Characteristics of well developed money market
Table of Contents
- 1 Characteristics of well developed money market
- 1.2 1. Presence of a strong Central bank in a well developed money market:
- 1.3 2. Well organized banking industry in money market
- 1.4 3. Availability of credit instruments and resources in a well developed money market:
- 1.5 4. Presence of sub markets in a well developed money market
- 1.6 5. Free movement of funds among the various constituents of well developed money market
- 1.7 6. Better industrial relations in a well developed money market
- 1.8 7. Integrated monetary and fiscal policies of money market
- 1.9 8. Promotion of Foreign Trade in a well developed money market
Characteristics of well developed money market
The following are the characteristics of a well developed money market.
1. Presence of a strong Central bank in a well developed money market:
The presence of a strong Central bank is an indispensable factor for a well developed money market. The leader of the money market is the Central bank. So, it has to guide the money market by providing funds and also maintain a reasonable interest rate according to the prevailing conditions in the economy. If there is inflationary trend, the Central bank, by increasing the interest rate can bring down the prices. This will be possible only when all the economic activities in the country are carried through the banking sector.
The Central bank can help the commercial banks in undertaking various activities so that the entire economic activities are financed by the commercial banks. The commercial banks must have a better cordial relationship with Central bank so that they can always depend on Central bank for assistance. This position can be attained by the Central bank only when it is strong enough to assist the commercial bank.
2. Well organized banking industry in money market
The commercial banks in the country must be capable of attracting deposits from the public and meeting the credit requirements of the various sections of the society. viz., agriculturists, industrialists, traders, businessmen, etc. The bank should also undertake risks and lend more to various economic activities.
The lending activity of the commercial banks should generate more productive and positive activities in the economy. A commercial bank should not lend for speculation or for anti-social activities such as hoarding, black marketing, smuggling, etc.
Banks should open more branches throughout the country so that there will be more dependence on commercial banks. Thus, the entire activity in the country should be routed through the commercial banks.
3. Availability of credit instruments and resources in a well developed money market:
The essence of a well developed money market is providing short-term funds against bills, bonds, etc. So, there should be availability of these instruments adequately. At the same time, there should also be enough resources to support these credit instruments.
If there are more credit instruments with less resources, it means there is more demand for funds with less resources. This will increase the interest rate, affecting the activities in the market.
On the other hand, availability of more resources with less credit instruments will lead to lesser interest rate, which means lack of economic activities in the country. So there should be a balanced approach to the availability of resources and the credit instruments.
4. Presence of sub markets in a well developed money market
Sub markets are those which specialize in a particular credit instrument. Treasury bill market, trade bill market, Finance bill market and foreign bill market are some of the sub markets. These markets will also have call money market, acceptance market and discount market. These markets enable the issue of more bills. Issue house is a company which promotes the issue of bills, acceptance house helps in the acceptance of bills and discount house promotes discounting of bills. Thus, sub markets are responsible for the issue of more credit instruments and enable the movement of funds among the various types of bills.
5. Free movement of funds among the various constituents of well developed money market
When commercial banks are dealing in various credit instruments and sub markets, they ensure that equal amount of resources are distributed among the various sub markets. This will not only ensure uniform interest rate, but will help in the uniform growth of the economy. Agriculture as well as industry will get adequate resources. Similarly, both domestic and foreign trade will get adequate resources.
6. Better industrial relations in a well developed money market
If there are more strikes and lock-outs in the country, they will affect production and there will be less demand for short-term funds. So, a congenial industrial atmosphere is a per-requisite for a well developed money market.
7. Integrated monetary and fiscal policies of money market
The monetary policy is framed by the Central bank while the fiscal policy is framed by the Government. In the monetary policy, the Central bank tries to control price level while in the fiscal policy the government tries to maximize the revenue. If these policies are contradictory to each other, it will affect the working of a well developed money market.
8. Promotion of Foreign Trade in a well developed money market
When there is more foreign trade, there will be more foreign bills and foreign exchange transactions in a well developed money market. The foreign bills will also be discounted. Exchange rate will be streamlined.