What is Money Market?



The money market is a key component of the financial system as it is the fulcrum of monetary operations conducted by the central bank in its pursuit of monetary policy objectives. It is a market for short-term funds with maturity ranging from overnight to one year and includes financial instruments that are deemed to be close substitutes of money.

In other words, The money market in 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 is a mechanism to clear short term monetary transactions in an economy.


According to the RBI, "The money market is the centre for dealing mainly of short character, in monetary assets; 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 and other institutions and individuals are bid by borrowers, again comprising institutions and individuals and also by the government."
According to Nadler and Shipman, "A money market is a mechanical device through which short term funds are loaned and borrowed through which a large part of the financial transactions of a particular country or world are degraded. A money market is distinct from but supplementary to the commercial banking system."
The money market performs three broad functions. 
1.It provides an equilibrating mechanism for demand and supply of short-term funds.
2.It enables borrowers and lenders of short-term funds to fulfill their borrowing and investment requirements at an efficient market clearing price.
3.It provides an avenue for central bank intervention in influencing both quantum and cost of liquidity in the financial system, thereby transmitting monetary policy impulses to the real economy.
The objective of monetary management by the central bank is to align money market rates with the key policy rate. As excessive money market volatility could deliver confusing signals about the stance of monetary policy, it is critical to ensure orderly market behavior, from the point of view of both monetary and financial stability. Thus, efficient functioning of the money market is important for the effectiveness of monetary policy.
In order to meet these basic functions efficiently, money markets have evolved over time spawning new instruments and participants with varying risk profiles in line with the changes in the operating procedures of monetary policy. Changes in financial market structures, macroeconomic objectives and economic environment have called for shifts in monetary regimes, which, in turn, have necessitated refinements both in the operating instruments and procedures, and in institutional arrangements by central banks.
Money Market
On the whole, Money market is for short term monetary transactions.It provides facility for adjusting liquidity to the banks, business corporations, non-banking financial institutions (NBFs) and other financial institutions along with investors.

These markets are described as “money markets” because the assets that are bought and sold are short term—with maturities ranging from a day to a year—and normally are easily convertible into cash. Money markets include markets for such instruments as bank accounts, including term certificates of deposit; interbank loans (loans between banks); money market mutual funds; commercial paper; Treasury bills; and securities lending and repurchase agreements (repos).




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