Question

Explain 'Treasury Bill' and 'Call Money' as money market instruments.

Answer 1

• Treasury Bills:
  

Treasury bills, also known as Zero Coupon Bonds are the instrument of short term borrowing with maturity period of less than one year.

This instrument is issued by the Reserve Bank of India on behalf of the Central Government for fulfilling short term requirements of funds. They are issued at discount and are paid at par.

• Call Money is short term finance used for inter-bank transactions. It has a maturity period of one day to fifteen days. All the commercial banks are required to maintain cash balance which is known as Cash Reserve Ratio (CRR). The Reserve Bank of India keeps on changing this ratio from time to time thus affecting the availability of funds, for providing loans, with the banks. Call money is a facility under which banks borrow money from each other to maintain CRR at rate of interest known as Call Rate. This rate keeps on changing from day to day and sometimes from hour to hour.
  

The relationship between call rates and other short term instruments such as commercial papers, certificates of deposit etc. is an inverse relationship. An increase in call money rates increases the demand for other short term instruments.