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.

All three varieties are zero-coupon instruments (explained below) and are highly liquid, often traded in the secondary market. In addition to these, the government may issue ad-hoc short-term papers called Cash Management Bills (CMBs) with maturities less than 91 days to meet urgent cash requirements, but the standard market T-Bills are the 91d, 182d, and 364d tenors.

Nature of Treasury Bills

Treasury Bills are zero-coupon securities, meaning they do not pay periodic interest. They are issued at a discount to their face (par) value and redeemed at face value on maturity. The investor’s return is the difference between the purchase price and the face value received at maturity, which represents the implied yield.
For example, a 91-day T-Bill with a face value of ₹100 may be issued at ₹98. The investor pays ₹98 at purchase and receives ₹100 on maturity, earning ₹2 as interest.

Issuance and Auction Process

T-Bills are issued through auctions conducted by Reserve Bank of India. Auctions for 91-day T-Bills are usually held weekly, while 182-day and 364-day T-Bills are issued periodically according to a quarterly calendar announced in advance.

• Participants such as banks, primary dealers, and mutual funds submit bids either in terms of yield or price.
• New T-Bill issues are conducted through yield-based auctions, where bidders quote the yield they are willing to accept.
• Bids are accepted in ascending order of yield until the government’s notified amount is fully subscribed. The cutoff yield determined in this process fixes the issue price.

Re-issues of existing T-Bills are conducted through price-based auctions, where bidders quote the price per ₹100 face value. In such auctions, bids are accepted from the highest price downward.

Non-Competitive Bidding and Investment Size

To encourage wider participation, a non-competitive bidding facility is provided for smaller investors, such as individuals and small institutions. These investors are allotted T-Bills at the weighted average price of the competitive auction without having to bid.
The minimum investment in T-Bills is ₹25,000 and thereafter in multiples of ₹25,000. This structure reflects their traditional role as wholesale instruments, though retail participation has increased through non-competitive bidding and secondary market access.

Risk Profile and Economic Role

T-Bills carry virtually no default risk because they are backed by the sovereign. Banks use them extensively, including for meeting Statutory Liquidity Ratio requirements, while mutual funds and other institutions use them for safe short-term deployment of funds.
T-Bills also play an important role in monetary policy. Operations involving their purchase or sale are part of central bank liquidity management, and T-Bill yields serve as key benchmarks influencing other short-term interest rates in the economy.

Commercial Paper (CP)

Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note. CP was first introduced in India in 1990 to enable highly rated corporate borrowers to diversify their short-term funding sources. Over time, the universe of CP issuers has expanded. Corporate entities (companies) are the primary issuers of commercial paper. In addition, primary dealers (PDs) and all-India financial institutions are eligible to issue CP within limits set by RBI for their short-term borrowings.

• Not every company can issue CP; there are eligibility criteria. A corporation wishing to issue CP must have a minimum tangible net worth of ₹4 crore as per its latest audited balance sheet, and it should have a sanctioned working capital credit limit with a bank.
• The company’s bank account should be classified as a “Standard Asset” (i.e., not a non-performing loan) by the financing bank. These conditions ensure that only financially sound and creditworthy firms enter the CP market.
• Furthermore, every CP issue must have a credit rating from a recognized credit rating agency. RBI mandates that the CP must have a minimum rating of at least A2/P-2 or equivalent (which is an investment grade for short-term debt). The rating must be current at the time of issuance and reflect a strong capacity to repay. This requirement protects investors by ensuring only relatively low-risk companies can borrow via CP.

Maturity and Credit Rating Requirements

Commercial Papers have a short-term maturity range. In India, CP can be issued for durations from 7 days up to 1 year (365 days). However, in practice most CPs have maturities in the range of a few weeks to a few months (commonly 30, 90, 180 days, etc.), tailored to the issuer’s cash flow needs and investor demand.

