A market like this doesn’t exist in isolation. Most tasks are conducted via telephone, while an increasing number are transitioning to online platforms. A corporation can utilize this online market to meet its short-term financial needs by trading low-risk, liquid, and uninsured assets. When a company need operating capital, it often approaches the banking sector. Read on to discover everything there is to know about structure of money market and to become a subject matter expert on it.
The term “money market” refers to the section of the financial market where short-term cash and assets are traded. These financial instruments and assets often have a maturity of less than a year, making them extremely liquid. Investors can buy and sell a variety of financial instruments on the money market, including commercial papers and Treasury notes.
Structure of Money Market
One form of funding is a one-time investment made at the start of the production process and lasts for its entirety. The “money market” is where people go to borrow and lend money for short periods of time. Almost every aspect of the global financial system, including but not limited to financial institutions, businesses, corporations, and government agencies, has continual issues in managing liquidity as a result of the timing differences between expenditure and revenue. This is mostly due to the fact that producing money and spending money do not always occur simultaneously. In this article, we will cover the structure of money market along with equivalent matters around the topic.
Brokers of Finances
You can find them in any of the major towns; however, the cloth, grain, and commodity markets are the finest places to do so. They facilitate transactions between those seeking loans and those willing to lend.
Money Market Call and Notice
In the so-called “money market,” transactions involving money assets occur constantly. The lender will often remind the borrower two or three days before the payment is due. Once the borrower receives this letter, he or she has the specified amount of time to repay the loan. When a bank needs cash for only one day, they typically turn to the call money market. In the call money market, commercial banks, cooperative banks, and primary dealers actively participate, while RRBs are excluded from this membership. Non-banking financial entities such as LIC, GIC, UTI, and NABARD have the authorization to lend in the money market.
Repos
A repo transaction or reverse repo transaction occurs when two parties negotiate the simultaneous sale and purchase of an asset. Repo allows a seller to quickly collect funds by selling shares with a mutual agreement to repurchase them at a mutually agreed upon future date and price. The buyer’s goal is the same as the seller’s: to make a profit by reselling the securities to the seller at a higher price. Repossessions of government securities in India have been available to the public since December 1992. The Reserve Bank of India (RBI) first held auctions of government assets utilizing the “Reverse Repos” system in November 1996.
Unorganized Business
Local moneylenders, tribal banks, hundis, and similar institutions fall within this category. They are considered part of the “unorganized sector” because they are not regulated by the RBI or anybody else. The LIC, the GIC and its subsidiaries, and the UTI are just a few examples of non-bank financial institutions that participate in this market through banks. The structure of the money market refers to the overall framework and organization of the market for short-term financial instruments.
Commercial Papers (cps)
“Commercial paper,” or “CP,” is a form of unsecured money market asset that takes the form of a promissory note and has a specified maturity date. They detail a provider’s repayment obligations throughout the coming years. Moreover, they are very fluid and risk-free. They are typically issued by large, nationally recognized manufacturing and banking institutions with excellent credit ratings and a history of on-time debt repayment. The first CPs were on sale in India in January of 1990. The original idea behind CPs in India was to provide a new channel for investors to participate in while also expanding access to short-term financing for businesses with high credit ratings. The RBI adjusted its previous practices in order to expand the CP market. Companies, primary dealers (PDs), and all types of Indian banks can issue certificates of participation.
Nidhis
They interact with participants in the same way as mutual benefit funds do. The co-op relies heavily on dues paid by its members. The co-op offers low-interest loans to its members, who can use the funds for things like house improvements. You can only get them in South India, and they have a distinctively southern flavor. Chit money and Nidhis are both unregulated.
Cds (certificates of Deposit)
A certificate of deposit (CD) is a form of uninsured, negotiable promissory note that is sold at a discount from its face value. Commercial banks and organizations that handle development funds are the ones that hand them out. Banks redeem promissory notes, known as certificates of deposit (CDs), for money deposited for a specified period of time at a specified interest rate. India sold the first CDs in June of 1989. The primary intent of the scheme was to open the door for private banks to raise capital through the sale of certificates of deposit (CDs). The initial phase of the project involved the distribution of compact discs for donations of at least 1 crore Rupees. You can harvest them anywhere from three months to a full year after planting. You can easily transfer them to another recipient, but only after 45 days have elapsed.
