Money market instruments in India are an important source of short-term funding for businesses, investors and governments. They provide a variety of options to meet the needs of different entities. These money markets offer both low-risk investments and high returns with varying degrees of liquidity.
This article will discuss money market instruments in India, including types of money markets and their advantages and disadvantages. We will look at examples of money market investments & how they can be used to manage liquidity.
We’ll also look into the regulatory framework that governs money markets in India so as to provide an overview on money market instruments in India.
Types of Money Market instruments in India
Here are the various money market investments available in India
Repos
Repo, or repurchase agreement, is a money market instrument in which one party agrees to sell a security to another party at a specific price that is agreed upon with a commitment to buy it back at a later date at an agreed-upon price.
This money market instrument is usually used by banks and financial institutions for short-term liquidity management.
Commercial Paper
It is an unsecured money market instrument used in India by corporate bodies to meet short-term borrowing needs.
The money raised through this money market instrument is often used for working capital requirements. Some examples include inventory purchases, payment of salaries and dividends etc.
Treasury Bills
This money market instrument is issued by the Central Bank of India (RBI) on behalf of the Government.
Treasury Bills are short-term government securities with maturities ranging from 91 days to 364 days.
They are considered to be one of the safest money market instruments as they are backed by the full faith and credit of the Indian Government.
Certificate of Deposits
Certificates of Deposit (CDs) are money market instruments issued by banks and financial institutions, often to small and medium-sized enterprises (SMEs).
CDs are a type of money market instrument that pays a higher interest rate than regular savings accounts. But, it requires the depositor to keep their money in the account for a fixed period of time.
Mutual Funds
Mutual funds are money market instruments that pool money from investors and use it to purchase securities. These securities may include stocks, bonds or other investments.
Check out our article on how to choose the best mutual funds here.
They provide investors with diversified investment options in money markets and offer higher returns than other money markets instruments.
How can Money Markets be used to Manage Liquidity?
Usually, money market instruments or short term investments are subject to easier liquidity. Here are some ways they can be used to manage liquidity.
Access to short term loans
Money markets can be used by businesses and investors to manage liquidity and gain access to short-term borrowing.
Money market instruments include short-term debt securities, money market mutual funds, certificate of deposits (CDs), repurchase agreements (repos), commercial papers and treasury bills.
These money markets offer low risk investments with varying degrees of liquidity.
Access to short term money
Money market instruments can be used to manage liquidity by providing businesses and investors access to short-term money.
Money markets offer a range of money market instruments with varying maturities, interest rates and levels of risk, allowing businesses. Investors to choose a money market instrument that best suits their needs.
Lower costs
In addition, money market instruments provide businesses and investors access to short-term money at a lower cost than other forms of borrowing.
This is because money market instruments are often backed by governments or collateral. This reduces the risk of default for banks and financial institutions that offer such money market instruments.
Cash flow managements
Furthermore, money markets can be used to manage liquidity by allowing businesses and investors to effectively manage their cash flows.
By putting money in money markets, investors are able to earn a return on their money while still having access to it when needed.
Hedge against interest rates
Finally, money markets provide an effective way for businesses and investors to hedge against rising interest rates by allowing them to lock in fixed returns with money market instruments.
Money market instruments offer predictable returns which can help investors and businesses manage their money in the short-term.
Regulation of Money Market Instruments
In India, money markets are looked after by the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI).
The money market instruments are governed by the RBI through a number of measures.
RBI
First, money markets are tracked under the RBI guidelines on money market operations in India.
These rules specify the money market instruments that can be used in money markets, the interest rates applicable to money market instruments and the maturity period of money market instruments.
SEBI
Second, money markets are regulated by SEBI under SEBI (Mutual Funds) Regulations, 1996, which specify the requirements for money market mutual funds.
These regulations specify the types of money market mutual funds, the risk related to money market mutual funds, the redemption and tax rules applicable to money market mutual funds.
Securities Contracts Act, 1956
Third, money markets are regulated by SEBI through the Securities Contracts (Regulation) Act of 1956.
It states that the money market instruments that can be used in money markets and also sets out the blueprint for stock exchanges to act as intermediaries in money markets.
Companies act, 1956
Finally, money markets are regulated through the Companies Act of 1956 which defines money market instruments and sets out rules for money market investments.
This act also provides guidance on the legal structure of money market instruments and how money market transactions should be carried out.
Conclusion
Money market instruments offer a wide range of money market instruments with varying maturities, interest rates and levels of risk that allow businesses to access short-term money at lower costs.
These investments can be used for cash flow monitoring, as well as combating rising interest rates. In India, the RBI and SEBI provide regulatory measures on money markets under various laws such as the Securities Contracts (Regulation) Act 1956, Companies Act 1956 and Mutual Funds Regulations 1996.
With these regulations in place, investors have greater assurance when investing in money market instruments in India.