Important:

• A CP’s maturity cannot exceed one year, and it also cannot go beyond the date up to which the issuer’s credit rating is valid. This ensures that a valid rating covers the entire life of the CP instrument.
• CPs are typically issued at a discount to face value, like T-Bills, and redeemed at par. The difference constitutes the interest yield for the investor. They do not usually carry an explicit coupon rate. Corporates decide the discount rate (effectively the interest cost) based on prevailing money market rates and their credit rating.
• Since CP is unsecured (no collateral), only firms with good credit standing can issue it, and they generally pay a rate slightly higher than sovereign (T-Bill) rates, reflecting credit risk.
• The denomination of commercial paper is high – CP is issued in units of ₹5 lakh (₹500,000) or multiples thereof. Also, an investor must invest at least ₹5 lakh in a CP issue, meaning CP is not for small retail investors but for institutional and high-net-worth investors.
• CPs are issued in dematerialized form (or as physical promissory notes if investor insists, though demat is preferred) and are freely transferable by endorsement and delivery.

Usage

Companies use CP to raise money for working capital and other short-term requirements as an alternative to bank loans. It is usually cheaper than bank credit for high-rated firms, especially when liquidity is abundant. Investors in CP include banks, mutual funds, insurance companies, NBFCs, and other corporates – basically entities with short-term surplus funds seeking a better return than bank deposits with acceptable safety. Since CP is not backed by collateral, a default is possible (though rare among top-rated issuers); hence investors rely on ratings and the reputation of issuers.

Certificates of Deposit (CD)

A Certificate of Deposit (CD) is a negotiable money market instrument representing a time deposit with a bank (or eligible financial institution) for a specified period. In essence, it’s like a fixed deposit receipt that is tradable. CDs were introduced in India in 1989 to widen money market instruments and provide investors another option for deploying short-term funds.

Issuers

CDs can be issued by scheduled commercial banks (excluding Regional Rural Banks and Local Area Banks) and by certain permitted All-India Financial Institutions (AIFIs). For banks, issuing CDs allows them to raise bulk deposits outside the usual deposit schemes, to meet short-term liquidity needs or fund growth. For financial institutions (like NABARD, SIDBI, EXIM Bank, etc.), RBI permits an “umbrella limit” for short-term resource raising which can include CDs.

Characteristics

A CD is essentially a bank’s promise to pay back the deposited amount plus interest on the specified maturity date. CDs in India can be issued in dematerialised form or as a Usance promissory note (physical certificate). They are freely transferable by endorsement and delivery (making them negotiable instruments).

• There is no lock-in period, meaning the holder can sell a CD in the secondary market before maturity if needed. However, issuing banks/FIs are not allowed to buy back their own CDs before maturity nor can they offer loans against their own CDs (to prevent circumvention of rules).
• CDs may be issued at a discount to face value like CPs and T-Bills. Banks also have the flexibility to issue CDs on a floating-rate basis (with a transparent market-based reference rate) or on a fixed coupon basis, as long as the interest structure is clearly communicated.

The minimum size of a CD is ₹1 lakh (face value) and CDs are issued in multiples of ₹1 lakh. This means an investor must put at least ₹1,00,000 to get a CD, aligning with the wholesale nature of the instrument. CDs are considered relatively safe because they are obligations of banks, but they are not covered by deposit insurance beyond the usual limits (in India, deposit insurance covers up to ₹5 lakh for regular deposits; but since CDs are generally large, investors consider the issuing bank’s creditworthiness).

Maturity and Regulatory Guidelines

The maturity of a Certificate of Deposit varies by issuer type. For banks, CDs can have a maturity between 7 days and 1 year (365 days). This short-term tenure aligns with money market horizons. For eligible financial institutions (FIs), CDs can have longer maturities, not less than 1 year and up to 3 years. (The longer maturity for FIs recognizes their funding needs, but any CD beyond 1 year by definition strays from “money market” into slightly longer term; however, RBI allows certain FIs to issue up to 3-year CDs under prescribed limits.)

CDs can be issued at either a discount or with a coupon rate. In practice, many bank CDs are issued at a discount like CPs, especially for shorter tenors. Some may offer a fixed or floating interest rate payable at maturity. RBI regulations state banks are free to set the interest rates (competitive market pricing). If floating rate, it must be linked to a market benchmark transparently. The interest (or discount) is usually a bit higher than equivalent-tenor T-Bills, as bank credit risk is slightly higher than sovereign.

Regulatory guidelines

Banks issuing CDs must maintain CRR and SLR (Cash Reserve Ratio and Statutory Liquidity Ratio) on the amounts raised via CDs, just as they do for normal deposits. This ensures that raising funds via CDs doesn’t let banks evade reserve requirements. CDs, being negotiable, are often held in demat form and traded. All trades in CDs are reported on trading platforms (like the FIMMDA or exchange reporting systems) within 15 minutes of the trade, ensuring transparency. There is no grace period for repayment of CDs – on maturity date, payment must be made; if the maturity falls on a holiday, the CD is repaid on the prior working day, as per standard rule.

