What is a money market? In this market, you can invest in securities that can be converted into money in a short period. You can also invest in securities with a short-term horizon that can be liquidated over a year or less. These markets are the enablers of monetary policy.
Now, here's a riddle for you. "I am a low-risk investment. I can give stable returns & those with short-term goals prefer me. I have a fixed interest rate & maturity period. Who am I?" If you guessed debt investment, you did well.
Money market investments are debt-based, have low risk, and offer fixed returns over a period. These are also known as fixed-income securities. But, not all debt instruments are money market instruments. Before delving deeper, let's understand how money markets are regulated.
Money market instruments in India are financial securities that are used to raise funds in the short-term. These instruments are typically issued by governments, financial institutions, and corporations and have a maturity period of up to one year. Some examples of money market instruments in India include:
All money market instruments are debt investments, but all debt investments are not money market instruments. To deconstruct this definition, let's look at the features that differentiate these investments:
Money market instruments are a subset of debt instruments, characterized by their short-term nature, lower risk, and lower potential returns. Other debt instruments encompass a broader range of debt investments with varying maturity periods, purposes, risks, and returns.
It's the RBI. The money market consists of debt investments of short tenures. The RBI is the regulator of the money market in India under sections 45K, 45L, and 45W of the RBI Act (1934).
Here are a few guidelines set by the RBI for the money market instruments:
1. Only commercial banks and select all-India financial institutions can issue CDs. The RBI permits only these organisations to issue CDs.
2. Only companies with a tangible net worth of at least ₹4 crores can issue CPs.
3. The issuers must have a sanctioned working capital limit by banks or financial institutions.
Money market instruments are essentially debt investments of a short-term horizon of one day to one year. These investments have a comparatively lower risk and return potential than the other capital market-based debt instruments. The money market is the enabler of monetary policy since it enables the short-term demand and supply of funds. Some money market investments in India are T-bills, CDs, CPs and Repos. The banking regulator, the RBI, is also the regulator of the money market in India.
In India, the RBI is the regulator of both the money market and banking. The money market enables the monetary policy as it operates the supply and demand for short-term funds.
This regulatory body operates in the United States of America. The Office of the Comptroller of Currency (OCC), an independent bureau of the treasury department in the United States, regulates all national banks in the US, federal savings associations and federal agencies and branches of international banks in the US. The OCC primarily regulates banks chartered under the National Banks Act in the US.
The Federal Deposit Insurance Corporation or the FDIC has the examining and supervisory role in ensuring the safety and soundness of financial institutions in the United States. The FDIC also makes complex and large financial institutions resolvable. The organisation also manages receiverships of these financial bodies.
The money market is a segment of the financial market in which financial instruments with high liquidity and short-term maturities are traded. The main features of the money market are: