Definition

The money market is that part of a financial market which deals in the borrowing and lending of short term loans generally for a period of less than or equal to 365 days. It meets the short term requirements of borrowers and provides liquidity or cash to the lenders.
• It is a place where short term surplus investible funds at the disposal of financial institutions and individuals are bid by borrowers, again comprising institutions and individuals and also by the government.
• The Indian money market consists of Reserve Bank of India, Commercial banks, Co-operative banks, and other specialized financial institutions. The Reserve Bank of India is the leader of the money market in India.
• Money market does not refer to any specific market place. Rather it refers to the whole networks of financial institutions dealing in short-term funds, which provides an outlet to lenders and a source of supply for such funds to borrowers.
• It should be noted that money market does not deal in cash or money but simply provides a market for credit instruments such as bills of exchange, promissory notes, commercial paper, treasury bills, etc. These financial instruments are close substitute of money.
• Some Non-Banking Financial Companies (NBFCs) and financial institutions like LIC, GIC, UTI, etc. also operate in the Indian money market.

Structure of Indian Money Market
Indian money market is characterized by two sectors –
• Organized sector- The organized sector is within the direct purview of RBI regulations.
• Unorganized sector – The unorganized sector consists of indigenous bankers, money lenders, non-banking financial institutions, etc.

Major functions of money market
1. To maintain monetary equilibrium – It means to keep a balance between the demand for and supply of money for short term monetary transactions.

2. To promote economic growth – Money market can do this by making funds available to various units in the economy such as agriculture, small scale industries, etc.

3. To provide help to Trade and Industry – Money market provides adequate finance to trade and industry. Similarly, it also provides facility of discounting bills of exchange for trade and industry.

4. To help in implementing Monetary Policy – It provides a mechanism for an effective implementation of the monetary policy.

5. Money market provides non-inflationary sources of finance to government. It is possible by issuing treasury bills in order to raise short loans.

Instruments of Money Market

• Call Money
a. Call money is mainly used by the banks to meet their temporary requirement of cash. It is also known as money at call and money at short notice.
b. In this, market money is demanded for an extremely short period. The duration of such transactions is from a few hours to 14 days. These transactions help stock brokers and dealers to fulfill their financial requirements. The rate at which money is made available is called as call rate. Rate is fixed by the market forces such as the demand for and supply of money.

• Treasury Bill

a. It is a market for sale and purchase of short-term government securities.
b. These securities are called as Treasury Bills, which are promissory notes or financial bills issued by the RBI on behalf of the Government of India.
c. There are two types of treasury bills:
i. Ordinary or Regular Treasury Bills
ii. Ad Hoc Treasury Bills.
d. Treasury bills are highly liquid instruments. At any time the holder of treasury bills can transfer or get it discounted from RBI.
e. The maturity period of these securities range from as low as 14 days to as high as 364 days.
f. They have become very popular due to high level of safety involved in them.

• Cash Management Bills

a. The Government of India, in consultation with the RBI, decided to issue a new short-term instrument, known as Cash Management Bills (CMBs), to meet the temporary mismatches in the cash flow of the Government.
b. The CMBs have the generic character of T-bills but are issued for maturities less than 91

• Certificate of Deposits (CDs)

a. The certificate of deposits is issued by the Commercial Banks
b. They are worth the value of Rs. 25 lakh and in multiple of Rs. 25 lakh
c. The minimum subscription of CDs should be worth Rs. 1 Crore.
d. The maturity period of CD is as low as 3 months and as high as 1 year.
e. These are the transferable investment instrument in a money market.
f. The government initiated a market of CDs in order to widen the range of instruments in the money market and to provide a higher flexibility to investors for investing their short term money.

• Commercial Papers (CPs)

a. Commercial paper (CP) is an investment instrument which can be issued by a listed company having working capital more than or equal to Rs. 5 cr.
b. The CPs can be issued in multiples of Rs. 25 Laths. However, the minimum subscription should at least be Rs. 1 cr.
c. The maturity period for the CP is a minimum of 3 months and maximum 6 months.
d. Commercial paper (CP) is a popular instrument for financing working capital requirements of companies.
e. It can be issued for period ranging from 15 days to one year. Commercial papers are transferable by endorsement and delivery.

• Repurchase Agreements

a. A repurchase agreement, also known as a repo, is the sale of securities together with an agreement for the seller to buy back the securities at a later date.
b. The repurchase price should be greater than the original sale price, the difference effectively representing interest, sometimes called the repo rate.
c. The party that originally buys the securities effectively acts as a lender. The original seller is effectively acting as a borrower, using their security as collateral for a secured cash loan at a fixed rate of interest

• Short Term Loan

a. It is a market where the short term loan requirements of corporate are met by the Commercial banks
b. Banks provide short term loans to corporates in the form of cash credit or in the form of overdraft. Cash credit is given to industrialists and overdraft is given to businessmen.