The Reserve Bank of India (RBI) is preparing to introduce a pilot program for a Central Bank Digital Currency (CBDC) focused on interbank borrowing and the call money market. The money market is a segment of the financial market where highly liquid, short-term financial instruments, such as treasury bills and commercial papers, are traded. Call money, on the other hand, represents short-term loans repayable immediately upon the lender’s demand, without a predefined schedule. The interbank call money market allows major financial institutions to borrow and lend funds at interbank rates, typically for very short durations, often used to meet reserve requirements. This market serves not only banks but also various financial entities like mutual funds, corporations, and insurance companies.
Facts/Terms for UPSC Prelims
- Central Bank Digital Currency (CBDC): CBDC is a digital form of a country’s national currency issued and regulated by the central bank. It serves as legal tender and can be used for electronic transactions.
- Liquidity: Liquidity refers to the ease with which an asset can be converted into cash without a significant loss in value. High liquidity is a characteristic of money market instruments.
- Treasury Bills: Treasury bills are short-term government securities with maturities typically ranging from a few days to one year. They are used to raise funds for government operations.
- Commercial Papers: Commercial papers are unsecured, short-term debt instruments issued by corporations to raise funds for various purposes, such as working capital requirements.
- Interbank Rates: Interbank rates are the interest rates at which banks lend and borrow funds from each other in the interbank market. These rates can influence overall interest rate levels in the economy.
