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Money Market Instruments – RBI Grade B Phase 2
Money Market Instruments
Treasury Bills or T-Bills are basically instruments for short term (maturities less than one year) borrowing by the Central Government.
At present, the active T-Bills are 91-days T-Bills, 182-days T-Bills and 364-days T-Bills. In 1997, the Government had also introduced the 14-days intermediate treasury bills.
Auctions of T-Bills are conducted by RBI. Treasury bills are also issued under the Market Stabilization Scheme (MSS) .
Treasury bills are zero coupon securities and pay no interest.
T-Bills are issued on discount to face value, while the holder gets the face value on maturity. The return on T-Bills is the difference between the issue price and face value..
Individuals, Firms, Trusts, Institutions and banks can purchase T-Bills. The commercial and co-operative banks use T-Bills for fulfilling their SLR requirements.
The State governments do not issue any treasury bills.
Treasury bills are available for a minimum amount of Rs. 25,000 and in multiples of Rs. 25,000.
T-bills auctions are held on the Negotiated Dealing System (NDS) and the members electronically submit their bids on the system. Non-competitive bids are routed through the respective custodians or any bank or PD which is an NDS member.
Commercial Paper (CP)
Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note. CP, as a privately placed instrument, was introduced in India in 1990 with a view to enable highly rated corporate borrowers to diversify their sources of short-term borrowings and to provide an additional instrument to investors.
CP shall be issued in the form of a promissory note and held in physical form or in a dematerialized form through any of the depositories approved by and registered with SEBI.
Companies, Primary Dealers and All India Financial Institutions are eligible to issue CP.
Individuals, banks, other corporate bodies (registered or incorporated in India) and unincorporated bodies, Non-Resident Indians and Foreign Institutional Investors (FIIs) are eligible to invest in CP.
CP can be issued for maturities between a minimum of 7 days and a maximum of up to one year from the date of issue.
CP shall be issued in denominations of Rs. 5 lakh and it multiples thereof.
CP shall be issued at a discount to face value as may be determined by the issuer.
Issuers may buyback the CP, issued by them to the investors, before maturity. Buyback of CP shall be through the secondary market and at prevailing market price. The CP shall not be bought back before a minimum period of 7 days from the date of issue.
Certificates Of Deposit (CD)
Certificate of Deposit (CD) is a negotiable money market instrument and issued in dematerialised form or as a Usance Promissory Note against funds deposited at a bank or other eligible financial institution for a specified time period.
CDs can be issued by (i) scheduled commercial banks (excluding Regional Rural Banks and Local Area Banks) ; and (ii) select All-India Financial Institutions (FIs) that have been permitted by RBI to raise short-term resources within the umbrella limit fixed by RBI.
Minimum amount of a CD should be Rs.1 lakh, i.e., the minimum deposit that could be accepted from a single subscriber should not be less than Rs.1 lakh, and in multiples of Rs. 1 lakh thereafter.
CDs can be issued to individuals, corporations, companies (including banks and PDs) , trusts, funds, associations, etc. Non-Resident Indians (NRIs) may also subscribe to CDs, but only on non-repatriable basis, which should be clearly stated on the Certificate. Such CDs cannot be endorsed to another NRI in the secondary market.
The maturity period of CDs issued by banks should not be less than 7 days and not more than one year. FIs can issue CDs for a period between 1 year and up to 3 years.
The CDs are issued at a discount on face value. Return on them is difference between the issue value and face value.
Banks / FIs cannot grant loans against CDs. Furthermore, they cannot buy-back their own CDs before maturity.
Cash Management Bills (CMBs)
Government of India, in consultation with the Reserve Bank of India, has decided to issue a new short-term instrument, known as Cash Management Bills (CMBs) , to meet the temporary mismatches in the cash flow of the Government.
The CMBs have the generic character of T-bills but are issued for maturities less than 91 days.
Like T-bills, they are also issued at a discount and redeemed at face value at maturity.
The tenure, notified amount and date of issue of the CMBs depends upon the temporary cash requirement of the Government.
Difference between the Money Market and Capital Market
|S.NO||Basis||Money Market||Capital Market|
|1||Duration||Short Term||Long Term|
|2||Investments||Debt Instruments||Debt + Equity|
|3||Sources||Working Capital||Fixed Investments|
|4||Credit rating||Not Available||Available|
|6||Instruments||Treasury Bills||Equity Shares|
|7||Indicator or Economic Growth||No||Yes|
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