Complete Guide to the Indian Money Market: NISM Series-XXII Part One

This comprehensive study guide covers the fundamental aspects of the Indian Money Market as detailed in Chapter 8 of the NISM Series-XXII: Fixed Income Securities workbook. This first part focuses on the introduction to the market and a detailed exploration of the various instruments available to participants.

8.1 Introduction to the Money Market

The Money Market serves as a vital component of the financial system, primarily handling short-term financial instruments with maturities ranging from one day to one year. It acts as a mechanism for the Government, banks, and corporate entities to manage short-term liquidity mismatches.

Key Functions and the Role of the RBI

• Liquidity Management: The market allows entities with surplus funds to lend to those facing a temporary shortage.
• Monetary Policy Transmission: The Reserve Bank of India (RBI) utilizes the money market to transmit monetary policy directions by adjusting reserve ratios, conducting Open Market Operations (OMOs), and changing policy rates.
• Systemic Stability: The RBI manages systemic liquidity to ensure banks can access funds at reasonable rates, acting as the "Banker of Last Resort" to prevent exorbitant borrowing costs during stress.
• Global Context: Globally, central banks use money markets to moderate the money supply through the banking channel, especially during periods of financial stress, by providing liquidity against eligible collaterals.

Market Participants

The Indian money market is characterized by a diverse range of participants, including:

• Public and Private Sector Banks.
• Foreign and Co-operative Banks.
• Primary Dealers (PDs).
• Mutual Funds and Insurance Companies.
• Non-Banking Financial Companies (NBFCs).
• Corporates and Provident/Pension Funds.
• Payment Banks and Small Finance Banks.

8.2 Types of Instruments in the Money Market

The Indian money market is structurally divided into two primary segments: the Borrowing and Lending segment (with or without collaterals) and the Asset Market (involving the outright purchase and sale of instruments).

8.2.1 Borrowing and Lending Activities

This segment focuses on the transfer of funds for specific tenors. The following table summarizes the key borrowing and lending instruments:

Detailed Breakdown of Lending Instruments

1. Call, Notice, and Term Money:

   • Call Money: An avenue for unsecured lending and borrowing, strictly restricted to Scheduled Commercial Banks (SCBs) and Primary Dealers (PDs).
   • Notice Money: Refers to unsecured funds lent for periods beyond overnight and up to 14 days.
   • Term Money: Refers to unsecured funds lent for periods between 15 days and 1 year.
   • NDS-CALL: This RBI-owned system facilitates OTC deals through negotiation chat modes. All deals are settled on a T+0 basis through the participants' current accounts at the RBI.

2. Market Repo (G-Sec):

   • Also known as a ready forward contract, a Repo involves borrowing funds by selling securities with an agreement to repurchase them at a future date and a higher price.
   • The difference between the sale price and repurchase price incorporates the interest.
   • CROMS (Clearcorp Repo Order Matching System): An electronic platform that facilitates anonymous trading and reporting of Repo deals, settled by CCIL on a T+0 basis.

3. Triparty Repo (TREP):

   • This is a repo contract involving a Triparty Agent (TPA) who handles collateral selection, payment, settlement, and management during the repo period.
   • In India, the Clearing Corporation of India Ltd (CCIL) acts as the TPA.
   • Funds borrowed via TREP are exempted from CRR/SLR computation for the borrower, and the collateral is SLR-eligible for the lender.
   • The TREPS platform facilitates anonymous order matching.

4. Corporate Bond Repo (CBR):

   • Introduced in 2010, it allows borrowing against eligible collaterals such as listed corporate bonds, CPs, CDs, and units of Debt ETFs.
   • Participants cannot use their own securities as collateral.
   • Reporting is done via the F-TRAC system.

8.2.2 Asset Segment (Issuance and Secondary Market)

This segment involves instruments issued by the Government and other entities to raise resources, which are then traded in the secondary market.

Detailed Breakdown of Asset Instruments

1. Treasury Bills (T-Bills):

   • Short-term, zero-coupon debt instruments issued by the Government of India at a discount and redeemed at par (Rs 100).
   • RBI conducts weekly auctions on Wednesdays for three standard tenors: 91, 182, and 364 days.
   • 14-Day T-Bills are not available for public use and are primarily used for parking surplus funds of State Governments.

2. Cash Management Bills (CMBs):

   • Very short-term variants of T-bills with maturities less than 91 days.
   • Issued to meet temporary mismatches in the Government’s cash flow or to absorb excess systemic liquidity.

3. Commercial Paper (CP):

   • An unsecured short-term instrument used by Indian corporates to raise working capital.
   • Issued in denominations of Rs 5 lakh and multiples thereof.
   • Eligible issuers must have a minimum net worth of Rs 4 crore and a high credit rating (typically the second highest or above).

4. Certificate of Deposit (CD):

   • Tradable instruments issued by banks and select Financial Institutions (FIs).
   • Banks can issue CDs for tenors of 7 days to 1 year, while FIs can issue for 1 year to 3 years.
   • Issued in denominations of Rs 1 lakh and multiples thereof.

Key Takeaways for Exam Preparation

• Tenor Knowledge: Money market instruments always have a maturity of 1 year or less.
• Unsecured vs. Collateralized: Call, Notice, and Term money are unsecured; Repos and TREPs are collateralized.
• Settlement Standard: Most money market transactions (NDS-CALL, CROMS, TREPS) settle on a T+0 basis.
• Issuer Eligibility: Only banks and PDs can participate in the Call Money market. Corporates use CPs for working capital.
• Repo Mechanism: A Repo is essentially a "Buy and Sell Back" transaction that does not appear as a traditional loan in the balance sheet.

Important Terms to Remember

• NDS-CALL: Negotiated Dealing System for Call Money.
• CROMS: Clearcorp Repo Order Matching System.
• TREPS: Tri-Party Repo Dealing System.
• CBLO: Collateralized Borrowing and Lending Obligation (the predecessor to TREP).
• F-TRAC: Reporting platform for Corporate Bond Repos, CPs, and CDs.
• DVP-III: Delivery versus Payment System-III used for simultaneous transfer of securities and funds.

End of Part One. Part Two will cover Trends in the Indian Money Market, Call Money importance, and key Interest Rates (MIBOR/WACR).