Money Market is market for short term funds with expiry or maturity ranging from overnight to one year. Money Market is key component of the financial system for buying and selling of securities of short term maturities. In money market, financial instruments are highly liquid. This market is a purely unsecured market as no collateral is offered for securing the funds and there are no brokers involved. Call Money, Notice Money and Term Money markets are the sub markets of the Indian Money Market.
Money Market facilitates borrowing and lending of funds between banks and entities like primary dealers. An institution with excess fund may lend them on an uncollateralized basis to an institution which is short of funds.
Call Money, Notice Money, Term Money
Money market transactions are categorized as –
- Call Money – Under call money, funds are transacted on an overnight basis.
- Notice Money – Under Notice money, funds are transacted for a period between 2-14 days.
- Term Money – Under Term money, funds are transacted for more than 14 days and up to 1 year.
Participants in the Market
The entities permitted to participate both as lender and borrower in the call/notice money market are –
- Scheduled Commercial Banks (Excluding RRBs)
- Co-operative Bank (other than Land Development Banks)
- Primary Dealers (PDs)
The market is governed by the RBI which issue guidelines for various participants in the call/notice money market.
Borrowing and Lending Limits in Market
| Borrowing & Lending Limits in Market | |||
| Sr.No | Participant | Borrowing | Lending |
| 1 | Scheduled Commercial Banks | On a fortnightly average basis, borrowing outstanding should not exceed 100 per cent of capital funds (i.e., sum of Tier I and Tier II capital) of latest audited balance sheet. However, banks are allowed to borrow a maximum of 125 per cent of their capital funds on any day, during a fortnight. | On a fortnightly average basis, lending outstanding should not exceed 25 per cent of their capital funds. However, banks are allowed to lend a maximum of 50 per cent of their capital funds on any day, during a fortnight. |
| 2 | Co-operative Banks | Outstanding borrowings of State Co-operative Banks/District Central Co-operative Banks/ Urban Co-operative Banks in call/notice money market, on a daily basis should not exceed 2.0 per cent of their aggregate deposits as at end March of the previous financial year. | No Limit |
| 3 | Primary Dealers | PDs are allowed to borrow, on average in a reporting fortnight, up to 225 per cent of their net owned funds (NOF) as at end-March of the previous financial year. | PDs are allowed to lend in call/notice money market, on average in a reporting fortnight, up to 25 per cent of their NOF. |
How trades are conducted
- The trades are conducted both on telephone as well as on the NDS call system.
- Launched on Sept 18, 2006, NDS call system is a screen-based negotiated quote-driven system for all dealings in call/notice and term money markets.
- It is an electronic screen-based negotiated quote driven dealing platform for all dealings in call\notice\term money.
- The system has improved transparency and facilitated better rate discovery in the call money market.
- The settlement of money market deals is by electronic fund transfer on RTGS system operated by the RBI.
- Repayment of the borrowed fund also take place through RTGS system on due date of repayment.
