Economic and Business Environment · Indian Financial Markets

Money Market in India: Instruments and Participants

Updated 11 October 2026

The money market is the market for short-term funds, where borrowing and lending is for up to one year. Its main instruments are call and notice money, treasury bills, commercial paper, certificates of deposit and repos. To answer a question, define the market, name the issuer, tenor and purpose of each instrument.

Understand Money Market in India

The money market is where banks, institutions and the government borrow and lend funds for a short period, up to one year. It is not a physical place. It is a network of dealings done by phone, screen and electronic platforms. Its main job is to give liquidity: it lets those with surplus cash earn something, and those with a shortfall borrow quickly.

The market is mostly wholesale. Deals are large and are made between institutions. The instruments are usually safe, easy to sell and carry low risk compared with shares. The Reserve Bank of India (RBI) is the main regulator. It also uses the money market to manage liquidity and push interest rates in the direction it wants.

Participants include the RBI, the Central Government, commercial banks, primary dealers, mutual funds, insurance companies, corporates and other financial institutions. Some of them borrow, some lend and some do both, depending on their cash position that day.

The key instruments are these:

Call money: borrowing and lending of funds for one day. Mainly used by banks to meet daily cash needs.
Notice money: the same, but for 2 to 14 days.
Term money: borrowing and lending for a period of more than 14 days, that is, from 15 days up to one year. Like every money market instrument, it stays within the one-year limit.
Treasury bills (T-bills): short-term securities issued by the Government of India through the RBI. They are sold at a discount and repaid at face value. They are issued for 91, 182 and 364 days.
Commercial paper (CP): unsecured, short-term promissory note issued by creditworthy companies to raise funds.
Certificate of deposit (CD): a negotiable deposit certificate issued by banks and certain financial institutions for a fixed short period.
Repo and reverse repo: sale or purchase of securities with an agreement to reverse the deal later.

A repo is a loan against securities. The borrower sells securities and agrees to buy them back at a higher price on a fixed date. Repo deals take place between banks, primary dealers and other market participants, not only with the RBI. In a reverse repo, the lender buys the securities and resells them later.

The RBI uses these deals as a policy tool under its liquidity adjustment facility (LAF). Under LAF, the repo rate is the rate at which the RBI lends short-term funds to banks against government securities. Repo injects liquidity into the system.

Since April 2022, the LAF corridor has had the Standing Deposit Facility (SDF) rate as its floor and the Marginal Standing Facility (MSF) rate as its ceiling. The SDF rate is the repo rate minus 0.25%. Under the SDF, banks can park surplus funds with the RBI. The fixed-rate reverse repo, in which the RBI takes money from banks, is operated separately at the RBI's discretion. The RBI also absorbs liquidity through variable-rate reverse repo operations of different tenors.

Key rules to remember

Discount instrument price: Issue price = Face value − Discount; Used for T-bills and CP. They are issued at a discount and redeemed at face value, so there is no separate interest payment.
Return on a discount instrument: Yield (%) = [(Face value − Issue price) ÷ Issue price] × (365 ÷ Days to maturity) × 100; Annualised yield on the amount invested. Use only if the question gives prices and days.
Call and notice money tenor: Call money = 1 day; Notice money = 2 to 14 days; The tenor is the standard way to tell the two apart.
T-bill maturities: 91 days, 182 days, 364 days; These are the three standard T-bill tenors.
Repo cycle: Repo = sale of securities with an agreement to repurchase them later; Reverse repo = purchase of securities with an agreement to resell them later. In the RBI's LAF, the RBI is the lender in a repo.; Any two parties can do a repo, such as banks and primary dealers. In the RBI's LAF, repo adds liquidity to the system and reverse repo drains it. Since April 2022, the SDF rate (repo rate minus 0.25%) is the floor and the MSF rate the ceiling of the LAF corridor, and the fixed-rate reverse repo is operated separately at the RBI's discretion.

How to solve Money Market in India questions

Use this method for any question on the money market, whether it asks for a definition, a difference or a short note.

1Read the command word. 'Define' needs a short statement. 'Distinguish' needs a point-by-point comparison. 'Explain' needs features and examples.
2Start with the meaning of the money market: short-term funds, up to one year, liquidity, wholesale deals.
3Name the instrument asked and state who issues it and who invests in it.
4Give the tenor and how it is priced, such as discount or interest, and whether it is secured.
5State the purpose, for example daily cash management for call money or government short-term borrowing for T-bills.
6For comparisons, make two or three columns in your mind and write the same points for each: issuer, tenor, nature, risk.
7For repo questions, say clearly who sells, who buys and who gets cash. Then state the effect on liquidity.
8Close with the role of the RBI or the importance of the market, in one line.

Quickest way: Four-point instrument grid

When to use it: Use it when the question asks you to compare instruments or write a short note under time pressure.

