Money Market: Characteristics and Instruments

Meaning of Money Market

Money market refers to the market where short-term financial securities with high liquidity are traded. It is a segment of financial market which mainly deal in short-term funds. Money market is a market for securities that are equal to money and can be easily converted into money with little transaction costs and lower losses. It includes all transactions with a maturity period of less than or equal to one year. Money market is not a term given to a particular place or any type of activity. It is collective name that comprises of all institutions and organizations that deals in financial instruments of short-term nature. 

Money market is an important part of Indian financial system which fulfills short-term needs of funds for borrowers like government, individual investors etc. Lenders are also able to utilize their idle lying funds for earning returns by converting them into effective investments through the medium of money market. Various instruments which are traded in money market are treasury bills, commercial papers, certificate of deposits, bill of exchange, promissory notes etc. 

Characteristics of Money Market

Various characteristics of money market are as discussed below: –

  1. It is a market of short-term financial securities which are close substitutes of money. All of the securities traded in money market are highly liquid having a maturity period ranging in between one day and one year only. 
  2. Money market is a collection of markets but not a single place. All of the organizations and institutions that trades in overnight short-term financial assets are included in money market. 
  3. It is termed as a wholesale market of short-term instruments that operates over the phone without the involvement of brokers.
  4. Money market instruments are characterized by their high safety nature. All the instruments traded in this market have short maturity period that is equal to or less than one year.
  5. This market is regulated by Reserve Bank of India for ensuring optimum liquidity in market. All interest rates in money market are monitored by RBI for offering reasonable rates to both suppliers and borrowers. 
  6. Money market serve an important medium for tackling short term liquidity crisis in market by channelizing the surplus funds from peoples to deficit areas.
  7. It is a need based market where market is shaped in accordance to the demand and supply of money.

Instruments of Money Market

Various instruments of money market are described in points given below: 

  1. Promissory note: Promissory notes are earliest types of bills that include a written promise made by one party to another party for paying a definite sum of money at specified future date. It becomes due for payment after 90 days within 3 grace days. Promisor and Payee are 2 parties to promissory notes.
  2. Commercial Bills: Commercial bill is another type of money market instrument which is somehow similar to promissory notes. However, these bills are drawn by creditor and accepted by debtor’s bank. Commercial bills can be discounted with broker or bank by creditor. There are three parties to commercial bills that are Drawer, Drawee and Payee.
  3. Treasury Bills: Treasury bills are one of the safest form of money market instruments available in market. These are issued by central government for raising short-term funds in order to meet its current obligations. Treasury bills carry zero amount of risk, therefore returns are not much attractive. It does not contain any interest rate and investors benefits from making capital gains as they are sold by government at a discounted value but full face value is paid back on maturity. Treasury bills is one of the optimum tool of investment available for risk-averse investors.
  4. Call and Notice Money: Call money market is one where funds are lend and borrowed for one day. Whereas, notice market is one where borrowing and lending of funds take place for time period up to 14 days. No collateral security is required for raising funds in these markets. A borrower issues a depository receipt to lender and he is required to pay back the borrowed amount along with interest on call. 
  5. Inter-Bank Term market: It is available only to cooperative and commercial banks in India. In this market, borrowing and lending of money is done without any collateral security for time period of over 14 days to 90 days.
  6. Commercial Papers: Commercial papers are unsecured instruments issued by highly reputed companies for raising short-term funds. It is serve as a promissory notes created by corporates in order to meet their working capital requirement by borrowing from public instead of banking institutions. This instrument can only be used by companies with high worth and good reputation in market. Maturity period of commercial paper ranges in between 15 days to 1 year.