Money Market Instruments and Nostro/Vostro Accounts: The Complete IIBF Treasury Guide

Money market instruments and nostro/vostro accounts are the operational heartbeat of every bank treasury, supplying the short-term funding, liquidity buffers, and cross-border settlement plumbing that keep a balance sheet solvent from one business day to the next. While the long end of the book earns the headline yield, it is the money market desk that quietly ensures the bank can meet its payment obligations, park surplus cash productively, and square every foreign-exchange deal across borders. For IIBF Treasury, Investment and Risk Management candidates, this is one of the highest-scoring corners of the syllabus, because examiners return to it again and again.

This guide walks you through the full menu of sub-one-year instruments alongside the correspondent-banking accounts that settle cross-currency flows. We cover the mechanics, the tenors, the regulatory logic, and the exam traps, then close with a study plan, a comparison table, common mistakes, and a focused FAQ so you can answer with confidence on exam day.

What Are Money Market Instruments? The Short-Term Foundation

Money market instruments are short-term debt and lending products, almost always with a tenor of one year or less, that banks, primary dealers, and other institutions use to manage day-to-day liquidity. The defining features are short maturity, high liquidity, and relatively low credit risk. A treasury uses these instruments to bridge timing gaps between cash inflows and outflows, to deploy temporary surpluses, and to maintain the regulatory liquidity buffers it is required to hold.

Think of the money market as the bank's working-capital toolkit. When deposits run ahead of loans, the desk lends the surplus; when payments fall due before funds arrive, the desk borrows. Every instrument below is simply a different way to do one of those two things, with a different trade-off between safety, yield, and how quickly the money can be moved.

Call, Notice and Term Money: The Overnight Core

The interbank call, notice, and term money segment is the most liquid part of the Indian money market and the first place a treasury looks to fund a shortfall or deploy a surplus. These are unsecured loans between banks, priced off the prevailing call rate, which tracks the RBI policy corridor closely.

• Call money is borrowed and repaid on an overnight basis (one business day), making it the purest measure of immediate liquidity demand.
• Notice money covers tenors from 2 to 14 days, repayable on a short notice agreed between the parties.
• Term money runs from 15 days up to one year, giving treasuries a way to lock in funding for known commitments.

Participation in the call and notice segment is restricted to banks and primary dealers, who operate within prudential borrowing and lending limits set by the RBI as a multiple of their net worth or capital funds. The weighted average call rate (WACR) is the operating target of monetary policy, so movements here ripple straight into deposit and lending decisions. Treasurers watch the call rate against the standing deposit facility (SDF) and marginal standing facility (MSF) bounds to judge whether system liquidity is in surplus or deficit. Because these loans are unsecured, counterparty discipline and intraday position management matter as much as the headline yield. If you want a structured refresher on this segment, the Treasury, Investment and Risk Management module walks through it chapter by chapter.

Treasury Bills, Commercial Paper and Certificates of Deposit

Beyond pure interbank lending, a treasury holds a portfolio of discounted, short-dated instruments that balance safety, yield, and liquidity. The three workhorses among money market instruments are treasury bills, commercial paper, and certificates of deposit.

• Treasury bills (T-bills) are sovereign zero-coupon instruments issued by the RBI on behalf of the Government in 91-day, 182-day, and 364-day tenors. They are sold at a discount and redeemed at face value, so the return is the difference between purchase price and par. As risk-free paper carrying zero credit risk, T-bills are the preferred SLR-eligible liquidity buffer.
• Commercial paper (CP) is an unsecured promissory note issued by highly rated corporates, primary dealers, and large financial institutions to raise short-term working capital. Tenors range from 7 days to one year, issuance requires a minimum credit rating, and the paper is sold at a discount to face value.
• Certificates of deposit (CDs) are negotiable instruments issued by banks and select financial institutions against funds deposited for a fixed period, typically 7 days to one year for banks. Unlike a plain term deposit, a CD is tradeable in the secondary market.

