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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.
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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."
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 longerterm funding, which is supplied by bonds and equity.
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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
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Common money market instruments
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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.
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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.
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
(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.
(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 welldeveloped 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.
(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.