Meaning of Money Market
The money market is not a well-defined place where the business is transacted as in the case of capital markets where all business is transacted at a formal place, i.e. stock exchange. The money market is basically a telephone market and all the transactions are done through oral communication and are subsequently confirmed by written communication and exchange of relative instruments.
According to the RBI, "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.
From the above definition, it is clear that the money market consist of many sub-market such as the inter-bank call money, bill discounting, treasury bills, Certificate of deposits (CDs), Commercial paper (CPs), Repurchase Options/Ready Forward (REPO or RF), Inter-Bank participation certificates (IBPCs), Securitized Debts, Options, Financial Futures, Forward Rate Agreement (FRAs), etc. which collectively constitute the money market.
Features of Money Market
a) It is a collection of market for following instruments - Call money, notice money, repos, term money, treasury bills, commercial bills, certificate of deposits, commercial papers inter-bank participation certificates, inter-Corporates deposits, swaps, etc.
b) The sub markets have close inter- relationship & free movement of funds from one sub-market to another.
c) A network of large number of participants exists which will add greater depth to the market.
d) Activities in the money market tend to concentrate in some centre, which serves a region or an area. The width of such area may vary depending upon the size and needs of the market itself.
e) The relationship that characterizes a money market is impersonal in character so that competition is relatively pure.
f) Price differentials for assets of similar type will tend to be eliminated by the interplay of demand & supply.
g) A certain degree of flexibility in the regulatory framework exists and there are constant endeavours for introducing a new instruments / innovative dealing techniques.
h) It is a wholesale market & the volume of funds or financial assets traded are very large i.e. in crores of rupees.
Functions of Money Market
Money market is an important part of the economy. It plays very significant functions. As mentioned above it is basically a market for short term monetary transactions. Thus it has to provide facility for adjusting liquidity to the banks, business corporations, non-banking financial institutions (NBFs) and other financial institutions along with investors. The major functions of money market are given below:
a) To maintain monetary equilibrium. It means to keep a balance between the demand for and supply of money for short term monetary transactions.
b) To promote economic growth. Money market can do this by making funds available to various units in the economy such as agriculture, small scale industries, etc.
c) To provide help to Trade and Industry. Money market provides adequate finance to trade and industry. Similarly it also provides facility of discounting bills of exchange for trade and industry.
d) To help in implementing Monetary Policy. It provides a mechanism for an effective implementation of the monetary policy.
e) To help in Capital Formation. Money market makes available investment avenues for short term period. It helps in generating savings and investments in the economy.
f) Money market provides non-inflationary sources of finance to government. It is possible by issuing treasury bills in order to raise short loans. However this does not leads to increases in the prices.
Features of the Indian Money Market
In money market short term surplus funds with banks, financial institutions and others are bid by borrowers i.e., individuals, companies and the Government. In the Indian money market RBI occupies the pivotal position. The Indian money market can be divided into two sectors i.e. unorganized and organized. The organized sector comprises of Reserve Bank of India, SBI group and commercial banks foreign, public sector and private sector. The unorganized sector consists of indigenous bankers and money lenders. The organized money market in India has number of sub-markets such as the treasury bills market, the commercial market and inter-bank call money market. The following are the characteristics of the Indian Money Market :
a) Existence of Unorganized Money Market. The most important defect of the Indian money market in the existence of unorganized segment. In this segment of the market the purpose as well period are not clearly demarcated. In fact, this segment thieves on this characteristic. This segment undermines the role of the RBI in the money market. Efforts of RBI to bring indigenous bankers within statutory frame work have not yielded much result.
b) Lack of Integration. Another important deficiency is lack of intergration of different segments or functionaries. However, with the enactment of the Banking Companies Regulation Act 1949, the position has changed considerably. The RBI is now almost fully effective in this area under various provisions of the RBI Act and the Banking Companies Regulation Act.
c) Disparity in interest rates. There have been too many interest rates prevailing in the market at the same time like borrowing rates of government, the lending rates of commercial banks, the rates of cooperative banks and rats of financial institutions. This was basically due to lack of mobility of funds from one sub-segment to another.However, with changes in financial sector the different rates of interest have been quickly adjusting to changes in the bank rate.
d) Seasonal Diversity of Money Market. A notable characteristic is the seasonal diversity. There are very wide fluctuations in the rates of interest in the money market from one period to another in the year. November to June is the buy period. During this period crops from rural areas are moved to cities and parts. The wide fluctuations create problems in the money market. The Reserve Bank of India attempts to lessen the seasonal fluctuations in the money market.
e) Lack of Proper Bill Market. Indian Bill market is an underdeveloped one. A well organized bill market or a discount market for short term bills is essential for establishing an effective link between credit agencies and Reserve Bank of India. The reasons for the situation are historical, like preference for cash to bills etc.
f) Lack of very well Organized Banking System. Till 1969, the branch expansion was very slow. There was tremendous effort in this direction after nationalization. A well developed banking system is essential for money market. Even, at present the lack of branches in rural areas hinders the movement of funds. With emphasis on profitability, there may be some problems on this account.
In totality it can be said that Indian Money Market is relatively under developed. In no case it can be compared with London Money Market or New York Money Market. There are number of factors responsible for it in addition to the above discussed characteristics. For example, lack of continuous supply of bills, a developed acceptance market, commercial bills market, dealers in short term assets and coordination between different sections of the money market.
Essential Characteristic of a Strong Money Market
In order to fulfill the above objectives, the money market should be fully developed and efficient. In every country of the world, some type of money market exists. Some of them are highly developed while others are not well developed. Prof. S.N. Sen has described certain essential features of a developed money market. They are as follows:
(i) Highly Organized Banking System: The commercial banks are the nerve centre of the whole money market. They are the principal suppliers of short-term funds. The commercial banks serve as vital link between the central bank and the various segments of the money market. Consequently, a well developed money market and a highly organized banking system co-exist. In an underdeveloped money market, the commercial banking system is not fully developed.
(ii) Presence of a Central Bank: The Central Bank acts as the banker’s bank. It keeps their cash reserves and provides them financial accommodation in difficulties by discounting their eligible securities. The central bank is the leader, guide and controller of the money market. In an underdeveloped money market, the central bank is in its infancy and not in a position to influence the money market.
(iii)Availability of Proper Credit Instruments: It is necessary for the existence of developed money market a continuous availability of readily acceptable negotiable securities such a bills of exchange, treasury bills etc. in the market. There should be a number of dealers in the money market to transact in these securities. Availability of negotiable securities and the presence of dealers and brokers in large numbers to transact in these securities are needed for the existence of a strong money market.
(iv) Existence of Sub-markets: The number of sub-markets determines the development of a money market. The larger the number of sub-markets, the broader and more developed will be the structure of money market.
(v) Ample Resources: There must be availability of sufficient funds to finance transactions in the sub-markets. These funds may come from within the country and also from foreign countries.
(vi) Existence of Secondary Market: There should be an active secondary market in these instruments.
(vii) Demand and Supply of Funds: There should be a large demand and supply of short-term funds. It presupposes the existence of a large domestic and foreign trade. Besides, it should have adequate amount of liquidity in the form of large amounts maturing within a short period.