The money market is a financial market where short-term financial assets are traded, providing liquidity and aiding participants' borrowing needs, primarily banks and institutional investors. Instruments such as treasury bills, commercial papers, and certificates of deposit are key components of the money market, regulated by the Reserve Bank of India (RBI), which also implements monetary policy to maintain liquidity and economic stability. The Monetary Policy Committee (MPC) of the RBI sets benchmark interest rates, aiming to control inflation and promote growth within defined parameters.

1. Money Market
 Money Market is a financial market where short-
term financial assets having liquidity of one year or
less are traded on stock exchanges. The securities or
trading bills are highly liquid. Also, these facilitate
the participant’s short-term borrowing needs
through trading bills. The participants in this
financial market are usually banks, large
institutional investors, and individual investors.

2. Introduction to Money Market Instruments
 Money market instruments are short-term debt securities with high liquidity.
 They provide a means for borrowers to raise funds and lenders to invest cash
for short periods.
 Examples include Treasury bills, commercial papers, and certificates of
deposit.
 These instruments are highly regarded for their safety and low risk.
 RBI regulates the money market. Therefore, in turn, helps to regulate the
level of liquidity in the economy.
 Since most organizations are short on their working capital requirements.
The money market helps such organizations to have the necessary funds to
meet their working capital requirements.
 It is an important source of finance for the government sector for both
national and international trade. And hence, provides an opportunity for the
banks to park their surplus funds.

3. Importance of Money Market
 It fulfills the finance needs of the trade and industry as &
when required.
 For getting the short-term funds of the commercial banks, the
money market furnishes the beneficial channels.
 By selling the treasury bills, the government can quickly raise
the short-term capital from the market with a low rate of
interest.
 It helps the RBI to formulate and implement the monetary
policies, and to accomplish its open market operations on a
large scale.
 It helps the RBI to regulate the funds in the market and
provides commercial papers for rediscount.

4. Functions of Money Market
 Provides funds
 Central Bank Policies
 Helps government
 Helps in Financial Mobility
 Promote Liquidity and Safety
 Economy in use of cash

5. Money Market Instruments
 Components: Call money Market and
Government Securities
 Call money- money borrowed/lent for
a day.
 Inter-bank term money- Borrowings
among banks for a period of more
than 7 days

6. Treasury Bills
 Issued by the Government of India to meet short-
term borrowing needs.
 Maturity periods range from 91 days to 364 days.
 Offered at a discount to face value and redeemed at
par upon maturity.
 T-bills are highly secure and provide attractive
returns for investors.

7. Commercial Papers
 Unsecured promissory notes issued by corporations to meet short-term
funding needs. It was introduced In India in 1990 with the objectives of
enabling corporate borrowers diversify their sources of short-term
borrowing and to provide an additional investment instrument to
investors.
 Usually have maturity periods ranging from 7 days to 1 year.
 Issued at a discount to face value and redeemed at par upon maturity.
 CPs offer higher returns than cash equivalents with similar maturities.
 Commercial papers can be compared to an unsecured short-term
promissory note which is issued by top rated companies with a purpose
of raising capital to meet requirements directly from the market.
 Also, Commercial papers are traded actively in secondary market.

8. Certificates of Deposits
 This functions as a deposit receipt for money which is deposited with a
financial organization or bank. The Certificate of Deposit is different from a
Fixed Deposit receipt in two ways. i. Certificate of deposits are issued only
of the sum of money is huge. ii. Certificate of deposit is freely negotiable.
 The RBI first announced in 1989 that the Certificate of Investments have
become the most preferred choice of organization in terms of investments
as they carry low risk whilst providing high interest rates than the Treasury
bills and term deposits.
 CD’s are also issued at discounted price like the Treasury bills and they
range between a span of 7 days up to 1 year.
 The Certificate of Deposit issued by banks range from 3 months, 6 months
and 12 months.
 Note: CD’s can be purchased to individuals (except minors), companies,
corporations, funds, non–resident Indians, etc.

9. Banker’s Acceptance
 A Banker’s Acceptance is a document that promises
future payment which is guaranteed by a commercial
bank. Also, it is used in money market funds and will
specify the details of repayment like the date of
repayment, amount to be paid, and details of the
individual to which the repayment is due.
 BA’s features maturity periods that range between
30 days up to 180 days.

10. Repurchase Agreements (Repo)
 Also called Reverse Repo or simply Repo, they are
loans of short duration which are agreed by the
buyers and the sellers for the purpose of buying and
repurchasing.
 These transactions are carried out only between the
parties approved by the RBI.

11. Reserve Bank of India
 The Reserve Bank of India is a central bank and was
established on 1st
April 1935 by the provisions of the
Reserve Bank of India Act 1934. RBI works as a central
bank where commercial banks are account holders. The
central office of RBI is located in Mumbai since its
inception. It was inaugurated with a share capital of Rs. 5
Crores divided into shares of Rs. 100 each fully paid up.
RBI was Nationalised on 1st
January 1949 based on the
Reserve Bank of India (Transfer to Public Ownership) Act,
1948. RBI is fully owned by the Government of India. The
Reserve Bank of India has 20 regional offices, most of
them in state capitals and 11 Sub-offices.

12. Structure of RBI
 One Governor;
 Not more than four Deputy Governors;
 Two Governmental officials from the Ministry of Finance;
 Ten nominated directors from various fields by the government to
give representation to important elements in the economic life of
the country, and
 The four-nominated director by the Central Government to
represent the four local boards with the headquarters at Mumbai,
Kolkata, Chennai, and New Delhi.
 The local Board consists of five members each central government-
appointed for a term of four years to represent territorial and
economic interests and the interests of cooperative and indigenous
banks.

