In this chapter

Money Market
It is a market for financial assets that are close substitute for money. It is a market for overnight to short term funds and instruments having a maturity period of one or less than one year.

 Money market is a market for short-term financial assets which are near substitutes for money. Money market instruments are liquid and can be turned over quickly at low costs. Money market instruments are for short duration, generally defined as less than one year.

Definition
The money market is the collective name given to the various firms and institutions that deal in the various grades of near money.-Geottery Crowther
A market for short term financial assets that are close substitutes for money, facilitates the exchange of money for new financial claims in the primary market as also for financial claims, already issued in the secondary market.-RBI

Characteristics of Money Market

Not a single market but collection of markets for several instruments. Wholesale market of short term debt instruments. Its principal feature is honour where the creditworthiness of the participant is important. Need based market.

Conti.
It is the market for short term funds with maturity ranging from overnight to one year Provides an avenue for the central bank intervention in influencing both quantum and liquidity in the financial system. The central bank strives to align money market rates with the key policy rate. Money market influences the effectiveness of monetary policy.

Functions of the Money Market

Provide a balancing mechanism to even out the demand for and supply of short term funds. Provide a focal point for central bank intervention for influencing liquidity and general level of interest rates in the economy. Provide reasonable assess to suppliers and users of short term funds to fulfill their borrowings and investment requirements at an efficient market clearing price. Facilitates the development of a market for longer term securities. The interest rates for extremely short term use of money serve as a benchmark for long term financial instruments.

Benefits of an efficient Money Market

Provides a stable source of funds to banks. Encourage development of non bank entities. Facilitates Govt. market borrowings. Makes effective monetary policy action. Helps in pricing different floating interest products.

The Indian Money Market

The average turn over of Indian Money Market is over Rs. 40,000 crores daily. 2% of the annual GDP of India gates traded in the money market in just one day.

Role of RBI in the Money Market

To ensure that liquidity and short term interest rates are maintained at levels consistent with the monetary policy objectives of maintaining price stability; To ensure an adequate flow of credit to the productive sector of the economy; It influences liquidity and interest rates through a number of operating instruments cash reserve requirements of banks, conduct of open market operations, repos, change in bank rates.

Link Between the Money Market and the Monetary Policy in India
The Monetary Policy represents policies, objectives and instruments directed towards regulating money supply and the cost and availability of credit in the economy. Money market provides a balancing mechanism to even out the demand for and supply of short term funds. The monetary policy in India is an adjunct of the economic policy. The objectives of the monetary policy are not different from those of the economic policy.

Link Between the Money Market and the Monetary Policy in India
Money market provides a focal point for central bank intervention for influencing liquidity and general level of interest rates in the economy. In the monetary policy framework, broad objectives are prescribed and an operating framework of policy instruments to achieve them is formulated. Money market facilitates the development of a market for longer term securities. RBI uses multiple instruments to ensure that appropriate liquidity is maintained in the system.

Different Money Market Instruments

Treasury Bills. Commercial Papers. Commercial Bills. Certificate of Deposit. Call/ Notice Money Market.

Classification of Money Market

Call money market Gilt edge market Capital market Collateral loan market Acceptance market Bill market-Commercial bill and treasury bill

Commercial Bill
A Bill of exchange contains a written order from the creditor to the debtor, to pay a certain sum, to a certain person, after a certain period It is for short period ranging between 2 months and 6 months.

TYPES OF BILLS
Demand and Usance/time bills Clean bills and documentary bills-railway receipts, lottery receits etc. Inland and foreign bills Export bills and import bills Indigenous bills Accommodation bills and supply bills

ACCEPTANCE MARKET
The Acceptance Market refers to the Market where short genuine Trade Bills are accepted by financial intermediaries. In London, there are specialist firms called Market Acceptance House which accept bills drawn by trader and impart greater marketability to such bills. In India, there are no Acceptance Houses but The Commercial Banks undertake this business to some extent.

TREASURY BILLS MARKET

Treasury Bills represent short term borrowing of the Government. Treasury Bills Market refers to the Market where these bills are bought and sold. A Treasury Bill is nothing but a promissory note issued by the Government under discount for a specified period stated therein. It is purely a finance bill since it does not arise out of any trade transaction.

 Treasury Bills are issued only by the RBI on behalf of the Government. It is lowest one in the entire structure of interest rates in the country because of short term maturity and high degree of liquidity and security.

TYPES OF TREASURY BILLS

1. Ordinary or Regular :

Ordinary Treasury Bills are issued to the public and other financial institutions for meeting the short term financial requirements of the Central Government.
2. Adhoc : Adhoc Bills are always issued by favor of RBI only. They are not sold through tender or auction. They are purchased by the RBI on tap with authority to issue currency notes against them.

Organized Money Market

RBI Commercial bank Development bank Financial institutions like LIC,UTI and general insurance Co-operative institutions Non banking companies

Unorganized Money Market

Indigenous bankers Money lenders Nidhis Chit fund

conclusion
Since 1990s, the money market has udergone a significant transformation in terms of instruments, participants, and technological infrastructure.