[Commerce Class Notes] on Money Market Pdf for Exam

What is a Money Market?

Money Market transacts in itself very short-term debt investments. At the wholesale level, the market involves large-volume trades between the institutions and the traders. While at the retail level, it includes money market mutual funds that are bought by the individual investors and respective money market accounts are opened by the bank customers.

The money market is a pillar who contributes to the global financial system. The market involves overnight swaps of vast amounts of money between the banks and the various governments. The majority of the transactions happening in the money market are wholesale transactions which take place between the financial institutions and companies.

Money Market Explained

More specific way to understand what a money market is, we will understand the same from the below mentioned points:

  • The money market involves the purchase and sale of large volumes but of very short-term debt products, like the overnight reserves or even the commercial paper.

  • An individual may invest in this money market by purchasing a money market mutual fund, may be a T-bill or by opening a money market account in the bank.

  • The money market is characterized by assurance of high degree of safety with relatively low rates of return.

Money Market Instruments

The money market instruments that facilitates the functioning of this market and are used for various purposes are discussed hereunder:

  1. Certificate of Deposits

These are commonly offered to the consumers by banks, thrift institutions and credit unions.

  1. Repurchase Agreements 

These are short-term loans which operates for less than a week and more frequently for one day 

  1. Money Market Mutual Funds

 A short-term instrument debt operated by professional institutions. 

  1. Commercial Paper

Short term instruments like the promissory notes that are issued by the company at discount on the face value.

  1. Treasury Bills

Short-term debt obligations of a national government which are opened to be matured within three to twelve months.

  1. Money Funds

These are the pooled short-maturity, standard investments that buy money market securities on behalf of retail or institutional investors. 

  1. Foreign Exchange swaps

Exchanging the set of currencies at a spot date and then reversing the exchange of currencies at a predetermined time. 

  1. Short-lived Mortgaged 

They are the asset backed securities.

Money Market Controlled by

RBI (Reserve Bank of India) controls the money market. Money Market is a big segment of the financial market in India where the borrowing and lending function occurs in short-term funds which take place in these markets. The maturity of the money market instruments is from minimum one day to a maximum of one year. 

In India, the Money Market is regulated by both RBI (the Reserve bank of India) and also the SEBI (the Security and Exchange Board of India). The nature of transactions in this kind of market is such that they are functions in large amounts and high in volume. 

So, we can say that the entire market is dominated by a small number, yet with large players. The RBI together with the SEBI lays down the regulations as are followed by the participants in this market, also they regulate the market and any faults occurring in these markets, respective penalties are too fixed by the two bodies. 

Wholesale transactions even make their way into the hands of consumers who are actually the components of money market mutual funds and of other investments.

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