Money Market is the financial market for short-term borrowing and lending which deals with the short term fund requirements of different financial entities. It offers short-term liquid funding instruments such as Treasury bills, Commercial paper, Certificate of Deposit etc. The money market consists of financial institutions and dealers who wish to either borrow or lend for short period of time, typically up to one year.
Main characteristics of Money Market
The government, banks and the financial institutions are main players in the money market.
The funds are available for the period of a single day to one year.
This is very safe investment and has low interest rate that is suitable for temporary cash storage.
An important term in the Money Market is ‘Trading’. This engages Treasury bills, Commercial Paper, Bankers’ Acceptances etc. It gives liquidity funding for the global financial system.
Money Market plays a very important role in the economy.
The money market takes care of the requirements of market participants who are short cash and long cash by balancing the demand and supply of short term funds.
The basic functions of Money market are
To borrow for the short time period as the borrowing period is usually less than a year.
To help the banks meeting the Government Regulatory Requirements like SLR, CRR etc.
To generate return with lower risk.
To generate return on the surplus funds.
To maintain the liquidity by investing in cash equivalent instruments
Benefits of an efficient Money Market
An efficient money market provides numerous benefits to the economy.
It improves liquidity management and hence lowers costs. It allows banks to manage interest rate risk as well as the maturity structure of assets and liabilities
It allows corporates to lower the costs of short term funding and provides them with a good alternative to long term borrowing.
It provides access to a wide range of buyers for government securities, thus enabling them to achieve better pricing on its debt
For the central bank, it helps to implement monetary control through indirect methods
It also helps in the development of both primary and secondary securities markets as well as foreign exchange and derivatives markets.
Common Money Market Instruments
Most commonly used money market instruments are
Certificate of Deposit
Certificates of Deposit
Money market mutual funds
Key Players in Money Market
The Central Bank
Market Makers (Primary Dealers)
Money market operators also include other institutional players’ viz. Mutual Funds (MFs), Foreign Institutional Investors (FIls), etc. The level of participation of these players varies largely depending on the regulations.