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

Money market instruments and nostro/vostro accounts form the operational backbone of every bank treasury, supplying the short-term funding, liquidity buffers and settlement plumbing that keep a balance sheet solvent day to day. Where longer-dated assets earn the headline yield, it is the money market desk that ensures a bank can meet its payment obligations, park surplus cash productively and square forex deals across borders. For IIBF Treasury Management candidates, mastering the menu of sub-one-year instruments alongside the correspondent banking accounts that settle cross-currency flows is essential, because exam questions repeatedly test the mechanics, tenors and regulatory limits that govern this fast-moving corner of the market.

Call, Notice and Term Money: The Overnight Core of Money Market Instruments

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 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 and marginal standing facility bounds to judge whether system liquidity is in surplus or deficit, and you can track the live policy numbers on the RBI rates page. Because these loans are unsecured, counterparty discipline and intraday position management matter as much as the headline yield.

Treasury Bills, Commercial Paper and Certificates of Deposit

Beyond pure interbank lending, a treasury holds a portfolio of discount and short-dated instruments that balance safety, yield and liquidity. The three workhorses 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 and issuance requires a minimum credit rating, with the paper 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.

For exam purposes, remember the credit-risk hierarchy: T-bills are sovereign and risk-free, CDs carry bank risk, and CP carries corporate risk and therefore the widest spread. Each instrument helps a treasury fine-tune the maturity ladder, and you can drill these distinctions with our match game or scenario sets on the practice tests page.

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 and 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. Keep an eye on policy commentary through our IIBF news feed to see how each RBI review reshapes the secured money market.

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 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. Review the broader treasury context across our banking exam blog to connect these settlement mechanics with ALM and risk topics.

Conclusion: Build Treasury Confidence for Your IIBF Exam

The money market is where a treasury proves it can fund the bank, manage liquidity and settle every forex deal cleanly. Knowing how call, notice and term money, T-bills, commercial paper, certificates of deposit, repo and TREPS fit together, and how nostro, vostro and loro accounts route cross-currency settlement, gives you both exam marks and real-world fluency. Reinforce these money market instruments and nostro/vostro concepts with targeted practice on our IIBF practice tests, sharpen recall with the match game, and keep your policy knowledge current through the RBI rates dashboard.