List of popular money market instruments used in India: 1. Commercial Papers (CPs) 2. Certificate of Deposits (CDs) 3. Inter-Bank Participation Certificates (IBPCs) 4. Treasury Bills (T-Bills) 5. Commercial Bills 6. Call/Notice Money 7. Repurchase Agreements (REPOs).

Instrument # 1. Commercial Papers (CPs):

Commercial Paper is an unsecured promissory note issued with a fixed maturity, by a company, and approved by RBI. This was introduced in India in 1990.

The period of maturity may range from 7 days to one year. The instrument is negotiable by endorsement and delivery. It is usually issued at a discount on the face value. It is a debt instrument issued by large credit-worthy companies as a means for short term finance (working capital needs). The total amount of CP issue should not exceed the working capital limits sanctioned by banks or financial institutions.

In addition to highly rated corporates (CRISIL P-2 or equivalent rated), primary dealers and all India financial institutions are also allowed to access short-term finance through CPs. The minimum size of issue shall be Rs. 5 lakhs and multiples thereof.


Manufacturing companies, Leasing and Finance Companies, Mutual Funds and Financial Institutions are the major issuers of commercial papers. The net worth of the issuing company shall be Rs. 4 crores (as per latest audited balance sheet) or more. CPs can be issued to individuals, banks, corporates, non-corporates, NRIs and FIIs. However, scheduled commercial banks are major investors in CPs.


Following are the advantages of Commercial Papers:

(i) The issue and transaction of a commercial paper is simple. There is not much documentation between the issuer and investor.


(ii) It is a flexible instrument. The maturity date can be tailored as to the cash- flow of the company.

(iii) Corporates get direct and quick access to institutional investors. They can issue CPs directly to investors- hence it is also called Direct Paper.

(iv) Commercial paper is an attractive source of working capital funds, because of low cost.

(v) It assures high return to investors.


The investors of CP prefer to hold them till maturity, so there is little activity in the secondary market for CP.

Instrument # 2. Certificate of Deposits (CDs):

Certificate of Deposits (CDs) is a negotiable money market instrument issued in dematerialized form as a usance promissory note, for funds deposited at a bank or with other eligible financial institution for a specified time period.

They are short term time deposit instruments issued by banks and financial institutions to raise large sums of money. It is a debt instrument and bearer certificate which is negotiable in the market. It is issued by banks/financial Institutions (FIs) against deposits kept by individuals, companies and institutions. They are like bank term deposits accounts. Unlike traditional time deposits (Fixed Deposits) these are freely negotiable instruments and are often referred to as Negotiable Certificate of Deposits (NCDs). In Indian market RBI introduced this in 1989.

A CD pays the depositor a specified amount of interest during the term of the certificate, plus the purchase price of the CD at maturity. Today negotiable CDs are sold in large denominations and can be resold in the secondary market. This makes negotiable CDs highly liquid. The original purchaser need not hold the CD to maturity. However, Banks cannot discount them or negotiate them.


CDs can be issued by scheduled commercial banks (excluding RRBs and Local Area Banks) and selected all India financial institutions permitted by RBI (IDBI, IFCI, SIDBI, EXIM bank etc.). Banks can offer CDs which have maturity between 7 days and 1 year. CDs from financial institutions have maturity between 1 and 3 years. CDs are available in the denominations of Rs. 1 Lakh and in multiple thereafter.

With effect from 2002, Banks and FIs can issue CDs in de-materialized form only. However, investors can request for certificate in physical form.


Following are the features of CD:


(i) It is a document of title to time deposit.

(ii) It is usually issued at discount to face value.

(iii) Banks have the freedom to issue CDs depending on their requirements.

(iv) Banks are neither permitted to grant loans against CDs nor to buy them back prematurely.


(v) The transaction cost of CD is lower.


Following are the advantages of CD:

(i) CDs are the most convenient instruments to depositors as they enable their short term surpluses to earn higher return.


(ii) CDs also offer maximum liquidity as they are transferable by endorsement and delivery.

(iii) This is an ideal instrument for the banks with short term surplus fund to invest.

(iv) Since the interest rate is high, investors hold CDs till maturity, so the secondary market for CDs is not so active.

