By convention, the term 'Money Market' refers to the market for short-term requirement and deployment of funds. Money market instruments are those instruments, which have a maturity period of less than one year. The most active part of the money market is the market for overnight call and term money between banks and institutions and repo transactions. Call Money / Repo are very short-term Money Market products.

The below mentioned instruments are normally termed as money market instruments:

• Certificate of Deposit (CD)
• Commercial Paper (C P)
• Inter Bank Participation Certificates
• Inter Bank term Money
• Treasury Bills
• Bill Rediscounting
• Call/ Notice/ Term Money

The call money market is an integral part of the Indian Money Market, where the day-to-day surplus funds (mostly of banks) are traded. The loans are of short-term duration varying from 1 to 14 days. The money that is lent for one day in this market is known as 'Call Money', and if it exceeds one day (but less than 15 days) it is referred to as 'Notice Money'. Term Money refers to Money lent for 15 days or more in the InterBank Market.

Banks borrow in this money market for the following purpose:

• To fill the gaps or temporary mismatches in funds
• To meet the CRR & SLR mandatory requirements as stipulated by the Reserve Bank of India
• To meet sudden demand for funds arising out of large outflows.

Primary Dealers can be referred to as Merchant Bankers to Government of India, comprising the first tier of the government securities market. These were formed during the year 1994-96 to strengthen the market infrastructure and put in place an improvised and an efficient secondary government securities market trading system and encourage retailing of Government Securities on large scale.

The role of Primary Dealers is to;

1. commit participation as Principals in Government of India issues through bidding in auctions
2. provide underwriting services
3. offer firm buy - sell / bid ask quotes for T-Bills & dated securities
4. development of Secondary Debt Market

G-Secs are issued by the Reserve Bank of India on behalf of the Government of India. These form a part of the borrowing program approved by the parliament in the ‘union budget’. G- Secs are normally issued in dematerialized form (SGL) and are also issued in the physical form (in the form of Stock Certificate) and are transferable. When issued in the physical form they are issued in the multiples of Rs. 10,000/-. Normally the dated Government Securities, have a period of 1 year to 20 years. These are sovereign instruments bearing a fixed interest rate (or otherwise) with interests payable semi-annually or otherwise and principal as per schedule, normally on due date on redemption

G-secs are issued by RBI in either a yield-based (participants bid for the coupon payable) or price-based (participants bid a price for a bond with a fixed coupon) auction basis. The Auction can be either a Multiple price (participants get allotments at their quoted prices/yields) Auction or a Uniform price (all participants get allotments at the same price).
RBI has recently announced a non-competitive bidding facility for retail investors in G-Secs through which non-competitive bids will be allowed up to 5 percent of the notified amount in the specified auctions of dated securities.

StateDevelopment Loans (SDLs) are issued by the respective state governments but the RBI coordinates the actual process of selling these securities. Each state is allowed to issue securities up to a certain limit each year. The planning commission in consultation with the respective state governments determines this limit. Generally, the coupon rates on state loans are marginally higher than those of GOI-Secs issued at the same time.

The procedure for selling of state loans, the auction process and allotment procedure is similar to that for GOI-Sec. State Loans also qualify for SLR status Interest payment and other modalities are similar to GOI-Secs. They are also issued in dematerialized form. State Government Securities are also issued in the physical form (in the form of Stock Certificate) and are transferable. No stamp duty is payable on transfer for State Loans as in the case of GOI-Secs. In general, State loans are much less liquid than GOI-Secs.

Treasury bills are actually a class of Central Government Securities. Treasury bills, commonly referred to as T-Bills are issued by Government of India against their short term borrowing requirements with maturities ranging between 14 to 364 days. The T-Bill of the following periods are currently issued by Government/Reserve Bank of India in Primary Market : 91-day, 182-day and 364-day T-Bills. All these are issued at a discount-to-face value. For example a Treasury bill of Rs. 100.00 face value issued for Rs. 91.50 gets redeemed at the end of it's tenure at Rs. 100.00.

