In a developed money market, there are many different submarkets for credit instruments. Call loans, bills, Treasury bills, collateral loans, acceptance, and foreign currencies all have their own markets. Along with the growth of the money market, new submarkets are also starting up. But not just in niche markets. There have to be enough stores in each niche market, and they all have to work well together. We will go over the features of developed money market in detail in this article.
A sophisticated money market needs a well-built banking system to go with it. It is the hub of the world’s financial system. Commercial banks offer short-term loans and bill discounts to their clients. They act as a link between the central bank, brokers, discount houses, acceptance houses, and borrowers on the money market.
Features of Developed Money Market
Read on disadvantages of money market account to learn the whole story. A mature money market has all six of the following: a central bank, a commercial banking system, enough financial assets, well-established sub-markets, an interest rate structure, and economic and legal provisions that help the money market. Continue reading to become an expert in features of developed money market and learn everything you can about it.
Sub-Markets
There are parts of the money market that are weak. Different parts of the money market deal with different kinds of loans with different terms. Along with acceptances, call loans, and bills of exchange, money, bills of exchange, commercial paper, and government notes will all be traded. Money markets can’t form if these underlying markets don’t exist or aren’t sensitive to even small changes in interest and discount rates. These parts can be found on the money markets in New York and London.
In each submarket, there must be more than one seller and more than one buyer. Professor S.N. Sen says, “The more sub-markets there are, the bigger and more developed the structure of the money market will be.” However, these sub-markets need to work together for the market as a whole to work well. If interest rates are too high in one place, people who want to borrow money will move to places where rates are lower.
When interest rates go up in one place, lending businesses will move there. Help people move goods and services from one market to another. In India, there are a lot of different markets that are not yet linked together. Disjointed submarkets are a problem. Different parts of India have different interest rates. The bill market is missing from the new money market we have now. In recent years, there has been more market integration.
Availability of Ample Resources
A financial market that is hard to understand has access to a lot of resources. A developed money market has access to both domestic and international sources of money. A lot of money from both inside and outside the country flows into the London Money Market. Investors from other countries see assets with a high level of liquidity in developed countries as safe and profitable. Less expensive ways to move money around have made more money available. For the money market to work well, it needs a lot of money.
On a financial market, the goal is to get resources. Foreign investors are hesitant to put money into emerging economies because their governments and economies change quickly. You don’t have to use money markets. Even if you can’t get short-term loans from other countries, you can still set up a money market.
Monetary-Fiscal Policy Unity
The governors of the central bank set monetary policy, while government officials set fiscal policy. The goal of fiscal policy is to get as much tax money as possible, while the Federal Reserve is in charge of controlling inflation. Policies that go against each other can make it hard for the money market to work well.
Central Bank Existence
Simply put, the Central Bank is there to help people who work in banks. By discounting the right securities, they can protect their cash reserves and have more freedom during hard times. This is a way for financial institutions, like commercial banks, to turn assets into cash.
By doing open market operations, the central bank is able to handle seasonal changes in the amount of money in circulation and provide liquidity during busy times. The central bank is in charge of the money market and how it works. When a money market is young, the central bank doesn’t have much power over it.
Unified Interest Rates
A developed money market has a single set of interest rates. Loan terms that are worse than the market are put together. When the interest rate set by the central bank changes, the interest rates on the secondary markets also change to reflect the new balance. With the way interest rates work now, the central bank can control the amount of money in circulation.
Advanced Industrial System
A strong industrial infrastructure is important for the health of the money market. In a mature financial market, there is a need for it.
Foreign Trade Promotion
In a mature money market, foreign trade increases foreign bills and foreign exchange transactions. There will be a discount on bills from abroad. Additionally, we need to make it easier to trade currencies.
International Attraction
The developed world is now a big draw for money from other places. Consequently, well-developed money markets often attract foreign dealers, borrowers, and lenders.
Credit Instrument Availability
For a mature money market to grow, it needs widely recognized negotiable securities like bills of exchange, treasury bills, and so on. For these securities, money market dealers are a must. The lack of tradable securities and the presence of numerous dealers and brokers cause a weak money market.
Organized Banking
The money market is mostly made up of commercial banks. This group gives money, but it is only for a short time. Their lending habits affect the amount of money in the economy. Commercial banks are very important because they are the link between the highly regulated banking system and the business world. When the money market isn’t growing, commercial banking isn’t either.
Better Industrial Relations
If there are more strikes and lockouts across the country, there will be less need for short-term loans. Furthermore, for the money market to grow and do well, there must be good economic conditions.
Funds Flexibility and Adequacy
For a strong financial market to grow, time and money must be put into it. Additionally, the amount of money going into the money market should go up and down based on how much people want it.
Near Money-Assets
Bills of exchange, treasury bills, promissory notes, and bonds are just some of the short-term government debt instruments that are easy to get in a well-developed money market. As more short-term money assets are put on the market, the money market grows. Market participants accept bills of this kind and provide a discount.
The money market should always be able to give us these things. A lot of people should want to buy and sell these debt securities. For the money market to grow, it requires a lot of near-money assets or credit instruments. People who trade cash and other liquid assets run the money market.
Frequently Asked Questions
What is the Importance of a Developed Money Market?
The money market can help the monetary authority control the flow of money. The low-interest money market helps people who need short-term cash. Because of this, the capital market, business, and industry all grow. The way money markets work is very important to how governments make decisions.
Why Financial Markets Underdeveloped in Developing Countries?
Low interest rates and taking too many risks have led to high asset prices. This has also caused risk spreads to narrow and term premiums to fall, as well as the growth of the non-banking sector, a rise in debt, a lack of liquidity, and a lack of collateral. The financial system is not as stable as it should be.
What is the Main Problem of Money Market?
There aren’t enough resources on the Indian money market for a number of reasons, such as a lack of savings, a reluctance to use banks, a parallel economy, and so on.
Conclusion
Only the London Money Market meets all of the above criteria, so it can be called a sophisticated money market. In this article, we will discuss about features of developed money market in brief with examples for your better understanding.