Money Market Concept, Meaning

There are two types of financial markets viz., the money market and the capital market. The money market in that part of a financial market which deals in the borrowing and lending of short term loans generally for a period of less than or equal to 365 days. It is a mechanism to clear short term monetary transactions in an economy.

Definitions of Money Market

Following definitions will help us to understand the concept of money market. According to Crowther, "The money market is a name given to the various firms and institutions that deal in the various grades of near money." According to the RBI, "The money market is the centre for dealing mainly of short character, in monetary assets; it meets the short term requirements of borrowers and provides liquidity or cash to the lenders. It is a place where short term surplus investible funds at the disposal of financial and other institutions and individuals are bid by borrowers, again comprising institutions and individuals and also by the government."

The Money Market is the close substitutes for money with the short term time span from overnight to year. The Indian Money Market consists of both organised and unorganised segment. The organised segment

includes the Reserve Bank of India, State Bank of India, Public Sector as well as Private Sector Banks, Regional Rural Bank, Commercial Banks including Foreign Banks, Non-Scheduled Commercial Banks and other Non-Bank Financial Intermediaries such as LIC, GIC, and UTI etc. On the other hand, the unorganised segment consists of indigenous bankers, money lenders and other non-bank financial intermediaries.
The organized sector of the Indian money market comprises the RBI, Commercial banks, foreign banks, cooperative banks, finance corporations, mutual funds and the Discount and Finance House of India Limited (DFHI).

Indian money market can be divided into various sub-markets depending on their nature and scope of the transactions and the features of the instruments.

Structures In my previous article, I discussed about what exactly are money markets, objectives of money markets and features/drawbacks of money markets: What are Money Markets? Now, we shall discuss about the structure/constituents of Money Markets in India. Basically, Money Market in India is comprised of two sectors: Organised Money Market and Unorganised Money Market. ORGANISED MONEY MARKET The RBI is the apex institution which controls and monitors all the organizations in the organised sector. The commercial banks can operate as lenders and operators. The FIs like IDBI, ICICI, and others operate as lenders. The organised sector of Indian money market is fairly developed and organised, but it is not comparable to the money markets of developed countries like USA, UK and Japan. Main constituents/components of Organised Money Market: 1. The Call Money: It is also known as Interbank Call Money Market. Here, lending and borrowing transactions are carried out for one day. These one day loans may or may not be renewed the next day. The demand for call money comes from commercial banks that need to meet requirements of CRR and SLR, whereas supply comes from commercial banks with excess funds, and FIs like IDBI, etc. 2. The Treasury Bill Market: It deals in Treasury Bills of short term duration: 14 days, 91 days, 182 days and 364 days. They are issued by Government and largely held by RBI. The treasury bills facilitate the financing of Central Government temporary deficits. From May 2001, the auction of 14 days and 182 days treasury bills has been discontinued. At present, there are 91 days and 364 days treasury bills. The rate of interest for treasury bills is determined by the market, depending on the demand and supply of funds in the money market. 3. The Commercial Bill Market: It deals in bills of exchange. A seller draws a bill of exchange on the buyer to make payment within a certain period of time. The bills can be domestic bills or foreign bills of exchange. The commercial bills are purchased and discounted by commercial banks, and are rediscounted by FIs like EXIM Bank, SIDBI, IDBI, etc. 4. The Certificate of Deposit Market: The scheme of Certificate of Deposit (CD) was introduced by RBI in 1989. The main purpose of CD is to enable the commercial banks to raise funds from the market. The CDs maturity period ranges from 7 days to 1 year (in case of FIs minimum 1 year and maximum 3 years). The CDs are issued at a discount to its face value. The CDs are issued in denomination of Rs. 1 lakh and thereafter, multiples of Rs. 1 lakh. The holder is entitled to receive a fixed rate of interest and have no lockin period. 5. The Commercial Paper Market: The scheme of Commercial Paper (CP) was introduced in 1990. Blue chip companies for short term financing issue CPs. As per RBI guidelines, CPs can be issued on the following conditions: The minimum tangible net worth of the company to be at least Rs. 4 crores. The CP receives a minimum rating of A-2 or such other rating from recognized rating agencies like CRISIL, CARE, ICRA, Fitch Ratings, etc. The company has been sanctioned working capital limit by bank/s or all-India FIs. The CPs maturity period ranges from 7 days to 1 year. They can be issued in multiples of Rs. 5 lakhs and in multiples thereof. They are sold at a discount to its face value and redeemed at its face value. 6. Money Market Mutual Funds (MMMFs): The MMMFs were introduced in 1992. The objective of MMMFs is to provide an additional short term avenue to the individual investors. In 1995, RBI modified the scheme to allow private sector organizations to setup MMMFs. During 1996, the scheme of MMMFs was made more flexible by bringing it on par with all Mutual Funds by allowing investments by corporate and others. The scheme has been made more attractive to investors by reducing lock in period from 45 days to 15 days. Resources mobilized from MMMFs are required to be invested in call money, CDs, CPs, commercial bills, treasury bills, and government dated securities having an unexpired maturity of upto 1 year.