1. Money Market in India

The Indian money market is the marketplace for short-term funds and financial instruments (with maturities of up to one year). It plays a critical role in balancing short-term liquidity in the economy. Money market instruments are highly liquid, low-risk, and can be easily converted to cash.

They provide a way for borrowers (like banks or the government) to meet short-term funding needs and for lenders/investors to earn returns on surplus funds while keeping their money safe.

Key Participants

The money market’s main participants include the Reserve Bank of India (RBI) – which regulates the market and intervenes via monetary operations – and the Government of India – which raises short-term funds by issuing Treasury Bills.

• Banks (public, private, cooperative) are the predominant players, borrowing and lending funds in the interbank market.
• Primary Dealers (PDs) also participate, especially in government securities markets. Large corporations access the money market by issuing Commercial Paper for their short-term funding.
• Non-Banking Financial Companies (NBFCs) and other financial institutions use money markets to manage reserves and liquidity.
• Mutual funds , particularly money market mutual funds, invest in instruments like T-bills, CP, CDs to park investors’ short-term surplus.

These participants together ensure that short-term funds flow efficiently between those with temporary surpluses and those with temporary deficits.

Call/Notice Money

Call money refers to short-term funds lent or borrowed on an overnight basis (duration of 1 day) in the interbank market. Notice money refers to short-term funds for 2 to 14 days duration. In other words, call money deals mature the next day, while notice money deals require a notice (usually 2+ days) before repayment, with a maximum maturity of two weeks. These are unsecured loans between banks (no collateral), used to manage daily liquidity.

Who participates in Call / Notice Money Market?

Only select institutions can participate in the call/notice money market. Scheduled commercial banks (excluding regional rural banks, until recent changes) and Primary Dealers (PDs) are allowed to borrow and lend in the call/notice market. (As of latest guidelines, even Regional Rural Banks have been permitted limited access as lenders/borrowers in call/notice markets under RBI’s norms.)

Non-bank entities like mutual funds or NBFCs are not permitted to directly participate in call/notice money markets, making it primarily an interbank market.

Role in Interbank Liquidity

The call money market is pivotal for interbank liquidity management . Banks with surplus funds lend to those facing short-term shortages, ensuring no idle cash stays unused and no bank goes short of funds. The interest rate in this market, known as the call rate , fluctuates based on demand-supply of funds and serves as an important indicator of banking system liquidity. If liquidity is tight, call rates tend to spike; when liquidity is ample, call rates soften. The RBI closely monitors call rates as they reflect the short-term interest rate in the economy.

Through its interventions (like repo operations or open market operations), RBI can indirectly influence the call money rate and thus overall liquidity. In essence, call/notice money markets provide the safety valve for day-to-day adjustments, helping banks meet reserve requirements and payment obligations by borrowing overnight or for a few days. This maintains stability in the financial system and prevents temporary cash mismatches from escalating into bigger issues.

Treasury Bills (T-Bills)

Treasury Bills (T-Bills) are short-term debt instruments issued by the Government of India to meet its short-term funding needs. They are considered the safest money market instruments since they are backed by the government’s credit. In India, T-Bills are issued by RBI on behalf of the Government. Investors in T-Bills effectively lend to the government for a short duration, helping finance the government’s temporary budget deficits or cash flow mismatches. Since T-Bills are part of the money market, their tenor is less than one year .

Types of T-Bills: 91-day, 182-day, 364-day

The Government of India currently issues three main tenors of T-Bills in the market viz. 91-day, 182-day, and 364-day treasury bills.

• The 91-day T-Bill (about 3 months maturity) is auctioned on a weekly basis (usually every Wednesday) by RBI.
• Similarly, 182-day (6 months) and 364-day (12 months) T-Bills are regularly auctioned (typically on Wednesdays as well) as per an issuance calendar.

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