it’s now a major part of the overnight market for many institutions.

Banker’s Acceptance (BA)

A BA is essentially a commercial bill accepted by a bank. In international trade or even large domestic trade, if a seller draws a time draft on a buyer, the buyer’s bank may “accept” it (guarantee payment).

Once accepted, that draft becomes a banker’s acceptance. BAs are typically sold at a discount in the secondary market (with the bank’s credit behind it). They are a way for companies to borrow on the credit of a bank. In Indian context, while banks do finance bills, the specific BA market is not huge, but the term could appear in a general sense. If you see a reference like “90-day BA rate”, that’s more common in the US where 90-day dollar BAs were a benchmark. For India, just remember BA = trade bill guaranteed by a bank, making it a money market instrument.

Underwriting (of T-Bills/G-sec)

Underwriting in money market context refers to the commitment given typically by PDs to purchase unsold portions of government security auctions. Primary Dealers submit underwriting bids before auctions, which RBI can invoke if needed (a portion called “devolvement” happens if the auction demand is weak). The term “devolvement on PDs” is used when PDs have to pick up those unsold securities.

Underwriting commission is paid to them for this risk. This mechanism ensures that every T-Bill or bond auction doesn’t fail due to temporary lack of demand; PDs provide a backstop. In terms of terms: “Devolve” means RBI forced some securities onto underwriters; “cut-off price/yield” (coming next) is related to auctions as well.

Cut-off Yield/Price

In an auction of money market instruments like T-Bills (or bonds), RBI receives bids at various yields. The cut-off yield is the highest yield at which the RBI accepts bids to sell the full amount of the issue.

This corresponds to a cut-off price (since higher yield means lower price). For example, if a 91-day T-Bill auction has bids ranging from 6.50% to 6.75%, and RBI needs to sell ₹X crores, it may accept all bids up to 6.70% and part of the bids at 6.75% (which becomes the cut-off yield). Investors bidding at yields below cut-off get full allotment at the cut-off price; those at cut-off yield might get partial allotment if it’s over-subscribed at that level. This term is relevant because exam questions can be around interpreting what cut-off yield means (basically the yield of the last accepted bid).

Money Market Mutual Fund (MMMF)

A mutual fund scheme that invests in money market instruments like T-Bills, CP, CD, call money, repos, etc. These funds are often marketed as liquid funds or ultra short-term debt funds. Key terms related: NAV (Net Asset Value) which for an MMMF is usually stable or changes very slowly as these instruments don’t fluctuate much; Exit load – many liquid funds have no exit load or a very minor one for very short holding periods, to encourage use as a cash parking vehicle. From a terminology standpoint, just remember MMMFs allow individuals to indirectly access the money market. Regulators (SEBI and RBI) keep an eye on them because large flows in or out can impact the markets (for example, if corporate treasuries pull out money at quarter-end, it can cause short-term rates to jump).

Mumbai Interbank offered Rate (MIBOR)

MIBOR is the overnight benchmark interest rate for unsecured loans between banks in the Indian interbank market. It’s akin to LIBOR (London Interbank offered Rate) but for Mumbai and for rupee loans. It was first introduced by the NSE in 1998. Today, FBIL publishes the overnight MIBOR based on actual traded rates (through NDS-call platform).

MIBOR is used as a reference rate for various financial contracts like interest rate swaps, FRA, or for pricing some corporate loans. For instance, a loan might be given at “MIBOR + 50 bps”. It’s essentially the weighted average call rate on a given day, standardized as a benchmark. With LIBOR phased out globally, domestic benchmarks like MIBOR have gained more prominence for local currency contracts.

Yield to Maturity (YTM)

YTM is a concept from bond markets, but applicable to money market instruments as well, particularly discount instruments. The YTM is the total return anticipated on an instrument if it is held until it matures, considering both interest (if any) and the gain/loss if bought at a price different from face value.

For a Treasury Bill which pays no coupon, the YTM would be based purely on the discount (e.g., if a 182-day T-bill of ₹100 face is bought at ₹97, the ₹3 gain over half a year would be annualized to get YTM). YTM helps compare instruments of different maturities or coupon structures on an equal footing (annualized percentage). In money markets, you often quote yields (annualized) even for short durations to standardize comparisons.

Discount Rate

For money market instruments like T-Bills, CPs, and other zero-coupon instruments, the discount rate is the rate at which the instrument is priced at a discount to its face value. Unlike YTM, which is usually computed on a compounding basis, discount rate might be calculated on simple interest over the instrument’s period. For example, if a 91-day T-bill is priced with a discount rate of 6%, it means for 91 days the return is 6% per annum simple, so roughly 6% * (91/365) ≈ 1.5% actual return, which would be the discount from face value.

Financial professionals convert between discount rate and YTM for T-bills (because by convention T-bills are often quoted on a discount yield basis). For exam purposes, know that “issued at discount” means the instrument doesn’t pay periodic interest but gives the interest as the difference from face value, and the discount rate is one way of quoting that interest.