Money Market

Money market means market where money or its equivalent can be traded. Money is synonym of liquidity. Money market consists of financial institutions and dealers in money or credit who wish to generate liquidity. It is better known as a place where large institutions and government manage their short term cash needs. Corporations raise money by issuing long term debt and equity instruments. The money market is the a market which is used for buying and selling short term loanable funds in the form of securities and loans. Money is not what is traded in the money market. Short term loans are traded which can be converted into cash rather quickly. The buyer of a money market instrument is the lender. The seller of the money market instrument is the borrower. Money market instruments have a maturity of one year or less. Most have a maturity of six months or less. The majority of money market instruments are issued at a discount. This means that the lender of the money does not receive interest payments. Money market instruments are regarded as quite safe. For generation of liquidity, short term borrowing and lending is done by these financial institutions and dealers. Money Market is part of financial market where instruments with high liquidity and very short term maturities are traded. Due to highly liquid nature of securities and their short term maturities, money market is treated as a safe place. Hence, money market is a market where short term obligations such as treasury bills, commercial papers and banker’s acceptances are bought and sold.

There are some instruments which are considered more safe than others. T-Bills are considered safer than commercial paper. Nevertheless, they are all considered low risk.

The money market trades both corporate and government debt securities. T-Bills are the majority of what's traded in the money market. However, Treasury Notes are also traded. Treasury Notes have maturities from one year to ten years. T-Bonds are also traded. However, the only T-Bonds traded have one year or less to maturity. One of the greatest advantages to the Money Market is the great liquidity. It is such a huge market that the spreads are kept relatively low. Also, interest earned from the Money Market is free of state tax. One last feature of the Money Market is the absence of business risk.

Benefits and functions of Money Market: Money markets exist to facilitate efficient transfer of short-term funds between holders and borrowers of cash assets. For the lender/investor, it provides a good return on their funds. For the borrower, it enables rapid and relatively inexpensive acquisition of cash to cover short-term liabilities. One of the primary functions of money market is to provide focal point for RBI’s intervention for influencing liquidity and general levels of interest rates in the economy. RBI being the main constituent in the money market aims at ensuring that liquidity and short term interest rates are consistent with the monetary policy objectives.