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    Home » Unlock the Hidden Potential of the Indian Money Market Now!
    Money Market
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    Unlock the Hidden Potential of the Indian Money Market Now!

    February 8, 2023Updated:March 24, 202310 Mins Read107 Views
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    Generally, on the money market, assets with a maturity of up to one year are exchanged. Additionally, these financial assets are very liquid. Therefore, they are safer than money and are utilized as close equivalents. Are you wondering what the money market is? You can continue reading to learn everything there is to know about them in this article.

    List of Contents

    • What Exactly Is the Money Market?
    • Money Market’s Role in India
      • 1. Meeting the government’s financial obligations
      • 2. Financial policy implementation
      • 3. Demand and supply balance
      • 4. Usage of cash in the economy
      • 5. Portfolio management
      • 6. Liquid assets for economic expansion
      • 7. Availability of funds for short-term borrowers
    • Indian Money Market Structure
      • Organized Sectors
      • Unorganized Sectors
    • Money Market Instruments
      • 1. Treasury Bills
      • 2. Commercial Paper
      • 3. Certificate of Deposits
    • Participants in the Money Market
      • 1. Corporates
      • 2. Banks
      • 3. Mutual Funds
      • 4. Insurance Companies
      • 5. Public Sector Undertakings
      • 6. Central Government
    • Introduced Money Market Reforms in India
      • 1. Introduction of New Money Market Instruments
      • 2. Liquidity Adjustment Facility (LAF)
      • 3. Deregulation of Interest Rates
      • 4. Real Time Gross Settlement (RTGS) and National Electronic Fund Transfer (NEFT)
      • 5. Electronic Payments
    • Conclusion
    • FAQs

    What Exactly Is the Money Market?

     Money Market

    The money market is a financial market for short-term securities such as government bills and commercial papers. These markets are extremely liquid and low-risk. Thus, this makes them particularly appealing to borrowers and lenders seeking rapid access to capital. Its effectiveness depends on several aspects, including the rural people’s involvement, the market system’s length and breadth, the use of technology, and the system’s administration to prevent corruption. Therefore, it is difficult to create a successful money market when the economy lacks cash and population expectations.


    Money Market’s Role in India

     Money Market

    1. Meeting the government’s financial obligations

    Using treasury notes in the money markets enables governments to meet their short-term financial needs.

    2. Financial policy implementation

    Central banks and money markets aid in the successful execution of these policies and implement monetary policies. The goal of it is to distribute funds evenly to various economic sectors to accelerate economic growth.

    3. Demand and supply balance

    Money markets depend on the logical allocation of money and other resources and the mobilization of savings into diverse investment channels. This helps preserve the equilibrium between supply and demand.

    4. Usage of cash in the economy

    Money markets include a variety of near replacements for currency but no genuine currency. Consequently, it reduces the uses and benefits of currency.

    5. Portfolio management

    Different products are available in money markets to meet the diverse needs of investors and borrowers. Investors might construct a portfolio following their risk and return objectives.

    6. Liquid assets for economic expansion

    The money market’s instruments are very liquid. They permit more efficient management of liquidity by the government, resulting in improved borrowing and lending and enhancing economic growth.

    7. Availability of funds for short-term borrowers

    Money markets allow simple access to short-term borrowers’ funds, facilitating borrowing at acceptable interest rates.


    Indian Money Market Structure

    Indian Money Market Structure

    The Indian Money Market consists of Organized and Unorganized sectors.

    Organized Sectors

    The RBI controls and coordinates it methodically. It includes the following:

    • India’s central bank, the Reserve Bank of India
    • State Bank of India (SBI) and its seven subsidiary banks
    • Twenty government-owned commercial banks
    • Other listed and non-listed commercial banks
    • Foreign banks
    • Regional Rural Banks
    • Non-bank financial institutions (NBFC) like the LIC, the GIC, subsidiaries, UTI, etc.
    • Banks, quasi-government agencies, and major corporations also make their short-term excess cash accessible to the organized market.

    Unorganized Sectors

    It is not managed and regulated by the RBI. Unorganized Sectors contains the following:

    • Indigenous banks
    • Moneylenders
    • Non-Banking Financial Companies (NBFCs)

    Money Market Instruments

    Instruments

    The money market consists of treasury bills, commercial papers, and certificates of deposit.

    1. Treasury Bills

    Treasury bills are money market instruments issued by the Reserve bank of India (RBI) on behalf of the federal government. These notes are often issued when funds are scarce or when the RBI seeks to manage the market’s cash liquidity. The following are its features:

    • They are extremely liquid devices with a negligible danger component.
    • Compensatory Treasury notes are issued at a discount relative to their face value.
    • The bill’s maturity or Zero-Coupon Bonds is always one year or less than one year.

    2. Commercial Paper

    The term commercial paper refers to a specific sort of promissory note. They are issued by major corporations and corporations needing fast short-term loans to fulfill the demand of operating capital, seasonal variations and expenditures of share issuance, etc. Its attributes include:

    • Commercial paper has an expiration date between 15 days and one year.
    • They are issued at a discount and redeemed at par.
    • They are extremely liquid and readily transferable money market securities.
    • It is an uninsured short-term debt instrument.

