Structure & Functions of Money Market - Financial Markets and Institutions | Financial Markets and Institutions - B Com PDF Download

There are two kinds of markets where borrowing and lending of money takes place between fund scarce and fund surplus individuals and groups. The markets catering the need of short term funds are called Money Markets while the markets that cater to the need of long term funds are called Capital Markets.

Thus, money markets is that segment of financial markets where borrowing and lending of the short-term funds takes place. The maturity of the money market instruments is one day to one year.  In our country, Money Markets are regulated by both RBI and SEBI.

Indian money market is divided into organized and unorganized segments. Unorganized market is old Indigenous market mainly made of indigenous bankers, money lenders etc.  Organized market is that part which comes under the regulatory purview of RBI and SEBI. The nature of the money market transactions is such that they are large in amount and high in volume. Thus, the entire market is dominated by small number of large players.  At the same time, the money market in India is yet underdeveloped. The key players in the organized money market include Governments (Central and State), Discount and Finance House of India (DFHI), Mutual Funds, Corporate, Commercial / Cooperative Banks, Public Sector Undertakings (PSUs), Insurance Companies and Financial Institutions and Non-Banking Financial Companies (NBFCs).

Contents 

• Structure of Organised Money Market in India
  • Call Money / Notice  Money / Term Money Market
  • Treasury Bill (T – Bills)
  • Commercial Bills
  • Certificate Of Deposits (CDs)
  • Commercial Papers (CP)
  • Money Market Mutual Funds (MMMFs)
  • The Repo / Reverse Repo Market
  • Discount And Finance House Of India (DFHI)
• Functions of Money Markets

Structure of Organised Money Market in India

The organized money market in India is not a single market but is a conglomeration of markets of various instruments. They have been discussed below:

Call Money / Notice  Money / Term Money Market

Call Money, Notice Money and Term Money markets are sub-markets of the Indian Money Market. These refer to the markets for very short term funds. Call Money refers to the borrowing or lending of funds for 1 day. Notice Money refers to the borrowing and lending of funds for 2-14 days. Term money refers to borrowing and lending of funds for a period of more than 14 days.  

Treasury Bill (T – Bills)

The bill market is a sub-market of the money market in India. There are two types of bills viz. Treasury Bills and commercial bills. While Treasury Bills or T-Bills are issued by the Central Government; Commercial Bills are issued by financial institutions.  

Commercial Bills

Commercial bills market is basically a market of instruments similar to Bill of Exchange. The participants of commercial bill market in India are banks and financial institutions but this market is not yet developed.

Certificate Of Deposits (CDs)

Certificate of Deposit (CD) refers to a money market instrument, which is negotiable and equivalent to a promissory note. All scheduled commercial banks excluding Regional Rural Banks (RRBs) and Local Area Banks (LABs) and Select All India Financial Institutions permitted by RBI are eligible to issue certificates of deposits. 

Commercial Papers (CP)

Commercial Paper (CP) is yet another money market instrument in India, which was first introduced in 1990 to enable the highly rated corporates to diversify their resources for short term fund requirements. 

Money Market Mutual Funds (MMMFs)

Money Market Mutual Funds (MMMFs) were introduced by RBI in 1992 but since 2000, they are brought under the purview of the SEBI.  They provide additional short-term avenue to individual investors.

The Repo / Reverse Repo Market

Repo (repurchase agreement ) was introduced in December 1992. Repo means selling a security under an agreement to repurchase it at a predetermined date and rate. Repo transactions are affected between banks and financial institutions and among bank themselves, RBI also undertake Repo. IN 1996, Reverse Repo was introduced.  Reverse Repo means buying a security on a spot basis with a commitment to resell on a forward basis. Reverse Repo transactions are affected with scheduled commercial banks and primary dealers.

Discount And Finance House Of India (DFHI)

It was established in 1988 by RBI and is jointly owned by RBI, public sector banks and all India financial institutions which have contributed to its paid up capital. DFHI plays important role in developing an active secondary market in Money Market Instruments. From 1996, it has been assigned status of a Primary Dealer (PD).  It deals in treasury bills, commercial bills, CDs, CPs, short term deposits, call money market and government securities.

Functions of Money Markets

Due to short maturity term, the instruments of money market are liquid and can be converted to cash easily and thus are able to address the need of the short term surplus fund of the lenders and short term borrowing requirements of the borrowers.  Thus, the major function of the money markets is to cater to the short term financial needs of the economy. The other functions are as follows:

1. Money Markets help in effective implementation of the RBI’s monetary policy
2. Money markets help to maintain demand and supply equilibrium with regard to short term funds
3. They cater to the short term fund requirement of the governments
4. They help in maintaining liquidity in the economy