Money Market

Money market is the part of financial markets where instruments with high liquidity and very short- term maturity are traded whose period of maturity is one year or less. It's the place where large financial institutions, dealers and government participate and meet out their short-term cash needs. It should be noted that money market does not deal in cash or money as such but simply provides a market for credit of instruments or securities to generate liquidity.

Indian money market is diversified and has evolved through many stages, from the conventional platform of Treasury Bills and Call Money to Commercial Paper, Certificates of Deposit, Repos, FRAS and IRS.

The Indian money market consists of the Unorganised Sector: money lenders, indigenous bankers and chit funds, the Organised Sector: Reserve Bank of India, private banks, public sector banks, development banks and other Non-Banking Financial Companies (NBFC'S) such as Life Insurance Corporation of India (LIC). Unit Trust of India (UTI). the International Finance Corporation and IDBI; and the Cooperative Sector

Functions of Money Market

It provides an equilibrating mechanism for demand and supply of short term funds.

It enables borrowers and lenders of short term funds to fulfill their borrowing and investment requirements at an efficient market clearing price.

It provides an avenue for Central Bank intervention in influencing both quantum and cost of liquidity in the financial system, thereby

transmitting Monetary Policy impulses to the real economy.

Types of Money Market

Indian money market is mainly divided into two Parts;-

Organised Sector It comprises of all the public sector banks and foreign exchange banks except Reserve Bank of India.

Unorganised Sector It comprises of domestic bankers and moneylenders, They do not have been given any financial validity or certificatlion by any financial institution. They are commonly found in underdeveloped areas., e.g.moneylenders landlord, broker, committee, etc.issues.

Money Market Instrument

Some of the important money market instruments are:-

Call money: Call money is used by banks to meet the temporary requirement of cash. They borrow and lend money from other banks cn daily basis. It is repayable on demand, with a maturity period varying from 1 day to 14 days. The rate of interest paid on call money is known as call rate.

Treasury Bill (T-Bills): Treasury bills are instruments of short term borrowing by the Central Bank (RBI) issued as promissory notes under discount. They are issued at a price less than their face value and the difference between the buy price and the maturity value is the interest carned by the buyer of the instrument. The buy value of the T-Bill is determined by the bidding process through auctions. These bills are secured instruments and are issued for a period not exceeding 364 days.

Commercial Papers: Commercial papers are unsecured promissory notes with a fixed maturity of no more than 270 days. They are issued by corporate and financial institutions at a discounted value on face value for the purpose of financing of accounts receivables inventories and meeting short term liabilíties.

Certificate of Deposit: Certificate of Deposit is like a promissory note issued by a bank in the form of a certificate entitling the bearer to receive interest. It is similar to bank term deposit account. The certificate bears the maturity date, fixed rate of interest and the value, These certificates are available in the tenure of 3 months to 5 years.

Repurchase Agreements (Repo): Repurchase agreements, which are also called as Repo or Reverse Repo, are short term loans that buyers and sellers agree upon for selling and repurchasing. It can be done only between the parties approved by RBI and allowed only for RBI-approved securities such as state and central government securities, T-Bills, PSU bonds and corporate bonds. They are usually used for overnight borrowing.

Banker's Acceptance: Banker's Acceptance is like a short term investment plan created by non-financial firms, backed by a guarantee from the bank. It's like a bill of exchange stating a buyer's promise to pay to the seller a certain specified amount at a certain date, and the bank guarantees that the buyer will pay the seller at a future date. Firms with strong credit rating can draw such bill.

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