The money market is a market for financial assets that are close substitutes 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. It is not a place (like the Stock Market), but an activity conducted by telephone. The money market constitutes a very important segment of the Indian financial system. The main players are: Reserve Bank of India (RBI), Discount and Finance House of India (DFHI), mutual funds, banks, corporate investors, non-banking finance companies (NBFCs), state governments, provident funds, primary dealers, Securities Trading Corporation of India (STCI), public sector undertaking (PSUs), non-residents Indians and overseas corporate bodies. A well-functioning money market 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 longer-term financial instrument. An efficient money market benefits a number of players. It is provides a stable source of funds to banks in addition to deposits, allowing alternative financing structures and competition. It allows banks to manage risks arising from interest rate fluctuations and to manage the maturity structure of their assets and liabilities.
[...] The call money market is a market for very short-term funds repayable on demand and with a maturity period varying between one day to a fortnight. When money is borrowed or lent for a day, it is known as call (overnight) money. Intervening holidays and/or Sundays are excluded for this purpose. When money is borrowed or lend for more than a day and upto 14 days, it is known as notice money. No collateral security is required to cover these transactions. [...]
[...] Money Market Instruments The instruments traded in the Indian money market are Treasury Bills (T-bills) ii) Call/notice money market- Call (overnight) and short notice (up to 14 days) iii) Commercial papers iv) Certificates of deposit Commercial Bills Call/notice money market and treasury bills form the most important segments of the Indian money market. Treasury bills, call money market, and certificates of deposit provide liquidity for government and banks while commercial paper and commercial bills provide liquidity for the commercial sector and intermediaries. [...]
[...] The Reverse Bank's intervention is necessary as there is a close linkage between the call money market and other segments of the money market and the foreign exchange market. Term Money Market Beyond the call/notice money market is the term money market. This money market is one beyond the overnight tenor, with maturity ranging between the three months to one year. In other words, a term money market is one where funds are traded upto a period of three to six months. [...]
[...] In case of need for funds, banks can rediscount the bills in the money market and get ready money. Commercial bills ensure improved quality of lending, liquidity, and efficiency in money management. It is fully secured for investment since it is transferable by endorsement and delivery and it has high degree of liquidity. The bills market is highly developed in industrial countries but it is very limited in India. Commercial bills rediscounted by commercial banks with financial institutions amount to less than Rs crore. [...]
[...] A developed interbank market provides the basis for growth and liquidity in the money market including the secondary market for commercial paper and treasury bills. An efficient money market encourages the development of non-bank intermediaries, thus increasing the competition for funds. Savers get a wide array of saving instruments to choose from and invest their savings. A liquid money market provides an effective source of long-term finance to borrowers. Large borrowers can lower the cost of raising funds and manage short-term funding or surplus efficiently. [...]
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