HomeIMPORTANTIndian Money Market - Definition, Structure & Instrument

Indian Money Market – Definition, Structure & Instrument



A money market refers to a market where financial instruments with high liquidity and short-term maturities are traded. money market for buying and selling securities of short-term maturities, ranging from overnight to one year, such as treasury bills and commercial papers. these instruments are very liquid and substitute for money.

According to RBI, the money market means” the center for dealings mainly of short term character, in monetary assets, and its meats the short term requirements of borrowers and provides liquidity or cash to lenders”

According to prof. chaku, the money market may be defined as a place where short-term fund is bought & sold.

The major objectives of the money market are to provide:

  • A balancing mechanism for short-term surpluses and deficiencies.
  • To meet short-term funds requirements to the users at a realistic and reasonable price or last.
  • To bring liquidity to business operations.

Structure of money market in India

India is a vast country and rich in agricultural products. for many years British’s ruled over India and gave benefits to their home country i.e., England. a number of decades have passed since independence but still, the Indian government is not able to provide banking facilities in every corner of the country. that’& why the position of regional balance has not been achieved and India still having its area into three divisions such as a rural, urban and semi-urban.

Keeping in mind about above views, the Indian money market is also classified into two-part:

1. Unorganised Sector:

The unorganized money market means the market which is not governed by any governing body. It operates individually and independently. The major players in the unorganized money market include money lenders, Indigenous bankers, merchants, landlords, Meghan’s, chukars, nidhis, chit funds, etc.

2. Organised sector:

On the other hand, an organized market is a government by the reserve bank of India. this market has overcome all the defects of an unorganized money market and it is well established scientifically managed market. it comprises of:

  • The Reserve Bank of India.
  • The commercial bank i.e., public, private, and foreign banks.
  • The exchange i.e., export, import bank.
  • The cooperative banks.
  • The agriculture bank i.e., NABARD.
  • The non-banking financial institutions such as IDBI, ICICI, UTI, LIC, P.T.O, etc.

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Functions Of Indian Money Market:

Summarized below are some of the important features of a developed money market.

  • It has an organized banking system.
  • It consists of several sub-market that deal with different types of credit instruments.
  • A developed money market consists of near-money assets of various types like bills of exchange, treasury bills, and bonds.
  • It also has access to financial sources from within the country as well as from foreign investments.
  • The money market securities are considered to be highly liquid and are fixed-income securities that have a shorter maturity term.
  • Issuers of the money market instrument have a good credit rating. therefore, it is obvious that the country’s money market instruments are safe for investment purposes.
  • One of the main features of money market instruments is that they are issued at discounted prices to face value.

The instrument of the money market:

There are multiple types of money market instruments available, each of them aiming to boost the total productive capacity and hence, the GDP of the country. it also provides secure returns to the investors looking for low-risk investment opportunities for a short tenure.

The list of money market instruments traded in the money market are:

1. Treasury bill (T-Bills):

When the government is in need of short-term funds, then they issue treasury bills through RBI are known to be one of the safest money market instruments available. however, treasury bills carry zero risks. i.e. are zero risk instruments. it is just like a promissory note or finance bill having a maturity of a maximum of one year. the treasury bills do not pay any interest but are available at a discount to face value at the time of the issue.

Treasury bills can be classified in two ways i.e. based on maturity and based on types.

  • Ordinary treasury bills it is issued to the public and other financial institutions for meeting the short-term requirement of the government.
  • Adhoc treasury bills are sold through tender or aviation.

Currently, there are 3 types of treasury bills issued by the central government of India via auctions, which are 91 days, 182 days, and 364 days treasury bills.

2. Call money market (CMM):

It is short -term loan market. the main lenders of the fund in the call money market are SBI, LIC, GIC, UTI, IDBI, NABARD, and other financial institutions, and the main borrowers are the scheduled commercial banks. it is also called the inter-bank call money market. the interest rates in the market are market-driven and hence highly sensitive to demands and supply. also, the interest rates have been known to fluctuate by a large % at certain times.

3. Commercial bill (CB):

It is also called a trade bill. it is a promise to pay a fixed specified amount in the specified period by the purchaser of the goods to the seller.

Commercial bills, also a money market instrument, work more like the bill of exchange. businesses issue them to meet their short-term money requirements.

# Importance of commercial bills(C.B):

  • Liquidity and self-liquidity.
  • Central bank central.
  • Discounting and re-discounting facility.
  • Safe and good return.

# Drawbacks:

  • Less promotion to bill scheme.
  • Stamp duty.
  • Absence of secondary market.
  • Lack of genuine trade bills.
  • Absence of acceptance houses.

4. Certificate of deposit:

A certificate of deposit or CD is a negotiable term deposit accepted by commercial banks.it is usually issued through a promissory note.

CD’S Can be issued to individuals, corporations, trusts, etc. also, and the CD’S can be issued by scheduled commercial banks at a discount. and the duration of these varies between 3 months to 1 year. the same, when issued by a financial institution, is issued for a minimum of 1 year and a maximum of 1 year, and a maximum of 3 years.

5. Commercial paper:

Corporates issue CP to meet their short-term working capital requirements. hence serves as an alternative to borrowing from a bank. also, the period of commercial paper ranges from 15 days to 1 year.

The reserve bank of India lays down the policies related to the issue of CP’S. as a result, a company requires RBI, S prior approval to issue a cp in the market. also, cp has to be issued at a discount to face value. and the market decides the discount rate.

Denomination and the size of CP:

Minimum size-Rs, 25 lakhs.

Maximum size-100% of the issuer’s working capital.

