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D.Babjohn1, V.Swapna2, E.Sreenivasa Reddy3, K.Hareesh4

Asst.Prof, Department of Management, Gates Institute of Technology, Gooty, A.P
P.G Student, Department of Management Studies, Gates Institute of Technology, Gooty, A.P

The Money market in India correlation for short-term funds with maturity ranging from overnight to one year
in India including financial instruments that are deemed to be close substitutes of money. Similar to developed
economies the Indian money market is diversified and has evolved through many stages, from the conventional
platform of treasury bills and call money to commercial paper, certificates of deposit, repos, forward rate
agreements and most recently interest rate swaps.The India money market is a monetary system that involves
the lending and borrowing of short-term funds. India money market has seen exponential growth just after the
globalization initiative in 1992. It has been observed that financial institutions do employ money market
instruments for financing short-term monetary requirements of various sectors such as agriculture, finance and
manufacturing. The performance of the India money market has been outstanding in the past 20 years.
The Indian money market consists of diverse sub-markets, each dealing in a particular type of short-term credit.
The money market fulfills the borrowing and investment requirements of providers and users of short-term
funds, and balances the demand for and supply of short-term funds by providing an equilibrium mechanism. It
also serves as a focal point for the central bank's intervention in the market. A well regulated financial sector is
essential in globalize economy. Financial innovation has contributed in the economic development. A financial
institution is an institution that provides financial services for its clients or members. Probably the most
important financial service provided by financial institutions is acting as financial intermediaries. Most
financial institutions are highly regulated by government.

Keywords: Money Market, Financial Insturments, commercial Papers, Certificates of deposit

,Treasury Bills.


Definition: Money market basically refers to a section of the financial market where financial instruments with
high liquidity and short-term maturities are traded. Money market has become a component of the financial
market for buying and selling of securities of short-term maturities, of one year or less, such as treasury bills and
commercial papers.
Over-the-counter trading is done in the money market and it is a wholesale process. It is used by the participants
as a way of borrowing and lending for the short term.
Description: Money market consists of negotiable instruments such as treasury bills, commercial papers. and
certificates of deposit. It is used by many participants, including companies, to raise funds by selling

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commercial papers in the market. Money market is considered a safe place to invest due to the high liquidity of
It has certain risks which investors should be aware of, one of them being default on securities such as
commercial papers. Money market consists of various financial institutions and dealers, who seek to borrow or
loan securities. It is the best source to invest in liquid assets. The money market is an unregulated and informal
market and not structured like the capital markets, where things are organized in a formal way. Money market
gives lesser return to investors who invest in it but provides a variety of products. Withdrawing money from the
money market is easier. Money markets are different from capital markets as they are for a shorter period of
time while capital markets are used for longer time periods. Meanwhile, a mortgage lender can create protection
against a fallout risk by entering an agreement with an agency or private conduit for operational, rather than
mandatory, delivery of the mortgage. In such an agreement, the mortgage originator effectively buys an option,
which gives the lender the right, but not the obligation, to deliver the mortgage. Against that, the private conduit
charges a fee for allowing optional delivery.


The money market is not a market in the usual sense of the term. It does not mean a single trading place or
trading organisation dealing in money. But it is a collective name given to the various forms and institutions
that deal with the various grades of near money.
It is a market in short-term funds in which the lenders of money meet the borrowers of money. The lenders of
money are the Reserve Bank of India, all scheduled commercial banks, co-operative banks, financial institutions
like the LIC, UTI, GIC, foreign exchange banks, and indigenous bankers, moneylenders, etc.
The borrowers of money are the Central Government, State Governments, local bodies, traders, merchants,
businessmen, exporters, importers, companies, farmers, and the public. Thus the money market is a market for
monetary assets in which the short-term requirements of the borrowers are met in order to provide liquidity or
cash to the lenders.


