Define money market. Discuss the various instruments of money markets.
Ans. The money market is. a market for financial assets that are close substitutes for money. It is a market for overnight to short-term funds and instruments having a maturity period of one or less than one year. It is not a physical location (like the stock market), but an activity that is conducted over the telephone. The money market constitutes a very important segment of the Indian financial system. The various types of money market instruments are as follows:
(1) Trade credit is one of the most common sources of short-term financing. It is the credit extended by a seller to the buyer (corporate) while the latter make purchases for production. The payment is made after the sale of the finished product.
(2) Bank finance from Scheduled Banks is the next source of short-term loan. Scheduled Banks consist of banks listed under the second schedule of the RBI Act, 1934 consisting of Commercial Banks and Cooperative Banks. They are the main constituents of the money market and provide most of the short- term working capital finance to the corporate sector by granting loans, overdrafts or cash credit and through the discount of bills or other commercial papers. Banks extend credit to all sectors of the industry ranging from the small-scale sector like handlooms to the large industries like textiles, engineering, chemicals, etc.
(3) Commercial bills market: A bill of exchange is a written order from the seller to the buyer instructing him to pay a specified amount on a specified date. Such an instrument can be used as a means of finance whereby the supplier of goods grants trade credit to the buyer. Once the bill is "accepted" by the buyer, he can "discount" it with a bank, i.e. sell it to the bank for an amount less than the amount specified in the bill. The difference between the two amounts is the interest for the period of credit. The use of bills is a flexible way of granting trade credit.
(4) Commercial paper is an unsecured negotiable short-term promissory note with fixed maturity period usually issued in large denominations by the leading nationally reputed companies for financing their current transactions and seasonal need for funds. The maturity period of commercial paper varies 30 days to six months. The paper is sold at a'discount from the face value with the difference representing the interest for from the period.
(5) Certificate of Deposits is marketable bearer or registered fund receipts deposited in banks with specified maturity periods and interest rates. They are negotiable, highly liquid and riskless instruments. CDs have a maturity of three months to one year .
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