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Regulation of Money Market Instruments in India

IndianMoney.com Research Team | Posted On Thursday, February 20,2020, 03:51 PM

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Regulation of Money Market Instruments in India

 

 

Money market instruments are highly liquid and invest in short term debt of under a year. The instruments traded under the money market are the closest substitute for cash in terms of liquidity and tradability. A money market generally comprises of commercial banks, acceptance houses and non-banking financial companies (NBFCs).

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Regulation of Money Market Instruments in India

The money market is a larger domain that comprises several assets which themselves are sub-domains to the larger segment. The sub-domains are:

However, trading and dealing under the money market are not done in cash which means highly liquid assets are traded. These assets are:

  1. Treasury bills
  2. Commercial bills or commercial papers
  3. Government papers
  4. Trade bills
  5. Promissory notes
  6. Certificates of Deposit
  7. Repurchase agreement
  8. Banker’s acceptance

See Also: Money Market Instruments

Money Market Objectives

The money market highly supports and affects a country’s economy by serving several objectives. Some of the important objectives of money market instruments are:

  • The highest objective of money markets is the storage of surplus funds for the short term.
  • Helps lower the short-term deficit.
  • Helps the Reserve Bank of India in the regulation of liquidity in the economy.
  • Helps users meet short-term monetary needs at an affordable price.
  • Helps capital market, industry, and related trade develop and become a robust system.
  • Helps design effective monetary policy.
  • Helps in the facilitation of smooth functioning for commercial banks

See Also: Functions Of Money Market

What are The Characteristics of Money Market Instruments?

Money market instruments have several benefits and reflect multiple characteristics that are advantageous to the economy as well as the customers. Some of these are:

  1. Safety: Money Market instruments are highly safe and one of the best investment options for the short term. For a risk-averse investor, money market instruments can be a primary investment being safer than equity mutual funds and stocks. These assets are known to generate appreciable returns over time.
  2. Liquidity: Money Market instruments thrive on their liquidity. The near-cash equivalents are known for their high liquidity and almost instant conversion as and when required. As the investment is only for the short term it accounts for quick release of money and hence liquidity.
  3. Yield: The time-to-money yield of money market instruments is quite high.
  4. Discounted Price: Money market instruments are generally offered at a value that is lesser than their face value accounting for discounted pricing.

How are Money Market Instruments Regulated?

RBI governs and regulates the money market instruments under sections 45K, 45L, and 45W of the RBI Act, 1934. The Reserve Bank of India issues guidelines to regulate the money market instruments by addressing the eligible market participants accounting for Certificate of Deposits, Treasury bills, call or notice money market, commercial paper and non-convertible debentures with a maturity of up to 1 year.

All co-operative banks, scheduled banks, and primary dealers are allowed to take part in the call/notice money market enacting as both lenders and borrowers.

RBI Guidelines for the Money Market Instruments

Certificate of Deposits

Certificate of Deposits are issued against larger deposits made with financial institutions and banks. The primary difference lies in the amount of money deposited in the Certificate of Deposit as larger sums of money are accepted and it’s freely negotiable.

Organizations that have huge amounts of surplus money which needs to be preserved in a safe avenue; opt for Certificates of Deposits. These offer higher earnings as compared to T-Bills and term deposits and are relatively liquid.

See Also: Money Market Instruments

Guidelines:

  1. Certificates of Deposits can only be issued by scheduled banks, select All-India financial institutions permitted by the RBI.

Note: Scheduled banks for all purposes in money markets exclude RRBs.

1. Commercial Papers

CPs are unsecured promissory notes issued for a short term by high rated companies in order to raise capital to leverage daily operations.

Guidelines:

CPs can be issued by companies with a tangible net worth of at least Rs 4 crores.

Has a sanctioned working capital limit issued by FIs or banks.

2. Non-Convertible Debentures(NCD)

NCD can be issued only if:

  1. The Corporate has a tangible net worth of at least Rs 4 crores (excluding NBFCs and Primary Dealers)
  2. Has a sanctioned working capital limit issued by FIs or banks.
  3. FI/bank has certified the borrowal account as a Standard Asset.

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