Money Market: Definition, Feature and Instruments

What is Money Market?

As per RBI definitions “ A market for short terms financial assets that are close substitute for money, facilitates the exchange of money in primary and secondary market”.
The money market is a mechanism that deals with the lending and borrowing of short term funds (less than one year).
It doesn’t actually deal in cash or money but deals with substitute of cash like trade bills, promissory notes & govt papers which can converted into cash without any loss at low transaction cost.
It includes all individual, institution and intermediaries.

Features of Money Market?

It is a market purely for short-terms funds or financial assets called near money.
It deals with financial assets having a maturity period less than one year only.
In Money Market transaction can not take place formal like stock exchange, only through oral communication, relevant document and written communication transaction can be done.
Transaction have to be conducted without the help of brokers.
It is not a single homogeneous market, it comprises of several submarket like call money market, acceptance & bill market.
The component of Money Market are the commercial banks, acceptance houses & NBFC (Non-banking financial companies).

Instrument of Money Market

A variety of instrument are available in a developed money market. In India till 1986, only a few instrument were available.

They were:

Treasury Bills (T-Bills)

Treasury bills (TBs), offer short-term investment opportunities, generally up to one year.
They are thus useful in managing short-term liquidity.
Types of treasury bills through auctions
91- Day, 182- day, 364- day, and 14- day TBs

Commercial paper (CP)

CP is a short term unsecured loan issued by a corporation typically financing day to day operation.
CP is very safe investment because the financial situation of a company can easily be predicted over a few months.
Only company with high credit rating issues CP’s.

CERTIFICATES OF DEPOSIT

Certificate of Deposit (CD) is a negotiable money market instrument and issued in dematerialised form or as a Usance Promissory Note against funds deposited at a bank or other eligible financial institution for a specified time period
Scheduled commercial banks excluding Regional Rural Banks (RRBs) and Local Area Banks (LABs)
Select all-India Financial Institutions that have been permitted by RBI to raise short-term resources within the umbrella limit fixed by RBI.

CALL MONEY MARKET

Call money market is that part of the national money market where the day to day surplus funds, mostly of banks are traded in.
They are highly liquid, their liquidity being exceed only by cash.
The loans made in this market are of the short term nature.

COMMERCIAL BILLS MARKET

Funds for working capital required by commerce and industry are mainly provided by banks through cash credits, overdrafts, and purchase/discontinuing of commercial bills.

BILL OF EXCHANGE

The financial instrument which is traded in the bill market of exchange. It is used for financing a transaction in goods that takes some time to complete.

Quant Quiz (D.I. of IBPS PO 2012 and 2014)