INTRODUCTION OF MONEY MARKET :
Money market is a very important segment of a financial system. Monetary assets of short-term nature up to one year and financial assets that are close substitutes for money are dealt in the money market. Money market instruments have the characteristics of liquidity (quick conversion into money), minimum transaction cost and no loss in value. Excess funds are deployed in the money market, which in turn is availed of to meet temporary shortages of cash and other obligations. Money market provides access to providers and users of short-term funds to fulfill their investments and borrowings requirements respectively at an efficient market clearing price. It performs the crucial role of providing an equilibrating mechanism to even out short-term liquidity, surpluses and deficits and in the process, facilitates the conduct of monetary policy. The money market is one of the primary mechanism through which the Central Bank influences liquidity and the general level of interest rates in an economy. The Bank’s interventions to influence liquidity serve as a signaling-device for other segments of the financial system.
The money market functions as a wholesale debt market for low-risk, highly liquid, short term instruments. Funds are available in this market for periods ranging from a single day upto a year. Mostly government, banks and financial institutions dominate this market. It is a formal financial market that deals with short-term fund management.
Though there are a few types of players in money market, the role and the level of participation by each type of player differs largely.
Government is an active player in the money market and in most of the economies; it constitutes the biggest borrower in this market. Both, Government securities (G-secs) and Treasury bill (T-bill) is a security issued by RBI on behalf of the Government of India to meet the latter’s borrowing for financing fiscal deficit. Apart from functioning as a banker to the government, the central bank (RBI) also regulates the money market and issues guidelines to govern the money market operations.
Another dominant player in the money market is the banking industry. Banks mobilize deposits of savers in lending to investors of the economy. This process is known as credit creation. However, banks are not allowed to lent out the entire amount for extending credit for investment. In order to promote certain prudential norms for healthy banking practices, most of the developed economies require all commercial banks to maintain minimum liquid and cash reserves in form of Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) framed under the policies of central banks. The banks are required to ensure that these reserve requirements are met before
directing deposits on their credit plans. If banks fall short of these statutory reserve requirements, the deficit amount can be raised using the money market.
Other institutional players like financial institutions, corporates, mutual funds (MFs), Foreign institutional investors (FIIs) etc. also transact in money market to fulfill their respective short term finance deficits and short falls. However, the degree of participation of these players depends largely on the regulations formulated by the regulating authorities in an economy. For instance, the level of participation of the FIIs in the Indian money market is restricted to investment in government securities only.