This article throws light upon the eleven popular instruments of money market. The instruments are: 1. Call Money/Notice Money/Term Money 2. Treasury Bills 3. Repo and Reverse Repo 4. Commercial Paper 5. Certificate of Deposits 6. Banker’s Acceptance 7. Inter Corporate Deposits 8. CBLO (Collateralised Borrowing And Lending Obligation) 9. Inter-Bank Participation and Others.

Instrument # 1. Call Money/Notice Money/Term Money:

Call money is lent to bill brokers by bankers and others at interest on the terms that it is repayable “at call” or on demand. (A bill Broker is a merchant who buys and sells bill of exchange. Bill brokers are more commonly termed as discount houses.

Discount houses are an important part of the short term money market, One of their important functions being to provide a source of first class bills for bankers. They are tenderers for Treasury Bills and they also deal in short-dated Government Bonds. They act as the channel through which the RBI controls the amount of the country in the financial system of the country.)

The call money should be ready for payment on call even if the call is placed overnight. In other and simple words call money is to be paid at moment a call is placed without waiting for any time.


Notice Money:

In case of notice money some time is provided for repayments which may vary from 24 hours to 14 days. Call money or notice money are vulnerable for creating volatility in the market.(For example if you borrowed certain amount on certain rate of interest from the money lender as a call money or notice money and on receiving the call or notice you shall be bound to arrange the funds at exorbitant rate).

In order to keep control over such volatilities of money markets the RBI keeps an eye on the functioning of the market and if necessary immediately issues specific or certain guidelines to control such happenings.

There is not much difference between Call Money and Notice Money. Since loans are of short term nature ranging between 1-14 days. In case the money is borrowed for one day it is known as call money and if the it is for more than one day and up to 14 days (i.e., less than 15 days) it is known as Notice Money and if money is lent for 15 days or more than 15 days in the inter-bank market it is known as Term Money.


In case of Term Money the RBI from time to time puts certain restrictions to specified type of institutions to borrow in the market. For example some time before some of institutions like Mutual Funds, IDBI, UTI were also allowed in call market only for the purpose of lending but after August 2005 these have been restricted.

Likewise Mutual Funds are not permitted to borrow under Term Money. At present RBI, Banks and Primary Dealers, SBIDFHI Ltd. (Discount and Finance House in India and SBI Gilt were amalgamated in 2004 and now known as SBI DFHI Ltd.), Co-operative Banks, (RRBs are not permitted), (Individuals, companies Firms and Mutual Funds can only purchase the Treasury Bills, commercial papers, Certificate of Deposits) are permitted for both lending as well as borrowing. Banks most borrow to fulfill their mandatory requirement of SLR and CRR and also when they are short of funds for any other reason.

In fact both call money and notice money are short term advances made by banks to stock­brokers, jobbers, and bill brokers, repayable on demand (i.e., at “call”) or at up to 7 or 14 days (“at short notice”). This item represents the bank’s most liquid item, after cash.

Instrument # 2. Treasury Bills:

Treasury Bills are in short obligations of the government issued on weekly basis by the Reserve Bank of India. This instrument of money market is meant to meet short term requirements of the government of India. In fact during the financial crises faced by the British Government in India Treasury Bills were introduced in the early 20th century say about 1917 to provide financial help to the than government and the practice is continuing till date.


The Treasury Bills are short term instruments issued by the Reserve Bank of India and are treated to be the safest instruments with no risk at all or having Zero risk. Such type of bills are issued on the discounted value. In other words these are sold on less value in comparison to their face value.

Suppose a T.Bill having face value of Rs. 100/- is sold for Rs. 97.85 for a specified period the purchaser shall get Rs. 100/- on the maturity of the bill. The benefit of the purchaser is the margin amount of purchasing and redeeming the bill. In the above case it may be Rs. 100 -Rs. 97.85 = Rs. 2.15.

In fact treasury bills are issued by the government of India to meet its short term obligations. These Bills are issued with different maturity dates like 91 days, 182 days and 364 days. These bills are traded in the money market as per their maturity value.

For Example:


T.Bills with maturity of 91 days: The auction of such bills are done on weekly basis on every Wednesday.

The T.Bills with maturity up to 182 days: On fortnightly basis on every alternate Wednesday(It should not be a reporting week).

T.Bills with maturity within 364 days are auctioned on every alternate Wednesday in a reporting week.

Treasury bills are issued at a discount and in bearer form. Application for the issue of treasury bills is by tender, allotment being made at the higher tender rate and downwards, until the whole issue has been allotted. There is minimum or zero risk in these instruments and are available in both primary and secondary market.


It can also be used by banks for maintaining statutory SLR level as per RBI specifications and are generally issued in the form of SGL (Subsidiary General Ledger) in other words only entries are made in the ledger maintained by RBI.