Investors in CDs include mutual funds, banks (buying CDs of other banks), corporations, trust funds, etc. (NRIs can invest on non-repatriable basis). CDs give investors a slightly higher return than a regular bank term deposit and liquidity if they need to exit early by selling in the market. For banks, it’s a way to attract bulk funds when needed, albeit at market rates.

Repurchase Agreements (Repo and Reverse Repo)

A Repurchase Agreement (Repo) is a short-term money market instrument through which funds are borrowed or lent against the collateral of government securities. In a repo transaction, one party sells securities to another with an agreement to repurchase them at a predetermined price on a specified future date. Economically, a repo is equivalent to a collateralized short-term loan, where the seller of securities is the borrower of funds and the buyer is the lender.
A Reverse Repo is the mirror image of a repo. From the perspective of the lender of funds, the transaction is termed reverse repo. Thus, the same transaction is called a repo for the borrower and a reverse repo for the lender.
Repos are widely used by banks and financial institutions to manage short-term liquidity, since they provide funds while maintaining security through collateral.

Participants in the Repo Market

Participants in the repo market include scheduled commercial banks, primary dealers, mutual funds, insurance companies, non-banking financial companies, and other regulated financial institutions. The central bank, the Reserve Bank of India, is a major participant through its liquidity adjustment operations. Retail investors do not directly participate in repo markets.

Maturity and Instruments Used

Repo transactions are typically very short-term in nature. Most repos are overnight repos, though term repos of longer maturity (up to 14 days or more, as notified) are also permitted. The collateral used in repo transactions mainly consists of government securities such as Treasury Bills, dated government securities, and other approved securities.
Since repos are backed by high-quality collateral, they are considered low-risk instruments. The interest rate on a repo transaction is known as the repo rate.

Role in Monetary Policy and Liquidity Management

The repo market plays a central role in liquidity management and monetary policy transmission. By adjusting the repo and reverse repo rates, the RBI influences short-term interest rates and system-wide liquidity. When liquidity is tight, the RBI injects funds through repo operations; when liquidity is excessive, it absorbs funds through reverse repos.
The repo rate serves as the policy rate and acts as the benchmark for short-term interest rates in the economy. Banks actively use repo markets to manage daily funding needs and to meet reserve requirements efficiently.

Commercial Bills and Bill Market

Commercial Bills are short-term negotiable instruments arising out of genuine trade transactions. They represent credit extended by one business to another for the sale of goods and are drawn as bills of exchange. Typically, a seller draws a bill on the buyer, which is accepted by the buyer and becomes payable on a future date.
Commercial bills usually have maturities ranging from 30 days to 180 days. These bills can be discounted with banks, allowing sellers to obtain immediate funds before the bill’s maturity. The bank charges a discount, which represents the interest cost.

Bill Discounting and Rediscounting

When a bank purchases a commercial bill before maturity by paying its discounted value, it is known as bill discounting. Banks can further rediscount these bills with other banks or financial institutions to manage their liquidity. This creates a secondary market for commercial bills, improving liquidity in the system.
The RBI has historically encouraged the use of bill financing to promote genuine trade-based credit, as opposed to cash credit systems. However, in practice, the bill market in India has remained relatively underdeveloped compared to other money market segments.

Role and Limitations

Commercial bills provide a self-liquidating form of finance, as they are linked to actual trade transactions. They help businesses manage working capital and allow banks to deploy short-term funds against trade-backed instruments.
Despite these advantages, the commercial bill market in India remains limited due to factors such as preference for cash credit, documentation requirements, and lack of a deep secondary market.

Collateralised Borrowing and Lending Obligation (CBLO)

Collateralised Borrowing and Lending Obligation (CBLO) is a money market instrument that facilitates borrowing and lending of funds against collateral in an electronic order-matching system. It was introduced to provide a safe and efficient alternative to the unsecured call money market.
In CBLO transactions, borrowing is fully collateralised by government securities, reducing counterparty risk. The instrument is issued at a discount and redeemed at face value, similar to other money market instruments.

