Money market refers to the market for short term assets that are close substitutes of money, usually with maturities of less than a year. A well functioning money market provides a relatively safe and steady income-yielding avenue, for short term investment of funds both for banks and corporates and allows the investor institutions to optimize the yield on temporary surplus funds. The RBI is a regular player in the money market and intervenes to regulate the liquidity and interest rates in the conduct of monetary policy to achieve the broad objective of price stability, efficient allocation of credit and a stable foreign exchange market. As per definition given by RBI the money market is "the centre for dealings, mainly short-term character, in money assets. It meets the short-term requirements of borrower and provides liquidity or cash to the lenders. It is the place where short-term surplus investible funds at the disposal of financial and other institutions and individuals are bid by borrowers, again comprising Institutions, individuals and also the Government itself" The main segments of the money market are the call/notice money, term money, commercial bills, treasury bills, commercial paper and certificate deposits. Mr.G. Crowther in his treatise "An Outline of Money defines money market as "the collective name given to the various firms and institutions that deal in the various grades of near-money". The money market is as concrete as any other market and one could see it in operation in London's Lambard Street or New York's Wall Street. Typical of any other commodity market, there is very close relationship between different segments of the money market, (like bankers' Call Money market, commercial paper, treasury bills) that the one is affected by the other. In other words different segments of the money-market are broadly integrated.

The most active segment of the money market has been the call money market, where the day to day imbalances in the funds position of scheduled commercial banks are eased out. The call notice money market has graduated into a broad and vibrant institution .

Call/Notice money is the money borrowed or lent on demand for a very short period. When money is borrowed or lent for a day, it is known as Call (Overnight) Money. Intervening holidays and/or Sunday are excluded for this purpose. Thus money, borrowed on a day and repaid on the next working day, (irrespective of the number of intervening holidays) is "Call Money". When money is borrowed or lent for more than a day and up to 14 days, it is "Notice Money". No collateral security is required to cover these transactions.

The entry into this field is restricted by RBI. Commercial Banks, Co-operative Banks and Primary Dealers are allowed to borrow and lend in this market. Specified All-India Financial Institutions, Mutual Funds, and certain specified entities are allowed to access to Call/Notice money market only as lenders. Reserve Bank of India has recently taken steps to make the call/notice money market completely inter-bank market. Hence the non-bank entities will not be allowed access to this market beyond December 31, 2000.

From May 1, 1989, the interest rates in the call and the notice money market are market determined. Interest rates in this market are highly sensitive to the demand - supply factors. Within one fortnight, rates are known to have moved from a low of 1 - 2 per cent to dizzy heights of over 140 per cent per annum. Large intra-day variations are also not uncommon. Hence there is a high degree of interest rate risk for participants. In view of the short tenure of such transactions, both the borrowers and the lenders are required to have current accounts with the Reserve Bank of India. This will facilitate quick and timely debit and credit operations. The call market enables the banks and institutions to even out their day to day deficits and surpluses of money. Banks especially access the call market to borrow/lend money for adjusting their cash reserve requirements (CRR). The lenders having steady inflow of funds (e.g. LIC, UTI) look at the call market as an outlet for deploying funds on short term basis.

Inter-bank market for deposits of maturity beyond 14 days is referred to as the term money market. The entry restrictions are the same as those for Call/Notice Money except that, as per existing regulations, the specified entities are not allowed to lend beyond 14 days.

The market in this segment is presently not very deep. The declining spread in lending operations, the volatility in the call money market with accompanying risks in running asset/liability mismatches, the growing desire for fixed interest rate borrowing by corporates, the move towards fuller integration between forex and money markets, etc. are all the driving forces for the development of the term money market. These, coupled with the proposals for rationalisation of reserve requirements and stringent guidelines by regulators/managements of institutions, in the asset/liability and interest rate risk management, should stimulate the evolution of term money market sooner than later. The DFHI (Discount & Finance House of India), as a major player in the market, is putting in all efforts to activate this market.

Treasury Bills are short term (up to one year) borrowing instruments of the union government. It is an IOU of the Government. It is a promise by the Government to pay a stated sum after expiry of the stated period from the date of issue (14/91/182/364 days i.e. less than one year). They are issued at a discount to the face value, and on maturity the face value is paid to the holder. The rate of discount and the corresponding issue price are determined at each auction.

• The 14/91/182/364-days bills are issued for a minimum value of Rs.25,000 and multiples thereof.

• They are issued at a discount to face value.

• Any person in India including individuals, firms, companies, corporate bodies, trusts and institutions can purchase the bills.

• The bills are eligible securities for SLR purposes.

• All bids above a cut-off price are accepted and bidders are permitted to place multiple bids quoting different prices at each auction. Till November 6, 1998, all types of T-Bills auctions were conducted by means of 'Multiple Price Auction'. However, since November 6, 1998, auction of 91-days T-Bills are being conducted by means of 'Uniform Price Auction'. In the case of 'Multiple Price Auction' method successful bidders pay their own bid prices, whereas under 'Uniform Price Auction' method, all successful bidders pay an uniform price, i.e. the cut-off price emerged in the auction.

• The bills are generally issued in the form of SGL - entries in the books of Reserve Bank of India. The SGL holdings can be transferred by issuing a SGL transfer form. For non-SGL account holders, RBI has been issuing the bills in scrip form.

After receiving written bids at various levels of yield expectations, a particular yield is decided as the cut-off rate of the security in question. Auction participants (bidders) who bid at yield levels lower than the yield determined as cut-off get full allotment although at a premium. The premium is equal to the yield differential expressed in rupee terms. The yield differential is the difference between the cut-off yield and the yield at which the bid is made. All bids made at yield levels higher than that determined as cut-off yield get entirely rejected.

This system of auction is exactly identical to that of the French Auction System as far as the price discovery mechanism part is concerned. The difference is observed only at the stage of payment obligation. After determination of the market related cut-off rate, allotment is made to all the bidders at a uniform price. The concept of premium on account of yield differential does not exist here.

New money market instruments like Certificates of Deposits (CDs) and Commercial Paper (CPs) were introduced in 1989-90 to give greater flexibility to investors in the deployment of their short-term surplus funds

Certificates of Deposit (CDs) - introduced since June 1989 - are negotiable term deposit certificates issued by a commercial banks/Financial Institutions at discount to face value at market rates, with maturity ranging from 15 days to one year.

Being securities in the form of promissory notes, transfer of title is easy, by endorsement and delivery. Further, they are governed by the Negotiable Instruments Act. As these certificates are the liabilities of commercial banks/financial institutions, they make sound investments.

DFHI trades in these instruments in the secondary market. The market for these instruments, is not very deep, but quite often CDs are available in the secondary market. DFHI is always willing to buy these instruments thereby lending liquidity to the market.

Salient features :

• CDs can be issued to individuals, corporations, companies, trusts, funds, associates, etc.

• NRIs can subscribe to CDs on non-repatriable basis.

• CDs attract stamp duty as applicable to negotiable instruments.

• Banks have to maintain SLR and CRR on the issue price of CDs. No ceiling on the amount to be issued.

• The minimum issue size of CDs is Rs.5 lakhs and multiples thereof.

• CDs are transferable by endorsement and delivery.

• The minimum lock-in-period for CDs is 15 days.

CDs are issued by Banks, when the deposit growth is sluggish and credit demand is high and a tightening trend in call rate is evident. CDs are generally considered high cost liabilities and banks have recourse to them only under tight liquidity conditions.