The structure of money market in India comprises of both organised and unorganised markets. The organised
money market consists of the Reserve Bank of India, all scheduled commercial banks, cooperative banks, and
financial institutions like Life Insurance Corporation, General Insurance Corporation and Unit Trust of India and
foreign exchange banks, and DFHI.
The unorganised money market includes indigenous bankers, moneylenders, both professional and non-
professional traders, merchants, landlords, pawn brokers, nidhis, and chit funds. Nidhis are mutual loan
associations and chit funds are voluntary loan associations for mobilising savings.
Characteristics of the Unorganised Money Market in India:
1. Personal Touch:
The moneylenders have a personal touch with the borrowers. The moneylender knows every borrower
personally in the village because the latter resides there.
2. Informality:
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The moneylenders have considerable amount of informality in dealing with their borrowers.
3. Flexibility in Loans:
There is no rigidity in loan transactions. The borrower can have more or less amount of loan according to his
requirements depending upon the nature of security or his goodwill with the moneylender.
4. Multiplicity of Lending Activities:
Mostly people do not specialise in moneylending alone. They combine moneylending with other economic
activities. A moneylender may supply goods on loan instead of money in cash.
5. Varied Interest Rates:
There is multiplicity of interest rates. Interest rates are much higher than rates in the developed sector of the
money market. The interest rates are not even uniform. The rate depends on the need of the borrower, the
amount of loan, the time for which it is required and the nature of security. The greater the urgency, the higher
will be the interest rate.
6. Defective System of Accounting:
In the unorganised sector of the money market, the system of maintaining accounts is highly defective. Proper
accounts are never maintained. Formal receipts are not issued for the interest charged and the principal repaid by
the borrowers. Besides, there is utmost secrecy in maintaining accounts and lending procedures. The accounts of
the moneylenders are not liable to checking by any higher authority.
7. Absence of Link with the Developed Money Market:
The undeveloped sector is not linked with the developed sector of the money market. The former works
independently of the latter and is also not under the control of the developed market. This has the effect of
reducing the volume of monetary transactions and savings, and prevents their use in productive investments.


The money market performs a number of functions in the Indian economy:
1. It provides short-term funds to public and private institutions needing such financing for their working capital
requirements. It is done by discounting trade bills through commercial banks, discount houses, brokers and
acceptance houses. Thus the money market helps the development of commerce, industry and trade within and
outside the country.
2. It provides an opportunity to banks and other institutions to use their surplus funds profitably for a short
period. These institutions include not only commercial banks and other financial institutions but also large non-
financial business corporations, states and local governments.
3. The money market removes the necessity of borrowing by the commercial banks from the Reserve Bank of
India. If the former find their reserves short of cash requirements they can call in some of their loans from the
money market. The commercial banks prefer to recall their loans rather than borrow from the central bank at a
higher rate of interest.
4. The money market helps the government in borrowing short-term funds at low interest rate on the basis of
treasury bills. On the other hand, if the government were to issue paper money or borrow from the Reserve Bank
of India, it would lead to inflationary pressures in the economy.

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5. The money market helps in the successful implementation of the monetary policies of the central bank. It is
through the money market that the Reserve Bank of India is in a position to control the banking system and
thereby influence commerce and industry.
6. By facilitating the transfer of funds from one sector to another, the money market helps in financial mobility.
Mobility in the flow of funds is essential for the development of commerce and industry in an economy.
7. One of the important functions of the money market, is that it promotes liquidity and safety of financial
assets. It thus encourages savings and investment.
8. The money market brings equilibrium between the demand and supply of loanable funds. This it does by
allocating savings into investment channels. In this way, it also helps in rational allocation of resources.
9. As the money market deals in near-money assets and not money proper it helps in economising the use of
cash. It thus provides a convenient and safe way of transferring funds, from one place to another, thereby
immensely helping commerce and industry.