13. OBJECTIVES OF RBI
 To maintain monetary stability such that the business and
economic life of the country can deliver the welfare gains of a
mixed economy;
 To maintain the financial stability and ensure sound financial
institutions so that economic units can conduct their business
with confidence;
 To maintain stable payment systems, so that financial
transactions can be safely and efficiently executed;
 To ensure that credit allocation by the financial system broadly
reflects the national economic priorities and social concerns;
 To regulate the overall volume of money and credit in the
economy to ensure a reasonable degree of price stability;
 To promote the development of financial markets and systems to
enable itself to operate/regulate efficiently.

14. ROLE OF RESERVE BANK OF INDIA
 Monetary policy
 Issuer of currency
 Transact government business
 Banker to banks
 Regulator and supervisor of the financial system
 Manager of Foreign Exchange
 Supervisory Functions
 Developmental role
 Other Control and Supervisory Roles

15. Monetary Policy
 Monetary policy is a set of tools used by a
nation's central bank to control the overall money
supply and promote economic growth and employ
strategies such as revising interest rates and
changing bank reserve requirements.

16. INSTRUMENTS of Money Market
 Monetary policy is a set of actions to control a nation's
overall money supply and achieve economic growth.
 Monetary policy strategies include revising interest rates
and changing bank reserve requirements.
 Monetary policy is commonly classified as either
expansionary or contractionary.
 It is an effective instrument for controlling
macroeconomic factors like unemployment and inflation.
 The monetary policy tools are divided into Quantitative
tools and Qualitative tools which regulate the money
supply indirectly and directly in the economy respectively.

17. What is Monetary Policy Committee (MPC)?
 The Monetary Policy Committee sets India's
benchmark interest rate. Meetings occur at least
quarterly, and decisions are published afterward. The
committee has six members: three from the Reserve
Bank of India and three appointed by the
government. A "silent period" for utmost
confidentiality surrounds rate decisions. The
committee, chaired by the RBI governor, decides by
majority, with the governor's casting vote in ties.
Their mandate is to maintain 4% annual inflation
until March 31, 2026, with a 2-6% tolerance range.

18. History and Formation of MPC
 Prior to the creation of the committee, the Reserve Bank of India's Governor
made all significant interest rate decisions on his own.
 The MPC was founded under the Reserve Bank of India Act of 1934 to increase
transparency and accountability in India's monetary policymaking.
 The MPC meets at least four times a year, and following each meeting, the
monetary policy is published, with each member declaring their position.
 The Urjit Patel Committee was the first to suggest forming a five-member
Monetary Policy Committee.
 Following that, the government recommended the formation of a seven-
member commission.
 The Monetary Policy Department (MPD) of the Reserve Bank aids the MPC in
policy development.
 On June 27, 2016, the Monetary Policy Committee was established.
 The Financial Markets Operations Department (FMOD) implements monetary
policy through daily liquidity management operations.

19. Need of Monetary Policy
 Monetary policy refers to the central bank's approach to
using monetary tools within its competence to achieve
the Act's objectives.
 Regarding monetary policy, the RBI's major purpose is
to preserve price stability while seeking growth.
 Price stability is a necessary condition for long-term
expansion.
 The updated RBI Act of 1934 further states that the
Indian government, in collaboration with the Reserve
Bank, sets the inflation objective (4 percent + 2%) every
five years.

20. Objectives of Monetary Policy Committee
 According to the Chakravarty Committee's recommendations,
price stability, economic growth, equity, social justice, and
supporting the establishment of new financial enterprises are all
vital aspects of India's monetary policy.
 The Reserve Bank of India (RBI) aims to keep inflation tolerable
while the Indian government strives to boost the country's GDP
growth rate.
 To meet the country’s inflation target and achieve its major
objectives, the Monetary Policy Committee estimates the
necessary policy interest rate.
 The Reserve Bank lends overnight liquidity to banks against the
collateral of government and other approved assets at a repo rate
under the liquidity adjustment facility (LAF).

21. Importance of Monetary Policy Committee
 Economic Stability: MPC is vital in ensuring stability by regulating key
economic indicators like inflation and interest rates.
 Inflation Control: It helps control inflation, maintaining price stability crucial
for sustainable economic growth.
 Interest Rate Management: MPC sets benchmark interest rates, influencing
borrowing costs, spending, and investment.
 Predictable Policy Framework: Provides a transparent and predictable
monetary policy framework, aiding businesses and investors in decision-
making.
 Government and RBI Collaboration: Fosters collaboration between the
government and the Reserve Bank of India in shaping monetary policies.
 Expertise Inclusion: Comprising experts from diverse fields, the MPC brings a
comprehensive understanding of economic nuances.
 Public Accountability: Enhances accountability as MPC decisions are public,
ensuring scrutiny and understanding of policy choices.

22. Members of Monetary Policy Committee
 The Monetary Policy Committee (MPC) comprises six members,
including:
 Governor of the Reserve Bank of India (RBI): The Governor of the RBI is
the ex-officio chairperson of the MPC.
 Deputy Governor of the RBI: One of the Deputy Governors of the RBI is a
member of the MPC.
 Two External Members: The government appoints two external members
to the MPC. These members are experts in the field of economics,
finance, or monetary policy.
 Executive Director of the RBI: The Executive Director of the RBI is also a
member of the MPC.
 Secretary of the Department of Economic Affairs: The Secretary of the
Department of Economic Affairs, Ministry of Finance, is a non-voting
member of the MPC.

23. Current Members
 The MPC RBI includes 6 members currently namely-
 Shaktikanta Das (Governor of RBI)
 Michael Debabrata Patra (Deputy Governor)
 Rajiv Ranjan
 Jayanth R. Varma,
 Ashima Goyal
 Shashanka Bhide