Instrument # 3. Inter-Bank Participation Certificates (IBPCs):

Participation Certificate or IBPC is another instrument introduced in the market following the recommendation of the working group known as the Vaghul Committee on money market. It is an inter-bank participation to fund their short-term needs. The participation certificates are issued by banks for periods of 91 days and 780 days. Banks may be having long book debts and may be in necessity to find temporary support of funds to tide over.

The objective is to provide some degree of flexibility in the credit portfolio of banks and smoothen consortium arrangements. This is purely an inter-bank instrument to even out liquidity within the banking system. The RBI has authorized the banks to fund their short term needs from within the system through issuance of IBPC in 1988.

The participating banks viz., the issuing and borrowing banks get access to funds against advances comparatively with less procedural complexities. Banks having surplus funds can thus build up and earn more on their assets over a certain period. The rate of interest on participations would be left free to be determined between the issuing bank and the participating bank.

Instrument # 4. Treasury Bills (T-Bills):


Treasury bills are short term promissory notes issued by RBI on behalf of the central government to bridge the deficit between the revenue and expenditure in the budget. It is usually issued at a discount for a specified period, namely, 91 days, 182 days and 364 days. The government promises to pay the specified amount mentioned therein to the bearer of the instrument on the due date.

It does not carry regular interest payments as it is issued at a discount. This means that they are sold for an amount that is less than what the government promises to pay at maturity. The difference between the purchase price and the face value is the return from buying the T-Bill.

It is a finance bill as it does not arise out of any trade transactions. It does not need any endorsement or acceptance as it is a claim against the government.

As of now, T-Bills are issued in dematerialized form by making entries for purchases and sales in the Subsidiary General Ledger (SGL) account maintained with the RBI. T-bills are also available in physical form on request.


Following are the features of T-bills:


(i) T-bills are the important money market instruments used by the Govt.

(ii) To raise funds.

(iii) T-bills are zero risk instruments since they are backed by Government.

(iv) Treasury bills offer short-term investment opportunities, generally up to one year.

(v) Treasury bills are available for a minimum amount of Rs. 25,000 and in multiples thereof.

(vi) Treasury Bills are negotiable instruments.


(vii) At present, the Government of India issues three types of treasury bills viz., 91-day, 182- day and 364-day bills.

There are two types of T-Bills, namely, ordinary and adhoc.

Ordinary treasury bills are issued to the public and financial institutions for meeting the short term financial requirements of the Central Government.

Adhoc treasury bills are issued to State Governments, semi government Departments and foreign central banks. The Government of India and RBI entered in to a formal agreement on September 4, 1994 to phase out the system of adhocs.

The participants in the T-bills market includes RBI, commercial banks, state governments, financial institutions, primary dealers, provident funds, corporate customers, mutual funds, foreign banks, FIIs, Public etc. State governments and commercial banks are the dominant users of T-bills other than the afore-said participants.

According to the period of issue, T-bills can be classified into three:


I. 91 days T-bills

II. 182 days T-bills

III. 364 days T-bills

Treasury bills are sold through an auction process according to a fixed auction calendar announced by the RBI. Banks and primary dealers are the major bidders in the competitive auction process. In a competitive bid, participants submit their bids to the RBI who then decides the cut-off yield/price and makes the allotment. The instrument price is quoted at a discount price to the par value of Rs. 100 considering the return needed.

RBI accepts non-competitive bids from state governments, non-government provident funds and foreign central banks. They will be allotted T-bills at a weighted average price determined in competitive bidding.



Following are the advantages of T-bills:

(i) T-bills help in effective cash management of the Government

(ii) It is an important tool for the central bank for market intervention and to control liquidity and short-term interest rates.

(iii) The yield is assured and risk is zero as the T-bills are backed by Government.

(iv) They are highly liquid as there exists an active secondary market.

(v) The transaction cost is very low.

(vi) No tax will be deducted at source from the maturity value on T-bills.

(vii) Commercial banks can maintain their SLR and CRR requirements by using T-bills.

Instrument # 5. Commercial Bills:

Commercial bills arise out of trade transactions. When goods are sold on credit the seller draws a bill on the buyer for the due amount. The buyer accepts it agreeing to pay the amount after specific period to the person mentioned in the bill or to the bearer of the bill. It is drawn for a short period ranging from three to six months.

