Features, Objectives and Functions of Money Market.

 

FEATURES OF MONEY MARKET :-

1.        Constituents Of Money Market :- Like other markets, money market also has three constituents

            a. It has buyers and sellers in the form of borrower 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.

2.        Heterogeneous Market :- The money market is not a single homogenous market but consists of several term sub-markets, each market dealing with a specific short-credit instrument e.g., call money market, trade bill market, etc . Thus it is difficult to talk about a general money market.

3.        Dealers of Money Market :- The financial institutions in the money markets are traders, manufactures, speculators, and even government institutions . The lenders in the money market are commercial banks , central banks , non- bank financial intermediaries etc.

4          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.

5          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.

6.        Physical Contract Not Necessary :- Money market does not refer to a specific place. Where borrowers and lenders meet each other. In fact, it is not necessary that the borrowers and lenders should have personal contract with each other at a particular place. They may carry on their negotiations through telephone or mail. Thus, money market simply relates to the arrangements which establish direct and indirect contract between borrowers and lenders.

7.        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.

8.        Association With Big Cities :- Generally money markets are associated with important places or localities. Almost every big city has a money. In this way, we have London money market, New York money market, Bombay money market etc.

9.        Change With Place And Time :- Through the functions of money in different countries are broadly the same, the instruments, institution and practices of these time, For example, in London money market, bill of exchange  used to be of great importance. But, now because of change in business practices and the growth of public debt, government treasury bills have become more important.

OBJECTIVES OF MONEY MARKET :-

            The following are the important objectives of a money market :

1.  To provide a parking place employ short-term surplus funds.

2. To provide room for overcoming short-time deficits.

3. To influence and regulate liquidity in the economy through the intervention of Central Bank.

4.To provide a reasonable access to borrowers and lenders of  short term fund.

5. To provide facility for adjusting liquidity  to the banks, business corporation. NBFCs and other  financial institutions along with investors.

6. To maintain a monetary equilibrium by maintaining a balance between the demand for and supply of money for short term monetary transactions.

7. To promote economic growth by making funds available to various sectors in the economy.

FUNCTIONS OF MONEY MARKET :-

            The money market perform a diversity of function in the banking structure of the economy :-

1. The money market provides outlets to commercial banks, non banking financial concerns, Business Corporation and other investors for their short-term funds.

2. The money market  also provides short-term  funds to businessman, industrialists, and trades etc. to meet their day-to-day  requirements of working capital.

3. The money market provides short-term funds not only to private businessman but also to government  and its agencies.

4.  It enables businessmen with temporary surplus funds  to invest them for a short  period.

5. The money market serves as a medium through which the Central Bank of the country exercises control on the creation of credit. In fact, the credit control measures of the market that the impact is then transferred to the various segments of the economy.

            The functions of the money market are virtually the same in all the countries of the world. But the institutions, instruments and modes of operation  are different  in different money markets.

IMPORTANCE OF MONEY MARKET :-

            A well developed money market is  essential for a modern economy. Through, historically money market has developed as a result of industrial and commercial progress, it also has important role play in the process of industrialization and economic development of a country.

Importance of a developed money market and its various functions are discussed below:-

1. Financial Trade :- Money market plays crucial role in financial 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 requirement through the system of finance bills, commercial papers etc.

(b) Industries generally need long-term loans which are provided in the capital market. But 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 indirectly helps the industries through its link with and influence on long-term capital market.

3.        Profitable Investment :- Money market enables the commercial banks to use their excess reserves in profitable investment. The main objectives 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 reserve of the commercial banks are invested in near-money market 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.

4.        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.

5.        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 smoothers the functioning and increases the efficiency of the certain bank. Money market helps the central bank in two ways:-

a. The short run interest rates of money market serves as an indicator of the monetary and banking conditions in the country and in this ways, 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.

6.        Help To Government :- Developed money market is also of great help to the government. It helps the government in two ways:-

a. It enables the government to methods of raising funds (e.g. trough deficit financing or borrowing from the Central bank) are inflationary in nature.

b. It helps the government in floating long-term loans because of the fact that the changes in the short-term interest rates of the money market influence the interest rates on long-term capital.

7.        Encouragement To Saving And Investment :- A developed and competitive money market tends to establish equilibrium between saving and investment i.e. supply and demand for loan able funds. It thus, not only encourages saving and investment, but also helps in transferring funds from one (surplus) sector to another (deficit). In this way, money market plays a vital role in accelerating the process of capital formation.