Money Market Instruments are short-term financial instruments used for borrowing and lending funds for periods usually less than one year.
They are highly liquid, safe, and considered near-cash assets.
They help governments, financial institutions, and corporations manage their short-term funding needs.
Investors use them to earn safe and steady returns for a short duration.
In simple terms: Money Market Instruments are like short-term IOUs that help manage liquidity.
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Characteristics of Money Market Instruments
1. Short-term maturity – usually less than 1 year.
2. Highly liquid – can be quickly converted into cash.
3. Low risk – backed by government, banks, or strong corporates.
4. Low return – safer than shares, but returns are modest.
5. Issued at discount, redeemed at face value – many instruments follow this principle.
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Types of Money Market Instruments in India
1. Treasury Bills (T-Bills)
Issued by the Government of India.
Maturities: 91 days, 182 days, 364 days.
Issued at discount, redeemed at face value.
Example: Buy a T-Bill for ₹96,000, get ₹1,00,000 on maturity.
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2. Commercial Paper (CP)
Short-term unsecured debt issued by corporates to meet working capital needs.
Maturity: 7 days to 1 year.
Example: A company like Tata Steel may issue CPs to raise ₹500 crore for short-term needs.
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3. Certificate of Deposit (CD)
Issued by commercial banks and financial institutions.
It is a negotiable time deposit.
Maturity: 7 days to 1 year for banks; up to 3 years for financial institutions.
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4. Call Money & Notice Money
Funds borrowed/lent between banks to maintain CRR (Cash Reserve Ratio).
Call Money: Overnight (1 day).
Notice Money: 2–14 days.
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5. Repurchase Agreements (Repo & Reverse Repo)
Repo: Banks borrow funds by selling securities with an agreement to repurchase them later at a fixed price.
Reverse Repo: Banks lend money by buying securities with an agreement to sell them back later.
Used by RBI for liquidity control.
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6. Banker’s Acceptance (BA) (less common in India)
A short-term debt instrument guaranteed by a bank.
Commonly used in international trade.
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Advantages of Money Market Instruments
Provides safety and liquidity to investors.
Helps governments and companies raise short-term funds.
Stabilises the financial system by balancing short-term cash needs.
Lower risk compared to stock market investments.
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Disadvantages
Lower returns compared to equities and long-term bonds.
Limited to large institutions and high-net-worth investors in practice.
Sensitive to RBI’s monetary policy and interest rate changes.
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Example in Current Situation (India, 2025)
The Reserve Bank of India (RBI) uses Treasury Bills, Repos, and Reverse Repos actively to control inflation and manage liquidity.
In times of high inflation, RBI increases repo rate, making borrowing costlier in the money market.
Many corporates (like Reliance, Infosys, Tata) issue Commercial Papers to meet short-term working capital requirements instead of taking expensive bank loans.
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✅ In short:
Money Market Instruments are short-term, safe, liquid investment tools like T-Bills, CPs, CDs, Call Money, and Repos that help in short-term borrowing, lending, and liquidity management.
