Characteristics of money market; nature of money market; features of money market
Money market is the market for dealing in monetary assets of short-term nature. Short term funds up to one year and financial assets that are close substitutes for money are dealt in the money market. In other words, it refers to the institutional arrangements facilitating borrowing and lending of short-term funds. The money market brings together the lenders who have surplus short term investible funds and the borrowers who are in need of short-term funds.
The money market is a wholesale debt market for low-risk, highly liquid, short-term instruments. The money market is not a place but an activity, the transactions are carried out by telephone, mail etc. among people who may have never met one another. Thus, the money market represents the country’s pool of short-term investible funds to meet the short-term requirements of the economy.
According to Nadler and Shipman, “A money market is a mechanical device through which short term funds are loaned and borrowed through which a large part of the financial transactions of a particular country or world are degraded. A money market is distinct from but supplementary to the commercial banking system.”
According to the McGraw Hill Dictionary of Modern Economics, “money market is the term designed to include the financial institutions which handle the purchase, sale, and transfers of short-term credit instruments. The money market includes the entire machinery for the channelizing of short-term funds. Concerned primarily with small business needs for working capital, individual’s borrowings, and government short term obligations, it differs from the long term or capital market which devotes its attention to dealings in bonds, corporate stock and mortgage credit.”
According to the Reserve Bank of India, “money market is the centre for dealing. mainly of short-term character, in money assets; it meets the short-term requirements of borrowings and provides liquidity or cash to the lenders. It is the place where short term surplus investible funds at the disposal of financial and other institutions and individuals are bid by borrowers’ agents comprising institutions and individuals and also the government itself.”
According to the Geoffrey, “money market is the collective name given to the various firms and institutions that deal in the various grades of the near money.”
According to the J.M. Culbertson, “money market is a network of markets that are grouped together because they deal in financial instruments that have a similar function in the economy and are to some degree substitutes from the point view of holders. The instruments of the money market are liquid assets, interest bearing debts that mature within a short period of time or callable on demand.”
S.N. Sen, in his book ‘Central Banking in Underdeveloped Money Market’, has aptly stated that the short-term money market is “the place where the strain on the banking system is first felt in periods of pressure, and it is the place where ease in the banking system is first felt in periods of monetary superfluity.”
The money market is thus a reservoir of short-term funds. It is a region where short term funds are bought and sold through telephone or mail. Funds are borrowed in the market for a short period ranging from a day to six months or less than one year. The assets which are used as credit instruments are known as “near money assets.”
GENERAL CHARACTERISTICS OF MONEY MARKET
The money market is a wholesale market. The volumes are very large and generally transactions are settled on daily basis. In an economy, a well-developed money market contributes to an effective implementation of the monetary policy also. On the basis of this, general characteristics of money market are outlined below:
1. Near money assets:
Money market does not deal in money, but in short-term financial instruments or near-money assets. These assets are relatively liquid and readily marketable. The assets against which the funds can be borrowed in the money market include short-term government securities, bills of exchange, bankers’ acceptances, etc.
2. Short-term Loans:
Money market deals with short-term loans. In a money market, the borrowers can obtain funds for periods varying from a day, a week, a month or three to six months. Thus, it deals with financial assets having a maturity period less than one year only.
3. Physical Contact Not Necessary:
Money market does not refer to a specific place where borrowers and lenders meet each other. The transactions are being conducted even over the phone and therefore, there is an essential need for the presence of well-developed communication system. Thus, money market simply relates to the arrangement which establishes direct and indirect contact between the borrowers and lenders.
Transactions in money market may be conducted with or without the help of brokers. Lenders and borrowers may carry on their negotiations through telephone or mail. Thus, money market simply relates to the arrangement which establishes direct and indirect contact between the borrowers and lenders without the help of brokers.
5. Transaction cost:
The short-term financial assets that are dealt in money market are close substitutes for money. Therefore, these financial assets are being converted into money with ease, speed, without loss and with minimum transaction cost.
6. Heterogeneous Market:
The money market is not a single homogeneous market but consists of several sub-markets, each market dealing with a specific short-term credit instrument, e.g., call money market, trade bill market, etc. Thus, it is difficult to talk about a general money market.
7. Constituents of Money Market:
Like other markets, money market also has three constituents:
(a) It has buyers and sellers in the form of borrowers and lenders,
(b) It has a commodity; it deals with short-maturity credit instruments, like commercial bills, treasury bills, etc.
(c) It has a price in the form of rate of interest which is an item of cost to the borrower and return to the lender.
8. Dealers of Money Market:
The financial institutions in the money market meet the short-term needs of the borrowers. The borrowers in the money market are traders, manufactures, speculators, and even government institutions. The lenders in the money market are commercial banks, central banks, non-bank financial intermediaries, etc.
9. Need based market:
Money market is a need based market wherein the demand and supply of money shape the market. The price of money lent is determined in the form of interest.
10. Different from Capital Market:
Money market is different from capital market on the basis of maturity period. Money market deals with the short-term lending and borrowing of funds, while capital market deals with medium and long-term lending and borrowing of funds. There are constant efforts for introducing new instruments and innovative dealing techniques for widening the scope of money market.
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