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Money Market

market is a place for trading in money and short term financial assets that are close substitutes of money. an opportunity for balancing the short term surplus funds of investors with short term requirements of borrowers.


Market Do

for short term loans i.e. less than one year.

not deal in money but near money assets. market is not a place but an activity.

Money The

transactions are carried out by telephone, mail etc. among people who may have never met one other. Bombay money market, New York money



The centre for dealings, mainly short term character, in monetary assets; it meets the short term requirements of borrowers and provide liquidity and cash to the lenders.

Characteristics of Money Market


occupies an important position in the money market. short term funds to various borrowers.



mechanism for cost control, credit control.


businessmen to invest their temporary surplus

Characteristics of a developed money Market

Developed commercial banking system Presence of a central bank Availability of ample resources Near money assets Sub markets

Players in Indian Money Market



banks Financial institutions Brokers Corporate units Discount and finance house of India

Functions Of Money Market

1. Economic development of the country: Provide short term funds

regular supply of funds through its sub- markets and instruments in economic development by providing financial assistance to trade, commerce and industry.


2. Profitable investment: o Helps commercial banks to use their excess reserves in profitable investments. Maximize profits by investing their excess reserves.
o Excess reserves are invested in near money assets which

are highly liquid and can be easily converted into cash.

3. Help to government: Borrows short term funds at very low interest rates. 4. Help to commercial Bank: the banks with deficit of funds can raise funds from money market at a low rate of interest. 5. Encouragement to Savings and investment: it encourages saving and investment by transferring funds from one sector to another sector.

Money Market




Collateral loan Market

Acceptance Market

Call money Market


Bill Market

1. Call Money Market

It is the market for very short term funds, also called money at call and short notice.
These loans are given for a very short period not exceeding 7 days. More often from day to day or for overnight only i.e. 24 hours.

Highly liquid market

Loans are unsecured

2. Collateral loan market

Backed by the securities, stocks and bonds. Collateral securities may be in the form of some valuable say govt. bonds which are easily marketable and do not fluctuate much in prices. The collateral is returned to the borrower when the loan is repaid

Once the borrower is unable to repay the loan, the collateral becomes the property of the lender.
These loans are given for few months.

3. Acceptance Market
Bankers acceptance

is a draft drawn by an individual or a firm upon a bank and accepted by the bank whereby it is ordered to pay to the order of a designated party or to bearer a certain sum of money at a specified time in future. market where the bankers acceptance are easily sold and discounted is known as acceptance market.


bankers acceptance can be easily discounted in the money market because they carry signature of the bankers.

4. Bill Market

is a market in which short term papers or bills are bought and sold.

Bills of exchange

Short term papers

Treasury bills

bill of exchange is a written unconditional order which is signed by the drawer requiring the drawee to pay on demand or at fixed future time, a definite sum of money. bills are government papers securities for a short period usually of 91 days duration. bills are promissory notes of the government to pay a specified sum after a specified period.




1. Commercial Banks

are the backbone of the money market.


banks use their short term deposits for financing trade and commerce for short period. invest their surplus funds in discounting bills of exchange. banks put their excess reserves in different forms or channels of investments which satisfy their liquidity and profitability needs.



2. Central bank

a vital role authority

Monetary Acts

as an apex institution of last resort and guardian of money market


Controller Raises

or reduces the money supply and credit to ensure economic stability in the economy.

3. Acceptance Houses

as intermediaries between importers and exporters and between lenders and borrowers in the short period. in acceptance of commercial bills/trade



4. Non-banking financial intermediaries


to lending and borrowing of short term funds in the money market. Insurance companies, provident funds etc. investment houses,


Money market instruments

Treasury bills Commercial Bills

Call and short notice money market


REPO Commercial Paper

Certificate of deposits

1. Commercial bills

instrument containing an unconditional order Signed by the drawer Directing a certain person to pay a certain sum of money only to, or order of a certain person, or to bearer of an instrument at a fixed time in future or on demand Bill drawn when goods are sold on credit Buyer accepts the bill and return to seller The seller may either retain the bill or get it discounted

2. Treasury Bills

is a short term government security

of 91 days, 180 days or 365 days duration



by central bank on behalf of government


fixed rate of interest payable on basis of competitive bidding


3. Call and short notice money


money refers to money given for very short period


for a day or overnight but not exceeding seven days in any circumstances. money refers to a money given for upto 14 days

Notice If If

the loan is given for 1 day Money at call

loan cannot be called back on demand and will require notice of atleast 3 days Money at short notice

4. Certificate of deposit

are marketable receipts in bearer or registered form of funds deposited in a bank for a specified period at specified rate of interest transferable



and riskless in terms of default of payment of interest and principal.

5. Commercial Papers

are short term usance promissory notes


by reputed companies with good credit rating and having sufficient tangible assets by endorsement and delivery



issued by banks, public utilities, insurance and finance companies.


REPO, holder of securities sells them to an investor with an agreement to repurchase at predetermined date and rate. called ready forward transaction as it involves selling a security on spot basis and repurchasing the same on forward basis.


Defects in Indian money market

Existence of unorganized money market Seasonal diversity of money market Lack of integration Disparity in interest rates Lack of very well organized banking system

Reforms in Indian Money Market

Development of money market instruments

Deregulation of interest rates

Institutional development

Permission to foreign institutional investors