Understanding Money Market in India

Understanding Money Market in India

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A market for short-term funds is Money Market. The term "short-term" refers to anything shorter than 364 days. To put it another way, the borrowing and repayment process takes no more than 364 days. The makers need two sorts of money: finance to cover day-to-day costs like buying raw materials, paying wages, paying excise taxes, paying for electricity, etc. and money to cover capital expenditures like buying machinery and installing pollution control equipment, among other things. The first type of financing is short-term investments in the production process. The market where such brief time frame finance is acquired and loaned is called 'Currency Market'.

Liquidity management is a persistent issue for nearly every financial institution, business, government agency, or other entity in the system. This is primarily due to the fact that the timing of expenditures and receipts rarely coincide. The Money Market's primary function is to fill this liquidity gap. By purchasing (or selling) the shortfall (or surplus) of funds in the Money Market, businesses and financial institutions can overcome cash receipt and expenditure inconsistencies. Simply put, the Money Market is a means of short-term borrowing and lending. While the Money Market facilitates the movement of substantial sums of money between banks, it also provides a means by which the cash-rich corporations' and other institutions' surplus funds can be utilized (at a cost) by banks, corporations, and other institutions in need of short-term funding. Almost anyone who has a temporary surplus of money can supply the Money Market with funds.

Money Market instruments include government bonds, corporate bonds, and bank bonds that have a ready market, similar to equity shares of a listed company. The term "money markets" refers to the market for securities with initial maturity of less than one year, such as commercial paper, treasury bills, and certificates of deposits. The nature of Money Market instruments is more liquid. Money as well as highly liquid marketable securities are traded on the Money Market. It is not a place like the stock market; rather, it is an activity where all trading takes place over the phone. The Money Market is notable for its commitment to honor and creditworthiness.

The Money Market is an important part of the financial system because it allows lenders' surplus funds and borrowers' needs to come into balance for short periods of time, from one day to a year. The money market provides a non-inflationary means of financing government deficits, permits governments to use open market operations to implement monetary policy, and serves as a market-based benchmark for determining interest rates.