Meaning of
Money Market
The money market is not a well-defined place where the business is
transacted as in the case of capital markets where all business is transacted
at a formal place, i.e. stock exchange. The money market is basically a
telephone market and all the transactions are done through oral communication
and are subsequently confirmed by written communication and exchange of
relative instruments.
According to the RBI, "The
money market is the centre for dealing mainly of short character, in monetary
assets; it meets the short term requirements of borrowers and provides
liquidity or cash to the lenders. It is a place where short term surplus
investible funds at the disposal of financial and other institutions and
individuals are bid by borrowers, again comprising institutions and individuals
and also by the government.
From the above definition, it is clear that the money market consist of
many sub-market such as the inter-bank call money, bill discounting, treasury
bills, Certificate of deposits (CDs), Commercial paper (CPs), Repurchase
Options/Ready Forward (REPO or RF), Inter-Bank participation certificates
(IBPCs), Securitized Debts, Options, Financial Futures, Forward Rate Agreement
(FRAs), etc. which collectively constitute the money market.
Features
of Money Market
a)
It is a collection of market for following
instruments - Call money, notice money, repos, term money, treasury bills,
commercial bills, certificate of deposits, commercial papers inter-bank
participation certificates, inter-Corporates deposits, swaps, etc.
b)
The sub markets have close inter- relationship
& free movement of funds from one sub-market to another.
c)
A network of large number of participants exists
which will add greater depth to the market.
d)
Activities in the money market tend to
concentrate in some centre, which serves a region or an area. The width of such
area may vary depending upon the size and needs of the market itself.
e)
The relationship that characterizes a money
market is impersonal in character so that competition is relatively pure.
f)
Price differentials for assets of similar type
will tend to be eliminated by the interplay of demand & supply.
g)
A certain degree of flexibility in the regulatory
framework exists and there are constant endeavours for introducing a new
instruments / innovative dealing techniques.
h)
It is a wholesale market & the volume of
funds or financial assets traded are very large i.e. in crores of rupees.
Functions
of Money Market
Money market is an important part of the economy. It plays very
significant functions. As mentioned above it is basically a market for short
term monetary transactions. Thus 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. The
major functions of money market are given below:
a)
To maintain monetary equilibrium. It means to
keep a balance between the demand for and supply of money for short term
monetary transactions.
b)
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.
c)
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.
d)
To help in implementing Monetary Policy. It
provides a mechanism for an effective implementation of the monetary policy.
e)
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.
f)
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 does not leads to increases in the prices.
Features of the Indian Money Market
In money market short term surplus funds with banks, financial
institutions and others are bid by borrowers i.e., individuals, companies and
the Government. In the Indian money market RBI occupies the pivotal position.
The Indian money market can be divided into two sectors i.e. unorganized and
organized. The organized sector comprises of Reserve Bank of India, SBI group and
commercial banks foreign, public sector and private sector. The unorganized
sector consists of indigenous bankers and money lenders. The organized money
market in India has number of sub-markets such as the treasury bills market,
the commercial market and inter-bank call money market. The following are the
characteristics of the Indian Money Market :
a)
Existence
of Unorganized Money Market. The most important defect of the Indian money
market in the existence of unorganized segment. In this segment of the market
the purpose as well period are not clearly demarcated. In fact, this segment
thieves on this characteristic. This segment undermines the role of the RBI in
the money market. Efforts of RBI to bring indigenous bankers within statutory
frame work have not yielded much result.
b)
Lack of
Integration. Another important deficiency is lack of intergration of
different segments or functionaries. However, with the enactment of the Banking
Companies Regulation Act 1949, the position has changed considerably. The RBI
is now almost fully effective in this area under various provisions of the RBI
Act and the Banking Companies Regulation Act.
c)
Disparity
in interest rates. There have been too many interest rates prevailing in
the market at the same time like borrowing rates of government, the lending
rates of commercial banks, the rates of cooperative banks and rats of financial
institutions. This was basically due to lack of mobility of funds from one
sub-segment to another.However, with changes in financial sector the different
rates of interest have been quickly adjusting to changes in the bank rate.
d)
Seasonal
Diversity of Money Market. A notable characteristic is the seasonal diversity.
There are very wide fluctuations in the rates of interest in the money market from
one period to another in the year. November to June is the buy period. During
this period crops from rural areas are moved to cities and parts. The wide fluctuations
create problems in the money market. The Reserve Bank of India attempts to
lessen the seasonal fluctuations in the money market.
e)
Lack of
Proper Bill Market. Indian Bill market is an underdeveloped one. A well organized
bill market or a discount market for short term bills is essential for
establishing an effective link between credit agencies and Reserve Bank of
India. The reasons for the situation are historical, like preference for cash
to bills etc.
f)
Lack of
very well Organized Banking System. Till 1969, the branch expansion was very
slow. There was tremendous effort in this direction after nationalization. A
well developed banking system is essential for money market. Even, at present
the lack of branches in rural areas hinders the movement of funds. With
emphasis on profitability, there may be some problems on this account.
In totality it can be said that Indian Money Market is relatively under
developed. In no case it can be compared with London Money Market or New York
Money Market. There are number of factors responsible for it in addition to the
above discussed characteristics. For example, lack of continuous supply of
bills, a developed acceptance market, commercial bills market, dealers in short
term assets and coordination between different sections of the money market.
Essential Characteristic of a Strong Money Market
In order to
fulfill the above objectives, the money market should be fully developed and
efficient. In every country of the world, some type of money market exists.
Some of them are highly developed while others are not well developed. Prof.
S.N. Sen has described certain essential features of a developed money market.
They are as follows:
(i) Highly Organized Banking System: The commercial banks are the nerve
centre of the whole money market. They are the principal suppliers of
short-term funds. The commercial banks serve as vital link between the central
bank and the various segments of the money market. Consequently, a well
developed money market and a highly organized banking system co-exist. In an
underdeveloped money market, the commercial banking system is not fully
developed.
(ii) Presence of a Central Bank: The Central Bank acts as the banker’s
bank. It keeps their cash reserves and provides them financial accommodation in
difficulties by discounting their eligible securities. The central bank is the
leader, guide and controller of the money market. In an underdeveloped money
market, the central bank is in its infancy and not in a position to influence
the money market.
(iii)Availability of Proper Credit
Instruments: It is necessary
for the existence of developed money market a continuous availability of
readily acceptable negotiable securities such a bills of exchange, treasury
bills etc. in the market. There should be a number of dealers in the money
market to transact in these securities. Availability of negotiable securities
and the presence of dealers and brokers in large numbers to transact in these
securities are needed for the existence of a strong money market.
(iv) Existence of Sub-markets: The number of sub-markets determines
the development of a money market. The larger the number of sub-markets, the
broader and more developed will be the structure of money market.
(v) Ample Resources: There must be availability
of sufficient funds to finance transactions in the sub-markets. These funds may
come from within the country and also from foreign countries.
(vi) Existence of Secondary Market: There
should be an active secondary market in these instruments.
(vii) Demand and Supply of Funds: There
should be a large demand and supply of short-term funds. It presupposes the existence
of a large domestic and foreign trade. Besides, it should have adequate amount
of liquidity in the form of large amounts maturing within a short period.
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