In an orderly money market, investors can withdraw funds and consumers can use low-cost emittance services to transfer funds between markets. Services comparable to currency exchanges are available on the London Money Market, which attracts customers from all around the world. Check out these features of developed money market to enhance your knowledge.
A unified interest rate structure is another hallmark of a mature money market, setting it distinct from its less developed counterparts. Interest rates in several niche markets are related to one another. Submarket interest rates adapt in response to movements in the prime lending rate set by the central bank. If you’re curious about role of rbi in money market, click here to read more.
Features of Developed Money Market
The demand and supply for financial services in any segment of a mature money market can have an impact on the entire market. It also features a sophisticated commercial banking infrastructure.Even in a mature financial industry, external events can have a significant impact. Limitations on international trade, economic boom and bust cycles, armed conflict, and unstable governments are all examples of such events. In this article, we will discuss about features of developed money market in brief with examples for your better understanding.
Plenty of Resources Available
Another indicator of the money market’s development and maturity is the availability of numerous resources. The London Money Market has access to sufficient funds from a wide variety of domestic and international sources. Foreigners often view investments in the highly flexible assets of industrialized countries as a secure and lucrative option. More money is available since it is simpler and cheaper to transfer money from one location to another. There must constantly be sufficient funds available in the money market for it to function efficiently and effectively.
This is the natural consequence of the fact that all financial markets strive to increase their capital bases. Countries with unstable governments and unstable exchange rates are not attractive to foreign investment. This can work without the need for a significant financial market. It can nevertheless create a money market even if it is unable to obtain short-term financing from other countries.
Sub-markets
In a mature money market, you can easily identify the well-developed and responsive niches. The term “money market” actually describes a collection of “submarkets,” or specialized financial exchanges, that trade in certain types and maturities of loans. Acceptances, call loans, collateral loans, FX, bills of exchange, commercial and treasury bills, and other financial instruments will all have their own markets. No money market can arise if these niche markets don’t exist or are insensitive to movement in interest and discount rates. The New York Money Market and the London Money Market both include these secondary markets.
There must be many customers and sellers in each niche market for it to thrive. As Professor S.N. Sen reportedly put it, “If there are more sub-markets, the structure of the money market will be both more developed and wider.” Still, it’s crucial to merge the various niche markets. Borrowers, it claims, will relocate their operations to areas of the economy where interest rates are lower in order to maintain a profit margin. When this occurs, lending activity will shift to areas where higher interest rates are available. Therefore, this will facilitate the transfer of products between different marketplaces.
In underdeveloped countries like India, many secondary markets either don’t exist or are just tenuously connected. There is a lack of synergy and a lack of compatibility between the various market components. There is a large variation in interest rates throughout the various regions of India. A stagnant money market lacks any and all of its essential submarkets, such as the bill market. Despite this, during the past few years numerous distinct types of marketplaces have become more interconnected.
Industrial Structure that is very Well Developed
The financial market cannot function optimally and achieve its primary aim until a sophisticated industrial infrastructure is in place. The financial industry now has a greater need for this strategy. Features of a developed money market include high liquidity, meaning that participants can easily buy and sell financial instruments at competitive prices.
Assets of Money
There are many different types of financial instruments that can be traded on a developed money market, including bills of exchange, treasury bills, promissory notes, and short-term government bonds. As more goods are perceived as analogous to currency, the money market will expand. The uniformity of the billing process facilitates both acceptance and payment. These assets should be readily available for purchase on the money market on a regular basis. Many investors and traders could be considering trading in these credit instruments. Without additional credit instruments and near-money assets, the money market will not expand. Trading in short-term assets is what keeps the money market active and competitive.
A Central Bank is there
The Central Bank serves as the bank for banks. They are able to hold on to cash and have resources available to them in times of need thanks to the discount on qualified stocks. Simply put, it facilitates the conversion of private banks’ and other financial institutions’ assets into cash during times of economic uncertainty. The central bank can benefit from open market activities by either collecting too much money during quiet times or dispensing an excess amount during busy times. As a result, the central bank is tasked with directing, guiding, and supervising the monetary system. Because both the central bank and the money market are still developing, the bank has little sway over the latter.