6. Repurchase agreements (Repo):

Repurchase agreements, also known as reverse repo or simply as the reverse repo, loans of a short duration that are agreed upon by buyers and sellers for the purpose of selling and repurchasing. these transactions can only be carried out between RBI-approved praties repo/ reverse repo transactions can be only done between the parties approved by RBI. transactions are only permitted between securities approved by the RBI like treasury bills, central or state government securities, corporate bonds, and PSU bonds.

7. Banker’s acceptance:

One of the most common money market instruments traded in the financial sector, a banker’s acceptance signifies a loan extended to the stipulated bank, with a signed guarantee of repayment in the future.

Since money market instruments are traded wholesale over the counter, they account to be purchased in standard units by an individual investor.

Similar to a treasury bill, a banker’s acceptance is often used in money market funds and specifies the details of the repayment like the amount to be repaid, the date of repayment, and the details of the individual to which the repayment is due. banker’s acceptance features maturity periods ranging from 30 days up to 180 days.

8. Inter-Bank term market:

This market was initially only for commercial and cooperative banks but is now available to various financial institutions as well. the interest rates are market-driven. also, the market is predominantly a 90-day market.

9. Money market mutual fund (MMMF):

Money market mutual funds, MFS are highly liquid open-ended dent funds generally used for short-term cash needs. the money market fund deal only in cash and cash equivalents with an average maturity of years with fixed income.

The fund manager of a money market fund invests in money market instruments like treasury bills, commercial paper, certificates of deposits, bills of exchange, etc.

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Defects of the Indian money market:

The money market is the market for lending and borrowing of short-term funds. a well-developed money market denotes an implementation of effective monetary policy. but the Indian money market suffers from many weaknesses.

1. Lack of interrogation:

The Indian money market is divided into two sectors viz, the organized and unorganized money market. but both the market is completely separate from each other. they are working independently and have little effect on each other. RBI is fully effective in controlling to organized sector. but, it has very little control over the unorganized sector.

2. Lack of rational interest rates structure:

The Indian money market exist too many interest rates. for example. the deposit and lending rates of commercial banks, the borrowing rate government, etc. in the past this created excess demand for credit and the RBI had to rely often on cash reserve ratio. though the RBI has tried to bring rationality in the interest rates, the situation in the Indian money market is still not effective.

3. Existence of an unorganized money market:

The existence of the unorganized sector in the money market still prevails in the Indian money market. the indigenous banker does not make any distinction between short-term and long-term finance. they have no coordination with each other and have no link with other banking sectors. they do not follow any sound banking regulations. the RBI has no control. over these bankers.

4. Absence of an organized bill market:

In the Indian money market, there is an absence of an adequate bill market. there is an absence of a commercial bill market or a discount for short-term commercial bills. there are many factors responsible for the underdeveloped bill market such as,

  • relying more on cash transactions,
  • cash credit of stamp duty,
  • seller’s limited use of bills,
  • the imposition of heavy stamp duty,
  • absence of acceptance houses etc.

5. Shortage of funds in the money market:

The lack of banking habits, inadequate banking facilities, less saving habits, etc. created to have a shortage of funds in the money market. on the other hand, the increasing demand for loanable funds in the money market far exceeds its supply.

6. Inadequate banking facilities:

Now a -days, commercial banks have opened many new branches of banking facilities. but, it still leaves. much scope for further development. in a developing country like India, people live below the poverty line and have fewer saving habits. their savings are very small and they do not have much access to banking facilities till now.

7. Seasonal stringency of money:

During the part of the year, the interest rates become high due to the increasing demand for funds in the money market for the operation in the agricultural sector. basically, it is seen in the period from October to June.

Measures to improve the Indian money market:

The major drawback of the Indian money market is its high volatility. gradually the money market transaction is increasing. but, on the recommendation of the sukhmoy Chakravarty committee (on the review of the working of the monetary system) and the Narasimham committee, RBI initiated a series of reforms in the Indian money market. the following are some of the measures undertaken.

Suggestions to remove defects:

In a view of the various defects in the Indian money market, the following suggestions have been made for its proper development.

  • The activities of the indigenous bank should be brought under the effective control of the reserve bank of India.
  • Hundies used in the money market should be standardized and written in a uniform manner in order to develop the all-India money market.
  • Banking facilities should be expanded especially in the market unbanked and neglected areas,
  • Discounting and rediscounting facilities should be expanded in a big way to develop the bill market in the country.
  • For raising the efficiency of the money market, the number of clearinghouses in the country should be increased and their work improved.
  • Adequate and less costly remittance facilities should be provided to the businessman to increase the mobility of capital.
  • Variations in the interest rates should be reduced.

Money market vs. capital markets:

The money market is defined as dealing in debt of less than one year. it is primarily used by governments and corporations to keep their cash flow steady, and for investors to make a modest profit.

The capital market is dedicated to the sale and purchase of long-term debt and equity instruments. the term capital market refers to the entirety of the stock and bond markets. while anyone can buy and sell a stock in a fraction of a second these days, companies that issue stock do so for the purpose of raising money for their long-term operations while a stock’s value may fluctuate, unlike many money market products, it has no expiration date (unless of course, the company itself ceases to operate).


RBI: Reserve Bank of India
NABARD: National Bank for Agriculture and Rural Development
IDBI: Industrial Development Bank of India
UTI: Urinary tract infections
LIC: Life Insurance Corporation

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Ankush Kumar
Ankush Kumarhttp://sabkuchhsikho.com
I am Ankush Gupta, a professional Blogger, Digital Marketer, YouTuber, Public Speaker & Entrepreneur. After completing my studies in Lucknow, I moved to Delhi my home town and enjoyed my entrepreneurial journey.

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