Money Market for short-term funds is understood as a market, whereby loans and borrowings of funds vary between overnight and a year. It is an important part of the financial system which helps companies, banks, financial institutions, government agencies, etc. meet the short-term and very short-term demands.
Salient Features of Money Market:
The transaction volume is large, which is a wholesale market.
Trading is done by telephone, which is then confirmed in writing via e-mail.
Included are banks, mutual funds, central banks and investment institutions.
The participants in the money market have an impersonal relationship, which is why there is pure competition.
The operations on the money market focus on a specific area that serves a particular region or area. The area may differ depending on market size and needs.
Five major monetary segments are Deposit Certificate (CD), Commercial Paper, Swaps, Repo and Treasury Securities.
Money Market Instruments:
Call/Note: If the money collected or borrowed on demand goes from one day to 14 days for a very short period then it can be called notice and when it’s more than 14 days this is called call money.
Treasury Bills: These are short-term, negotiable central-bank, government-sponsored financial assets to overcome liquidity deficiencies.
Trade bills: A trade bill is a negotiable, less risky, self-liquidating device. These bills improve the payment obligation on the date specified when the goods are purchased under credit.
In the money market, the financial assets handled have high liquidity, low transaction costs, low risk and no value loss. And so, for these instruments, it acts as a whole selling debt market.
Functions of Money Market:
The monetary market has three fundamental functions:
It offers a balancing tool to match short-term funding demand and supply.
It is a centre for central bank intervention, liquidity control and general interest rates.
It provides the suppliers and users with short-term funds with a reasonable price for market-clearing, to meet their requirements.
In order to balance the short-term liquidity imbalances in the country, the financial market plays an essential role. The central bank controls the level of liquidity and interest rate within the country with the help of this market.