Composition of Indian Money Market, Indian Economy | Business Economics for CA Foundation PDF Download

Indian Money Market: Important Constituents of Indian Money Market - 

A money market is a mechanism which makes possible for borrowers and lenders to come together. Essentially it refers to a market of short-term funds. It meets the short-term requirements of the borrowers and provides liquidity of cash to the lenders. In the words of Crowther, money market is the name given to the various firms and institutions that deal with various grade of money.

According to Madden and Nadler, “a money market is a mechanism through which short-term loans are loaned and borrowed and through which a large part of the financial transactions of a particular country or of the world are cleared”.

The importance of the money market for the nation does not solely lie on its size; it lies rather in its liquidity in its capacity for furnishing cash to any part of the country at a few hours notice. What a bank balance is to the individual, the money market is to the country’s credit system.

The term “money market” is used atleast in three senses to be judged by the context. In its narrowest and most specific sense it appears as “the London Money Market” when it signifies the market in short­-term, secured loans, most of them “at call” in which the borrowers are the London Discount Houses and a small number of money brokers and jobbers and the lenders are principally the commercial banks, though they include other financial institutions and some companies.

In London the term money even in narrow sense the money market is to be regarded as embracing the market in bills in which the discount houses are predominant. Secondly, the term is used to denote any market in highly liquid assets which is supported by an identifiable and active set of operators.

In London it embraces the group includes the Inter-bank, Inter-company and Local Authority Markets and the market in Sterling Certificates of deposit. Finally, the term is occasionally met in the literature of Monetary Theory where it may refer simply to the market in loanable funds in the most general and undifferentiated sense.

The term “Money Market” does not refer to any specific place where money is lent or borrowed. Money market is a mechanism through which a large part of the financial transactions of a particular country or of the world are cleared.

Although money market does not refer to any specific place, it may be located in or associated with a particular place or geographical locality where short-term funds from an entire region or country or countries are attracted.

Mumbai Money Market in India, is a typical example. There are also a few money markets which are international in character e.g. London Money Market, New York Money Market etc. These serve not only specific areas or countries but several countries in the world.

A money market is not homogeneous in character. It consists of several sectors or sub-markets such as call loan markets, bills market or discount market, acceptance market, collateral loan market etc. That is why, Crowther describes, “a money market as the various firms and institutions that deal in various grades of near money.

The money market is a wholesale market. The volume of business is very large and generally transactions are settled on a daily basis. There are a large number of participants in the money market commercial banks, mutual funds, investment institutions, financial institutions and finally the central bank.

The central bank occupies a strategic and pivotal position in the money market. The money market can obtain funds from the central banks either by borrowing or through sales of securities.

By varying the liquidity and regulating accession to the accommodation, the central bank influences the cost and availability of credit. A well-developed money market contributes to an effective implementation of monetary policy.

The Constituents of the Money Market:

A money market consists of several sectors or sub- markets; each specialising in a particular type of lending.

The important sectors are:

(a) Call Money Market:

This is a sub-market specialising in call loans which are sometimes referred to as “loans to call and short notice”. Call money refers to funds borrowed by the discount houses from the clearing and other banks and which they employ in holding portfolio assets.

A large portion of the funds are borrowed literally “at call” that is they can be withdrawn, “called” without notice on a day’s basis. Some, however, are lent at seven days’ notice or for even longer periods. For the clearing banks call money represents their most liquid asset after cash and balances at the central bank and is used for the adjustment of day-to-day changes in their total reserves.

In UK such loans are provided by the banks to bill brokers and discount houses. In USA call money is interest-bearing deposits and foreign banks that can be withdrawn within 24 hours’ notice. Many Euro currency take this form. In India this sector provides facilities for inter-bank lending.

(b) Acceptance Market:

This sub-market specialises in the acceptance of bills of exchange on behalf of the customers. Acceptance Houses in the London Money Market provide an example of institutions specialising in this business.

Commercial banks also accept bills of exchange on behalf of their customers. Although both inland and foreign bills are accepted, the service rendered by the acceptance market is especially important in the case of foreign bills. Once the bill is accepted in this manner, it is easier for the same to be discounted.

(c) Bill Market (Discount Market):

This is another sub-market specialising in the discounting of short-term commercial bills and treasury bills. In the London Money Market, the Discount Houses specialise in this field. English commercial banks do not undertake the discounting of commercial bills; instead they get these bills from the discount houses according to their needs.

With the decline in the volume of commercial bills, the Discount Houses turned their attention to the Treasury Bills and short- dated government securities also. In other countries the discounting of commercial bills is considered to be a subsidiary function of the commercial banks. In India, the establishment of Discount and Finance House of India Ltd. in 1988 has been an important step towards the development of an active discount market.

The discount market provides valuable services to the commercial banks by imparting greater flexibility to them in their funds management, to the trading community by facilitating the financing of home and foreign trade and to the government by creating a market in Treasury Bills and short-dated government securities.

(d) Collateral Loan Market:

This sector specialises in the granting of short-term loans against collateral securities. Such loans are usually granted by the commercial banks to stock exchange dealers and brokers. Business houses also avail of short-term loans; against the security of goods, documents of title to goods, stock exchange securities, bullion etc.