What does the Money Market in India Mean?
The organization which allows people to borrow and lend finances for a short period is termed as “Money Market”. The time period is less than a year.
In the money market, financial instruments are traded for the short term and they have high liquidity. Some examples of these financial instruments include commercial papers, certificates of deposits, treasury bills, etc. It is recommended to invest in the money market if you require high liquidity of funds.
But like with every form of investment, even this comes with certain risks. Firstly, the money market is not regulated, therefore is unstructured. The overall returns of the money market is less compared to other financial instruments but provide the investor with various products to choose from. Secondly, being default on commercial papers and other securities can also hamper your portfolio.
To visualize in general, a money market account works similar to a bank account. The idea behind it is also similar, that is you deposit some money in the account and the bank pays a certain interest on it. To open a money market account, you need a simple set of documents typically that includes your personal information. Note that depending on the bank, you may need to fulfill a minimum initial deposit limit.
Remember this – a money market account is like a hybrid of both savings and checking accounts. You can save cash here and earn interest on the deposit like a savings account, but you can also withdraw money anytime through a debit card like a checking account. But of course, the number of allowed transactions and the number of cheques are limited.
Opening a money market account is great as an emergency fund or if you are saving to build/buy a house etc.
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What are the Two Types of Finances?
- The first type is with the purpose to meet day-t0-day expenses, including salary payments, raw material purchase, utility bills etc.
- The second type is to meet the capital requirements of the company which may be used to purchase new machinery or upgrade existing ones.
One challenge faced by the financial system is maintaining liquidity. Liquidity may not be available when the expenditures and payments do not be in sync. To be able to meet all the receipts at a time by the financial systems through purchasing the shortfall funds of the “Money Market” paved its way.
Characteristics of the Money Market in India
- Money market in India is not limited to any land, country, or geography and hence, can be widespread.
- Transactions are made in the form of money or funds.
- It is purely based on funds and assets for a short period of time, which are easily convertible in money i.e., near money.
- Not limited to the single market but also has various submarkets so it also trades a variety of instruments.
- This market acts as a link between other banks and the Reserve Bank of India, providing information about governance and monetary policy.
- No broker/third party is required to trade. So, these are the features that make the currency market stronger.
Goal of The Money Market in India
- Help users with funds for a short period to meet their requirements quickly, adequately and at reasonable costs.
- Provide parking spaces to use excess funds in a short period.
- Help get rid of deficits in the short term.
- Provide means to the RBI to regulate and influence liquidity
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Structure/Segment of the Money Market
It is said to be organized because it is included systematically in the RBI. It has the SBI, RBI, and its seven Affiliated institutions, 20 state-owned banks, other formal and informal commercial banks, regional rural banks, and foreign banks.
The Unorganized sector includes many local bankers and rural money lenders. The chaotic money market is an old market, mainly composed of local bankers, usurers, etc.
- The NBFC (Non-banking financial institutions) include the GIC (General Insurance Corporation of India Limited), LIC and other subsidiaries like the UTI(Unit Trust of India) which are also a part of the market. The banks are directly related.
- The unorganized sector has money-lenders and localized banks. It falls into this sector because the activities are not regulated by the Reserve Bank of India.
- The lenders operate nationwide, but they are not related to each other.
- Commercial Banks provide indigenous banks with rediscount facilities in return they link with RBI. Such an organization has weak links with the Reserve Bank of India and is more organized.
- Short-term surplus funds are made available to the organized market through banks by Quasi(Partially) Governments and large companies.
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The Components of the Money Market in India
The main components are lenders who provide short-term loans and borrowers who need short-term loans.
1. Funds Supply
The organized money market is that part that comes under the regulatory ambit of RBI & SEBI. Government (central and state), Discount and Finance Houses in India (DFHI), mutual funds, companies, commercial or cooperative banks, public sector companies, insurance companies, financial institutions, and non-bank financial companies (NBFCs) are the major players in India’s organized money market. They are regulated by the Reserve Bank of India.
These sectors are not controlled and coordinated by the RBI and thus, are not organized. They are composed of local bankers and rural loan banks.
2. Demands of Supply
The borrowers include:
- Central Government
- State Government
- Local governments, such as village committees, municipalities etc.
- Industrial traders, importers, exporters and farmers.
- The public.
What is the Organized Money Market in India Sub-Market?
The organized sector is divided into these sub-markets:
Call Money Market
This provides an institutional system that allows some banks to provide temporary surpluses due to a lack of funds. Mostly, the banks are a part of this type of market, and the SBI acts as the lender. The broker keeps in contact with the bank, establishes a connection between the credit bank and the borrowing bank, and manages the money market as needed.
Treasury Bill Market
It is a risk-free, profitable, and highly liquid investment outlet for short-term surpluses of various financial institutions. It does not contain significant risk, is profitable, and is a good liquidity option for some financial institutions. It is a major way through which the government raises money.
Business Letter Market
The business letter market deals with business letters from companies that conduct business. These bills usually are for three months. This invoice is a promise to pay the seller of the item a specified amount within the time limit specified by the buyer of the item.
Collateral Loan Market
These markets deal with the collateral loan that is loans backed by security. In India’s secured credit market, commercial banks provide short-term loans with government bonds, government stocks, and bonds as collateral.
Money Market in India: Another Aspect
An important aspect of the Indian money market investment is that private investors have very limited opportunities for direct participation. Recently, NSE has been providing a series of money market tools for retail investors. However, due to the large business volume and low liquidity, private investors cannot use it. But nothing to worry much about on this front. As a retail investor in India, you can passively invest in any of these instruments through a money market mutual fund.
Final Thoughts – Money Market in India
So, here’s all you need to know about the money market in India. It is an important nerve in a country’s financial system and maintains a balance between supply and demand.
Frequently Asked Questions
How is the money market necessary overall?
The money market is balanced on supply and demand for monetary transactions.
Is the money market the same as the stock market?
No. The basic difference is that the money market is not limited to a certain geography.
Is money marketing risk-free?
It is a profitable, risk-free, and liquid form of investment outlet.
Why is it called the money market?
The money market is a very liquid and very reliable short-term debt market. Because of these characteristics, they are usually regarded as cash equivalents that can be converted into cash in a short period.
Why is the money market important?
The currency market is essential to the normal operation of modern finance. It enables depositors to borrow money from those who need short-term credit and allocate funds to the most productive uses. These loans are usually paid overnight or within days or weeks.