As per RBI definitions A market for short terms financial assets that are close substitute for money,

, facilitates the exchange of money in primary and secondary market.

The money market is a mechanism that deals with the lending and borrowing of short term funds (less than one year). A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded.

It doesnt actually deal in cash or money but deals with substitute of cash like trade bills, promissory notes & govt papers which can converted into cash without any loss at low transaction cost. It includes all individual, institution and intermediaries.

It is a market purely for short-terms funds or financial assets called near money. It deals with financial assets having a maturity period less than one year only. In Money Market transaction can not take place formal like stock exchange, only through oral communication, relevant document and written communication transaction can be done.

Transaction have to be conducted without the help of brokers. It is not a single homogeneous market, it comprises of several submarket like call money market, acceptance & bill market. The component of Money Market are the commercial banks, acceptance houses & NBFC (Non-banking financial companies).

To provide a parking place to employ short term surplus funds. To enable the central bank to influence and regulate liquidity in the economy through its intervention in this market. To provide a reasonable access to users of short-term funds to meet their requirement quickly, adequately at reasonable cost.

o Development

of trade & industry. o Development of capital market. o Smooth functioning of commercial banks. o Effective central bank control. o Formulation of suitable monetary policy. o Non inflationary source of finance to government.

Money Market consists of a number of submarkets which collectively constitute the money market. They are, Call Money Market Commercial bills market or discount market Acceptance market Treasury bill market

A variety of instrument are available in a developed money market. In India till 1986, only a few instrument were available.

They were Treasury bills Money at call and short notice in the call loan market. Commercial bills, promissory notes in the bill market.

Now, in addition to the above the following new instrument are available:
Commercial

papers. Certificate of deposit. Banker's Acceptance Repurchase agreement Money Market mutual fund

Call money market is that part of the national money market where the day to day surplus funds, mostly of banks are traded in. They are highly liquid, their liquidity being exceed only by cash. The loans made in this market are of the short term nature.

Continued..

Banks borrow from other banks in order to meet a sudden demand for funds, large payments, large remittances, and to maintain cash or liquidity with the RBI. Thus, to the extent that call money is used in India for the purpose of adjustment of reserves.

Treasury bills (TBs), offer short-term investment opportunities, generally up to one year. They are thus useful in managing short-term liquidity. Types of treasury bills through auctions 91- Day, 182- day, 364- day, and 14- day TBs

Continued.. It is important to note that no specific amount of funds was sought to be raised through the auctions of these bills. The amount raised in each auction suspended upon the funds available with the market participants, and the funds they desired to invest in these bills. Thus, the new bill had become a handy instrument for banks, financial institution.

Treasury bills are available for a minimum amount of Rs.25,000 and in multiples of Rs. 25,000. Treasury bills are issued at a discount and are redeemed at par. Treasury bills are also issued under the Market Stabilization Scheme (MSS). 91-day T-bills are auctioned every week on Wednesdays. 182-day and 364-day T-bills are auctioned every alternate week on Wednesdays.

Funds for working capital required by commerce and industry are mainly provided by banks through cash credits, overdrafts, and purchase/discontinuing of commercial bills. BILL OF EXCHANGE The financial instrument which is traded in the bill market of exchange. It is used for financing a transaction in goods that takes some time to complete.

It shows the liquidity to make the payment on a fixed date when goods are bought on credit. Accordingly to the Indian Negotiable Instruments Act, 1881, it is a written instrument containing as unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer of the instrument.

Commercial bills may be used for financing the movement and storage of goods between countries, before export (pre-export credit), and also within the country. In India the use of bill of exchange appears to be in vogue for financing agricultural operations, cottage and small scale industries, and other commercial and trade transactions.

Apart from the genuine bill of exchange, i.e. bills which evidence sale and /or dispatch of goods, there are other bills which are known to the money market. They are accommodation bills and supply bills. As accommodation bill is defined as one in which a person, called as accommodation party, puts his name (accept it) to accommodate another person without receiving and consideration. Such bill is sometimes called, a kite or wind bill.

