Question

Discuss the money market in brief.

Hint:

{Money Market = Short-term funds (≤ 1 year)}
Instruments: T-Bills, CP, CD, Call Money
Regulator: RBI

Answer 1

Definition: The money market is a component of the financial market where short-term funds (usually up to one year) are borrowed and lent. It deals in highly liquid and safe financial instruments that are close substitutes for money. Key Features of Money Market:

• Short-term: Maturity period up to one year
• High Liquidity: Instruments can be easily converted into cash
• Low Risk: Instruments are relatively safe with low default risk
• No Physical Location: It is a telephone, internet, and electronic network-based market
• Participants: Banks, financial institutions, corporations, mutual funds, RBI, and government

Money Market Instruments:

Instrument	Description
Treasury Bills (T-Bills)	Short-term borrowing by government (91 days, 182 days, 364 days)
Commercial Paper (CP)	Unsecured short-term promissory notes issued by corporations
Certificate of Deposit (CD)	Time deposit issued by banks with fixed maturity
Call Money	Loans repayable on demand, usually overnight between banks
Repurchase Agreements (Repos)	Sale of securities with agreement to repurchase at later date
Commercial Bills	Bills of exchange arising from trade transactions

Objectives/Functions:

• Provides short-term funds to borrowers
• Offers liquidity to investors
• Helps in implementing monetary policy (RBI uses money market operations)
• Maintains equilibrium between demand and supply of short-term funds

Regulator: In India, the money market is regulated by the Reserve Bank of India (RBI).