For every instrument write four points: Who issues, How long, How priced, Why used.
Call: banks, 1 day, interest rate set by demand and supply, daily cash needs.
Notice: banks, 2 to 14 days, same pricing, slightly longer needs.
T-bill: Government via RBI, 91/182/364 days, discount, government short-term funds.
CP: companies, short term, unsecured, discount, working capital.
CD: scheduled commercial banks and certain permitted financial institutions (such as All India Financial Institutions), fixed short period, negotiable, discount, raising deposits.
Repo: used by the RBI under LAF, and also by banks, primary dealers and other participants among themselves; short term, repo rate, liquidity management.

Common mistakes in Money Market in India

Saying call money and notice money are the same.
Both are interbank loans for very short periods, so they seem identical.
Fix: Fix the tenor: call is one day, notice is 2 to 14 days. Write this first in any distinction.
Mixing up repo and reverse repo.
Students look at the transaction from the bank's side instead of the RBI's side.
Fix: Repo: RBI lends to banks and gives them cash. Reverse repo: RBI takes cash from banks. Always fix your viewpoint as the RBI.
Saying T-bills pay periodic interest.
Students confuse them with government bonds.
Fix: T-bills are zero coupon. They are sold at a discount and redeemed at face value. The gain is the difference.
Calling commercial paper a secured instrument.
It sounds like a formal bond or debenture.
Fix: CP is an unsecured promissory note. Only creditworthy companies can issue it, because investors rely on the issuer's standing.
Treating the money market as the market for long-term funds.
It is mixed up with the capital market during revision.
Fix: Money market: up to one year. Capital market: longer term, shares and bonds. State the one-year limit in every definition.
Confusing certificates of deposit with ordinary fixed deposits.
Both are issued by banks and have a fixed period.
Fix: A CD is negotiable and issued as a certificate, so it can be sold before maturity. Mention negotiability in your answer.

Worked examples

Example 1

Distinguish between call money and notice money. Also state who mainly uses them.

Show the solution

Meaning: Call money is the borrowing and lending of funds for one day in the interbank market. Notice money is the same for a period of more than one day, up to 14 days.
Tenor: Call money is for 1 day. Notice money is for 2 to 14 days.
Purpose: Call money meets overnight cash needs, such as maintaining required reserves. Notice money meets a slightly longer shortfall.
Users: Both are mainly used by banks, and other approved participants take part as well.
Rate: In both cases the interest rate depends on the demand for and supply of funds in the market.

Answer: Call money is a one-day loan and notice money is a loan for 2 to 14 days. Both are short-term interbank instruments used mainly by banks for liquidity, and their rates move with demand and supply of funds.

Example 2

A treasury bill with a face value of ₹1,00,000 and a maturity of 91 days is issued at ₹98,500. Find the discount, and explain why the investor needs no interest payment.

Show the solution

Discount = Face value − Issue price.
Discount = ₹1,00,000 − ₹98,500 = ₹1,500.
The investor pays ₹98,500 today.
After 91 days the Government pays ₹1,00,000 on redemption.
The gain of ₹1,500 is the return, so no separate interest is paid. This is the nature of a discount instrument.

Answer: The discount is ₹1,500. The investor earns it as the difference between the price paid (₹98,500) and the redemption value (₹1,00,000), so the T-bill needs no periodic interest.

Exam tips

Learn the tenors by heart: call 1 day, notice 2 to 14 days, T-bills 91, 182 and 364 days. They are easy marks.
For distinction questions, draw a two-column layout with at least four points each. Examiners reward clear, matched points.
In any repo question, state the RBI's viewpoint first. Then write the effect: repo adds liquidity, reverse repo absorbs it.
Always add a one-line definition of the money market with the words 'short-term' and 'up to one year' at the start of a long answer.
Give an example of an issuer, such as a bank for a CD or a company for CP, so your answer looks practical.

Practice questions from Indian Financial Markets

Money Market in India: frequently asked questions

What is the difference between call money and notice money?

Call money is for one day. Notice money is for 2 to 14 days. Both are mainly used by banks to manage short-term cash needs.

What is the difference between treasury bills, commercial paper and certificates of deposit?

T-bills are issued by the Government of India through the RBI. Commercial paper is issued by creditworthy companies and is unsecured. Certificates of deposit are negotiable deposit certificates issued by scheduled commercial banks and certain permitted financial institutions, such as All India Financial Institutions. All three are short-term and usually issued at a discount.

What is repo and reverse repo rate?

A repo is a sale of securities with an agreement to buy them back later, so it works as a loan against securities. In the RBI's liquidity adjustment facility, the repo rate is the rate at which the RBI lends short-term funds to banks. Since April 2022, the SDF rate (repo minus 0.25%) is the floor of the LAF corridor and the MSF rate is the ceiling. The fixed-rate reverse repo, where the RBI takes money from banks, is operated separately at the RBI's discretion, and repo deals also take place between banks and other participants.

How long can money market instruments run?

They are short-term instruments, with maturity up to one year. Anything longer belongs to the capital market.