JAIIB Short Notes Part-1 
          
                                                          Money Market 
          
         Introduction 
         •   It is a market for overnight to short-term funds and instruments having a maturity period of one or less 
             than one year. 
         •   It is regulated by Reserve Bank of India. 
         •   The maturity of the instruments is up to 1 year. 
          
         Money Market Instruments 
         •   Treasury Bills 
         •   Cash Management Bills 
         •   Commercial Bills 
         •   Certificate of Deposits  
         •   Commercial Papers 
         •   Call Money Market 
         •   Collateralized Borrowing and Lending Obligation 
          
         Call Money Market 
         •   Call money - for a period of 1 day 
         •   Notice money market - between 2–14 days 
         •   Term Money – exceeding 14 days  
          
         Participants in the Call Money Market 
         •   RBI – as Regulator 
         •   Schedule Commercial Banks (excluding RRB’s) 
         •   Cooperative Banks 
         •   Land Development Banks 
         •   Primary Dealers 
          
         Borrowing Limit: - 
         •   Schedule Commercial Bank – 125% of capital funds 
         •   Cooperative Banks – 2% of their aggregate deposits 
         •   Primary Dealers – 225% of the Net Owned funds 
          
         Lending Limit 
         •   Schedule Commercial Bank – 50% of capital funds 
         •   Cooperative Banks – No limit 
         •   Primary Dealers – 25% of the Net Owned funds 
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         Treasury Bills 
         •   Treasury bills are short-term instruments issued by the Reserve Bank on behalf of the government to 
             tide over short-term liquidity shortfalls.  
         •   This instrument is used by the government to raise short-term funds to bridge seasonal or temporary 
             gaps between its receipts (revenue and capital) and expenditure. 
         •   Treasury bills are zero coupon securities and pay no interest. Instead, they are issued at a discount and 
             redeemed at the face value at maturity. 
         •   The difference between the discount and face value is called as discount.  
         •   Min. value of a T-Bill is Rs. 25,000. 
         •   They are presently issued in three tenors, namely, 91 day, 182 day and 364 day. 
          
         Calculating Yield on T-Bills 
                                                                                                                    
          
         Participants in the T-Bills Market 
         •   RBI 
         •   Banks  
         •   Mutual funds  
         •   Financial institutions,  
         •   Primary dealers 
         •   State Government  
         •   Central Bank of Nepal 
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         Cash Management Bills (CMBs) 
         •   In 2010, Government of India, in consultation with RBI introduced a new short-term instrument, known 
             as  Cash  Management  Bills  (CMBs),  to  meet  the  temporary  mismatches  in  the  cash  flow  of  the 
             Government of India.  
         •   The CMBs have the generic character of T-bills but are issued for maturities less than 91 days. 
          
         COMMERCIAL BILLS 
         •   Bills of exchange are negotiable instruments drawn by the seller (drawer) on the buyer (drawee) for 
             the value of the goods delivered to him.  
         •   Such bills are called trade bills. 
         •   When trade bills are accepted by commercial banks, they are called commercial bills. 
         •   The bank discounts this bill by keeping a certain margin and credits the proceeds.  
         •   Banks, when in need of money, can also get such bills rediscounted by financial institutions such as LIC, 
             UTI, GIC, ICICI, and IRBI.  
         •   The maturity period of the bills varies from 30 days, 60 days, or 90 days, depending on the credit 
             extended in the industry. 
         Certificate of Deposits 
         ❖  Certificates of deposit were introduced in June 1989.  
         ❖   Certificates of deposit are negotiable money market instruments short-term tradable time deposits 
             issued by commercial banks and financial institutions. 
         ❖  CDs can be issued by: 
             i) Scheduled commercial banks excluding Regional Rural Banks and Local Area Banks. 
             ii) Financial institutions (within the limit prescribed by RBI) 
             •   Minimum amount of a CD should be Rs. 1 lakh and should be in the multiples of Rs. 1 lakh thereafter. 
             •   The maturity period of CDs issued by banks should be not less than 7 days and not more than 1 year.  
             •   FIs can issue CDs for a period not less than 1 year and not exceeding 3 years from the date of issue. 
             •   CDs  can  be  issued  to  entities  like  individuals,  corporations,  companies,  trusts,  funds  and 
                 associations.  
         Commercial Paper 
         •   The Reserve Bank introduced commercial papers in January 1990. 
         •   A commercial paper is an unsecured short-term promissory note issued at a discount by creditworthy 
             corporates, primary dealers and all-India financial institutions. 
         •   Corporates, primary dealers, and all-India financial institutions are eligible to issue a CP. 
         •   A corporate should have tangible net worth of Rs. 4 crore and a sanctioned working capital limit from 
             a bank or a financial institution and the borrowal account is a standard asset.  
         •   The minimum credit rating shall be required which is P-2 by CRISIL or equivalent rating by other 
             approved agencies. 
         •   Maturity – The minimum of 7 days and a maximum of up to 1 year from the date of issue. 
         •   Denomination – Minimum of Rs. 5 lakh and multiples thereof. 
         •   Investment in a CP - A CP may be held by individuals, banks, corporates, unincorporated bodies, NRIs, 
             and FIIs. 
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         Collateralized Borrowing and Lending Obligation  
         •   The Collateralized Borrowing and Lending Obligation (CBLO) market is a money market segment 
             operated by the Clearing Corporation of India Ltd (CCIL).  
         •   In the CBLO market, financial entities can avail short term loans by providing prescribed securities as 
             collateral.  
         •   In terms of functioning and objectives, the CBLO market is almost similar to the call money market. 
         •   Available in the range of 1 – 90 days – 1 year. 
         •   CCIL provides the Dealing System through Indian Financial Network (INFINET), a closed user group to 
             the members of the Negotiated Dealing System who maintain current account with RBI and through 
             Internet for other entities who do not maintain current account with RBI. 
         Who are the participants in the CBLO market? 
         •   Institutions participating in CBLO are entities who have either no access or restricted access to the inter 
             -bank call money market.  
         •   Nationalized Banks, Private Banks, Foreign Banks, Co-operative Banks, Insurance Companies, Mutual 
             Funds, Primary Dealers, Bank cum Primary Dealers, NBFC, Corporate, Provident/ Pension Funds etc., 
             are eligible for CBLO membership. 
         Repo 
         •   Repo is a repurchase agreement entered into between eligible counterparties for borrowing and 
             lending of funds on a collateralized basis. 
         •   Repo involves selling of a security with the agreement to repurchase the same at a future date.  
         •   The seller of the security would receive funds while the buyer of the security receives collateral for the 
             funds he has lent. 
         •   The rate at which the funds are lent and borrowed is called as repo rate. 
          
         Ways and Means of Advance 
         •   The RBI gives temporary loan facilities to the centre and state governments as a banker to government. 
             This temporary loan facility is called Ways and Means Advances (WMA). 
         •   The WMA scheme aims to meet temporary mismatches in the 
             receipts  and  payments  of  the  government.  This  facility  can  be 
             availed by the government if it needs immediate cash from the RBI.  
         •   The WMA is to be vacated after 90 days.  
         •   Interest rate for WMA is currently charged at the repo rate. The 
             limits  for  WMA  are  mutually  decided  by  the  RBI  and  the 
             Government of India. 
          
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