MONEY MARKET

Definition of 'Money Market'

A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. The money market is used by participants as a means for borrowing and lending in the short term, from several days to just under a year. Money market securities consist of negotiable certificates of deposit (CDs), bankers acceptances, U.S. Treasury bills, commercial paper, municipal notes, federal funds and repurchase agreements (repos).

Characteristics of the money market

1. It is not a single market but a collection of markets for several instruments 2. It is wholesale market of short term debt instruments 3. Its principal feature is honor where the creditworthiness of the participants is important. 4. The main players are: Reserve bank of India (RBI), Discount and Finance House of India (DFHI), mutual funds, banks, corporate investor, non-banking finance companies (NBFCs), state governments, provident funds, Primary dealers. Securities Trading Corporation of India (STCI), public sector undertaking (PSUs), non-resident Indians and overseas corporate bodies. 5. It is a need based market wherein the demand and supply of money shape the market.

Functions of money market

1. To maintain monetary equilibrium. It means to keep a balance between the demand for and supply of money for short term monetary transactions. 2. To promote economic growth. Money market can do this by making funds available to various units in the economy such as agriculture, small scale industries, etc. 3. To provide help to Trade and Industry. Money market provides adequate finance to trade and industry. Similarly it also provides facility of discounting bills of exchange for trade and industry. 4. To help in implementing Monetary Policy. It provides a mechanism for an effective implementation of the monetary policy. 5. To help in Capital Formation. Money market makes available investment avenues for short term period. It helps in generating savings and investments in the economy. 6. Money market provides non-inflationary sources of finance to government. It is possible by issuing treasury bills in order to raise short loans. However this dose not leads to increases in the prices.

Importance of money market

If the money market is well developed and broad based in a country, it greatly helps in the economic development of a country. The central bank can use its monetary policy effectively and can bring desired changes in the economy for the industrial and commercial progress in the country. The importance of money market is given, in brief, as under:

(i) Financing Industry: A well developed money market helps the industries to secure short term
loans for meeting their working capital requirements. It thus saves a number of industrial units from

becoming sick.

(ii) Financing trade: An outward and a well knit money market system play an important role in
financing the domestic as well as international trade. The traders can get short term finance from banks by discounting bills of exchange. The acceptance houses and discount market help in financing foreign trade.

(iii) Profitable investment: The money market helps the commercial banks to earn profit by
investing their surplus funds in the purchase of. Treasury bills and bills of exchange, these short term credit instruments are not only safe but also highly liquid. The banks can easily convert them into cash at a short notice.

(iv) Self sufficiency of banks: The money market is useful for the commercial banks themselves. If
the commercial banks are at any time in need of funds, they can meet their requirements by recalling their old short term loans from the money market.

(v) Effective implementation of monetary policy: The well developed money market helps the
central bank in shaping and controlling the flow of money in the country. The central bank mops up excess short term liquidity through the sale of treasury bills and injects liquidity by purchase of treasury bills.

(vi) Encourages economic growth: If the money market is well organized, it safeguards the liquidity
and safety of financial asset This encourages the twin functions of economic growth, savings and investments.

(vii) Help to government: The organized money market helps the government of a country to
borrow funds through the sale of Treasury bills at low rate of interest The government thus would not go for deficit financing through the printing of notes and issuing of more money which generally leads to rise in an increase in general prices.

(viii) Proper allocation of resources: In the money market, the demand for and supply of loan able
funds are brought at equilibrium The savings of the community are converted into investment which leads to pro allocation of resources in the country.

Composition and Structure of Money market

Structure means support on the basis body will stand. So there are following components which support the whole money market. In the structure of money market, there are two components are included

1st Composition or component Financial institution

There are two parts of financial institution in money market:-

a) organized sector
In this sector there following dealer who deal short term loans in money market.

I) RBI :RBI means reserve bank of India. This is central bank of India. It is issue short term loan when any bank has any need of short term money.

II) Commercial Banks:In commercial banks, there are SBI , Nationalize bank , rural banks , private banks which deals in short term loans with each other , one bank can take or give short term loan to each other when they need or extra money , they want to invest in short term govt. security.

III) Co-operative banks:-

The co-operative banks are also take part in money market. In the top dealer in this market is state cooperative bank. In the district level central cooperative bank do dealing in short term loan.

b) Unorganized Sector
In this sector indigenous banks, money lenders deals with each other or with organized sector. 2nd Composition or component Financial Instruments or papers

1 ) Call money market

Call money market is the market which deals in short term loans. This loan can be given for one hour to one or two days .This call loans is given without any security. The borrower or loan taker will repay the loan at call. So this loan is also called call loan in this market. The rate of this loan is very high.

II) Treasury bill Market

Treasury bills are the bill which is issued by central govt. This bill is sold by RBI on the behalf of Govt. There is dealing of treasury bills in treasury bill market. The main dealer of T.B are the UTI & LIC . This is 90 loan acceptance bill . This bill can be discounted from any other bank.

III) Commercial bill market a) Promissory Notes: - In this bill, the loan taker give the promise to pay certain amount after certain
period.

b) Bill of exchange
Under this bill firms can sell the good. In this bill loan giver order that his amount must be give to him or his ordered person after certain period. This bill can also discounted from bank.

Money Market Instruments

Money Market Instruments provide the tools by which one can operate in the money market. Money market instrument meets short term requirements of the borrowers and provides liquidity to the lenders. The most common money market instruments are Treasury Bills, Certificate of Deposits, Commercial Papers, Repurchase Agreements and Banker's Acceptance.

Indian Money Market:

The average turnover of the money market in India is over Rs 40,000 crore daily. This is more than 3 per cent of the total money supply in the Indian economy and 6 percent of the total funds that commercial banks have let out to the system. This implies that 2 per cent of the annual GDP of India gets traded in the money market in just one day. Even though the money market is many times larger than the capital market, it is not even a fraction of the daily trading in developed markets.