Instrument # 3. Repo and Reverse Repo:

Repo as also called Repurchase Agreement are sort of a very short term loans which are obtained by sale of securities wherein two parties agree to sell and repurchase the same securities. This agreement is a commitment by the seller to repurchase the sold security on a specified rate and on specified date.

When two parties enter into repo agreement the seller sells specified securities with an commitment to repurchase the same at mutually decided at future price and date. Why so happens if the seller is bound to repurchase the very same security which he is selling. It is because the seller does not wish to part with the securities for a long time.

In fact he wants to retain the securities but at present or currently he is in dire need of cash for a short period. Since he also want to retain the sold securities he enters into agreement to repurchase the same in future on a pre-decided date and price.


In this way the seller of securities gets a short term loan to meet his immediate cash requirements. It is a simple, cheap and effective way to raise short term funds. The rate at which the money is lent is called Repo Rate which is mutually decided by both parties. Repo transactions are safe because these are backed by the transfer of securities.

The Repo/Reverse Repo transactions can be done only between the parties approved by the RBI like Banks, Primary Dealers, Financial Institutions, Mutual Funds, Insurance Companies etc. Banks mostly use this system for overnight borrowings.

All securities cannot be transacted under this system. Only those securities can be transacted which are approved by the RBI like Government of India and State Government securities, Public Sector Undertaking Bonds, Treasury Bills, FI Bonds etc.

Reverse Repo:


The Reverse Repo is Reverse Repurchase Agreement. Reverse means to return the other way round. In case of Repo the seller makes a commitment to repurchase the sold securities on the terms decided between seller and buyer. In case of reverse repo the buyer purchases the securities to resell the same to the seller on an agreed date and at pre-decided price.

This transaction of repo and reverse repo is if seen from the point of view of the seller it is called Repo and when it is seen with a point of view of the buyer it is called Reverse Repo. Whether a transaction is Repo or Reverse Repo depends upon which party instated the transaction.

In order to keep a control on these transactions the RBI plays a vital role to control money circulation in the economy. Either it injects more money into the market to ascertain the required liquidity or sucks out the money from the market. All this is done because RBI holds certain government securities with it in the form of government investments.

When money supply in the economy rises, the RBI sells these securities to the commercial banks. The rate at which these securities are sold is called Repo rate. When money supply in the economy is low, RBI buys these securities from commercial banks. When it buys securities it pays to commercial banks for buying the securities just to inject the money in the economy. The rate at which it buys securities from the commercial banks is called Reverse Repo Rate.

With regard to Repo and Reverse Repo it can be said in short that the transaction is called Repo for the institution which is borrowing the money and it is “Reverse Repo” for the institutions who is lending the money.

What is Repo Rate?


Whenever the banks have any shortage of funds they can borrow it from the Reserve Bank of India. The Repo rate is the rate at which commercial banks borrow money from RBI. RBI periodically revises its rates either reducing or increasing as per the current requirement of the national economy. In case repo rate is reduced it help banks to get funds at a cheaper rate. In case Repo rates are increased by the RBI the borrowing by commercial banks from RBI becomes more expensive.

What is Reverse Repo Rate?

Reverse Repo Rate is the rate at which Reserve Bank of India borrows money from commercial banks. It is always a matter of happiness for commercial banks to lend money to the RBI because with RBI their money is always safe with good return. If RBI increases Repo rates it will attract more funds from banks.

And if banks for the sake of earning more interest deploy more and more funds with RBI, it will cause the money to be drawn out of the banking system. With a view to keep control on the money market in larger interest of the national economy the RBI changes repo and reverse repo rates from time to time.

Instrument # 4. Commercial Paper:

Commercial Paper is an unsecured privately placed money market instrument. It is also a short term money market instrument popularly known as “CP” issued in the form of promissory note. The commercial papers are issued by highly rated corporate borrowers at a discounted value on face value.

Mostly these papers are issued by highly rated corporate borrowers, Primary Dealers, Satellite Dealers (system of SD has been discontinued since 2002) and Financial Institutions to meet their short term fund requirements primarily for working capital requirements, against receivables, maintaining inventory and other type of short term liabilities.


Introduced in India in 1990 with a view to provide an additional money market instrument to provide a source of funds to corporate at cheaper rate of interest in comparison to commercial banks. These are basically promissory notes issued with fixed maturity period ranging between 7 days to one year. Minimum amount of CP should not be less than 5 lacs and thereafter in multiple thereof.

Main thing is these are issued by private companies and are unsecured. But because issuing company have very high credit ratings these are easy bought by those having surplus funds. Being short term instruments these are beneficial to both seller and the buyer. For example if company has sold its products worth Rs. 10 lacs with credit period of 3 month.

