The money market allows for buying, selling, and borrowing of high-quality, short-term debt instruments with terms of one year or less in a regulated exchange. It lets the government, financial institutions, and other large organisations sell short-term securities to get money right away. Even small investors can feel safe when they invest in the money market. The structure of money market will be covered in-depth in this article, along with some examples for your convenience.
Buyers and sellers buy and sell short-term debt on the money market. Institutions and traders do a huge number of wholesale transactions. This group includes both money market mutual funds and savings accounts for the general public. Although the money markets are safe, they do not offer much profit-making potential. Read on objectives of money market for more information to help you comprehend the topic.
Structure of Money Market
The group includes government banks, the Reserve Bank of India (RBI), commercial, rural, and international banks, and companies like LIC and UTI that work indirectly. RBI is in charge of keeping an eye on this business. Banks are another example of a large company that plays a role in this sector. Read on to discover everything there is to know about structure of money market and to become a subject matter expert on it.
Commercial Papers (CPs)
Commercial paper (CP) fits this description because it is a type of promissory note with a set date when it will be due. The issuer makes promises for a short amount of time. Also they are safe and easy to use. The biggest public and private companies and banks in the world give them out.
After a lot of debate, CPs were put into use in India in January 1990. India set up CPs to give investors another option and to help companies with high credit ratings find different ways to get short-term financing. RBI changed its plan to help the CP industry grow. Corporations, public debtors (PDs), and Indian financial institutions can all give out CPs.
Money Market Mutual Funds
Thanks to RBI, small investors have been able to use MMMFs since April 1992. Mutual funds that invest in money market products like call money, repos, treasury bills, certificates of deposit, and commercial paper with their clients’ money. The issuer will pay off these bonds in less than a year.
Discount and Finance House
Additionally, this institution is regulated by the Securities and Exchange Board of India (SEBI) and is an important part of the Indian financial system.
Moreover, DFHI is a market maker for government securities, commercial bills, certificates of deposit, certificates of participation, call money market, and short-term deposits. Businesses, banks, and other financial institutions have turned to DFHI, a money market intermediary, to put their short-term surpluses to work.
Indigenous Bankers
Additionally, there is another important component of the structure of the money market. Banks deal in the hundreds, take deposits, and give out loans.
In addition, hundi is a type of short-term credit that is a traditional unit of exchange in the area. However, it is important to note that market rates and bank rates are not the same. Despite this, banks have enough money to take care of themselves.
Money Lenders
So to speak, they lend money. People who live in rural areas often see payday lenders as good. In the same way, they tend to gather in cities. Interest rates are very high right now. Many people have debts that are not helping them.
Borrowers could also be farm workers, small and marginal farmers, artisans, factory workers, small merchants, etc. They designed the structure of the money market to provide liquidity to the financial system and enable short-term borrowing and lending.
Chit Funds
There are places where you can save money. Members regularly give money to the group. The money goes to a certain person in the group.
Repos
In a repo, two different people or groups sell and then buy the same security. In a repo transaction, the seller gets money right away in exchange for agreeing to buy back the securities at a set price.
The buyer agrees to sell the securities back to the seller at the agreed-upon date and for the agreed-upon price. India began taking back government bonds and other securities in December 1992. RBI has used “Reverse Repos” auctions to sell off government bonds since November 1996.
Finance Brokers
You can find them in almost any business centre, but they are especially common in the textile, grain, and commodity exchanges in the city. They help people get loans.
Organized Sector
India’s “organized sector” is made up of the Reserve Bank of India, the State Bank of India and its seven partners, twenty commercial banks that are owned by the government, other scheduled and non-scheduled commercial banks, foreign banks, and Regional Rural Banks. The RBI is in charge of it. Money market instruments with changes: This is the basic structure of money market .
Unorganized Sector
These are places like banks and hundis that offer financial services in the area. Since the RBI doesn’t control them, they don’t do things in a very organised way. In this business, customers can reach LIC, GIC, and their affiliates, as well as UTI, through banks. This is the main structure of money market .
Treasury Bills (T-Bills)
RBI gives out Treasury bills with very short terms. They are a way for the government to get money quickly. Their help with cash flow is only short-term. The lengths of time that India’s treasury bills are good for range from 91 to 364 days. No country gives out Treasury notes. They set the rates of all TB loans through an auction.
Certificates of Deposits (CDs)
In essence, certificates of deposit are promissory notes that have been discounted, are not secured, and can be traded. It is a kind of money that commercial and development banks give out which is the basic structure of money market. Certificates of deposit (CDs) are bank deposits that can be sold and pay a set rate of interest. As of June 1989, India had CDs for sale.
Commercial banks might be able to lend more money if they accepted CDs as market funding. The first program gave out certificates of deposit with amounts of Rs.1 crore (Rs.25 million) or more. They grew fully in three to twelve months. After 45 days, you can give them to someone else.
Call and Notice Money Market
Usually, transactions on the call money market happen at night. Money market funds trade between 2 and 14 days, so keep that in mind. Lenders always make money market loans available for early repayment. Lenders usually give borrowers a few days’ notice before a payment is due. When the borrower gets this notice, he or she has to make the required payments by the date given.
The call money market is where banks go to borrow money for a short time, usually just one day. Primary dealers, cooperative banks, and commercial banks (but not RRBs) make up most of the call money market. The Discount and Finance House of India (DFHI), LIC, GIC, UTI, NABARD, and other financial institutions all lend money on the money market.
Commercial Bills
Commercial bills that are short-term, negotiable, and pay themselves off are low-risk investments. Vendors often give customers negotiable instruments as payment for the goods they sell. Laws govern international trade. Commercial banks use commercial bills as their money.
The buyer can make the payment terms longer (i.e. usance bill) if the seller agrees. Most crops are ready to eat after 90 days. If the vendor is short on cash during the usance term, his bank might give him a discount on his bill. Because of a process called “bill discounting,” commercial banks can give credit to businesses. Banks can make money by re-discounting commercial bills several times over the course of their life.
Frequently Asked Questions
What is Money Market Structure?
The Indian financial market has both organized and unorganized parts. Furthermore, the structure of the money market includes various participants such as banks, financial institutions, and central banks.The Reserve Bank of India regulates the “organized sector,” which comprises the government, commercial banks, rural banks, and foreign banks.
What is Money Market Explain?
Banks and other dealers buy and sell securities on the money market. A good way to invest is to invest money that can be easily converted into cash. Capital markets are centralized, unlike money markets. Instead, they make them up as they go.
What is the Importance of Structure of Money Market?
Generally, in a year, the supply and demand of money transactions on the market will be in balance. As a result, the money is beneficial for businesses and the economy as a whole.
Conclusion
Nowadays, changes in the bank rate impact how interest rates are set in the country to a greater extent. Because of this, the Reserve Bank has made big steps toward improving the Indian monetary system and solved some problems that were once very important. Continue reading to become an expert in structure of money market and learn everything you can about it.