Money market instruments 

They are short-term, high-liquidity, and low-risk debt securities with maturities of less than one year, used by governments, banks, and corporations for immediate funding. Key instruments include Treasury bills (T-bills), commercial paper, certificates of deposit (CDs), repurchase agreements (Repo), and banker’s acceptances.

• Certificate of Deposit (CD)

These certificates are issued directly by a commercial bank at a discounted rate, and their tenure usually ranges from seven days to one year. CDs function similarly to a bank fixed deposit, except for the higher negotiating factor and higher liquidity. 

Introduced by the Reserve Bank of India (RBI) in 1989, CDs have become a popular investment option for investors looking for short-term assets since they carry no risk while offering interest rates greater than those offered by fixed deposits.

• Treasury Bills 

These are issued by the Government of India when it requires funds to meet its short-term requirements. The treasury banknotes are issued at a discounted value and are traded on primary and secondary markets. 

Since treasury bills are backed by the sovereign, the associated risk is negligible. However, these securities do not generate any interest. The only profit is the difference between the maturity value of the bill and its discounted purchase price. 

• Commercial Papers 

This is an unsecured money market instrument issued by well-established corporations as promissory notes. The maturity period of these instruments is less than a year; hence, the interest rate is quite low if you compare it with other debt securities. 

This money market instrument enables corporate borrowers to avail of short-term borrowing by raising capital directly from the market. 

• Repurchase Agreements 

Also known as buybacks, these are formal agreements between two parties where the issuer offers a guarantee to repurchase the security in the future. These transactions can only be made between two parties that are approved by RBI, as repurchase agreements usually involve trading of government securities. The date of purchase and interest rate is predetermined. 

• Banker’s Acceptance 

Issued by commercial banks, this is a financial document that guarantees a future payment to the lender. The document clearly mentions the repayment terms, including the date of repayment and the amount to be repaid. The maturity period of this safe and reliable instrument usually ranges from 30 days to 180 days.