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Learn Money Market – its Concept, Meaning and Functions

Published : August 28, 2017

Learn Money Market – its Concept, Meaning and Functions

Money Market is a segment of Financial Market where borrowing and lending of short-term funds take place. The maturity of money market instruments is from one day to one year. In India, the Money market is regulated by both RBI and SEBI.

The nature of money market transactions is such that they are large in amount and high in volume. Thus we can say that the entire market is dominated by a small number of large players.

Indian Money Market is divided into two segments.

Unorganized Money Market:

The unorganized money market is an old and ancient market, mainly it made of Indigenous Bankers and Money Lenders etc.

Organized Market:

The organized money market is that part which comes under the regulatory ambit of RBI & SEBI. Governments (Central and State), Discount and Finance House of India (DFHI), Mutual Funds, Corporate, Commercial or Cooperative Banks, Public Sector Undertakings, Insurance Companies and Financial Institutions and Non-Banking Financial Companies (NBFCs) are the key players of Organized Indian Money Market.

Structure of Organized Money Market of India:

The organized money market in India is not a single market; it is a combination of markets of various instruments.

  1. Call Money / Notice Money:

Call money, Notice money and term money markets are sub-markets of the Indian money market. These markets provide funds for very short-term. Lending and borrowing from call money market for 1 day.

Whereas lending and borrowing of funds from Notice Money Market are for 2 to 14 days. And when there is borrowing and lending of funds for the tenor of more than 14 days, it refers to “Term Money”.

  1. Treasury Bills:

The Bill market is a sub-market of the money market in India. There are two types of the bill in the money market. Treasury Bills and Commercial bill. Treasury bills are also known as T-Bills, T-bills are issued by the Central bank on behalf of Government, whereas Commercial Bills are issued by Financial Institutions.

Treasury bills do not yield any interest, but it is issued at discount and repaid at par at the time of maturity. In T-bills there is no risk of default; it is a safe investment instrument.

  1. Commercial Bills:

Commercial bill is a money market instrument which is similar to the bill of exchange; it is issued by a Commercial organization to raise money for short-term needs. In India, the participants of commercial bill market are banks and financial institutions.

  1. Certificate of Deposits:

Certificate of Deposits also known as CDs. It is a negotiable money market instrument. It is like a promissory note. Rates, terms, and amounts vary from institution to institution. CDs are not supposed to trade publically neither it is traded on any exchange.

Certificate of deposit can be issued at discount on its face value. The banks and financial institutions can issue CDs on a floating rate basis.

  1. Commercial Paper:

Commercial paper is another money market instrument in India. Commercial paper is also known as CP. CP refers to a short-term unsecured money market instrument. Commercial paper issued as a promissory note by big corporations those having excellent credit ratings, CPs are not backed by collateral. Hence only large firms with considerable financial strength are authorized to issue the instrument.

  1. Money Market Mutual Funds (MMMFs):

Money Market Mutual Funds were introduced by RBI in 1992 and since 2000 they are brought under the regulation of SEBI. It is an open ended mutual fund which invests in short-term debt securities.

The money market mutual fund is a mutual fund which solely invests in money market instruments.

  1. Repo / Reverse Repo Market:

Repo means “Repurchase Agreement”; it was introduced in December 1992. REPO means selling a security under an agreement to repurchase it at a predetermined date and rate. Those who deal in government securities they use repo as an overnight borrowings.

  1. Discount and Finance House of India (DFHI):

DFHI is established by RBI in 1988. It is jointly owned by RBI, Public Sectors Banks, and all Indian Financial Institutions, which have contributed to its paid up capital.

DFHI plays an important role in developing an active secondary money market. It deals in T-Bills, Commercial bills, CDs, CPs, call money market and government securities.

Functions of Money Markets

Money Market Instruments are liquid and can be converted into cash easily and thus are able to address the need of the short term surplus funds of the lenders and short term fund requirements of the borrowers.

The major functions of a money market instrument are to cater the short term financial needs of the economy. Some other functions are as following:

  1. Money Markets help in effective implementation of the RBI’s monetary policy.
  2. Money market helps to maintain demand and supply equilibrium with regard to short term funds.
  3. It also meets the need of short term fund requirement of the government.
  4. It helps in maintaining the liquidity in the economy.

 


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