MONEY MARKET

MONEY MARKET

  • Money market refers to a section of the financial market where financial instruments with high liquidity and short-term maturities are traded.
  • It deals with borrowing and lending of short term credit/loan generally with a time period of less than or equal to 1 year.

 

FUNCTIONS OF MONEY MARKET

  • It provides facilities for allocation of short term funds through money market instruments.
  • It helps the government to meet its deficits through non inflationary financial sources such as treasury bills.
  • It makes available sufficient finance to the trade and industry
  • It ensure an equilibrium between the demand and supply of money and short term funds
  • It promotes economic growth
  • It provides a mechanism for Reserve Bank of India (RBI) to implement monetary policy

 

INSTRUMENTS OF MONEY MARKET

 

 

Call money/ Term money market/ Notice money

 

  •          Call Money–  is also referred to as the money at call. It deals with very short term funds, and is demanded extremely short durations from a few hours to 1 day
  •          Notice Money– for borrowing and lending operations of 2 to 14 days.
  •         Term Money– Lending and borrowing of funds beyond 14 days
 

 

Treasury bill

  •          They are the government securities (G-Sec) issued by RBI on behalf of the central government to meet its fiscal deficits.
  •          The maturity period of these securities varies from 14 days to 364 days.
  •          Treasury bills are further classified into two types viz. ordinary/regular treasury bills and ad hoc treasury bills.
 

Commercial bills

  •          It refers to the bill of exchange which is used to finance the short term working capital requirements of any business.
  •          These are negotiable and self-liquidating financial instruments , in which the seller is the drawer while the buyer is the drawee.
Cash management bills(CMBs)
  •         CMBs are issued by the government of India in consultation with the Reserve Bank of India (RBI) to meet its short term cash requirements.
  •          The maturity period of these bills is less than 91 days
 

 

Certificates of Deposits (CDs)

  •         Certificate of Deposit (CD) is an agreement between the depositor and the bank where a predetermined amount of money is fixed for a specific time period
  •         It is issued in dematerialised (Demat) form
  •          When it matures, the principal amount along with the interest earned is available for withdrawal
 

 

Commercial papers

(CPs)

  •          CP is a short-term debt instrument issued by companies to raise funds generally for a time period up to one year.
  •          It is an unsecured money market instrument issued in the form of a promissory note and was introduced in India in 1990.
  •         The minimum maturity period of commercial paper is for 7 days and a maximum of 1 year.
 

Repo / Reverse Repo Market

  •          The repo rate/ the repurchase rate is the rate at which RBI lends money to banks, when banks face shortage of funds.
  •          These are short-term, usually overnight borrowings.
  •         The opposite of repo rate is reverse repo rate-it is the rate at which RBI borrows funds from other banks for the short term

 

Terms associated with money market:

  • Waterfall approach- for the valuation of money market and debt securities.
  • Money Market Mutual Funds (MMMF) are short-run liquid investments which invest in high-quality money market instruments such as Treasury Bills (T-Bills), Repurchase Agreements (Repos), Commercial Papers and Certificate of Deposits. It is an open-ended mutual fund.