The Securities and Exchange Commission (SEC) passed new rules governing money market funds in mid-2014.
These rules are designed to combat potential liquidity problems should the economy experience another
financial meltdown on the order of 2008-2009. Traditionally money market funds have been the place where
many investors park cash. Shares of the funds maintained a constant $1 per share value and there was immediate
liquidity. The new rules will change some of these attributes for some money market funds. Here is a guide to
the new rules and where they will apply.
Floating NAV
Certain money market funds will have a floating net asset value (NAV) once the new rules take effect. These
funds will no longer be priced at a constant $1 per share. This will impact institutional municipal money market
funds and institutional prime/general purpose money market funds only. Retail money market funds will not be
impacted by this rule.

The new rules call for two types of liquidity fees that could impose pretty stiff fees on redemptions, especially
for these traditionally low return vehicles. If the money market funds weekly liquid assets fall below 30% of
the funds total assets then the board of directors of the fund may impose a 2% fee on fund redemptions. If the
money market funds weekly liquid assets fall below 10% of the funds total assets, redemptions would be
subject to a 1% percent redemption fee unless the board of directors votes otherwise. Both institutional and
retail municipal and prime/general purpose money market funds are subject to these new rules. If a money
market funds liquid assets were to fall below 30% of total assets the funds board of directors will be allowed to
vote on whether to restrict all fund redemptions for 10 days. Given that money market funds are typically used
for their low investment risk and liquidity the imposition of redemption gates could be problematic for many
investors.U.S. Treasury money market funds and funds that invest only in U.S. government issued securities are
exempt from the new rules including the floating NAV, redemption gates and redemption fees. This may result
in these being the money market funds of choice for many investors going forward.
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Retail money market funds are essentially owned by individual investors. Note that money market funds offered
within a 401(k) are deemed to be owned by individuals as well. Institutional money market funds are defined as
being open to any shareholders including individuals, corporations, small businesses as well as institutional
accounts such as those for endowments and foundations.
Municipal money market funds investment mostly in municipal and other government money market and fixed-
income vehicles that provide tax-exempt income either at the national level or for a particular state.
Governmental money market funds invest in governmental securities, while U.S.Treasury money market funds
invest in Treasury instruments. Prime or general purpose money market funds invest across the spectrum of
government securities and non-governmental money market instruments.
Implications for investors
Fidelity Investments is in the process of asking shareholders to approve the conversion of three of its money
market funds to governmental funds in order to avoid the new rules and restrictions. While it is likely that many
investors will prefer governmental money market funds that will allow them to avoid the floating NAV and
redemption restrictions, it is also likely that these money funds will offer lower rates of interest going
forward.Certainly for funds that will be needed in the near-term money market funds will remain a viable
option, especially the governmental funds. However in many cases investors and financial advisors might look
at other options for the lower risk, shorter-term fixed income portion of their portfolios. These might include
short-term bond funds and other alternatives. Another option that many broker-dealers are considering is
moving their clients sweep account away from money market funds altogether and into bank deposit programs
offered via banking affiliates.
Alternatives With Added Risk
Since the announcement of these new rules at least a dozen new short-term bond mutual funds have been
launched including Vanguards Ultra Short-Term Bond Fund (VUBFX), although according to Vanguard the
launch was not related to the new money market fund rules.
Short-term bond funds will offer a higher yield than money market funds but also carry more market risk based
on their underlying holdings. According to Morningstar Inc. (MORN) the average ultrashort-term bond fund lost
7.89% during 2008. Financial advisors would be wise to remind clients seeking a bit more yield of the potential
risks of assuming these funds are a substitute for money market funds.
The Bottom Line
In an attempt to prevent a collapse of our financial system in the event of another economic meltdown on the
order of the financial crisis of 2008-2009, the SEC passed a number of changes in the rules governing money
market funds. Some funds will have redemption fees imposed upon shareholders in certain cases, while others
will see their NAV be allowed to fluctuate from the traditional stable $1 per share. These changes will force
investors and financial advisors to reexamine how they use money market funds and also to look for

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The money market specializes in debt securities that mature in less than one year. Money market securities are
very liquid, and are considered very safe. As a result, they offer a lower return than other securities. The easiest
way for individuals to gain access to the money market is through a money market mutual fund.

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