Defining Money marketRBI “The centre for dealings,mainly of short term character,in monetary assets;it meets the short-term requirements of the borrowers and provides liquidity for cash to the lenders”

Geoffery Growther”Money market is the collective name given to the different firms and institutions which deal with the near money asset of different grades.”

By ” MONEY MARKET “ we mean simply an arrangement that brings about a direct or indirect contact between the lender or the borrower. The basic function is to provide the facilities for adjustment of liquqidity positions of commercial banks,business corporations,nbfc’s and other investors.

Money market is the market for the short term financial assets which are near substitutes for money.money market instruments are liquid and can be turned over quickly at low transction cost and without loss. Money market instruments are for short duration ,generally speaking—less than one year

Charateristics of money market• Money market is basically over the phone market.The transactions

are conducted through oral communication .Written communication and exchange of relevant documents may follow subsequently.

• Dealing may be done with or without the help of brokers• Short term market• Upto a period of one year.• Financial assets which can be converted into money with

ease ,speed,without loss and with minimum transactions cost are regarded as close substitutes for money or near money.

• Money market consists of many sub markets,such as ,inter bank call money, bill rediscounting,treasury bills etc.Collectively they constitute the money market.

Charateristic Features of Money Market

1) Constituents of money market• There are three constituents• Commodity-In the form of money• Price -INTEREST charged/paid• Buyers and sellers---Lenders and borrowers• 2) Heterogenous Nature: Because it comprises several

sub markets—call money market, collateral market, the bill market

• 3) Dealers of Money: The commercial Banks ,Development banks ,The Central Banks are the dealers

• NO Physical contact required : Today, people can borrow money over the phone and even through third persons.

• Association with big cities: Money market is associated with other MM’s eg. American money market is associated with London MM.

• Change in Place and Time: In different MM’s the operations preferences and practices vary considerably.eg.

•

Objectives OF MONEY MARKET

• It provides an equilibrating mechanism for evening out short term surplus and deficits.

• It provides as the focal point for central bank intervention for influncing liquidity in the economy.

• It provides reasonable access to users of short term money to meet their requirements at a realistic price.

Structure of Money market

• Call money Market:Extremely short Period of time(7 days).There is no colatteral or securities demanded against these loans.The lending agency reserves the right to the loan back as and when decided by the lending agency,even before the period of stipulated days.

• 7feb 2004 PD’s can borrow upto 200% of their NOF (Net Owned Funds)

• Collateral loan Market:Loans are offered against collateral like stocks and securities.Collateral becomes the property of the lender if not paid within stipulated period.

• Accceptance Loan Market: Market for Bankers Acceptance. A draft is drawn by an individual or a firm upon a bank where by the designated person or the bearer is permitted to make both inland and transnational trade transactions.the bankers acceptance is mainly used for international trade .it can be sold and discounted at any time.

• Bill Market or discount Market: #Commercial paper market #Treasury bills Market # CD Certificate of deposits. #Commercial Papers guarantor should have one higher credit

rating than the issuer of commercial paperOffer documet Net worth of Guarantor#Derivatives Market #Collateralised Borrowing and Lending obligation(CBLO)#Repo Market

Prequisits of Efficient Money Market• Money market should be wide and deep.• Varied instruments.• Active secondary market for these instruments• Strong central bank for regulation,direction and faciliation• There should be a number of interrelated and integrated sub

market.• There should be competition within and between these sub

markets.• Liquidity should be high-large amounts maturing in short time

and ready marketibility of the asset.• Large demand and supply of the funds.

Importance of Money Market• Important source of financing trade and industry through

bills,commercial bills.commercial papers,etc.It influences avaliability of finances in the national and international.

• Avaliability of funds in the MM interest rates have effect on interest rates and resource mobilization in capital market

• MM offers an avenue to the commercial banks for investing short term surpluses of funds and borrowing for short term needs so as to meet stattory requirements of each reserve ratio CRR an SLR which vary every fortnight depending on banks net demand and time liability(NDTL)

• It facilitates effective implementation of monetary policy of central bank of a country.

• MM serves as an important guide to the government in formulating,revising and implementing its monetary policy,conditions prevailing in the MM serve as an indicator of the monetary state of the economy

Structure of Money MarketMM

National Money Market

Short Term Money Market

ORGANIZEDUN ORGANIZED

Call Loan Bill-MarketAcceptanceCo-lateral

Bills of Exchange Treasury Bills

Money Lenders&

Indegenous Bankers

Hundies

Indian Money MarketIMM

ORGANIZEDUN ORGANIZED

State Bank of India

Private Sector M.M.Public Sector M.M

Nationalised Bank

Regional rural Bank

Scheduled Commercial

Banks

Regional Rural Banks

Deficiencies in Indian money Market• Dichotomy.(Shroffs,Multanis,Khatris,Chit-funds)• Lack of co-ordination.• Divergence of lending rates and policies.• Inadequate control by the reserve bank.• Inelasticity and Instability.• Underdeveloped bill market.• Improper care of rural finance.(agricultural finance)• No bankers acceptance development.• Blending of trading and lending activities(unorg. Sec)• Banking gap (rural India left out).