What is the Money Market?

It is a market for financial assets that can be considered as close substitutes for money. The financial assets included in the money market are overnight to short-term funds and instruments with a maturity period of one year or less than that.

What are the characteristics of the Money Market?

Pep Talk India Money Market

  • It is not a physical market but an activity that is carried out online and over the phone.
  • Consider it to be a wholesale market comprising many short-term debt instruments.
  • The creditworthiness of participants is of utmost importance.
  • It is a need-based market depending on the demand and supply of money.

Who are the main players in the Indian money market?

  • The Reserve Bank of India (RBI)
  • The Discount and Finance House of India (DFHI)
  • Mutual Funds
  • Banks
  • Corporate Investors
  • State governments
  • Provident funds
  • Primary dealers
  • Non-banking finance companies (NBFCs)
  • The Securities Trading Corporation of India (STCI)
  • Public sector undertakings (PSUs)
  • Non-resident Indians (NRIs)

What are the functions of the money market?

It has three main functions:

  1. Even out the demand for and supply of short-term funds by providing a balancing mechanism.
  2. Provide a focus point for the intervention of the central bank to influence liquidity and the interest rate levels.
  3. Boost access of short-term funds to suppliers and investors at an efficient market clearing price.

Important terms and instruments related to the money market

 

Money at Call and Short Notice/Call money

It is an inter-bank transaction on day to day basis under which one bank may borrow from other banks on a day to day basis. The rate of interest on such transactions is known as the call money rate, which is the most sensitive segment of the money market. A high call money rate means the money market is tight, while low means money market is flush with funds.

Time Lending Rate/Benchmark PLR

It is the rate of interest which a bank charges from its prime borrowers; i.e. high credit worthy, high net worth borrowers, who may generally be corporate borrowers. Every bank has its own prime borrower.

Certificate of Deposit

It is a financial instrument issued by a bank for raising short term deposit mainly from its corporate clients, whose maturity may not be less than one year. It is issued at a discount to the face value.

Commercial Paper

It is a financial statement issued by a firm/public company to raise short term deposits from its clients, whose maturity may not be less than one year.

Commercial Bill/Bill of Exchange/Hundi

It is a financial instrument used essentially for trading purposes on the basis of which a trader/manufacturer may buy goods/raw materials on credit with a maturity of 91 days. This facilitates trade on credit and is a standardized instrument which can be used by the seller to discount it with a bank and re-discount it with the RBI in order to get financial assistance.

Basel Norms

These are norms laid down by the Bank of International Settlement (BIS) located at Basel, Switzerland. BIS is the Central Bank of Central Banks, of which RBI is also a member. It layds down time to time norms of capital adequacy, market discipline, risk perception, supervisory review etc to be taken into account by the banking industry and laying down its Capital Adequacy Ratio accordingly.

Capital Adequacy Ratio

It is a ratio that ensures strength and resilience of a bank/financial institution and also enforces in the process that a bank has sufficient strength to absorb a reasonable degree of losses.

Asset Reconstruction Fund/Company

It is a mechanism set up to take care of bad debts of a bank/financial institute. It may take over a certain portion/the whole of bad debts at a discount and thereby clean the books of the relevant bank while it recovers these bad debts on its own.

The Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act)

It is a landmark legislation enacted in India in 2002, which for the first time empowers Indian Banks to attach and sell the hypothecated property and assets of the defaulters of loans without the prior approval of the court.

 

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