Functions of money market ; Functions of money market in India ; Functions of money market ppt
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.”
Money market is an important part of the economy. It plays very significant functions. It is basically a market for short term monetary transactions. Thus it has to provide facility for adjusting liquidity to the banks, business corporations, non-banking financial institutions (NBFS) and other financial institutions along with investors. Though, historically, money market has developed as a result of industrial and commercial progress, it also has important role to play in the process of industrialization and economic development of a country. Functions of developed money market are discussed below:
1. Financing Trade: Money Market plays crucial role in financing both internal as well as international trade. Commercial finance is made available to the traders through bills of exchange, which are discounted by the bill market. The acceptance houses and discount markets help in financing foreign trade.
2. Financing Industry: Money market contributes to the growth of industries in two ways:
(a) Money market helps the industries in securing short-term loans to meet their working capital requirements through the system of finance bills, commercial papers, etc.
(b) Industries generally need long-term loans, which are provided in the capital market. However, capital market depends upon the nature of and the conditions in the money market. The short-term interest rates of the money market influence the long-term interest rates of the capital market. Thus, money market indirectly helps the industries through its link with and influence on long-term capital market.
3. Liquidity of Investment: Stock exchanges provide liquidity of investment to the investors. Investors can sell out any of their investments in securities at any time during trading days and trading hours on stock exchanges. Thus Stock exchanges provide liquidity of investment. The on-line trading and online settlement of demat securities facilitates the investors to sell out their investment and realize the proceeds within a day or two. Even investors can switch over their investment from one security to another according to the changing scenario of capital market.
4. Investment Priorities: Stock exchanges facilitate the investors to decide his investment priorities by providing him the basket of different kinds of securities of different industries and companies. Investor can sell stock of one company and buy a stock of another company through stock exchange whenever he wants. He can manage his investment portfolio to maximize his wealth.
5. Profitable Investment: Money market enables the commercial banks to use their excess reserves in profitable investment. The main objective of the commercial banks is to earn income from its reserves as well as maintain liquidity to meet the uncertain cash demand of the depositors. In the money market, the excess reserves of the commercial banks are invested in near-money assets (e.g. short-term bills of exchange) which are highly liquid and can be easily converted into cash. Thus, the commercial banks earn profits without losing liquidity.
6. Self-Sufficiency of Commercial Bank: Developed money market helps the commercial banks to become self-sufficient. In the situation of emergency, when the commercial banks have scarcity of funds, they need not approach the central bank and borrow at a higher interest rate. On the other hand, they can meet their requirements by recalling their old short-run loans from the money market.
7. Investment Safety: Stock exchanges through their by-laws given by Securities and Exchange Board of India (SEBI). Transparent procedures try to provide safety to the investment in industrial securities. Government has established the National stock Exchange (NSE) and over the counter Exchange of India (OTCEI) or investor’s safety. Exchange authorities try to curb speculative practices and minimize the risk for common investor to preserve his confidence.
8. Help to Central Bank: Though the central bank can function and influence the banking system in the absence of a money market, the existence of a developed money market smoothens the functioning and increases the efficiency of the central bank. Money market helps the central bank in two ways:
(a) The short-run interest rates of the money market serve as an indicator of the monetary and banking conditions in the country and, in this way, guide the central bank to adopt an appropriate banking policy,
(b) The sensitive and integrated money market helps the central bank to secure quick and widespread influence on the sub-markets, and thus achieve effective implementation of its policy.
9. Indicator of Industrial Development: Stock exchanges are the symbolic indicators of industrial development of a nation (i.e. Productivity, efficiency, economic- status). A prospect of each industry and every unit in an industry is reflected through the price fluctuation of industrial on stock exchanges. Stock exchanges Sensex and price fluctuations of securities of various companies tell the entire story of changes in industrial sector.
10. Barometer of National development of Economy: Stock exchanges are taken as a Barometer of national development of the economy of a country. Each economy is economically symbolized (indicators) by its most significant stock exchange. New York stock Exchange, London stock Exchange, Tokyo stock Exchange and Bombay stock Exchange are considered as barometers of U.S.A, United Kingdom, Japan and India respectively. At both national and international level these stock exchanges represent the progress and conditions of their economies.
11. Borrowings by the government: The money market helps the government in borrowing short term funds at very low interest rates. The borrowing is done on the basis of treasury bills. But in case the government resorts to deficit financing or to print more currency or to borrow from the central bank, it will merely raise the money supply over and above the needs of the economy and hence the price level will boost up. Thus, it is clear that the money market is very useful for the government since it meets its financial needs.
12. Savings and investment: Another point of importance of the money market is that it helps in promoting liquidity and safety of financial assets. By doing so it can help in encouraging savings and investment. The saving and investment equilibrium or equilibrium of demand and supply of loanable funds helps in the allocation of resources.