The company shall be getting money after a period of three months. But because of certain exigency they require the said money immediately. Instead of taking a loan from bank on higher rate of interest it can issue a commercial paper in the form of unsecured promissory note at a discount of certain percentage say 5 % of the face value of Rs. 10 lacs to be matured after a period of 3 months.

In this way they shall get the funds instantly to meet it exigency and the buyer will earn interest of Rs. 50000/- over a period of 3 months. Commercial papers are frequently traded in the secondary market as promissory notes and can be freely transferred in demat form. Although they are unsecured but risk remains minimum because of the goodwill and backing of highly rated corporates.

Reserve Bank of India issues guidelines from time to time. No participant is permitted to issue CP without getting rated done by an approved rating agency like Credit Rating Information Services of India Ltd. Popularly known as CRISIL, The Investment Information and Credit Rating Agency of India Ltd.

Popularly known as ICRA, Credit Analysis and Research Ltd. Popularly known as CARE, or such other credit rating agencies as may be specified by the RBI from time to time. Minimum credit rating should be P-2 of CRICIL or equivalent thereof if done by any other rating agency.


The transactions of commercial papers can be done through IPA only and only scheduled banks can act as Issuing and paying Agents (IPA). The initial investor in CP shall pay the discounted value of the CP by means of a crossed account payee cheque to the account of the issuer of CP through IPA. And like wise on the maturity of CP the holder of CP shall present the instrument for payment to the issuer through IPA. In case the CP is held in demat form it shall be redeemed through depository and receive the payment from the IPA.

Some other features of CP are:

1. Cheaper source of funds in comparison to banks,

2. Can be issued/traded in multiple of Rs. 5 lacs,

3. Highly liquid instrument,

4. Minimum net worth of issuer should not be less than as prescribed by RBI presently it is Rs. 4 crores,


5. Transferable by endorsement and delivery,

6. Issued at discount to face value, and

7. Can be issued in Demat form also.

Instrument # 5. Certificate of Deposits:

The certificate of deposits is an evidence of a deposit with a bank repayable on a fixed date. It is a fully negotiable bearer document transferable by delivery. To ensure the marketability of the certificates there needs to be what is called a “secondary market” that is somewhere the holder of certificate can sell it if he so wishes. The secondary market is provided by the discount houses and also the banks in the inter-bank market.

Like a bank term deposit it is a short term borrowing in the form of a short term usance promissory note issued by a bank like a certificate entitling the bearer to receive the interest. In other words a certificate of deposit is a short term borrowing note, like a promissory note, in the form of a certificate. It enables the bearer to receive the interest. It has a maturity date, a fixed rate of interest and fixed value.

Popularly known as “CD” it is issued at discount to the face value. CDs are subject to payment of duty under the stamp Act 1899. It usually has a term between 3 month to 5 years. The money is blocked for the term for which CD has been issued and the holder of CD cannot withdraw the money on demand. But can be liquidated on payment of penalty.


The returns on Certificate of Deposits are higher than T-Bills because it assumes higher level of risk. The returns on CDs are calculated in two ways one on annual percentage yield known as (APY) and second on annual percentage rate known as (APR). In APY interest earned is based on compounded interest calculation and whereas in case of APR simple interest calculation is done to calculate the return.

Interest is difference between the issue price and the face value. The Certificate of Deposits are like bank term deposits but are freely negotiable instruments. Banks also use CD to maintain their CRR and SLR. The Certificate of Deposit was introduced in India in 1989.

The act of rediscounting is the act of a person, institution, bank who has discounted a bill of exchange in subsequently selling to another person or entity; for example, a bank discounts a bill for a customer and than has it rediscounted by the central bank.

All the scheduled commercial banks are eligible to rediscount with the Reserve Bank of India which is also a central bank of India genuine trade bills arising out of sale/purchase of goods. In addition to banks Primary dealers (approved by the RBI) are also permitted to rediscount bills. Normally the maturity date of the bill can be within 90 days of rediscounting.

Instrument # 6. Banker’s Acceptance:

When it is said Banker’s acceptance it denotes banker’s guarantee for payment. In fact it is simply a bill of exchange drawn by a person and accepted by a bank for a trade transaction. A seller sends goods to buyer and raises a bill drawn on him for payment, the buyer in turn takes the bill to his banker to raise loan for making the payment. The bank depending on the creditworthiness of the buyer accepts the bill for payment. This process is called banker’s acceptance.

In other words it is a short term credit investment guaranteed by a bank. It carries buyer’s promise to pay to the seller a certain specified amount (the cost of goods purchased) at a certain date and if accepted by the bank the payment to seller is also guaranteed by the bank by hypothecating the goods as collateral.

The banker’s acceptance is mostly used to finance exports, imports and other goods transactions. Generally such bills are drawn for 90 days but term can vary between 30 days to 180 days. The holder of the bill i.e. seller can sell it in the secondary market even before maturity of the bill at discount to the face value in case of need of immediate funds.