Chit Funds
They relate to monetary matters. The group’s members contribute to the fund on a consistent basis. Distributing the collected funds is done to one or more members according to predetermined criteria. Besides, the structure of the money market involves various participants, including banks, financial institutions, corporations, and government entities.
Organized Market
The Reserve Bank of India, State Bank of India, nationalized commercial banks, foreign banks, and Regional Rural Banks form the “organized sector” of India’s economy. The RBI’s systematic approach in organizing this sector has led to its terming as “organized.” What sets the financial market apart and how it operates:
T-bills are Short for Treasury Bills
Treasury bills are short-term bonds issued by the Reserve Bank of India on behalf of the Indian government. Treasury bills are a common name for these types of investments. They are the primary source of quick funding for the government. They are useful for short-term cash flow management. The Government of India currently offers for public sale treasury notes with maturities of 91 days, 182 days, and 364 days. State governments do not issue Treasury bills. Since the implementation of the bidding mechanism, the market has determined the interest rates for all TBs.
Commercial Bills
Business bills are short-term, low-risk, and tradable debts used for self-payment. These negotiable documents allow vendors to draw funds from buyers to cover product costs, known as trade bills. When commercial banks accept trade bills as payment, they can issue commercial bills. Negotiating a later payment deadline, known as usance bills, is possible with the seller, with maturity ranging from 30 to 90 days. If short on funds, vendors may request a fee reduction from their bank during the usage period. By discounting commercial invoices, banks extend credit to customers. Banks can re-discount commercial bills multiple times, generating profits each time.
Mmmfs are Money Market Mutual Funds
To encourage participation in the money market by retail investors, the Reserve Bank of India (RBI) established money market mutual funds in April 1992. Money market mutual funds invest the funds of many individual investors in money market instruments such as call money, repurchase agreements (repos), treasury bills, certificates of deposit (CDs), and certificates of participation (CPs). These are debt instruments with maturities of one year or less. The structure of the money market allows for efficient allocation of funds between surplus and deficit units, facilitating short-term borrowing and lending.
House of Discount and Finance
The Reserve Bank of India (RBI) established it in April 1988 to increase the size and activity of the Indian money market. The Reserve Bank of India (RBI), along with public sector banks and other financial institutions in India, own the corporation. However, the DFHI buys and sells government bonds, treasury bills, commercial bills, certificates of deposit, certificates of participation, money market funds, and call deposits. DFHI’s role as a money market go-between has facilitated the investment of surplus funds by enterprises, banks, and other financial organizations.
Indigenous Bankers
They function much like a bank, taking deposits, lending money, and exchanging currencies. Using the hundi, individuals can borrow money for a brief period of time. Indigenous communities utilized it as a form of currency. Each market and each financial institution has its own interest rate. They may rely not just on the initial investment but also on further funds from other sources.
Money Lenders
Money lending is their primary occupation. Moneylenders dominate villages. They are still a common sight in urban areas. Generally speaking, interest rates are somewhat high. Lenders dole out large amounts of credit for uses that contribute little to the economy. The vast majority of users are service providers, artisans, factory employees, small shopkeepers, and farmers. Moreover, the structure of the money market includes rating agencies that assess the creditworthiness of issuers, providing valuable information to investors.
FAQ
Who Uses Money Markets the Most?
The key participants in the money market are commercial banks, governments, corporations, government-sponsored enterprises, money market mutual funds, futures market exchanges, brokers and dealers, and the Federal Reserve.
How does the Money Market Work?
There are two types of players in India’s financial market: the regulated and unregulated private sectors. Moreover, the Reserve Bank of India (RBI), other commercial banks, rural banks, and even foreign banks are all part of what is known as the “organized sector” in India. The Reserve Bank of India (RBI) is in charge of organizing and regulating this industry.
What is the Money Market’s most Important Job?
Interbank loans (loans between banks), commercial paper, Treasury bills, securities lending and repurchase agreements (repos), and money market mutual funds are all examples of products traded on the money market.
Final Words
The country’s monetary policy and the measures taken to maintain a stable financial system fall under the purview of the central bank. The money market facilitates the central bank’s role in policymaking. For instance, money market interest rates (which reflect the current health of the banking sector) might provide useful information to the central bank when formulating a policy for interest rate setting. Because of this interconnected structure, the central bank may more easily influence secondary markets and achieve its monetary policy objectives. Check out these structure of money market to enhance your knowledge. To learn about money market account disadvantages subject in greater detail, read this in-depth report.
