BASICS OF MONEY MARKET
- The financial system of any country is a conglomeration of sub-market, viz. money, capital and forex markets. The flow of funds in these markets is multi-directional depending upon liquidity, risk profile, yield pattern, interest rate differential or arbitrage opportunities, regulatory restrictions, etc. The role of money market in the overall financial system is prime in as much as the market acts as an equilibrating mechanism for evening out short term surpluses and deficits and provides a focal point for Central Bank's intervention to bring out variations in liquidity profile in the economy.
- Money Market is the market for short-term funds, generally ranging from overnight to a year. It helps in meeting the short-term and very short-term requirements of banks, financial institutions, firms, companies and also the Government. On the other hand, the surplus funds for short periods, with the individuals and other savers, are mobilised through the market and made available to the aforesaid entities for utilisation by them. Thus, the money market provides a mechanism for evening out short-term liquidity imbalances within an economy. Hence, the presence of an active and vibrant money market is an essential pre-requisite for growth and development of an economy.
- As the Indian economy gets integrated with the global economy, the demand for borrowing and lending options for the corporates and the financial institutions increases everyday. Known as the money market instruments, mutual funds, money market mutual funds, government bonds, treasury bills, commercial paper, certificates of deposit, repos (or, ready-forward purchases) offer various short-term alternatives. The major players in the money market are the Reserve Bank of India and financial institutions like the UTI, GIC, and LIC.
- While the call money rates have been deregulated and left to the demand and supply forces of the market, the RBI intervenes in the repos through its subsidiaries. The RBI also acts in the foreign exchange market, where it sells US dollars to stabilise the rupee-dollar exchange rate.
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