Meaning of Money Market
Money market is a collective name given to all the institutions that are dealing in short-term funds. It does not refer to a particular place.
Dealers in Money Market
Dealers in the money market are spread throughout the country. Short-term funds are required for working capital requirements, both in agriculture as well as in industry. Without the short-term funds, agricultural and industrial activities in the country will come to a halt. When agricultural and industrial activities are affected, they in turn affect production, trade, business, employment and income and thereby the economic growth of the country.
Instruments dealt in the money market
The short-term funds are borrowed by manufacturers, industrialists, traders, businessmen and even by government which issue credit instruments. These are cheques, bills, promissory notes, commercial paper, treasury bills and short-dated Government Bonds. These are called near money. Near money is one which has claim over money and is convertible into money.
1. The bills, consisting of treasury bills are issued by the government.
2. Trade bill, issued by the traders arising out of trade transactions.
3. Finance bill, issued by businessmen for raising short-term funds for business transactions.
4. Treasury bills are issued at discount by the Government when it requires temporary loans after calling for tenders, and usually payable in full after 3 months.
5. Foreign bills arising out of foreign transactions either in the form of trade or executing any projects in foreign country.
Commercial paper is one which is issued by a leading commercial house and it will enable businessmen to borrow money in the market. These commercial papers carry credit worthiness, due to the commercial house which is issuing the commercial paper. Short dated bonds are issued either by government or by quasi government institutions for the purpose of raising short-term funds.
Constituents of the money market
There are two sets of people in the money market. One is the borrower and other is the lender.
Who are the borrowers in money market?
Borrowers in money market consists of Government (the biggest borrower), Agriculturists (for meeting cost of cultivation), Traders, Businessmen, Commercial Banks and Non-Banking financial companies (NBFCs)
Who are the lenders in money market?
Lenders in money market includes Central Banks, Commercial banks, Co-operative banks, Foreign banks, Commercial house, Non-banking financial companies (Chit companies, Nidhis, Benefit societies, finance companies, factoring companies), Money lenders and indigenous bankers.
Commercial banks and non banking financial companies are found both on the borrowing side as well as on the lending side. The commercial banks borrow from the Central bank and then lend to the businessmen. Non banking financial companies borrow from the public or accept deposits from the public and finance others’ activities.
Importance of money market
Money market provides short-term funds:
The money market provides short-term funds by which working capital is available to manufacturers and agriculturists. This leads to more production in the country. Without the short-term funds, production will come to a standstill which will affect development in the country.
Money market provides opportunity for more commercial banks:
Commercial banks provide the major source of short-term funds. They earn profit due to the difference in interest rate between lending and borrowing. So, it provides opportunity for more commercial banks to operate in the economy.
Money market helps growth of investments:
The presence of commercial banks promotes savings in the country and thereby it channelizes the funds for investments. Thus, money market helps growth of investments in the country. Foreign trade, apart from domestic trade is also promoted by money market. The exporter need not wait for the receipt of money for exports as he can discount the bills with the commercial banks.