Money Market

1. Money Market • Money Market Concept, Meaning • There are two types of financial markets viz., the money market and the capital market. The money market in that part of a financial market which deals in the borrowing and lending of short term loans generally for a period of less than or equal to 365 days. It is a mechanism to clear short term monetary transactions in an economy.

2. Definitions of Money Market • According to Crowther, "The money market is a name given to the various firms and institutions that deal in the various grades of near money." • According to Nadler and Shipman, "A money market is a mechanical device through which short term funds are loaned and borrowed through which a large part of the financial transactions of a particular country or world are degraded. A money market is distinct from but supplementary to the commercial banking system."

3. Participants • The money market consists of financial institutions and dealers in money or credit who wish to either borrow or lend. Participants borrow and lend for short periods of time, typically up to thirteen months. Money market trades in short-term financial instruments commonly called "paper." This contrasts with the capital market for longer-term funding, which is supplied by bonds and equity. • The core of the money market consists of interbank lending--banks borrowing and lending to each other using commercial paper, repurchase agreements and similar instruments

4. Common money market instruments • Certificate of deposit - Time deposit, commonly offered to consumers by banks, thrift institutions, and credit unions. • Repurchase agreements- Short-term loans—normally for less than two weeks and frequently for one day—arranged by selling securities to an investor with an agreement to repurchase them at a fixed price on a fixed date. • Commercial paper- Unsecured promissory notes with a fixed maturity of one to 270 days; usually sold at a discount from face value. • Eurodollar deposit- Deposits made in U.S. dollars at a bank or bank branch located outside the United States.

5. Municipal notes - (in the U.S.). Short-term notes issued by municipalities in anticipation of tax receipts or other revenues. • Treasury bills- Short-term debt obligations of a national government that are issued to mature in three to twelve months. • Money funds - Pooled short maturity, high quality investments which buy money market securities on behalf of retail or institutional investors. • Foreign Exchange Swaps- Exchanging a set of currencies in spot date and the reversal of the exchange of currencies at a predetermined time in the future.

6. Functions/Importance/Uses 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. Money market is an important part of the economy. . It has to provide facility for adjusting liquidity to the banks, business corporations, non-banking financial institutions (NBFs) and other financial institutions along with investors

7. (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.

8. (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.

9. (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. (ix)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.