1. Call and Notice Money
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- It is applicable to inter-bank market which can involve two transacting parties which are generally banks.
- 1 day: Call Money; 2-14 days: Notice Money (or Short-notice Money)
- The borrower has to pay back immediately whenever the lender demands it. That is why, it is called as call money.
- It allows banks to earn interest on their surplus funds.
- It is a form of unsecured credit.
2. Treasury Bill
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- It is also known as T-Bill.
- The purpose of issuing T-bills is to finance short-term borrowing of the Government of India.
- It is the safest form of investment as it is sovereign backed. This means that, in case of default it is the liability of the Government which has issued it to pay-back the invested amount to the holder of the T-bill.
- It is issued by RBI on the behalf of the Government of India (Banker to the Government).
- It cannot be issued by State Governments.
- They are issued at discount and redeemed at par value. This means that there is no payment of coupon. Rather, the return is generated by way of difference in issue price and redemption price.
- Buyers: RBI itself, Banks, NBFCs etc (Mainly financial institutions)
- It is allowed to be invested or parked as under the SLR quota by the banks.
- It can be used for repo operations. However, those bills which have been pledged under SLR quota are not allowed to be used as collateral under repo operations.
3 types of T-Bills:
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- 91-day
- 182-day
- 364-day
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3. Cash Management Bill
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- It is similar to T-Bills in terms of all the provisions except that the tenure is less than 91 days.
- Aim: To fund short-term cash flow mismatch
- Like T-bill, it is also allowed under SLR quota as well as for repo operations.
4. Ways and Means Advances (WMAs)
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- It replaced the ad-hoc Treasury Bills to eliminate automatic financing of fiscal deficits (also known as deficit financing).
- It was introduced in 1997 as per an agreement between RBI and the Government of India or State Governments.
- As per the agreement, the Central Government would meet temporary mismatches between receipts and expenditure through Ways and Means Advances (WMA) provided by the RBI.
- As per the agreement WMAs shall be fully paid off within three months from the date of making the WMAs. The interest rate charged by RBI will be the repo rate.
- If the duration of advance exceeds more than 90 days, it is termed as overdraft and the interest rate charged is 2 percent more than the repo rate.
5. Certificate of Deposits (CDs)
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- They can be issued by scheduled commercial banks and some financial institutions.
- They cannot be issued by cooperative banks and RRBs.
- The purpose of issuing CDs is to meet short-term funds requirements.
- They can be bought by retail investors, institutional investors.
- Like T-Bills, CDs are issued at discount and redeemed at par value at the end of maturity period.
- A bank cannot provide loan against CDs. However, the RBI may relax these restrictions for temporary periods through a separate notification.
- Time Period: 7 days to 1 year
6. Commercial Paper
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- It is an unsecured money market instrument issued in the form of a promissory note.
- It was introduced in India in 1990 with a view to enabling highly rated corporate borrowers to diversify their sources of short-term borrowings and to provide an additional instrument to investors.
- Subsequently, primary dealers and satellite dealers were also permitted to issue CP to enable them to meet their short-term funding requirements for their operations.
- It is issued at a discount to face value.
- It can be issued for a maturity for a minimum of 15 days and a maximum upto one year from the date of issue.
- In short, it has similar provisions as CDs but are issued by non-banking corporates (Like Reliance, Tata etc).