Banks that are very Well Organized
Commercial banking institutions control the global money market. They’re the best options for getting cash rapidly. What they do with loans and payments has implications for the entire international financial system. The commercial banks serve as a vital link between the central bank and the various other components of the country’s efficient banking system. Due to the immaturity of the money market, the commercial banking sector is still in its formative stages.
Having the Right Credit Tools Available
For the money market to mature, it requires a regular supply of easily negotiable tools that participants can buy and sell. These tools include, but are not limited to, treasury bills, bills of exchange, and similar financial instruments. The money market cannot function without a wide variety of dealers to facilitate trades in these assets. First, there needs to be a sizable network of sellers and brokers to facilitate transactions in the underlying equities before such instrument can exist. In addition, there must be dealers for this kind of asset trading to occur within a money market that is still in its infancy. Features of a developed money market provides a platform for efficient allocation of funds, allowing borrowers and lenders to meet their short-term financing needs.
When there is a Well-developed Money Market and Better Business Ties,
When there are more strikes and lockouts in the country, production suffers and the need for short-term funding drops. Therefore, a prosperous financial market must provide a conducive setting for doing business.
Money Market Policies that Combine Monetary and Economic Policies
The Central Bank determines monetary policy, while the government formulates fiscal policy. Monetary policy aims to maintain stable prices, while fiscal policy aims to maximize tax revenue. Inconsistencies between these policies could hamper the smooth functioning of a mature financial market.
Attractions Around the World
Foreign investors are just as interested in the developed money markets. An advanced money market attracts participants from all around the world, including foreign dealers, borrowers, and lenders.
Structure of Interest Rates that Fit Together
A further feature of a sophisticated money market is the integration of interest rate structures. The varying interest rates in the various segments of the market are related. Specifically, the interest rates in various submarkets shift in a manner that is directly proportionate to the shift in the bank rate. The central bank of a country manages the money market due to its structured interest rates.
Foreign Trade Promotion in a Well-developed Money Market
Foreign exchange is used in a greater number of international bills and deals when the money market is healthy and there is substantial international trade. There will also be a discount on international invoices. The currency conversion will be simple to grasp. Features of a developed money market offers a wide range of short-term financial instruments such as treasury bills, commercial paper, certificates of deposit, and repurchase agreements.
Funds that are Flexible and Enough
A well-functioning money market requires a sufficient supply of capital and other resources. In addition, the amount of money entering the money market should rise and fall in response to the demand for funds.
FAQ
How does the Money Market Help the Growth of the Economy?
By providing commercial banks, government organizations, and other vital groups with short-term access to cash, the money market aids in the growth and stability of an economy. If you have extra cash lying around and want to put it to work for you, you may want to consider investing in the money market.
Why is it Important to have a Money Market that is Well-developed?
The money markets are a useful tool for the central bank in regulating the economy’s liquidity. The money market allows users to satisfy their needs for short-term funding at negligible interest rates. It promotes development in the commercial and industrial sectors as well as the financial sector. The central bank of a country manages the money market due to its structured interest rates.
What’s the Difference between a Developed Money Market and One that hasn’t Grown Yet?
Commercial banks, a central bank, bill brokers, discount and acceptance houses, and other financial organizations are all essential components of a mature money market. In contrast, the informal financial sector includes individuals such as pawnshop operators, loan sharks, local bankers, traders, merchants, landowners, and so on.
Final Words
What a financial market lacks but ought to have The commercial banking system is in disarray, the central bank is weak, credit instruments are scarce, niche markets lack diversity in interest rates, and so on. It’s difficult for those in charge of the economy when the money market isn’t completely developed. Check out these features of developed money market to enhance your knowledge.
