Concept of The Money Market

The market where fund-surplus groups and fund-scarce individuals and groups undertake transactions is called the financial market. The transactions are undertaken for interests or dividends. The financial market where short-term funds are undertaken is called the money market, while the transaction of long term funds takes place in the capital market. The money market fulfils the demands of funds for 364 days (i.e., short-term), and in the capital market, the financial instruments are traded for more than 364 days.

The instruments that are used in the money market are:

• Treasury Bills (TBs) 
• Certificate of Deposits (CD)
• Commercial Papers (CP)
• Commercial Bills (CB)
• Call Money Market (CMM)
• Mutual Funds (MFs)
• Repos and Reverse repo 
• Cash Management Bills (CMBs)
• Bankers Acceptance

Financial Market

The term ‘market’ is commonly used for exchanges, an organisation facilitating the trade of financial securities, e.g., a stock exchange or a commodity exchange. Such exchanges may be physically present like New York Stock Exchange (NYSE), London Stock Exchange (LSE), Bombay Stock Exchange (BSE) or an electronic system like NASDAQ.

The financial market also consists of:

• Stock Market, which helps raise funds by issuing stocks or shares, enables its sustainable trading of the same.
• Bond Market, in here the financing is through the issuance of bonds and subsequent trading of the same.
• Commodity Market: It is a market that trades in commodities like crops, livestock, cocoa, coffee and sugar; such commodities are called soft commodities. The other commodities traded include gold, gemstones and other metals, oils and gas. 
• The futures market provides standardised forward contracts for trading products at some future date.
• The cryptocurrency market facilitates the trading of digital assets and financial technologies.

Capital Market

It is a financial market in which long-term debt or equity-backed securities are bought and sold. In contrast to the money market, where funding is raised for mere 364 days, the capital market allows the funds to be raised for more than 364 days. These markets are managed by some entities like the Securities and Exchange Board of India (SEBI), US Securities and Exchange Commission (SEC), Bank of England (BoE), and also these institutions’ protection to investors against fraud.

The capital market can be either a primary or secondary market. In the primary market, new stocks or bonds to investors, mainly by the mechanism known as underwriting. The main entities that raise long term funds in such markets are governments (local, municipal or national) and business enterprises. Though governments only issue bonds, the companies issue both equity and bonds. In the secondary market, the existing securities are sold and bought by investors or traders, usually exchanging or over-the-counter. The secondary market’s presence boosts the investors to invest through the primary market, as through the secondary market, they can cash out their investments as the need arises.

Money Market

It refers to trading in short term debt investments. In wholesale, it involves larger-volume trades, which are done between institutions and traders. At the same time, retail includes money market mutual funds bought by individual investors and money market accounts.

The money market provides the stage to both investors and the corporate and industries which enter the market to either lend or borrow money or credit. Participants here borrow or lend for a short period, typically about a year. The financial instruments of the money market are commonly called ‘paper’. Interbank lending makes up the core of the money market- they use instruments like commercial paper repurchase agreements, while the major financial companies mainly use asset-backed commercial papers (ABCP).

Functions of Money Market

The money market serves five functions: finance trade, finance industries, investing profitably, enhancing commercial banks’ self-sufficiency, and lubricating central bank policy.

• Financing Trade: the corporate houses and industries also use the money market to raise domestic and financial trade money. The money market helps traders get commercial finance through a bill of exchange at discounted prices than the bill market.
• Finance industry: the money market finances the industries in 2 ways: They help industries secure short-term loans to meet their working capital requirements through a system of finance bills, commercial papers etc. The behaviour of the capital market also depends on the nature and behaviour of the money market, and hence the long term loans that the big businesses may aspire for.
• Profitable investments: The commercial banks put out their reserves in the money market to maintain the required liquidity and earn some profit in anyways standing reserve liquidity.
• Help to the central bank: the central bank uses the money market to influence the banking systems; a developed central bank smoothens the functioning and increases the efficiency of the central bank.

Money Market Instruments

• Certificate of deposits: Banks use CD and issue to the depositors for less than one year; they are negotiable and tradable in the money market.
• Repurchase agreements: For dealers, these are short-term borrowing in government securities. The dealer sells government securities to investors overnight and then buys on a subsequent day at a higher price; the small difference in price is the overnight interest rate.
• Mutual funds: short term investment debt, operated by professional institutions, viz., commercial banks, private and public financial investment and private sector companies.
• Commercial Paper (CP): short term instruments, promissory notes issued by the company at a discount to the face value and redeemed at face value, aimed at broadening investor participation.
• Treasury bills: short term debt obligations of a national government issued to mature in 3-12 months.

Conclusion

The smooth functioning of the money market in the country is important for the growth and development of the industries, corporate houses and well being of the financial institutions in the country. The money market affects the functioning of the capital market as well. Also, the production was undertaken by big industries as the money market provides short-term capital to finance the immediate needs in the economy.