Money Market Overview

By BYJU'S Exam Prep

Updated on: September 13th, 2023

The money market is a sub-division of the financial market that facilitates the transfer of funds between investors/ lenders and borrowers/ users. The money market is short term funds which deal in financial assets whose maturity period is up to one year/ 365 days.

Money market does not deal in cash or money but simply provides a market for credit instruments such as bills of exchange, promissory notes, commercial paper, treasury bills, etc. They are the close substitute for money. These instruments help to borrow funds to business units, other organizations and the Government for the short-term requirement.


The Indian money market includes the Reserve Bank of India, Commercial banks, Co-operative banks, and other specialized financial institutions. The RBI is the controller of the money market in India. Some Non-Banking Financial Companies (NBFCs) and financial institutions such as LIC, GIC, UTI, etc. also operate in the Indian money market.

Money Market Overview: Features; Structure; Instrument; Participants


The money market is an essential component of the financial market for buying and selling of securities of short-term maturities, of one year or less, such as treasury bills and commercial papers. Here are the features of the money market:

  • The money market has no geographical constraints, unlike the stock exchange. 
  • Even though there are various money market centres like Mumbai, Calcutta, Chennai, etc. However, they are not separate independent markets but are interlinked and interrelated.
  • It handles all the dealings in money or monetary assets.
  • It is a market purely for short-term funds.
  • There are different sub-markets such as Call money market, Bill market and it is not a single homogeneous market.
  • Money market constitutes a link between RBI and banks and provides information about monetary policy and management.
  • Transactions can be processed without the help of brokers.
  • Variety of instruments can be traded in the money market.

Structure of Indian Money Market

The Indian Money Market comprises two sectors: Organized and Unorganized 

Organized: It is systematically controlled and coordinated by the RBI. It consists of the following:

  • Reserve Bank of India
  • State Bank of India(SBI) with its 7 associate banks
  • Twenty nationalized commercial banks
  • Other scheduled and non-scheduled commercial banks
  • Foreign banks
  • Regional Rural Banks
  • Non-bank financial institutions (NBFC) such as the LIC, the GIC and subsidiaries, UTI, etc also operate in this market, but only indirectly through banks.
  • Quasi-government bodies and large companies also make their short-term surplus funds available to the organised market through banks.

Unorganized: It is not controlled and managed by the RBI. It includes:

  • Indigenous banks
  • Moneylenders.

Instruments of Money Market

Money market includes instruments such as treasury bills, commercial papers and certificates of deposit. The main instrument of the money market are as follows:

  1. Treasury Bills: Issued by the Reserve bank of India (RBI), they are the money market instrument acting on the behalf of the central government. These bills are generally issued when there is a shortage of funds, or when the RBI wants to control the cash liquidity in the market. Its features are as follows: 
    • The bill’s maturity or Zero-Coupon Bonds is always one year or less than one year. 
    • They are highly liquid instruments with very low-risk factor 
    • Treasury bills are issued at a discounted price than the face value and are compensatory.
    • Example: A treasury bill of 124 days face value 10,000/- will be issued at 9,000/-. If the holder holds it for the entire 124 days, he will be repaid Rs 5,000/- and so the difference, Rs. 1,000/- will be the discount.
  1. Commercial Paper: Commercial paper is a type of promissory note. They are issued by large companies and corporation in need of quick short-term loans to meet the need of working capital, seasonal changes and expenses of share issues, etc. Its features include:
    • It is a short-term uninsured debt instrument.
    • Commercial papers have a maturity date of between 15 days to 1 year. 
    • They are also issued at a discount and redeemed at par. 
    • They are highly liquid and easily transferable instruments of the money market.
    1. Commercial Bill: It is a kind of bill of exchange. In such a bill, the seller will draw a bill of exchange and the buyer of the goods will have to accept the bill. If it is a marketable financial instrument, it will become a trade bill. The seller can get discount after going to his bank. Here the bank will promise to pay the amount if the buyer is unable to do so. And this way a trade bill becomes a commercial bill. The duration for such bills is 30, 60, or 90 days. It is a negotiable instrument and is also self-liquidating in nature.
    2. Call Money: There may be times when the bank need help regarding funds. They depend on other commercial banks for a short-term loan. These are called ‘call money’. Also, an interbank transaction has no maturity date and is payable on demand. Most of the bank relies on call money to maintain their CLR (cash liquidity ratio) as per the RBI guidelines. The rate of interest on this is known as call rates.
    3. Certificate of Deposits: These are the instrument of money market issued only by commercial banks and financial institutions (under the guidelines of the RBI). They can also be issued in a Demat form. The features of Certificates of Deposit are as under:
      • The duration of maturity is between 7 days to a year when issued by banks and 1-3 years, when issued by other financial institutes. 
      • Certificates of Deposit are issued at discount. 
      • The return on them is the difference between the issued price and their greater face value.
      • They are issued only in multiples of one lac. 
      • They are easily transferable and highly liquid.

Participants of the Money Market

A large number of lenders, as well as borrowers, make up the money market. Some of the key players in the money market are as follows:

  1. Central Government: In the money market, the Central Government plays the role of the borrower through the issuance of Treasury Bills (T-Bills). The T-Bills represent zero risk instrument and are issued through the RBI. They are issued for a period of 91 days (3 months), 182 days (6 months) and 364 days (1 year). Banks, corporates and many other institutions buy the T-Bills and lend to the government as a part of it short- term borrowing program due to the risk-free nature of the T-Bills.
  2. Public Sector Undertakings: Government entities who have their shares listed on the stock exchange can issue commercial paper in order to obtain its working capital finance. The PSUs are only borrowers in the money market. They seldom lend their surplus. 
  3. Insurance Companies: General as well as life insurance companies are usual lenders in the money market. Being cash surplus entities in the money market, they do not borrow. With the introduction of CBLO (Collateralized Borrowing and Lending Obligations), they have become big investors. In between capital market instruments and money market instruments, insurance companies invest more in capital market instruments. As their lending programs are for very long periods, their role in the money market is a little less.
  4. Mutual Funds: They offer varieties of schemes for the different investment objectives of the public. The various schemes are known as Money Market Mutual Fund Schemes or Liquid Schemes. Its objective includes investing in the money market instrument. They ensure the highest liquidity to the investors by offering withdrawal by way of a day’s notice or encashment of units through Bank ATMs. They do not borrow but lend or invest only in the money market.
  5. Banks: Biggest borrower as well as lender in the money market are the scheduled commercial banks. They borrow and lend funds in the call money market, short-notice market, repo and reverse repo market. They also borrow in the rediscounting market from the RBI and IDBI. They lend in the commercial paper market by way of buying the commercial papers issued by corporates and listed public sector units. They also borrow through the issue of Certificate of Deposits to the corporates.
  6. Corporates: Corporates borrow in the form of short-term promissory notes. They can issue commercial papers after obtaining the necessary credit rating for the CP. They can also lend their temporary surplus in the CBLO market. They are the lender when they buy the Certificate of Deposit issued by the banks and through the purchase of Treasury bills.

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