The money market involves dealing in cash or near money or liquid assets of short term nature.
Thus, the money market is essentially concerned with lending and borrowing of cash and also buying and selling of assets which are close substitutes for money and can be quickly converted into money within a short period.
In other words, these markets deal in cash or money and also trade bills, promissory notes, government papers, etc which are drawn for short periods.
The dealers in this market consist of the government, banks, commercial and industrial concerns, stock exchange brokers, dealing in government and other securities, merchants, manufacturers, etc.
Features Of Money Market :
The salient features are as follows :
A) The flow of short term funds: These markets bring together the lenders who have surplus funds for the short term and the borrowers who are in need of storm funds.
B) Geographical name: A geographical name may be given by these markets according to its location such as the Mumbai money market or the New York money market.
C) Role of Brokers: Dealing in this market may be conducted with or without the help of brokers or intermediaries.
D) Sub-Markets: These markets consist of many submarkets such as inter-bank call money markets, treasury bills market, bills discounting market, etc.
E) Reasonable access: It provides reasonable access to users of short term funds to meet their requirements on reasonable terms or rates of interest.
F) Source of Working Capital: These markets constitute a major source of working capital finance.
Importance of Money Market :
1. Money markets play an important role in the economy of any country in the following ways.
2. These markets are an important source of financing trade and industry through commercial bills, commercial papers, etc.
3. It helps the lenders to earn on their idle or surplus funds for short periods.
4. It allows the government to raise funds from investors and commercial banks.
5. This market acts as a connecting link between all the segments of the financial market like the capital market, foreign exchange market, etc.
6. It facilitates the implementation of the monetary policy of the country’s central bank.
Composition of Money Market :
Following are the important components of the money market :
1. Call Money Market: Call money markets to refer to the market for extremely short period loans.
Bill agents and sellers in stock trade usually take money as call loans from commercial banks.
No collateral securities are demanded against these loans. These loans are given for a very short duration, not exceeding 7 days. Such loans are described as “call loans” or call money because the borrower has to repay it immediately they are called for.
It is to be noted that, inter-bank call money is very common in our country.
2. Collateral Loan Money : Collateral loans are loans which are offered against collateral securities like Stocks and bonds and the market is known as the collateral Loan market.
Collateral Loan market is geographically most diversified.
3. Acceptance Market: The acceptance market refers to the market for bankers acceptances engaged in business transactions.
A banker’s acceptance is a draft drawn by a firm or individual upon a bank ordering it to pay to the order of a designated party or to the bearer a specific whole of the amount at a specific future date and this draft is accepted by the bank.
Banker’s acceptances can be easily discounted or sold in the market called the acceptance market.
4. Bill Market : It is a market where short time papers or bills are purchased and sold. The most important types of short term are the bills of exchange and the treasury bills.
Instructions of Money Market:
The most commonly used instruments are briefly discussed below :
1. Call money or Short notice call loans: The trading in routine surplus funds of banks is termed as called Call Money.
Funds are borrowed by Banks faced with a temporary shortage of cash.
The lenders are banks having excess cash temporarily. Mutual funds financial institutions and insurance companies also supply short term funds.
Call money is also known as Over the telephone market. Call money funds are for a very short period ranging from 1 day to 14 days.
2. Treasury bills (T-bills) : These bills are issued by Reserve Bank of India on behalf of the Central government to meet its short term financial needs.
The maturity period of T-bills between 14 days to 364 days.
These bills are purchased by commercial banks, nonbanking financial institutions, insurance companies, etc.
T bills do not carry any interest but are issued at a discount. These bills are Negotiable instruments and are freely transferable.
3. Trade or Commercial Bills : Trade bills are drawn by one business firm on another firm.
The drawer of the bill gets it discounted with the banks and meets it’s short term requirements.
Generally, these bills are issued for a period of 90 days. Trade bills have to be honored by the drawer on its due date. This is why these bills are termed as “Self Liquidating”.
4. Commercial Paper (CP) : The commercial papers were introduced in 1990 as the money market instruments.
The CD is an unsecured promissory note issued by creditworthy companies with a fixed maturity period which may be between 15 days to 60 months.
5. Certificate of Deposits : A certificate of deposits is a time deposit issued by a bank. It is a document of title to the time deposit and works as a bearer certificate.
It can be issued for a period ranging from 15 days to 12 months. Banks are not permitted to discount these instruments.
Structure of the Indian Money Markets :
Two categories of financial agencies are:
A) The Organised Sector
B) The Unorganized Sector.
A) The Organised Sector: This sector contains well established financial institutions.
The Reserve Bank of India, at the apex, is the lender of the money markets and controls the banking sector.
The scheduled and non scheduled commercial banks in the private, as well as public sector, foreign banks, post office savings, and co-operative banks, are parts of this scheme.
B) The Unorganised Sector: The unorganized sector contains agencies that have different strategies, absence of consistency and consistency in the lending business.
It except indigenous bankers, money lenders, and chit funds. The indigenous bankers are known as shroffs, Multanis, Chettiar’s.
The Unorganised sector lacks scientific organization, being orthodox in approach, stagnant and I’ll be organized.
Drawbacks of Indian Money Market :
The distinguishing features of Indian money markets are given below :
A) Dichotomy: The Indian market is dichotomized into the organized and unorganized sector.
B) Lack of Coordination: The Indian markets may be characterized as loose and unbalanced because there exists no coordination between the organized and unorganized sectors.
C) Inadequate control by the RBI: The RBI has inadequate control over the functioning of the unorganized sector of the Indian money markets.
D) Divergent lending rates and policies: There is a wide divergence not only in the structure of interest rates but also in the lending policies of the different financial institutions.
E) Instability And inelasticity: The instable and inelastic Indian markets act as a great hindrance to the rapid economic development of the country.
F) No Bankers Acceptance: There is no development of bankers’ acceptance or acceptance of credit by the banks in India.
G) Banking Gap: Scientifically run institutions like commercial banks have a large urban orientation in India. Banking facilities are insufficient in the villages of India.
Examples Of Organised Sector :
- Reserve Bank of India
- Commercial Bank
- Regional Rural Banks
- Cooperative Bank’s
- Discount and Finance House of India, Delhi
Examples Of Unorganised Sector :
- Indigenous Bankers
- Money Lenders
- Chit Funds
Frequently Questions And Answers :
1. Is a money markets safe for investment?
Ans: Yes, the Money market is safe for investment.
2. Who has the best money market?
Ans: CIT bank has the best money market.
3. Who controls the money market?
And: Reserve Bank of India and the Securities and exchange board of India controls the money market.
4. What is T-bills?
Ans: These bills are issued by Reserve Bank of India on behalf of the Central government to meet its short term financial needs. The maturity period of T-bills between 14 days to 364 days.
5. What is Call money in Money Markets?
Ans: The trading in routine surplus funds of banks is termed as called Call Money.
6. Is money markets regulated by RBI?
Ans: Yes, Money markets are regulated by RBI with the help of SEBI.
7. Can an individual participate in money markets?
Ans: Yes, An individual can participate in money markets.
8. What is 360 in the money market account?
Ans: 360 is a type of savings account in the money market.
9. How did money market work?
Ans: Money market works with short term finance.