After reading this article you will learn about:- 1. Meaning of Money Market 2. Functions of Money Market 3. Need 4. Benefits.
Meaning of Money Market:
When we talk about any market it comes to our mind that a market consists of many shops, outlets, stalls, hawkers and now newly developed markets known as malls. Very obvious all these are essential parts of any market but when we talk about Money Market it should be taken that there are hundreds of shops selling money.
No doubt there are such places also where we happen to see the currency notes and coins piled up on a table or counter but all these shops of money are just dealing in exchange of money on two accounts: First they deal with exchanging old, torn, mutilated, and such currency notes which are not usually accepted by common shopkeepers.
All such type of shops are meant to deal with day to day currency difficulties of common man but cannot be considered as a part of Money Market. A Money Market is an important factor for the development of economy of any country. The money market largely is tool for the development of Industry, Infrastructure, Agriculture, Trading and commerce of any country. The money market is entirely different where no visible shops are counters exist.
It comprises of different types of companies, institutions, firms, individuals who are either in need of money or are having surplus money. The entities in need of money seek financial help from this market against some payables and the entities having surplus funds take opportunity to deploy their surplus funds in gainful way. All these entities deal through a systematic way devised for this purpose which is known as money market.
Most of the known economists have defined money market in their own observations such as:
As per Crowther, “The money market is a name given to the various firms and institutions that deal in the various grades of near money.”
Very simple Mr. Crowther has said that money market is operated by various firms and institutions which are dealing with not money but various grades of near money. Now what are these various grades of money.
If you think of money what comes to your mind? A currency Note or Coin? What about a piece of Gold, Silver, Diamond, a Piece of Land, a building, a factory, some partnership with any business, some shares of a reputed company held by you. Go on counting all these forms of different kinds of money as they can be negotiated at any moment if one desires to convert these into hard cash.
Mr. Crowther is right that all those engaged in money market deal with such items which are near to money in other words all those items are near to money which can easily be converted into money.
In India the Reserve Bank of India is the sole authority to regulate all financial and economic matters.
With regard to Money Market the RBI has defined a Money Market as:
“The Money Market is the centre for dealing mainly of short character, in monetary assets; it meets the short term requirements of borrowers and provides liquidity or cash to the lenders. It is a place where short term surplus investible funds at the disposal of financial and other institutions and individuals are bid by borrowers, again comprising institutions and individuals and also by the Government.”
The basic concept of money market can be identified with the help of above definitions. Having a careful consideration of RBI’s definition it becomes clear that the main role in the money market is played by the financial institutions including well organized banking system.
In view of Mr. Crowther saying various grades of near money it includes various types of financial instruments which are used for transactions in the money market. Money market is an important part of the economy. But it is mainly used for short term monetary transactions. In short a money market provides facility for adjusting liquidity to the banks, business houses, non-banking financial companies and institutions and other financial institutions along with investors.
In view of above it appears that Nadler and Shipman had rightly observed; “That a Money market is distinct but supplementary to the commercial banking system”.
The money market plays an important part in the economy of any nation and has specific functions particularly in short term financing.
Functions of Money Market:
1. To maintain monetary balance between demand and supply of short term monetary transactions.
2. Money market plays a very important role of making funds available to many units or entities engaged in diversified field of activities be it agriculture, industry, trade, commerce or any other business.
3. By providing funds to developing sectors it helps in growth of economy also.
4. Another important feature that money market provides is discounting of bills of exchange which facilitates growth of trade.
5. No doubt it provides a base for the implementation of monetary policy also.
6. The money market provides opportunity for short term investments, which provide for short term savings, which in turn help formation of capital base also.
In view of above when we talk about-a money market it can easily be understood that a money market is one where money or its equivalents can be traded. It is just a part of entire financial market where instruments of high liquidity with very short period of maturity are traded. In other words the money market can be defined as a market where money or its equivalent can be traded. But what is money?