Basically Banker’s Acceptance has its origin in trade bills which were issued by merchants but now are very important money market instrument of secondary market and also treated to be safe investment as they have the obligation to honor payment by both the buyer as well as bank.

Instrument # 7. Inter Corporate Deposits:

It means deposits given by one corporate to another corporate. It is a deposit made by one corporate having surplus funds to other corporate bodies. Since no bank finance in involved in such transactions and such transactions are made mutually between corporate themselves these transactions are governed under the Companies Act 1956(section 372 A). This market revolves round the corporates themselves.

Such transactions are purely unsecured loans and are non-negotiable/non-transferable and therefore have no secondary market. The rate of interest in such transactions is much higher than other markets. Being unsecured the risk level is also higher.

Strong corporate groups also use banks funds for this market. As per RBI guidelines the primary dealers are permitted to accept the inter corporate deposits up to 50 % of their net worth and for a period not less than 7 days but they cannot lend in ICD market.

Inter Corporate Deposits are mostly of Two Types:

1. Fixed Rate ICD:

The two parties involved in the transaction as lender and borrower negotiate the Specified Amount, Rate of interest, period or term of maturity of the ICD in the beginning of the transaction which remain same and unchangeable for the entire term of ICD. The rates are generally linked to interbank call money market rates.

2. Floating Rate ICD:

Since rates in such transactions are linked to call money market which is subject to daily volatility some corporates opt for floating rate ICD which may be linked to either NSE overnight call rates.

Instrument # 8. CBLO (Collateralised Borrowing And Lending Obligation):

This money market is relatively a new money market instrument announced by RBI in its Monetary and Credit Policy for the year of 2002-2003. Where was the need to introduce a new instrument in the money market? The history of money market shows that a number of entities were either phased out of the money market or their participation was restricted in terms of ceiling on call borrowing and lending transactions and their access was restricted to the call money market.

The Reserve Bank of India lately decided to allow operations to these phased out or restricted entities by way of this new instrument developed by Clearing Corporation of India Ltd. Popularly known as CCIL. But all the transactions under CBLO are to be done on line. It can therefore be said that CBLO is a discounted instrument available in electronic book entry form for the maturity period ranging from one day to 90 days( can be extended up to one year as per RBI).

In order to make market participants to borrow and lend funds, CBLO is an obligation by borrower to return the money borrowed, at a specified future date. This is an authority to the lender to receive money lent, at a specified future date with an option/privilege to transfer the authority to another person for value received. Also there is an underlying charge on securities held in custody of CCIL for the amount borrowed or lent.

It is a money market instrument that enables entities, which have been restricted participation in the call money market either to borrow or to lend.

It is a discounted instrument which can be traded on CBLO screen which is an electronic trading platform with the matching of the bids and yields take place on best yield time priority basis. So far rate of interest is concerned the participating parties are free to decide the rate.

The participants in this market are Banks, Financial Institutions, Insurance Companies, Mutual Funds, Primary Dealers, Non-Banking Finance Companies,, Non-Government Provident Funds etc.

CBLO dealing system is an automated order driven, on-line matching system provided by CCIL, so as to enable members to borrow and lend funds against under CBLO scheme. It also disseminates information regarding deals concluded, volumes, rate etc.

Instrument # 9. Inter-Bank Participation:

Popularly known as IBP is like Inter Corporate Deposit scheme. Instead of corporate this scheme is prevalent in banking system. This instrument facilitates the adjustment of short term requirement of funds to be transacted between the different banks. One bank can borrow from another bank in case of need and similarly any bank with surplus fund can lend to another bank.

These transactions are mainly of two types Risk sharing basis and without risk sharing basis In case of risk sharing basis transaction period normally is for 91-180 days at the rate of interest decided mutually by lending and borrowing banks. When the transaction is made without risk sharing basis the tenure cannot exceed 90 days. Again the rate of interest depended to be decided mutual by both the lending and the borrowing banks.

Instrument # 10. Money Market Mutual Funds:

It is a scheme introduced by the RBI permitting scheduled commercial banks and public financial institutions in 1992 to constitute a program for investing their resources collected from public in money market instruments like T-Bills, Govt. Securities, bonds and debentures (maturity up to one year), call/notice money, CPs, CDs etc. The instrument is just in its infancy stage waiting to take off.

Instrument # 11. Liquid Mutual Funds:

This particular mode is meant for those who have large surplus funds whether individuals or institutions. Basically this is unsecured money market instrument and funds are invested for a very short period say 7 -20 days. After having invested in this instruments withdrawals can be allowed only on the notice of at least 24 hours.

NAV is declared by the mutual funds on daily basis. Return depends on the rise and fall of the market.