A banker's acceptance is a short-term investment plan created by a company or firm with a guarantee from a bank. It is a guarantee from the bank that a buyer will pay the seller at a future date. A good credit rating is required by the company or firm drawing the bill. This is especially useful when the credit worthiness of a foreign trade partner is unknown.

The terms for these instruments are usually 90 days, but this period can vary between 30 and 180 days. Companies use the acceptance as a time draft for financing imports, exports and trade. In India, there are neither specialised acceptance agencies for providing this service on a commission basis nor is it provided to any significant extent by commercial banks. Under the bill market schemes introduced by RBI in 1952, banks are required to select the borrowers after careful examination of their means, respectability, and dealings for conversion of their advances in to bills.

Banks maintain opinion registers on different drawers of bills and they get reports from time to time on these drawers of bills. BA acts as a negotiable time draft for financing imports, exports or other transactions in goods. Acceptances are traded at discounts from face value in the secondary market. BAs are guaranteed by a bank to make payment.

DISCOUNTING SERVICE The central banks help banks in their liquidity management by providing them discounting and refinancing facilities. The RBI are in abundance liquidity (funds) to banks on occasions when liquidity shortages threaten economic stability. The central bank performs his function through its discount window or discounting mechanism.

Bank borrow funds temporarily at the discount window of the central bank. They are permitted to borrow or are given the privilege of doing so from the central bank against certain types of eligible paper, such as the commercial bill or treasury bill, which the central bank stands ready to discount for the purpose of financial accommodation to banks.

The question of setting up of discount house in India was considered by the banking commission in the early 1970s. DISCOUNT HOUSE FUNCTION It should be the sole depository of the surplus liquid funds of the banking system as well as the non-banking financial institutions.

It should use surplus funds to even out the imbalance in liquidity in the banking system subject to the RBI guidelines. It should create ready market for commercial bills, treasury bills, and government guaranteed securities by being ready to purchase from and sell to the banking system such securities.

Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note. It was introduced in India in 1990 with a view to enabling highly rated corporate borrowers/ to diversify their sources of short-term borrowings and to provide an additional instrument to investors.

Only company with high credit rating issues CPs Subsequently, primary dealers and satellite dealers were also permitted to issue CP to enable them to meet their short-term funding requirements for their operations. Primary dealers (PDs) and the All-India Financial Institutions (FIs) are eligible to issue CP. CP is very safe investment because the financial situation of a company can easily be predicted over a few months.

CP can be issued for maturities between a minimum of 15 days and a maximum up to one year from the date of issue. The aggregate amount of CP from an issuer shall be within the limit as approved by its Board of Directors or the quantum indicated by the Credit Rating Agency for the specified rating, whichever is lower. As regards FIs, they can issue CP within the overall umbrella limit fixed by the RBI i.e., issue of CP together with other instruments viz., term money borrowings, term deposits, certificates of deposit and inter-corporate deposits should not exceed 100 per cent of its net owned funds, as per the latest audited balance sheet.

Only a scheduled bank can act as an IPA for issuance of CP. Individuals, banking companies, other corporate bodies registered or incorporated in India and unincorporated bodies, NonResident Indians (NRIs) and Foreign Institutional Investors (FIIs) etc. can invest in CPs. Amount invested by single investor should not be less than Rs.5 lakh (face value). However, investment by FIIs would be within the limits set for their investments by Securities and Exchange Board of India

CP will be issued at a discount to face value as may be determined by the issuer. The investor in CP is required to pay only the discounted value of the CP by means of a crossed account payee cheque to the account of the issuer through IPA.

With a view to further widening the range of money market instruments and give investors greater flexibility in deployment of their shortterm surplus funds, Certificates of Deposit (CDs) were introduced in India in 1989. Certificate of Deposit (CD) is a negotiable money market instrument and issued in dematerialised form or as a Usage Promissory Note against funds deposited at a bank or other eligible financial institution for a specified time period

Scheduled commercial banks excluding Regional Rural Banks (RRBs) and Local Area Banks (LABs) Select all-India Financial Institutions that have been permitted by RBI to raise short-term resources within the umbrella limit fixed by RBI.