Repo, CBLO and TREPS: Collateralised Liquidity Management

Unsecured call money is convenient but capital-intensive and concentration-prone, so the bulk of short-term liquidity now flows through collateralised markets. A repo (repurchase agreement) is a sale of securities with a simultaneous agreement to repurchase them at a fixed price on a future date. Economically it is a secured loan, where the difference between the two legs is the repo interest. The RBI uses repo and reverse repo under its Liquidity Adjustment Facility (LAF) to inject or absorb funds, anchoring the entire short-term curve.

• Market repo lets banks, primary dealers, and other institutions borrow against government securities at rates negotiated bilaterally or on the electronic platform.
• TREPS (Triparty Repo) replaced the earlier CBLO (Collateralised Borrowing and Lending Obligation) as the anonymous, order-driven, collateralised money market product cleared through a central counterparty. A triparty agent handles collateral selection, valuation, and margining, which lowers operational risk and broadens participation to mutual funds, insurers, and corporates.

The shift from CBLO to TREPS deepened the secured segment, which now accounts for the largest share of money market turnover. For a treasury, collateralised borrowing conserves counterparty limits, reduces capital charges, and offers finer rate granularity. Candidates should be able to explain how repo interest is computed, why the repo rate sits at the centre of the policy corridor, and how TREPS settlement through a central counterparty mitigates default risk. To see how each policy review reshapes this segment, keep an eye on the official rate announcements and cross-check against the Indian Institute of Banking and Finance syllabus updates.

Nostro, Vostro and Loro Accounts in Forex Settlement

Cross-border trade and forex deals cannot settle without correspondent banking, and the vocabulary of nostro, vostro, and loro accounts is a perennial exam favourite. These are the same accounts viewed from different perspectives, all denominated in foreign currency and maintained with banks abroad.

• Nostro account means "our account with you": an account a domestic bank holds with a foreign bank in the foreign currency of that country. An Indian bank maintaining a US dollar account with a New York correspondent calls it a nostro.
• Vostro account means "your account with us": the mirror image, where a foreign bank maintains a rupee account with an Indian bank. The Special Rupee Vostro Account framework supports international trade settlement in Indian rupees.
• Loro account means "their account": a reference by a third bank to an account that one correspondent maintains with another, used mainly in three-party correspondence and reconciliation.

When a treasury sells dollars to a customer, the dollar leg settles by debiting the nostro account, while the rupee leg moves domestically. Daily nostro reconciliation is therefore a core back-office control: every entry in the bank's own ledger must match the mirror statement from the correspondent, and unreconciled or overdrawn nostro balances flag settlement and liquidity risk. Maintaining the right nostro funding level is a genuine liquidity-management decision, because idle foreign balances earn little while shortfalls trigger costly overdrafts. To connect these settlement mechanics with ALM and risk topics, browse the wider TIRM guide library.

Money Market Instruments at a Glance: Comparison Table

The table below summarises the key money market instruments so you can compare tenor, issuer, security, and risk in one view. Treat the time-sensitive limits as indicative and always confirm the current thresholds against the latest RBI and IIBF releases.

How to Study This Topic: A Practical 5-Step Plan

Money market questions reward clarity over cramming. The concepts are finite, the definitions are precise, and the exam tends to test the same handful of distinctions. Use this sequence to lock the topic down efficiently.

1. Master the tenor ladder first. Write out call, notice, and term money with their exact day-bands, then add the T-bill tenors (91/182/364). If you can reproduce these from memory, you have already secured the easy marks.
2. Build the risk hierarchy. Rank the instruments from sovereign to bank to corporate risk. A one-line mnemonic, T-bill safest, CP riskiest, helps you eliminate wrong options instantly.
3. Separate secured from unsecured. Group call/notice/term and CP/CD as unsecured, and repo/TREPS as secured. Examiners love asking which product conserves counterparty limits or capital, and the answer is always the collateralised one.
4. Drill the nostro/vostro/loro triangle. Practise the perspective shift with a worked example: the same dollar account is a nostro to the Indian bank and a vostro to the New York bank. Repeat until the viewpoint flips automatically.
5. Test under time pressure. Finish each study block with a short mock so recall becomes reflexive. Our TIRM mock tests and the broader practice test library are built for exactly this kind of rapid drilling.

