The Money Market and SEBI

What defines the money market

• The money market deals in instruments that mature in under one year. The capital market deals in longer-term ones.
• It generally offers lower risk and higher liquidity than the capital market.
• That makes it the go-to place for parking or raising short-term funds.

Treasury Bills

• Treasury Bills (T-Bills) are short-term government debt, issued by the RBI on the government’s behalf.
• They come in 91-day, 182-day and 364-day tenors.
• T-Bills are zero-coupon. They pay no interest directly.
• Investors buy them at a discount and redeem them at face value. The difference is the return.

Commercial Paper and Certificates of Deposit

• Commercial Paper (CP) is a short-term, unsecured borrowing instrument that companies issue. They must meet RBI eligibility criteria.
• A Certificate of Deposit (CD) is similar, but banks issue it instead of companies.
• Both let institutions raise short-term funds from the market, not only from bank loans or deposits.

The Call Money Market

• It handles overnight lending between banks.
• It is considered the most volatile segment of India’s organised money market.
• Rates swing sharply because banks borrow and lend only to cover very short-term, day-to-day cash gaps.

Corporate bonds and G-Secs

• Insurance companies, pension funds and retail investors can all trade Corporate Bonds and Government Securities in India.
• Retail investors gained direct G-Sec access through the RBI Retail Direct Scheme.
• They trade corporate bonds through brokers and stock exchange platforms.

What counts as a financial instrument

• A financial instrument is a tradable contract or claim on value, not a physical asset.
• Exchange-Traded Funds and currency swaps are financial instruments.
• Motor vehicles are tangible physical assets, so they do not qualify.

Participatory Notes

• Registered Foreign Portfolio Investors (FPIs) issue Participatory Notes (P-Notes). They are derivatives that give indirect access to Indian securities.
• An overseas investor buys a P-Note from the issuing FPI. It gains Indian market exposure without registering directly with SEBI.
• SEBI’s own story is in SEBI (Securities and Exchange Board of India).

Why P-Notes worry regulators

• The overseas buyer never appears on SEBI’s own investor register. The buyer’s identity sits with the issuing FPI.
• That gap raises fears of money laundering and round-tripping. Round-tripping means Indian money leaves the country and returns disguised as foreign investment.
• SEBI has tightened P-Note rules repeatedly. It requires stronger know-your-customer checks on the ultimate beneficial owner.
• It has also proposed further curbs, including separate registration for FPIs that issue these instruments.

What a sovereign default really means

• US government debt is backed only by the “full faith and credit” of the government, not by any hard asset.
• Exam trap: in a US default, Treasury bondholders would keep their legal claim to payment.
• A default means missed or delayed payment, not a cancelled claim.

Why the money market matters, at scale

• India’s overnight money market moves over ₹6 lakh crore on one ordinary day. That covers call money, triparty repo and market repo together.
• Banks do not hold exact cash for every rupee they owe overnight. They borrow and lend among themselves to cover small daily mismatches.
• Large corporations raise short-term funds through Commercial Paper rather than always going to a bank.
• Money-market and capital-market instruments carry different risk and liquidity, even though both raise funds for similar borrowers.
• See Capital Markets and Mutual Funds, Money and Monetary Concepts, Monetary Policy and RBI Tools and Reserve Bank of India (RBI).