As per Oxford Dictionary the money is defined as “a current medium of exchange”. The money is what it can get in exchange anything equivalent to its value whether in shape of goods or services. The money is anything which is acceptable by the seller. To be very clear on the subject of money the currency notes issued by the Reserve Bank of India are not real money.
All these currency notes signed by the Governor of RBI are just promises to pay money, but not real money. Previously all these currency notes carried a promise by the Governor of RBI to pay money on demand but the words “ON DEMAND” have been deleted and the currency notes have now become only a Fiat Money and not the real money.
Just like your currency notes are not real money. Having a currency note in your hand does not mean you do posses the money of the denomination printed on the currency note. But you feel having a sense of owning that much money with you. And when you go to a market for purchases your currency note is accepted as money.
In the same way in case of MONEY MARKET Banks, Financial Institutions, other organizations, even Individuals transact amongst each other. Either they borrow or lend huge amounts of money but nowhere cash is involved. These transactions are held on the basis of real money kept in accounts with the Reserve Bank of India.
Due to highly liquid nature of securities and their short term maturities money market is treated as a safe market for short term borrowing or lending. Transactions in money market are mostly done by the Central Bank, Commercial Banks, Financial Institutions, Mutual Funds and Primary Dealers and the transactions done by them are mostly of high value and short period.
Although the short period is taken into account for all those transactions having maturity period of one year but in practice this period is observed to a week or two.
In view of above description it is clear that a money market is a market of short term investments.
It can be understood by an example. Suppose Oriental Bank of India has to pay an amount of Rs. 100 crores at the end of day’s transactions to the Union Bank of India. The Oriental Bank of India would request the Reserve Bank of India to increase the balance in the account of Union Bank by Rs. 100 crores.
By doing so the RBI will decrease Rs. 100 crores from the balance of the Oriental bank of India. It was done because the Oriental Bank of India was in need of Rs. 100 crores at the end of its day transactions and wished to borrow that amount. At the same time another bank say Punjab National Bank was having surplus money of Rs. 100 crores for a period of 20 days (the number of days for which OBC wanted to borrow).
The Punjab National Bank lends money to the Oriental Bank of India for a period of 20 days at the agreed rate of interest. Accordingly their accounts with RBI are adjusted. This can be said as a money market transaction where no real money was transacted.
The above example should be enough to make it clear that the money market is a market of short term instruments. Such instruments are of less than one year maturity. It is only because of this reason that these are known as “near to money instruments”.
Need of Money Market:
Money market provides quick liquidity for short term to meet the urgent and immediate obligations. Main and basic need remains with Industrial Houses to meet their working capital requirements of short periods. If this period is long enough it may increase the cost of funds.
It is therefore always ensured that their remains a reasonable balance between acquiring liquidity and the earning profitability. The main object of any industrial or business house remains to earn the maximum profitability.
If the quick liquidity for a short period raised from money market fulfills this objective it serves the purpose for which the money market creates a bridge to overcome the gap of deficit and surplus cash flow.
Since the transactions in money market are for high value, these are most for a short period, the cost funds remain high if compared with earning of interest. The transactions in money market are done through different type of instruments.
Benefits of Money Market:
It provides an easy mechanism to transfer of short term funds required for a short period between two parties One in need of funds and the second having surplus funds. They are called borrowers and holders of funds or cash assets (cash assets are money market instruments).
For the lenders it provides a good opportunity of lending their surplus funds on an agreed rate of interest with good returns in a short period.
For the Borrowers it is an easy way to get cash money relatively on less expensive rates to meet their short term liabilities.
Money market is subject to volatile rate of interest depending on supply and demand of money. But it also provides a focal point for the controlling authority i.e., RBI to ensure liquidity as well as general rate of interest for the sustained economy. RBI ensures that the liquidity and the short term interest rates are consistent with the monetary policy. The object of monetary policy is to attain overall economic growth.