    3. Certificate of Deposits

    These are the money market instruments issued only by commercial banks and financial organizations. Additionally, they can be provided in Demat format. The following are characteristics of certificates of deposit:

    • Certificates of deposit are discounted.
    • The difference between the issued price and their larger face value is the return on them.
    • They are only available in multiples of one lac.
    • They are extremely liquid and easily transferred.
    • When issued by banks, the maturity period ranges from 7 days to a year, while when issued by other financial institutions, the maturity period ranges from 1-3 years.

    Participants in the Money Market

    Participants

    Some of the important participants are as follows:

    1. Corporates

    Corporate borrowing takes the form of promissory notes with a short maturity. After acquiring the requisite credit rating for the CP, they can issue commercial papers. Additionally, they might lend their temporary surplus to the CBLO market. When they buy certificates of deposit issued by banks and Treasury bills, they function as the lender.

    2. Banks

    The largest lender and borrowers in the money market are scheduled commercial banks. They borrow and lend cash on the call money market, short-notice market, repo, and reverse repo markets. They also borrow from the RBI and IDBI in the rediscounting market. They lend in the market for commercial paper by purchasing commercial papers issued by corporations and listed public sector organizations. Additionally, they borrow through issuing certificates of deposit to corporations.

    3. Mutual Funds

    They provide a variety of plans for the public’s diverse investing objectives. Money Market Mutual Fund Plans or Liquid Schemes are the names of the numerous schemes. Its purpose involves the purchase of money market instruments. They provide the best liquidity to investors by allowing withdrawals with a day’s notice or cashing in units using bank automated teller machines. They neither borrow nor invest outside.

    4. Insurance Companies

    General and life insurance companies are typical money market lenders. Due to their cash excess, they do not borrow. They have been major investors after the creation of CBLO (Collateralized Borrowing and Lending Obligations). Insurance businesses spend more of their assets on capital market products than money market securities. Due to the relatively lengthy terms of their lending programs, their significance is somewhat diminished.

    5. Public Sector Undertakings

    Government entities whose shares are traded on a stock market may issue commercial paper to finance their operating capital. The public sector undertakings are solely money market borrowers. They seldom loan out their surplus.

    6. Central Government

    The Federal Government assumes the borrower’s position in the money market (T-Bills) by issuing treasury bills. T-Bills constitute a risk-free product and are issued by the RBI. They are granted for 91 days, 182 days, and 364 days. Due to the risk-free nature of T-Bills, banks, corporations, and numerous other organizations purchase them and lend them to the government as part of its short-term borrowing program.


    Introduced Money Market Reforms in India

    Introduced Money Market Reforms in India

    1. Introduction of New Money Market Instruments

    The Reserve Bank of India has created many products, such as 182-Day treasury bills, 364-Day treasury bills, CDs, and CPs, to broaden and diversify the Indian money market. These instruments aid the government, commercial banks, financial institutions, and corporations in raising capital through the money market.

    2. Liquidity Adjustment Facility (LAF)

    The Reserve Bank of India created the LAF. The purpose of these rates is to stabilize short-term interest rates or call rates. The RBI often updates repo rates to maintain economic equilibrium.

    3. Deregulation of Interest Rates

    The interest rate ceiling on demand deposits and short-term interbank deposits was eliminated, leaving the rates to be determined by market forces. As a result of deregulatory efforts, commercial banks can borrow money at lower interest rates and reap the rewards when loan interest rates are high.

    4. Real Time Gross Settlement (RTGS) and National Electronic Fund Transfer (NEFT)

    As an improvement to the payment infrastructure, Real Time Gross Settlement (RTGS) and National Electronic Fund Transfer (NEFT) were established. These digital platforms provide the swift and transparent transfer of funds from one entity to another. They also enhance the transfer4 method by eliminating paperwork and excessive banking authority checks.

    5. Electronic Payments

    A mechanism for electronic transactions was implemented. Electronic transactions are simple to start and process. As a result, they eliminate the checkpoints and repetitive human interventions that might lead to mistakes. Consequently, computerized transactions are devoid of random human mistakes.


    Conclusion

    In short, the money market is a specialized venue for short-term trading assets. Its high liquidity makes it a popular choice for investors, buyers, and sellers of short-term securities. However, investors should avoid the unorganized sector due to its exploitative character and high-interest rates on the loans it offers consumers. Additionally, India’s organized sector is fairly robust. Therefore, people can approach a well-established, organized money market for their demands. As its monitor, the RBI plays a crucial role in administration and inspection. Therefore, in the event of any exploitation, investors can seek a resolution from the authorities.


    FAQs

    1. What is the Money Market?

    The Money Market is a financial market where short-term financial products are traded, such as Treasury bills, commercial papers, and certificates of deposit. It is a system for short-term borrowing and lending, often shorter than a year. By supplying financial institutions with liquidity and supporting the execution of monetary policies by the central bank, the Money Market is vital to the general functioning of the economy.

    2. What is the difference between the Indian Money Market and the Capital Market?

    The nature of the financial instruments exchanged on each of them is the key distinction between the Indian money market and the capital market. The Money Market focuses on short-term debt securities, such as treasury bills and commercial papers, whereas the Capital focuses on long-term debt securities, such as stocks, bonds, and debentures. Due to the short-term nature of the products exchanged, the Money Market is seen as having a lower level of risk than the Capital. The Money Market is largely utilized by banks and financial institutions to satisfy their short-term funding needs, whereas the Capital is utilized by corporations and people for long-term investment and fundraising.

    3. Which financial instruments are traded in the Indian money market?

    On the Indian money market, products such as Treasury bills, commercial papers, certificates of deposit, call money, and term money are exchanged.


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