Money market is a market for short term loans or financial assets. It is a market for the lending and borrowing of short term funds. As the name implies, it does not actually deal in cash or money. But it actually deals with near substitutes for money or near money like trade bills, promissory notes and Government papers drawn for a short period not exceeding one year. These short term instruments can be converted into cash readily without any loss and at low transaction cost.

Money market is the centre for dealing mainly in short term money assets. It meets the short term requirements of borrowers and provides liquidity or cash to lenders. It is the place where short term surplus funds at the disposal institutions and individuals are borrowed by individuals, institutions and also the Government.

The money market does not refer to a particular place where short term funds are dealt with. It includes all individuals, institutions and intermediaries dealing with short term funds. The transactions between borrowers, lenders and middlemen take place through telephone, telegraph, mail and agents. No personal contact or presence of the two parties is essential for negotiations in a money market. However, a geographical name may be given to a money market according to its location. For example, the London money market operates from Wall Street. But, they attract funds from all over the world to be lent to borrowers from all over the globe.

II. DIFINITION

The money market is the collective name given to the various firms and institutions that deal in the various grades of near money.

III. FEATURES

The following are the general features of a money market:

•It is a market purely for short term funds or financial assets called near money.

•It deals with financial assets having a maturity period up to one year only.

•It deals with only those assets which can be converted into cash readily without loss and with minimum transaction cost.

•Generally transactions take place through phone i.e., oral communication. Relevant documents and written communications can be exchanged subsequently. There is no formal place like stock exchange as in the case of a capital market.

•Transactions have to be conducted without the help of brokers.

•It is not a single homogenous market. It comprises of several submarkets, each specializing in a particular type of financing. Example, call money market, acceptance market, bill market and so on.

•The components of a money market are the central bank, commercial banks, non-banking financial companies, discount houses and acceptance houses. Commercial banks generally play a dominant role in this market.

Objectives

The following are the important objectives of a money market:

a.To provide a parking place to employ short term surplus funds.

b.To provide room for overcoming short term deficits.

c.To enable the central bank to influence and regulate liquidity in the economy through its intervention in this market.

d.To provide a reasonable access to users of short term funds to meet their requirements quickly, adequately and at reasonable costs.

Characteristic features of a developed 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. Certain essential features of a developed money market. They are as follows:

a.highly organized banking system

b.presence of a central bank

c.availability of proper credit instruments

d.Existence of sub-markets

e.Ample resources

f.Existence of secondary market

g.Demand and supply of funds

Importance of money market

A developed money market plays an important role in the financial system of a country by supplying short term funds adequately and quickly to trade and industry. The money market is in integral part of a country’s economy. Therefore a developed money market is highly indispensable for the rapid development of the economy. A developed money market helps the smooth functioning of the financial system in any economy in the following ways:

a.development of trade and industry

b.development of capital market

c.smooth functioning of commercial banks

d.effective central bank control

e.formulation of suitable monetary policy

f.non-inflationary source of finance to Government

IV. COMPOSITION OF MONEY MARKET

As stated earlier, the money market is not a single homogenous market. It consists of a number of sub-markets which collectively constitute the money market. There should be competition within each sub-market as well as between different sub-markets. The following are the main sub markets of a money market:

a.Call money market – The call money market refers to the market for extremely short period loans, say one day to fourteen days. These loans are repayable on demand at the option of either the lender or the borrower. As stated earlier, these loans are given to brokers and dealers in stock exchange. Similarly, banks with surplus funds lend to other banks with deficit funds in the call money market. Thus it provides an equilibrating mechanism for evening out short term surpluses and deficits. Moreover, commercial banks can quickly borrow from the call market to meet their statutory liquidity requirements. They can also maximize their profits easily by investing their surplus funds in the call market during the period when call rates are high and volatile.

b.Commercial bills market or discount market – A commercial bill is one which arises out of a genuine trade transaction, i.e., credit transaction. As soon as goods are sold on credit, the seller draws a bill on the buyer for the amount due. The buyer accepts it immediately agreeing to pay the amount mentioned there in after a certain specified date. Thus a bill of exchange contains a written order from the creditor to the debtor, to pay a certain sum, to a certain person, after a certain period. A bill of exchange is a self liquidating paper and negotiable. It is drawn always for a short period ranging between 3 months and 6 months.

c.Acceptance market – The acceptance market refers to the market where short term genuine trade bills are accepted by financial intermediaries. All trade bills cannot be discounted easily because the parties to the bills may not be financially sound. In case such bills are accepted by financial intermediaries like banks the bills earn a good and reputation and such bills can be readily discounted anywhere. In London, there are specialists firms called acceptance houses which accept bills drawn by traders and impart greater marketability to such bills. However, their importance has declined in recent times.

d.Treasury bill market – Just like commercial bills which represent commercial debt, treasury bills represent short term borrowings of the Government. Treasury bill market refers to the market where treasury bills are brought and sold. Treasury bills are very popular and enjoy a higher degree of liquidity since they are issued by the Government.