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
• Commercial papers.
• Certificate of deposit.
• Call Money Market
• Commercial bills market

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.

Read More:

PPT: Money Market and It's Instruments