Participants and Tenure

Participants in the CBLO market include banks, mutual funds, insurance companies, NBFCs, and other financial institutions. CBLO transactions can be overnight or for short-term maturities extending up to one year, though overnight and very short-term CBLOs are the most common.

Importance in the Money Market

CBLO provides a stable and secure platform for short-term fund management, particularly for non-bank participants who are not allowed in the call money market. By offering collateralised lending, it enhances overall stability and depth of the money market.

Money Market Mutual Funds (MMMFs)

Money Market Mutual Funds are a category of mutual funds that invest exclusively in money market instruments with short maturities and low credit risk. Their objective is to provide investors with relatively stable returns, high liquidity, and capital preservation. MMMFs channel surplus funds from investors into short-term instruments such as Treasury Bills, Commercial Paper, Certificates of Deposit, Repo instruments, and Call/Notice Money (where permitted).

Investment Profile and Features

Money market mutual funds invest only in instruments with maturities generally not exceeding one year, in line with regulatory norms. Because of their short maturity profile and diversification across issuers, these funds exhibit low interest rate risk and low credit risk compared to longer-term debt funds.
MMMFs offer high liquidity, often allowing investors to redeem their investments on a T+0 or T+1 basis. Returns are market-linked and typically higher than savings accounts but lower than long-term debt funds. Since these funds are regulated and professionally managed, they provide retail and institutional investors indirect access to the money market, which is otherwise dominated by wholesale participants.

Role in the Money Market

Money market mutual funds play an important role in mobilizing short-term savings and providing liquidity to banks, corporates, and the government. They act as major investors in CPs, CDs, and T-Bills, thereby deepening and stabilizing the money market.

Cash Management Bills (CMBs)

Cash Management Bills are short-term debt instruments issued by the Government of India to meet temporary mismatches in its cash flows. They are similar to Treasury Bills in nature but differ mainly in maturity and issuance pattern.

Characteristics of CMBs

CMBs have maturities of less than 91 days, making them ultra-short-term money market instruments. Unlike regular T-Bills, which are issued according to a pre-announced calendar, CMBs are issued on an ad hoc basis depending on the government’s immediate cash requirements.
CMBs are zero-coupon instruments, issued at a discount to face value and redeemed at par on maturity. They are issued by the Reserve Bank of India on behalf of the Government of India and are considered sovereign-risk-free instruments.

Market Role

CMBs help the government manage short-term liquidity without disturbing its regular borrowing program. For investors such as banks and mutual funds, CMBs provide an additional safe avenue for parking surplus funds for very short periods.

Term Money Market

The term money market refers to interbank borrowing and lending of funds for maturities beyond the notice money period (i.e., beyond 14 days) and up to one year. Unlike call and notice money, term money deals involve funds committed for a fixed term and cannot be withdrawn on demand.

Participants and Features

Participants in the term money market mainly include scheduled commercial banks and select financial institutions. These transactions are typically unsecured and are negotiated bilaterally between institutions.
Interest rates in the term money market are generally higher than call and notice money rates, reflecting the longer maturity and reduced flexibility. However, the term money market in India remains relatively underdeveloped due to banks’ preference for collateralised borrowing through repos.

Importance and Limitations

The term money market provides banks with a mechanism to manage short-term funding mismatches over slightly longer horizons. However, concerns about credit risk and the availability of safer collateralised alternatives have limited its depth and activity.

Inter-Corporate Deposits (ICDs)

Inter-Corporate Deposits are short-term unsecured loans extended by one corporate to another. They represent a form of direct corporate-to-corporate lending and are typically used to manage temporary liquidity needs.

Nature and Maturity

ICDs usually have maturities ranging from a few days to six months, though in some cases they may extend up to one year. They are negotiated privately and are not traded in organized markets. Because ICDs are unsecured, the terms and interest rates depend heavily on the creditworthiness and relationship between the participating companies.
Interest rates on ICDs are generally higher than those on bank loans or CPs, compensating lenders for higher credit risk and lower liquidity.

Role and Risks

ICDs provide flexibility and speed in raising short-term funds, especially for companies with limited access to formal money market instruments. However, they carry higher default risk and lack regulatory oversight compared to instruments such as CP or CDs. As a result, ICDs are typically used by corporates with strong mutual trust and risk appetite.