Defining Money market

RBI
“The centre for dealings,mainly of short term character,in
monetary assets;it meets the short-term requirements of the
borrowers and provides liquidity for cash to the lenders”

Geoffery Growther
”Money market is the collective name given to the different firms
and institutions which deal with the near money asset of different
grades.”

By ” MONEY MARKET “ we mean simply an arrangement that brings

Money market is the market for the short term financial assets
which are near substitutes for money.money market instruments
are liquid and can be turned over quickly at low transction cost and
without loss. Money market instruments are for short duration
 Charateristics of money
market
• Money market is basically over the phone market.The
transactions are conducted through oral
communication .Written communication and exchange
of relevant documents may follow subsequently.
• Dealing may be done with or without the help of
brokers
• Short term market
• Upto a period of one year.
• Financial assets which can be converted into money
with ease ,speed,without loss and with minimum
transactions cost are regarded as close substitutes for
money or near money.
• Money market consists of many sub markets,such as
,inter bank call money, bill rediscounting,treasury bills
etc.Collectively they constitute the money market.
 Charateristic Features of
Money Market
1) Constituents of money market
• There are three constituents
• Commodity-In the form of money
• Price -INTEREST charged/paid
• Buyers and sellers---Lenders and borrowers
• 2) Heterogenous Nature: Because it
comprises several sub markets—call money
market, collateral market, the bill market
• 3) Dealers of Money: The commercial Banks
,Development banks ,The Central Banks are
the dealers
• NO Physical contact required :
Today, people can borrow money
over the phone and even through
third persons.
• Association with big cities: Money
market is associated with other MM’s
eg. American money market is
associated with London MM.
• Change in Place and Time: In
different MM’s the operations
preferences and practices vary
considerably.eg.
•
 Objectives OF MONEY
MARKET
• It provides an equilibrating
mechanism for evening out short
term surplus and deficits.
• It provides as the focal point for
central bank intervention for
influncing liquidity in the economy.
• It provides reasonable access to
users of short term money to meet
their requirements at a realistic
price.
 Structure of Money market
• Call money Market:Extremely short Period of
time(7 days).There is no colatteral or securities
demanded against these loans.The lending
agency reserves the right to the loan back as and
when decided by the lending agency,even before
the period of stipulated days.
• 7feb 2004 PD’s can borrow upto 200% of their
NOF (Net Owned Funds)
• Collateral loan Market:Loans are offered
against collateral like stocks and
securities.Collateral becomes the property
of the lender if not paid within stipulated
period.
• Accceptance Loan Market: Market for
Bankers Acceptance. A draft is drawn by
an individual or a firm upon a bank where
by the designated person or the bearer is
permitted to make both inland and
transnational trade transactions.the
bankers acceptance is mainly used for
• Bill Market or discount Market:
#Commercial paper market
#Treasury bills Market
# CD Certificate of deposits.
#Commercial Papers guarantor should have one
higher credit rating than the issuer of commercial
paper
Offer documet Net worth of Guarantor
#Derivatives Market
#Collateralised Borrowing and Lending
obligation(CBLO)
#Repo Market
 Prequisits of Efficient Money
Market
• Money market should be wide and deep.
• Varied instruments.
• Active secondary market for these instruments
• Strong central bank for regulation,direction and
faciliation
• There should be a number of interrelated and
integrated sub market.
• There should be competition within and between
these sub markets.
• Liquidity should be high-large amounts maturing
in short time and ready marketibility of the asset.
• Large demand and supply of the funds.
 Importance of Money
• Market
Important source of financing trade and industry
through bills,commercial bills.commercial
papers,etc.It influences avaliability of finances in
the national and international.
• Avaliability of funds in the MM interest rates have
effect on interest rates and resource mobilization
in capital market
• MM offers an avenue to the commercial banks for
investing short term surpluses of funds and
borrowing for short term needs so as to meet
stattory requirements of each reserve ratio CRR
an SLR which vary every fortnight depending on
banks net demand and time liability(NDTL)
• It facilitates effective implementation of monetary
policy of central bank of a country.
• MM serves as an important guide to the
 Structure of Money Market
MM
Short Term
National
Money Market
Money Market

UN ORGANIZED
ORGANIZED

Call Co- Acceptan Bill-

UN ORGANIZED
ORGANIZED

Private Sector M.M.

Scheduled
State Nationali Regional Regional
Commercia
rural Rural Banks
Bank of sed Bank Bank l Banks
India
 Deficiencies in Indian
money Market
• Dichotomy.(Shroffs,Multanis,Khatris,Chit-
funds)
• Lack of co-ordination.
• Divergence of lending rates and policies.
• Inadequate control by the reserve bank.
• Inelasticity and Instability.
• Underdeveloped bill market.
• Improper care of rural finance.(agricultural
finance)
• No bankers acceptance development.
• Blending of trading and lending