For the surrounding theory, the Treasury, Investment and Risk Management hub ties money market mechanics back to ALM, valuation, and risk so the pieces reinforce one another rather than sitting in isolation.

Common Mistakes Candidates Make

• Confusing notice and term money. Notice money stops at 14 days; term money begins at 15 days. Mixing the boundary is the single most common slip.
• Calling a CD the same as a fixed deposit. A certificate of deposit is negotiable and tradeable in the secondary market, whereas an ordinary term deposit is not.
• Treating repo as an outright sale. Repo is economically a secured loan with a repurchase leg, not a permanent transfer of the security.
• Reversing nostro and vostro. Anchor it from your own bank's books: "nostro" is ours abroad, "vostro" is theirs with us. Read it from the wrong ledger and the answer flips.
• Quoting outdated limits. Borrowing limits, rating thresholds, and policy rates change with RBI reviews. Never state a stale figure in a descriptive answer; frame it as "as per the latest RBI guidelines."

Frequently Asked Questions

What is the difference between call, notice and term money?

Call money is overnight, lent and repaid in one business day. Notice money covers 2 to 14 days and is repayable on short notice agreed between the parties. Term money runs from 15 days up to one year. All three are unsecured interbank loans, and the weighted average call rate is the operating target of RBI monetary policy.

How do treasury bills, commercial paper and certificates of deposit differ?

T-bills are risk-free sovereign discount instruments issued in 91, 182, and 364-day tenors. Commercial paper is unsecured short-term paper issued by rated corporates and therefore carries corporate credit risk. Certificates of deposit are negotiable bank-issued instruments that carry bank risk and can be traded in the secondary market.

What replaced CBLO in the Indian money market?

TREPS, the Triparty Repo product, replaced the Collateralised Borrowing and Lending Obligation (CBLO). TREPS is cleared through a central counterparty and uses a triparty agent for collateral selection, valuation, and margining. It now carries the largest share of money market turnover.

What is the difference between a nostro and a vostro account?

A nostro account is "our account with you", an account a domestic bank holds in foreign currency with a bank abroad. A vostro account is "your account with us", an account a foreign bank holds, often in rupees, with the domestic bank. A loro account is a third-party reference to one correspondent account held with another.

Why is repo considered a secured money market instrument?

In a repo, securities are sold with a simultaneous agreement to repurchase them at a fixed future price, so the lender holds collateral for the duration of the loan. The difference between the two price legs is the repo interest. Because the cash is backed by government securities, repo carries far lower credit risk than unsecured call money.

How important is the money market section for the IIBF TIRM exam?

It is one of the most reliably tested areas of the Treasury, Investment and Risk Management syllabus, with recurring questions on tenors, instrument definitions, and nostro/vostro mechanics. Mastering it secures a cluster of scoring marks. For the exact weightage and any changes, always confirm against the latest IIBF notification.

Conclusion: Turn Treasury Theory into Exam Marks

The money market is where a treasury proves it can fund the bank, manage liquidity, and settle every forex deal cleanly. Once you can place call, notice, and term money, T-bills, commercial paper, certificates of deposit, repo, and TREPS on a single risk-and-tenor map, and once the nostro/vostro/loro triangle flips automatically in your head, both the exam marks and the real-world fluency follow. Keep your definitions sharp, keep your figures current, and practise until recall is reflexive, and this topic becomes one of your strongest scoring areas.

To go deeper on the valuation side of the treasury book, pair this with our Bond Valuation in Bank Treasury guide, Bank Investment Portfolio: HTM, AFS and HFT classification, and the full TIRM syllabus with free PDF so your money market knowledge sits inside the wider treasury picture.

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