Money Market

Overview Of Financial Market

• Money market is where financial instruments with highly liquidity and very short maturities are traded.

• Money market become a component of the financial markets for assets involved in short-term borrowing, lending, buying and selling with original maturities of one year or less.

What is Money Market ?

• Commercial Bank• Central Bank• Mutual Funds• Investment Institution

Market Participants.

• Certificate of deposits• Commercial Bills• Commercial Paper• Treasury Bill• Repurchase Agreements• Call Money• Federal Fund

Instruments

• A certificate of deposit (CD) is a savings certificate with a fixed maturity date, specified fixed interest rate and can be issued in any denomination aside from minimum investment requirements.

• A CD restricts access to the funds until the maturity date of the investment.

• CD are subject to payment of Stamp Duty under Indian Stamp Act 1899 (Central Act)

Certificate Of Deposits

• The commercial bills are issued by the seller (drawer) on the buyer (drawee) for the value of goods delivered by him.

• These bills are of 30 days, 60 days or 90 days maturity.

• Some of the examples of Commercial Bills are Bills of Exchange, Inland Bills, Foreign Bills .

Commercial Bills

• Commercial paper is an unsecured promissory note with a fixed maturity of no more than 270 days.

• It is not backed by collateral so only firms with excellent credit ratings from a recognized credit rating agency will be able to sell their commercial paper at a reasonable price.

Commercial Paper

• Treasury bills, commonly referred to as T-Bills are issued by Government against their short term borrowings requirements with maturities ranging between 14 to 364 days.

• All these are issued at a discount-to-face value.

Treasury Bills

• Financing Trade• Financing Industry• Profitable Investment• Self-sufficiency of commercial bank• Helps to central bank

Functions Of Money Market.

• The money market plays crucial role in financing domestic and international trade.

• Commercial finance is made available to the traders through bills of exchange, which are discounted by the bill market.

Financing Trade

• They help industries secure short-term loans to meet their working capital requirements through the system of finance bills, commercial papers, etc

Financing Industry

• The Money Market enables the commercial banks to use their excess reserves in profitable investment.

• The main objective of the commercial banks is to earn income from its reserves as well as maintain liquidity to meet the uncertain cash demand of the depositors.

• In the money market, the excess reserves of the commercial banks are invested in near-money assets (e.g., short-term bills of exchange), which are easily converted into cash. Thus, commercial banks earn profits without sacrificing liquidity.

Profitable Investment

• Developed money markets help the commercial banks to become self-sufficient.

• In the situation of emergency, when the commercial banks have scarcity of funds, they need not approach the central bank and borrow at a higher interest rate. On the other hand, they can meet their requirements by recalling their old short-run loans from the money market

Self-sufficiency of Commercial Bank

• Money markets help central banks in two ways –• Short-run interest rates serve as an indicator of the

monetary and banking conditions in the country and, in this way, guide the central bank to adopt an appropriate banking policy,

• Sensitive and integrated money markets help the central bank secure quick and widespread influence on the sub-markets, thus facilitating effective policy implementation

Help to Central Bank

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