Money and Money Market

Money Market

In an economy, there are various forms of market. One such form is the financial market, a place where financial assets are created and exchanged. This financial market has two major classifications – capital market and money market. Let us educate ourselves about the functioning of the money markets.

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Money Markets

The money market is a sub-section of the financial market that trades in short term financial funds and financial assets. These instruments and assets usually have a maturity period of less than one year and are highly liquid. So the buying and selling of such instruments, like commercial papers and t-bills, occurs in the money market.

This market is not a physical location. Most of the trading happens over the phone and now over the internet. It is a virtual market for trading in low-risk, liquid, and unsecured instruments to meet short-term financial needs a company may have. Companies turn to monetary market mostly to meet their working capital requirements.

Money Markets

The major players and institutions of this market are the Reserve Bank of India, all the commercial banks of the country, NBFC’s, LIC, Mutual Funds, large corporates, and even the respective state governments. Let us look at some other features of this market.

  • Unlike the stock exchange, the money market does not have geographical restrictions. Most transactions happen in the virtual world with institutions that can be spread out over the whole country, the whole world even.
  • While the market is quite flexible and unrestricted, it only deals in short-term securities (maturity period between one day and 364 days)
  • There is no need for brokers or other intermediaries. The transactions can happen without them.
  • There are many securities in the money market like T-bills, commercial bills, call money etc

Browse more Topics under Money And Money Market

  1. Introduction to Money
  2. Measures of Money Supply in India
  3. Monetary Standards
  4. Security Related to Money Market
  5. Classification of Inflation
  6. Measures to Check Inflation
  7. Effects of Inflation in Indian Economy
  8. Recession

Objectives of the Money Markets

The main objectives of the monetary market are as follows,

  1. The main objective is to provide borrowers with short-term funds at reasonable rates. And since the securities are all short-term the lenders will also have the benefit of liquidity.
  2. Turns savings and idle funds of the public into effective investments. This is beneficial for the entire economy
  3. Allows the Reserve Bank of India to regulate the levels of liquidity in the economy. This is one of the main functions of the RBI.
  4. Companies and corporations have short-term deficits from time to time. They may also need help with their working capital requirements. The money market will facilitate the funds necessary.
  5. Helps the government implement monetary policies via their open market operations which are direct and effective in nature.

Structure of Indian Money Markets

The Indian monetary market has two broad categories – the organized sector and the unorganized sector.

  • Organized Sector: This sector comprises of the governments, the RBI, the other commercial banks, rural banks, and even foreign banks. The RBI organizes and controls this sector. Other corporations like the LIC, UTI, etc also participate in this sector but not directly. Other large companies and corporates also participate in this sector through banks.
  • Unorganized Sector: These are the indigenous banks and the local money lenders and hundis etc. Their activities are not controlled by the RBI or any other body, so they are the unorganized sector.

Solved Question on Money Markets

Q: State some defects of the Indian Money market.

Ans: Some defects plaguing the monetary market in India are as follows,

  • The lack of coordination between the organized and the unorganized sections of the monetary market
  • The large influence of the unorganized sector and the lack of control over it
  • With the huge population of India and its ever-expanding economy, the banking facilities are still inadequate to support the monetary market
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