These bills are transferable by endorsement and delivery and can be discounted or rediscounted. In a bill market the bill of exchanges are bought and sold.

In short, Commercial bills are negotiable instruments drawn by the seller on the buyer which are, in turn accepted and discounted by commercial banks.

Commercial banks, co-operative banks, financial institutions, mutual funds etc. can participate in the bill market. Thus, the seller can get payment immediately by discounting the bills with commercial banks or other financial intermediaries. At maturity date the intermediary claims the amount of money from the person who has accepted the Bill.

There are many types of bills such as demand and usance bills, clean bills and documentary bills, inland and foreign bills, export bills and import bills, accommodation bills and supply bills, indigenous bills or hundis, Derivative usance promissory notes etc.

Instrument # 6. Call/Notice Money:

It means a loan for very short period i.e. one to fourteen days. The loans are repayable on demand at the option of either the lender or the borrower. Call money is money at call. Call money market is a market where short-term surplus funds of commercial banks, and other financial institutions, are traded. The participants, usually, borrow and lend call/ notice money for one day/ for a period up to 14 days. The call money market is the highly liquid market, and accounts for a major share of the total turnover of the money market. .

Inter Bank Term Money:

Inter-Bank market for deposits of maturity beyond 14 days and up to three months is referred to as the term money market.

In Call money market, if money is lent for a day it is called call money (money at call) or overnight money. On the other hand, if it is for a period of more than one day and less than 14 days, it is called notice money or money at short notice.

Participants in call/notice money market currently include banks, both scheduled commercial banks (excluding RRBs) and co-operative banks other than Land Development Banks and Primary Dealers (PDs), both as borrowers and lenders.

Scheduled commercial banks are the large-scale borrowers and lenders in the call money market. Major industrial and commercial centres like Mumbai, Delhi, Chennai, Ahmedabad, etc., are important call market centres.

The deals are conducted both on telephone as well as on the Non-Deliverable Swap (NDS) Call system, which is an electronic screen based system set up by the RBI for negotiating money market deals between entities permitted to operate in the money market.

As the money can be called back at any time, call money is highly liquid. The commercial banks can, thus, meet large sudden payments and remittances. It is highly profitable also, if they have surplus, as the call rates (interest rates) are high. It also enables the commercial banks to maintain their statutory reserve requirements. However, volatility of call money rates (varies from day-to-day, hour-to-hour,’ minute-to-minute etc.) is a drawback.

Instrument # 7. Repurchase Agreements (REPOs):

A Repurchase agreement, also known as a Repo is the sale of securities together with an agreement by the seller to buy back the securities at a later date. The repurchase price will be greater than the original sale price, the difference effectively representing interest, known as repo rate. It is a secured short-term loan in which the security (repo securities) serves as collateral. The party who sells a security under a repurchase agreement is borrower and the party who buys the security is the lender. The collateral security in the form of Subsidiary General Ledger (SGL) is transferred from the seller (borrower) to the buyer (lender).

Only RBI approved securities (repo securities) can be traded in this way. They include Central and State government bonds, Treasury bills, Corporate bonds, Bonds of Public Sector Units, financial institutions etc. Banks, Primary Dealers, Non-Banking Finance Companies, State- Owned Financial Institutions, Mutual Funds, Housing Finance Companies and Insurance Companies or any other entity allowed by RBI only can undertake repo deals.

A repo is combination of a secured cash loan and a forward contract. As it is a means of funding by selling a security held on a spot (ready) basis and repurchasing the same on a forward basis, it is also called a ready forward deal.

Two types of repos are currently in operation in India -Market repos (inter-bank repos) and RBI repos. Inter-bank repo is the repo/reverse repo transactions entered in to between banks among themselves and with DFHI and STCI. As part of its Open Market Operations (OMOs) RBI also undertakes repo/reverse repo deals with primary dealers and scheduled commercial banks to control liquidity in the market. This is called RBI Repo.

A reverse repo is the mirror image (exact opposite) of a repo. In a reverse repo, securities are acquired with a simultaneous commitment to resell at a specified time and period. In other words, the same transaction is repo for one party (seller/borrower) and reverse repo for the other party (buyer/lender). Hence whether a transaction is a repo or a reverse repo is determined only in terms of who initiated the first leg of the transaction.

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