Money Market in India: Meaning, Characteristics, Components, Segment

What does the Money Market in India Mean?

Money Market refers to an organization that lets people to borrow and lend money for a limited period of time. The time span is shorter than a year.

Financial instruments are exchanged in the money market for a short time and have a lot of liquidity. Commercial papers, certificates of deposits, treasury bills, and other financial instruments are examples. If you require high liquidity, it is recommended that you invest in the money market.

However, as with any type of investment, there are risks involved. To begin with, the money market is unstructured because it is unregulated. The money market offers lower overall returns than other financial instruments, but it does provide investors with a variety of alternatives to choose from. Second, defaulting on commercial papers and other instruments can put your assets at risk.

A money market account, in general, functions similarly to a bank account. The concept is similar in that you deposit money in an account and the bank pays you a specific amount of interest. A modest set of documentation, often including your personal information, is required to start a money market account. You may be required to meet a minimum initial deposit limit, depending on the bank.

Keep in mind that a money market account is a cross between a savings and a checking account. As a savings account, you can deposit money and receive interest on it, but you can also withdraw money at any time using a debit card, just like a checking account. However, the number of permitted transactions and cheques are both limited.

Establishing a money market account is a excellent way to save for an emergency fund or to build/buy a property.

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What are the Two Types of Finances? 

  • The first category is for day-to-day expenses such as salary payments, raw material purchases, electricity bills, and so on.
  • The second type is to meet the company’s capital requirements, which could be used to buy new machinery or improve old ones.

Maintaining liquidity is one of the financial system’s challenges. When expenditures and payments are not in sync, liquidity may be unavailable. The ability of financial systems to fulfill all revenues at once by purchasing the shortfall funds of the Money Market paved the way.

Characteristics of the Money Market in India

  • Money markets in India are not restricted to any particular land, country, or region, and thus can be found throughout the country.
  •  Transactions are created with money or funds.
  • It is entirely dependent on short-term cash and assets that are easily convertible into money, i.e. near money.
  • It trades a variety of instruments because it is not restricted to a single market but also has multiple submarkets.
  • This market serves as a conduit for information about governance and monetary policy between other banks and the Reserve Bank of India.
  • To trade, no broker or third party is required. These are the characteristics that make the currency market more powerful.

Goal of The Money Market in India

  • Let consumers to borrow funds for a limited time in order to cover their needs swiftly, properly, and at a reasonable rate.
  • To utilize up extra revenue quickly, provide parking spaces.
  • Aid in the short-term elimination of deficits.
  • Give the RBI tools to control and regulate liquidity.

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Structure/Segment of the Money Market

Organized Sectors:

It is said to be organized because it is included systematically in the RBI. It has the SBI, RBI, and its seven Affiliated institutions, 20 state-owned banks, other formal and informal commercial banks, regional rural banks, and foreign banks.

Unorganized Sectors: 

Several local bankers and rural money lenders work in the unorganized sector. The chaotic money market is an old market made up primarily of local bankers, usurers, and other financial institutions.

  • The NBFC (Non-banking financial institutions) include the GIC (General Insurance Corporation of India Limited), LIC and other subsidiaries like the UTI(Unit Trust of India) which are also a part of the market. The banks are directly related. 
  • Moneylenders and localized banks exist in the unorganized sector. Because the operations are not controlled by the Reserve Bank of India, it comes into this category.
  • The lenders are all across the country, yet they are unrelated.
  • Commercial banks provide rediscount facilities to indigenous banks in exchange for RBI connections. Such an organization is more organized and has weak ties with the Reserve Bank of India.
  • Quasi(Partially) Governments and large corporations make short-term surplus funds accessible to the organized market through banks.

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The Components of the Money Market in India

Lenders that give short-term loans and borrowers who require short-term loans are the two key components.

1. Funds Supply

Organized Sectors 

The organized money market is that portion of the market that is regulated by the RBI and SEBI. The key actors in India’s organized money market include the government (central and state), Discount and Financing Houses in India (DFHI), mutual funds, corporations, commercial or cooperative banks, public sector firms, insurance companies, financial institutions, and non-bank financial companies (NBFCs). The Reserve Bank of India regulates them.

Unorganized Sectors

The RBI does not control or coordinate these sectors, hence they are not organized. Local bankers and rural credit banks make up the group.

2. Demands of Supply

Among the borrowers are:

  • Central Government 
  • State Government 
  • Village committees, municipalities, and other local governments.
  • Importers, exporters, and farmers are all industrial traders.
  • The public.

What is the Organized Money Market in India Sub-Market? 

These sub-markets make up the organized sector:

Call Money Market 

Due to a scarcity of cash, this creates an institutional system that allows some institutions to produce temporary surpluses. This form of market is dominated by banks, with the SBI serving as the lender. The broker maintains communication with the bank, develops a link between the credit and borrowing banks, and handles the money market as needed.

Treasury Bill Market

It is a risk-free, profitable, and highly liquid investment avenue for various financial institutions’ short-term surpluses. It carries little risk, is profitable, and provides good liquidity for some financial organizations. It is a significant source of revenue for the government.

Business Letter Market 

The business letter market deals with business letters from companies that conduct business. These bills usually are for three months. This invoice is a promise to pay the seller of the item a specified amount within the time limit specified by the buyer of the item. 

Collateral Loan Market

These markets deal with secured loans, often known as collateral loans. Commercial banks in India’s secured credit market offer short-term loans secured by government bonds, government equities, and bonds.

Money Market in India: Another Aspect

Private investors have very limited opportunities for direct participation in the Indian money market, which is an important aspect. NSE has recently started offering a set of money market instruments to regular investors. Private investors, however, are unable to use it due to the high volume of business and low liquidity. Yet there’s nothing to be concerned about here. You can invest passively in any of these instruments as a retail investor in India through a money market mutual fund.

Final Thoughts – Money Market in India 

Therefore, here’s everything you need to know about India’s money market. It is a vital artery in a country’s financial system that keeps supply and demand in check.

Frequently Asked Questions

How is the money market necessary overall?

The supply and demand for monetary transactions are balanced in the money market.

Is the money market the same as the stock market?

No. The main distinction is that the money market is not constrained by geography.

Is money marketing risk-free? 

It’s a lucrative, risk-free, and liquid investing option.

Why is it called the money market?

The money market is a highly liquid and dependable source of short-term debt. They are commonly viewed as cash equivalents that can be turned into cash in a short amount of time because to their properties.

Why is the money market important? 

The currency market is necessary for modern finance to function properly. Depositors can borrow money from people in need of short-term credit, allowing them to put their money to the most profitable use. These loans are typically repaid the same day, or within a few days or weeks.

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