money market is defined as the trading of debt instruments with maturities of less than a year and fixed income. In this article, we will define money market instruments as well as their types and objectives.
Through trading bills, these facilitate the participant’s short-term borrowing needs. This financial market is typically populated by banks, large institutional investors, and individual investors.
In the money market, a variety of instruments are traded on both the NSE and BSE stock exchanges. Treasury bills, certificates of deposit, commercial paper, repurchase agreements, and other similar instruments fall into this category.
Because the securities being traded are highly liquid, the money markets is regarded as a secure place to invest. The Reserve Bank controls the interest rates on various money markets instruments.
The risk level of money market is considered low than other . This is due to the fact that the majority of the instruments have a maturity of one year or less. As a result, there is little time for a default to occur.
As a result, money markets is a market for financial assets that are close substitutes for money. In this article I will explain about the components and characteristics of money markets and also example about what is not concluded as money market instrument.
The Role of money markets in the economy
Money markets is extremely important to the economy. It enables a wide range of participants to raise funds. It provides liquidity to both investors and borrowers. As a result, maintaining a balance between the supply and demand for money. As a result, the economy’s development and growth are aided.
Objectives of Money Markets
Providing borrowers with short-term funds at a reasonable price, such as individual investors, governments, and so on. Lenders will also benefit from liquidity because money market securities are short-term.
It also enables lenders to convert idle funds into productive investments. Both the lender and the borrower benefit from this arrangement.
The RBI oversees the money markets. As a result, it contributes to the regulation of the economy’s liquidity level.
Because most businesses lack the necessary working capital. The money markets assists such organizations in obtaining the funds required to meet their working capital requirements
That is a vital source of funding for the government sector in both domestic and international trade. As a result, it provides an opportunity for banks to park their excess funds.
The Purposes of Money Market
- It keeps the market liquid. To control liquidity, the RBI employs money market instruments.
- It funds the government’s and the economy’s short-term needs. Any business or organization can borrow money quickly and for a short period of time.
- Assists in utilizing surplus funds in the market for a short period of time in order to earn an additional return. It directs savings to investments.
Helps in the transparent transfer of funds from one sector to another.
- Assist in the formulation of monetary policies. The current state of the money markets is the result of previous monetary policies. As a result, it serves as a guide for developing new policies concerning short-term money supply.
The characteristics of money market instruments
- It is a financial market with no fixed geographical location; and
- It is a market for short-term financial needs, such as working capital.
- Its primary players include commercial banks, and financial institutions
- Treasury bills, commercial papers, certificates of deposit, and call money are the main money markets instruments; it is highly liquid because it contains instruments with maturities of less than one year.
- The majority of money market instruments offer fixed returns.
Which of the following is not a money market instrument?
A fixed deposit (FD) is not a financial instrument. A certificate of deposit, on the other hand, is a money market instrument.
A certificate of deposit, like a fixed deposit, pays a higher interest rate than a bank savings account. On the other hand, it is negotiable,where as a fixed deposit is not. It also required a larger initial investment and has a longer investment horizon than a fixed deposit.
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