What is money market

The money market is referred to as dealing in debt instruments with less than a year to maturity bearing fixed income. In this article, we will cover the meaning of money market instruments along with its types and objectives. Money Market is a financial market where short-term financial assets having liquidity of one year or less are traded on stock exchanges. The securities or trading bills are highly liquid. The participants in this financial market are usually banks, large institutional investors, and individual investors.

These include treasury bills, certificates of deposit , commercial paper, repurchase agreements, etc. Since the securities being traded are highly liquid in nature , the money market is considered as a safe place for investment. The Reserve Bank controls the interest rate of various instruments in the money market. The degree of risk is smaller in the money market. This is because most of the instruments have a maturity of one year or less.

Hence, this gives minimal time for any default to occur. The money market thus can be defined as a market for financial assets that are near substitutes for money.

The money market plays a very significant role in the economy. It allows a variety of participants to raise funds. It offers liquidity to both the investors and the borrowers. And hence maintaining a balance between the demand and supply for money.

Thus facilitating the development and growth of the economy. T-bills are one of the most popular money market instruments. They have varying short-term maturities. The Government of India issues it at a discount for 14 days to days.

These instruments are issued at a discount and repaid at par at the time of maturity. And are issued in lots of Rs. Commercial bills, also a money market instrument, works more like the bill of exchange. Businesses issue them to meet their short-term money requirements. These instruments provide much better liquidity. As the same can be transferred from one person to another in case of immediate cash requirements. It is usually issued through a promissory note. And the duration of these varies between 3 months to 1 year.

The same, when issued by a financial institution, is issued for a minimum of 1 year and a maximum of 3 years. Hence serves as an alternative to borrowing from a bank. Also, the period of commercial paper ranges from 15 days to 1 year. Also, CP has to be issued at a discount to face value.

It is a financial instrument with a written promise by one party, to pay to another party, a definite sum of money by demand or at a specified future date, although it falls in due for payment after 90 days within three days of grace.

However, Promissory notes are usually not used in the business, but USA is an exception. The bills of exchange can be compared to the promissory note; besides it is drawn by the creditor and is accepted by the bank of the debater.

The bill of exchange can be discounted by the creditor with a bank or a broker. Additionally, there is a foreign bill of exchange which becomes due for payment from the date of acceptance. However, the remaining procedure is the same for the internal bills of exchange. Call and Notice Money exist in the market. With respect to Call Money, the funds are borrowed and lent for one day, whereas in the Notice Market, they are borrowed and lent up to 14 days, without any collateral security.

The commercial banks and cooperative banks borrow and lend funds in this market. However, the all-India financial institutions and mutual funds only participate as lenders of funds.

The inter-bank term market is for the cooperative and commercial banks in India who borrow and lend funds for a period of over 14 days and up to 90 days. This is done without any collateral security at the rates determined by markets. Money market accounts pay higher interest rates as compared to other types of banks accounts that includes passbook savings accounts and regular savings accounts, provided they maintain minimum balance. However, the interest rate is compounded, tiered, and credited monthly so that a money market account gathers more profit as the account balance increases.

The call money is an important part of Indian Money market, where surplus funds on day-to-day basis are traded. The Treasury bills, repurchase agreements, commercial papers etc. It consists of a large number of near-money assets of various types such as the bills of exchange, treasury bills, bonds etc. Plan your next. Dream Home. Wealth Building. Child's marriage. Child's education.

Tax saving. Money Market Instruments. What are Money Market Instruments. Features of Money Market Instruments. Functions of Money Market Instruments. Provides Funds The Money Market Instruments help to provide short-term funds to the private and public institutions who need finance for their working capital requirements. Federal Reserve Board. Federal Deposit Insurance Corporation. Securities and Exchange Commission.

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I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Bonds Fixed Income Essentials. Table of Contents Expand. What Is the Money Market? Understanding the Money Market. Who Uses the Money Market? Types of Money Market Instruments. Money Markets vs. Capital Markets. Key Takeaways The money market involves the purchase and sale of large volumes of very short-term debt products, such as overnight reserves or commercial paper.

An individual may invest in the money market by purchasing a money market mutual fund, buying a Treasury bill, or opening a money market account at a bank. Why Is the Money Market Important? What Are the Downsides of Money Markets? Article Sources.

Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. The difference between the face value of CDs and the prepaid interest is received by the bank from the purchaser of CDs at the time of issue. The bearer of CDs can sell the same to another purchaser. The bank maintains no record other than the Certificate No. A bank does not issue certificate of deposits for the value exceeding the limit prescribed for it by the Bangladesh Bank.

The outstanding amount of CDs was about Tk 1. The amount of resources mobilised through issue of CDs was only 0. Some important changes are also discernible in interbank market during FY to The Certificate of deposit had already been discontinued. Call money market is the most sensitive part of money market, in which a good number of players from the banking as well as the non-bank financial sector actively participate on a regular basis.

Initially, this market developed as an inter-bank market where the banks in temporary deficit of cash resorted to borrowing from other banks having surplus funds. As banks were in the public sector until the beginning of the s, the Bangladesh Bank provided them with liberal refinance facilities at concessional rates.

There was hardly any need for raising funds from the call money market during this period. Moreover, administered interest rate regime, easy availability of borrowing from central bank and its directive to provide credit to priority sectors were the major impediments in development of a call money market in the country. Notwithstanding the fact, banks participated in a limited scale in the call money market mainly to wipe out the temporary mismatch in their assets and liabilities.

A turning point was the denationalisation of Uttara and Pubali Bank in and respectively and the government decision to allow private banks to operate in the country. Formation of private banks during the s provided new opportunities to develop this segment of money market. In , two investment companies and in , one leasing company were allowed to participate in the call money market.

At present, all banks including specialised ones and non-bank financial institutions are allowed to participate in this market. Basic features the transactions of call money market are mainly Dhaka based. Since, the head offices of all banks and financial institutions are located in Dhaka, the branches of the banks and financial institutions from all over the country remit their excess funds to their respective head offices at Dhaka for investment.

The head offices, after meeting their usual liquidity requirement invest the surplus funds in the call money market. As there is no brokerage house or intermediary organisation, the transactions in call money market usually take place on the basis of bilateral negotiations.

Foreign banks are the main source of liquidity in the call money market. Cost of funds for foreign banks are very low as compared to the indigenous banks and as such they can hold a substantial amount of excess liquidity for lending in the call money market. In case of borrowing they are also at a very advantageous situation as compared to the local banks. Foreign banks have in their portfolio lower amount of non-performing loans compared to domestic private banks and nationalised banks.

Local private banks appear to be the regular borrowers in the call money market. Information systems of banks in Bangladesh are outdated. Market players therefore, do not know much about the demand for and supply of fund. Banks and financial institutions having surplus funds take advantage of the market imperfection of domestic deficit banks.

Bangladesh Bank has circulated some guidelines to the lending and borrowing banks and financial institutions regarding operations in the call money market. Although it is not compulsory for banks to participate in the call market, they are advised to provide call loans considering liquidity, solvency and sources of repayment of borrowings by the borrowing institutions.

The demand for and supply of funds in the call market remains volatile throughout the year with some occasional turbulence. The transactions and the rate of interest are largely linked with government treasury bill market, seasonality in demand for bank loans, central bank's monetary policy, variation in discount rate, open market operations, changes in statutory reserve requirements, excess liquidity position of the banks etc.

The transactions and the variations of the rate of interest in call money market normally remain high during November to April and as such the rate of interest during this period also goes up. The underdeveloped nature of the inter-bank market in Bangladesh is evident from the large spread between the highest and lowest rates in the call money market. The lowest call money market rate always remained higher than the Bank Rate during the period from September to June One notable feature of the call money market is that the spread between lowest and highest call money market rate has been larger during the reform period.

It is because of the fact that with the implementation of FSRP, the need for funds of banks other than the Bangladesh Bank increased with abolition of easy refinance facility from the central bank.

Thereafter, the lowest inter-bank call money rate remained lower than the bank rate. The inter-bank call money rate varied with rise in excess cash reserves of banks. Experience suggests that when there was a sufficient excess reserve with banks, the inter-bank rate came down but the rate denoted increase with the accentuation of shortfall in reserves position of banks.

Compared to nationalised banks and domestic private banks, the foreign banks in general, and Islami banks in particular, held higher excess reserves with them. Foreign banks are the major sources of supplier of funds to the inter-bank market in recent years.