Auction is a process of calling of bids with an objective of arriving at the market price. It is basically a price discovery mechanism. There are several variants of auction. Auction can be price based or yield based. In securities market we come across below mentioned auction methods.

a) Multiple Price Auction (French Auction)
In French auction, buyers typically submit bids that specify a quantity and a price (or a yield) at which they wish to purchase the desired quantity.  Once submitted, these bids are ranked from the highest to the lowest price (or from the lowest to the highest yield) and the quantity for sale is awarded to the best bids (i.e. highest prices or lowest yields) upto the cut-off price (partial allotment being resorted to in case the quantum of securities left over are less than the amount bid at cut-off price).  Under the multiple price auctions, each successful bidder will pay the actual price at which he has bid which would thus be a price higher than or equal to the cut-off price arrived at in the auction.

b)Uniform Price Auction (Dutch Auction)
The process is similar to the Multiple Price Auction except that the each successful bidder (who has bid above the cut-off price) pays the lowest price (cut-off price) accepted by the debt manager.  All the successful bidders will pay the same price, irrespective of their actual bid price.

c) Private Placement
After having discovered the coupon through the auction mechanism, if on account of some circumstances the Government / Reserve Bank of India decides to further issue the same security to expand the outstanding quantum, the government usually privately places the security with RBI. The RBI in turn may sell these securities at a later date through their open market window albeit at a different yield.

d) On-tap issue
Under this scheme of arrangements after the initial primary placement of a security, the issue remains open to yet further subscriptions. The period for which the issue remains open may be sometimes time specific or volume specific

The price of a bond in the markets is determined by the forces of demand and supply, as is the case in any market. The price of a bond in the marketplace also depends on a number of other factors and will fluctuate according to changes in

• Economic conditions
• General money market conditions including the state of money supply in the economy
• Interest rates prevalent in the market and the rates of new issues
• Future Interest Rate Expectations
• Credit quality of the issuer
•  There is however, a theoretical underpinning to the determination of the price of the bond in the market based on the measure of the yield of the security.

Yield on a security is the implied interest offered by a security over its life, given its current market price.

Coupon payments are the cash flows that are offered by a particular security at fixed intervals. The coupon expressed as a percentage of the face value of the security gives the coupon rate.

The difference between coupon rate and yield arises because the market price of a security might be different from the face value of the security. Since coupon payments are calculated on the face value, the coupon rate is different from the implied yield.

This is the yield or return derived by the investor on purchase of the instrument (yield related to purchase price)
It is calculated by dividing the coupon rate by the purchase price of the debenture.

For e. g: If an investor buys a 10% Rs 100 debenture of ABC company at Rs 90, his current Yield on the instrument would be computed as: Current Yield = (10%*100)/90 X 100 , That is 11.11% p.a.

G-Secs are traded on a clean price (Trade price) but settled on the dirty price (Trade price + Accrued Interest). This happens, as the coupon payments are not discounted in the price, as is the case in the other non-govt. debt instruments

The Day Count Convention to be followed for the calculation of Accrued Intetest in case of transactions in G-Secs is 30/360. I.e. each month is to be taken as having 30 days and each year is to be taken as having 360 days, irrespective of the actual number of days in the month. So, months like February, March, January, May, July, August, October and December are to be taken as having 30 days.

RBI: The Reserve Bank of India is the main regulator for the Money Market. Reserve Bank of India also controls and regulates the G-Secs Market. Apart from its role as a regulator, it has to simultaneously fulfill several other important objectives viz. managing the borrowing program of the Government of India, controlling inflation, ensuring adequate credit at reasonable costs to various sectors of the economy, managing the foreign exchange reserves of the country and ensuring a stable currency environment.

SEBI: Regulator for the Indian Corporate Debt Market is the Securities and Exchange Board of India (SEBI). SEBI controls bond market and corporate debt market in cases where entities raise money from public through public issues.

It regulates the manner in which such moneys are raised and tries to ensure a fair play for the retail investor. It forces the issuer to make the retail investor aware, of the risks inherent in the investment, by way and its disclosure norms. SEBI is also a regulator for the Mutual Funds.