Updated Feb 20, 2022

What is The Money Market?

What is the money market?

Short-term deals, fixed-income debt instruments is what the money market is all about. This article will explain what money market instruments signify and what they are, and why they exist. Short-term financial assets with liquidity of no more than one year are exchanged on the money market. However, the trading bills or securities are quite liquid. In addition, by exchanging bills, these instruments make it easier for the participant to get short-term borrowing. In this financial sector, you'll often find banks, major institutional investors, and retail investors all vying for your attention.

Traits of Money Market

• It might be referred to as a market collection where liquidity is its primary attribute. Call money, notice money, and other submarkets are all closely connected. This method may transfer cash from one sub-market to another effortlessly.

• There is a great deal of money being exchanged on the open market.

• It helps the borrowers meet their short-term financial needs. In addition, assets having a maturity of one year or less are included.

• It's still under development.

Objectives

The money market's primary goals are as follows:

• Offering short-term financing to borrowers including investors, the government, and so on at a fair cost. Lenders will benefit from increased liquidity because of the short maturity of money market assets.

• The Reserve Bank of India (RBI) regulates the money market in India. As a result, it helps to maintain a stable level of liquidity in the market.

• Since most businesses lack the necessary operating capital to satisfy their operational cash needs, the money market provides them needed finances.

• In domestic and foreign commerce, the government sector relies heavily on this form of financing. As a result, banks have a place to stash their extra cash.

Types of Money Market Instruments

Lenders and borrowers may leverage a variety of money market instruments, such as:

1. Treasury Bills

Most people choose Treasury notes because the government fully backs them. To renew Treasury notes and fund federal deficits, the Treasury frequently issues them.

2. Certificate of deposit

A commercial bank issues a CD, although it may be bought via brokerage companies. Any denomination may be issued with a maturity term of three months to five years.

3. Commercial Paper

Large institutions and corporations issue unsecured corporate debt to meet short-term cash flow needs, such as inventory and accounts payable. When investors buy commercial paper at a discount, they make money.

4. Bank Acceptance

In a banker's acceptance, a business issues a short-term loan backed by a bank. A drawer manufactures it in exchange for the money mentioned on its front. It is often used in international commerce because of its advantages for both parties.

5. Repurchase Contracts

Borrow money for brief periods with the promise of returning it at a lower price later. Many debt instruments traders who offer Govt bonds to lenders and then arrange to purchase them later use this strategy.

The Money Market's Functions

The money market serves the following purposes:

1. Trade Finance

The money market offers short-term funding for local and international merchants. Bills of exchange may be discounted for prompt payment of goods and services.

2. Industrial Growth

It is simple to receive short-term loans from the money market. But, business cash constraints may occur due to high transaction volumes.

3. Commercial Banks Independence

Profit from the money market's liquidity while investing extra reserves. Investing in short-term assets like bills of exchange may readily be turned into cash.

Conclusion

Markets for short-term investments with a maturity of one year or less are known as "Money Market." Individual investors and massive institutions are among the most common participants in this market. The Reserve Bank regulates numerous money market products. In the money market, short-term financial assets with one-year liquidity are exchanged. To meet short-term borrowing requirements, participants might trade bills. Large institutional investors, banks and individuals often participate in this financial sector as well. Treasury bills, CDs, commercial paper, and repurchase agreements are examples of money market instruments. The money market is regarded as a secure space to invest due to the high liquidity of the assets being exchanged. The money market is a market for near-money assets.