MONEY MARKET

Money Market-Introduction

A market where short-term funds are borrowed and lent is called Money Market MM is a market for short term financial assets, which are near substitutes for money The instruments dealt within the MM are liquid and can be turned over quickly at low transaction cost and without loss. The MM comprises individuals, institutions and the Government. These agencies create demand for money and also ensure supply of money for a shortterm period. MM represents countrys pool of short term investible funds to meet the short term requirements of the country

Money Market-Definition

Definition 1]According to the McGraw Hill Dictionary of Modern Economics, MM is the term designed to include the financial institutions which handle the purchase, sale, and transfers of short-term credit instruments. The MM includes the entire machinery for the channelizing of short-term funds. Concerned primarily with small business needs for working capital, individuals borrowing, and government short-term obligations, it differs from the long-term or capital market which devotes its attention to dealings in bonds, corporate stocks and mortgage credit.

Money Market-Definition

2] According to Geoffrey, MM is the collective name given to the various firms and institutions that deal in the various grades of the near-money. 3] According to the Reserve Bank of India, a MM is the centre for dealings, mainly of short-term character, in money assets; it meets the short-term requirements of borrowers and provides liquidity or cash to the lenders. It is the place where short-term surplus investible funds at the disposal of financial and other institutions and individuals are bid by borrowers agents comprising institutions and individuals and also the government itself.

GENERAL CHARACTERISTICS

1. Short-term funds are borrowed and lent. 2. No fixed place for conduct of operations (Well developed communication system required) 3. Dealings may be conducted with or without brokers 4. The financial assets dealt in are close substitutes for money 5. Funds are traded for a maximum period of 1 year 6. Presence of large number of submarkets such as inter-bank call money, bills rediscounting,etc

OBJECTIVES

1. Providing an equilibrium mechanism for ironing out short-term surplus and deficits. 2. Providing a focal point for central bank intervention for influencing liquidity in the economy. 3. Providing access to users of short-term money to meet their requirements at a reasonable price.

IMPORTANCE

1. Source of capital. 2. Ideal Investment 3. Effective Monetary management( monetary policy) 4. Economic development 5. Efficient banking system 6. Facilitating Trade 7. Helpful to Government

GENERAL FUNCTIONS

1. Investment function 2. Financing function 3. Facilitating function

SEGMENTS/SUBMARKETS

1. Call money market 2. Collateral loan market 3. Commercial Bill market 4. Treasury Bill market 5. Acceptance market 6. Discount market

FINANCIAL INSTITUTIONS

Commercial banks NBFCs Acceptance houses Central Bank

FINANCIAL INSTITUTIONS

Commercial banks
#Major player in MM,most imp segment of MM #Use short term deposits for funding #Invest funds for discounting commercial & TBs #Liquidity & Profitability are 2 cardinal principles

NBFCs
#Insurance & Leasing Cos #Lend to business corporations #Make decisive impact on MM operations thru their variety of activities

FINANCIAL INSTITUTIONS

Acceptance houses(AH)
#Specialize in task of acceptance of Commercial Bills #Imp constituent of London MM #Exchange bills on behalf of customers #Bills accepted by AH are easily discountable in MM #Discounting of such accepted bills is done by another specialized agency known as Discount Houses

Central Bank:
#Imp part of MM of a country #Guidance to various segments of MM

FINANCIAL INSTITUTIONS

Central Bank:
#Functions of Central Bank-Note issue, acting as a govt banker and bankers bank, lender of last resort, custodian of foreign exchange #Catalyst in achieving the goal of efficient monetary mgmt(EMM) to the country #Works for integrated development of various segments of Banking & Financial Segment #Credit Control Measures as a part of EMM #Efficiency of above measures is determined by efficiency & sensitivity of MM

DEVELOPED MONEY MARKETCHARACTERISTICS/ESSENTIALS

A developed money market is expected to possess the following essential characteristics. 1. Developed banking and financial system 2. Powerful Central Bank 3. Integrated Interest Structure 4. Specialized submarkets 5. Efficient coordination 6. High sensitivity

Developed MM

7. Large Number of instruments and dealers 8. Cheap remittance facilities

9. Adequacy of Funds 10.Highly organized banking system Other Features 1. A large volume of international trade 2. Rapid and massive industrial development 3. Political stability 4. Freedom of investment

Money Market and Capital Market

Similarities 1. Transfer of resources 2. Role of commercial banks 3. Liquidity adjustments 4. Flow of funds 5. Preference of investors 6. Influence of interest rates

Distinction
Sl No Point of difference Term of Finance Main constituents Money Market Capital Market

1 2

Short-term funds Call money market, Treasury bill market, CDs market, CPs market Etc

Long term funds Primary and secondary markets, with stock exchanges acting as a bridge Moderate to high risk High Moderate to low Central Bank, SEBI

3 4 5 6

Risk involved Price fluctuations Liquidity Regulator

Low credit and market risk Not much High Central Bank

INDIAN MM

History Till 1935, when the RBI was set up, the Indian money market remained highly disintegrated, unrecognized, narrow, shallow and therefore, very backward. The planned economic development that commenced in the year 1951 marked an important beginning in the area of the Indian money market. The nationalization of banks in 1969, setting up of various committees such as the Sukhmoy Chakraborty Committee (1982), the Vaghul Working Group (1986), the setting up of DFHI (1988), the Securities Trading Corporation of India (1994) and

Indian MM

The commencement of LPG process in 1991 gave a further fillip for the integrated and efficient development of Indian money market. Organised Vs Unorganised Money Markets The Indian money market predominantly consists of organised and unorganised money market.

Distinction between organised and unorganised money markets

Sl No Features Organised sector Unorganised sector

Interest rates Institutions

Reasonable real interest rates The whole banking system, NBFCs like UTI, Insurance cos etc T Bills, CDs, CPs, call money, liquid funds, derivatives etc

Exorbitant rate of interest Indigenous bankers, money lenders, chit funds etc. Hundis, P notes, B/E etc Not genuine, largely accommodative in nature

Instruments

Genuinenes Transactions must be s genuine

Defects of Indian Money Market

1. Unorganized money market 2. Absence of integration 3. Inadequate national market 4. Interest rate disparity 5. Deficient bill market 6. Limited funds 7. Seasonal variation 8. Unstable conditions

Defects of Indian Money Market

9. Lack of well organized banking system 10. Inadequate instruments 11. Inadequate foreign funds 12. Constricted secondary market 13. Limited participants.

Measures for Development

1. Infrastructure 2. Treasury bills 3. Developing bill culture 4. Innovative submarkets 5. Credit control measures 6. Repo operations 7. MMMFs 8. Derivative products

Global Money Markets

London Money Market-Lombard Worlds oldest/most developed & leading MM Introduction The Structure A) The Banking system B) Accepting houses C) Discount houses D) Bill brokers

New York Money Market

Second well developed MM(Americas biggest financial center) The wall street The Federal reserve system Interconnected markets A) Local market B) Commercial banks C) Open market Government securities