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An Overview of Money Markets

The organised and unorganised markets form the structure of the Indian money market. This article helps to understand the money market instruments.

As a segment of the financial system, the money markets deal with short-term finances. The money markets specialise in short-term mortgages with less than a year’s tenure. With all short-term securities becoming commodities, the money market operates as a part of the financial market dealing in short-term loans, lending, buying, and selling with initial maturities of one year or less. Most Western countries have access to treasury notes, commercial paper, banker’s agreements, savings, term deposits, bills of exchange, marketable securities, government funds, and quick mortgage and asset-backed securities.

Different Money Market Instruments in India

Treasury bills: Treasury bills are one of the extensively traded financial instruments. These are short-term Government of India debt instruments issued in three tenors of 91, 182 and 364 days. Treasury bills are heavily discounted money market instruments and are repaid at the end of the term.

Commercial bills: Commercial bills are also one of the money market instruments that work similarly to a bill of exchange. They are used by businesses to satisfy their short-term liquidity demands. Liquidity is significantly increased with the help of commercial bills. In an emergency, one can exchange money in return for commercial bills.

Certificate Deposit (CD): CDs are a  negotiable term deposit acknowledged by commercial banks. A promissory note is the most common form of it. Individuals, businesses, trusts and other entities can receive CDs. The CDs can also be offered at a reduced rate by a commercial bank. These can last anywhere from three months to one year. It is effective for a minimum level of one year and a maximum of three years at a bank or a financial institution.

Commercial Paper (CP): Businesses use CPs to address short-term working capital requirements. It will be used as an alternative to borrowing money from a bank. Furthermore, commercial paper can last anywhere from 15 days to a year.

Call Money: Call money is a market sector in which regulated financial institutions borrow or acquire on short notice (say, 14 days) to maintain track of daily cash flows.

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The Features of the Money Market

Unlike a stock exchange, a money market is not restricted by geography. While there are many money market locations, including Mumbai, Calcutta, and Chennai, these are not distinct autonomous markets but are interconnected and intertwined.

  • All transactions involving money or bank deposits are included
  • It is only a short-term fund market
  • There is no one-size-fits-all market
  • The demand money market, as well as the tax increase market, are two examples of sub-markets
  • The money market serves as a conduit between the Reserve Bank of India (RBI) and the commercial banks, giving monetary policy and management information
  • Transactions are completed without the use of a broker

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What is money? Why is it important?

Money is quite essential for the economy because

  • It provides cash for a company’s expansion
  • It hence helps the country’s economic growth and development by maintaining a balance between the supply for monetary transactions undertaken in the marketplace for up to a year
  • It aids in the execution of monetary policy
  • It contributes to the growth of a country’s trade and industry
  • It uses various money market instruments to meet its working capital needs
  • It contributes to the growth of in-country and out-of-country trades
  • The influence of short-term interest rates on long-term lending rates is significant
  • The money market mobilises funds for the financial markets by controlling interest rates
  • It assists banks in their operations
  • It determines a bank’s cash rate and statutory liquid ratio
  • It helps in investing the surplus cash in short-term instruments to ensure a constant money supply to the market
  • Previous monetary policies have resulted in the current status of the money market
  • As a result, it may be used to establish new policies relating to the short-term money supply
  • For example, T-bills (treasury bills) help the government raise cash in the short term
  • Eventually, the government will be forced to print more money or borrow money to fund initiatives, increasing monetary inflation
  • As a result, it’s also the responsibility of keeping inflation under control

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Money markets began as a dull corner of the capital market where three businesses financed short-term trade and working capital many years ago. Since then, they’ve grown in size with the help of securitisation and structured finance to rival the volume of credit intermediated through the banking system, taking on massive maturity mismatch, credit risk, and liquidity risk in the process. The disastrous role of money market finance in the credit cycle should prompt a reconsideration of the above permissive regulatory rulings, so that money markets do not become the financial fuel for a future disaster.


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