Money Market in India

Open Market Operations: 

                    Open market operations consist of buying and selling of government securities by the Reserve 

Bank. Open market operations have a direct effect on the availability and cost of credit. When the central 

bank purchases securities from the banks, it increases their cash reserve position and hence, their 

credit creation capacity. On the other hand, when the central bank sells securities to the banks, it 

reduces their cash  reserves and the credit creation capacity. The Reserve Bank of India did not 

rely much on open market operations to control credit. It was not used for influencing the availability 

of credit. Due to under-developed security market, the open market operations of the Reserve Bank 

are restricted to Government securities. These operations have also been used as a tool of public

 debt management. They assist the Indian government to raise borrowings. 

The open market operations of the Reserve Bank has not been so effective because of the following 

reasons: 

(a) Open market operations are restricted to government securities. 

(b) Gift-edged market is narrow. 

(c) Most of the open market operations are in the nature of “switch operations”  (i.e., purchasing one loan 

against the other).

Objectives of Open Market Operations The main objectives of open market operations are:

(a) To eliminate the effects of exports and imports to gold under the gold standard. 

(b) To impose a check on the export of capital. 

(c) To remove the shortage of money in the money market. 

(d) To make bank rate more effective. 

(e) To prevent a ‘run on the bank’.

Repurchase Agreements (Repo):

                      Repurchase Agreements which are also called as Repo or Reverse Repo are short term loans 

that buyers and sellers agree upon for selling and repurchasing. Repo or Reverse Repo transactions can be 

done only  between the parties approved by RBI and allowed only between RBI-approved securities such as 

state and central government securities, T-Bills, PSU bonds and corporate bonds. They are usually used 

for overnight borrowing.

                      Repurchase agreements are sold by sellers with a promise of purchasing them back at a given

price and on a given date in future.

Money Market Instruments:

                      Money Market Instruments provide the tools by which one can operate in the money market. 

Money market instrument meets short term requirements of the borrowers and provides liquidity to the

 lenders. The most common money market instruments are Treasury Bills, Certificate of Deposits, 

Commercial Papers, Repurchase Agreements 

Treasury Bills (T-Bills):

                           Treasury Bills are one of the safest money market instruments as they are issued by 

Central Government. They are zero-risk instruments, and hence returns are not that attractive. T-Bills

 are circulated by both primary as well as the secondary markets. They come with the maturities of

 3-month, 6-month and 1-year. The Central Government issues T-Bills at a price less than their face value

 and the difference between the buy price and the maturity value is the interest earned by the buyer of

 the instrument. The buy value of the T-Bill is determined by the bidding process through auctions.

At present,  the Government of India issues three types of treasury bills through auctions, namely, 

91-day, 182-day and 364-day.

Certificate of Deposits (CDs):

                              Certificate of Deposit is like a promissory note issued by a bank in form of a certificate 

entitling the bearer to receive interest. It is similar to bank term deposit account. The certificate bears the

maturity date, fixed rate of interest and the value. These certificates are available in the tenure of 3 months

to  5 years. The returns on certificate of deposits are higher than T-Bills because they carry higher level 

of risk.

Commercial Papers (CPs):

                                  Commercial Paper is the short term unsecured promissory note issued by corporates 

and financial institutions at a discounted value on face value. They come with fixed maturity period ranging 

from 1 day to 270 days. These are issued for the purpose of financing of accounts receivables, inventories

and meeting short term liabilities.

The return on commercial papers is is higher as compared to T-Bills so as the risk as they are less 

secure in comparison to these bills. It is easy to find buyers for the firms with high credit ratings. These

 securities are actively traded in secondary market.