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Money Market: Instruments, Functions and Operations

Money Market: Instruments, Functions and Operations #

 

Money Market: Short-Term Credit and High Liquidity Instruments #

  • Money market refers to a section of the financial market where financial instruments with high liquidity and short-term maturities are traded.
  • It deals with borrowing and lending of short term credit/loan generally with a time period of less than or equal to 1 year.

Functions of the Money Market in Economic Growth and Monetary Policy Implementation #

  • It provides facilities for allocation of short term funds through money market instruments.
  • It helps the government to meet its deficits through non inflationary financial sources such as treasury bills.
  • It makes available sufficient finance to the trade and industry
  • It ensure an equilibrium between the demand and supply of money and short term funds
  • It promotes economic growth
  • It provides a mechanism for Reserve Bank of India (RBI) to implement monetary policy

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Various Money Market Instruments for Monetary Management and Short-Term Financing  #

Call money/ Term money market/ Notice money
  • Call Money– is also referred to as the money at call. It deals with very short term funds, and is demanded extremely short durations from a few hours to 1 day
  • Notice Money– for borrowing and lending operations of 2 to 14 days.
  • Term Money– Lending and borrowing of funds beyond 14 days
Treasury bill
  • They are the government securities (G-Sec) issued by RBI on behalf of the central government to meet its fiscal deficits.
  • The maturity period of these securities varies from 14 days to 364 days.
  • Treasury bills are further classified into two types viz. ordinary/regular treasury bills and ad hoc treasury bills.
Commercial bills
  • It refers to the bill of exchange which is used to finance the short term working capital requirements of any business.
  • These are negotiable and self-liquidating financial instruments , in which the seller is the drawer while the buyer is the drawee.
Cash management bills(CMBs)
  • CMBs are issued by the government of India in consultation with the Reserve Bank of India (RBI) to meet its short term cash requirements.
  • The maturity period of these bills is less than 91 days
Certificates of Deposits (CDs)
  • Certificate of Deposit (CD) is an agreement between the depositor and the bank where a predetermined amount of money is fixed for a specific time period
  • It is issued in dematerialised (Demat) form
  • When it matures, the principal amount along with the interest earned is available for withdrawal
 Commercial papers (CPs)
  • CP is a short-term debt instrument issued by companies to raise funds generally for a time period up to one year.
  • It is an unsecured money market instrument issued in the form of a promissory note and was introduced in India in 1990.
  • The minimum maturity period of commercial paper is for 7 days and a maximum of 1 year.
 Repo / Reverse Repo Market
  • The repo rate/ the repurchase rate is the rate at which RBI lends money to banks, when banks face shortage of funds.
  • These are short-term, usually overnight borrowings.
  • The opposite of repo rate is reverse repo rate-it is the rate at which RBI borrows funds from other banks for the short term

 

Money Market Terms: From Waterfall Approach to Money Market Mutual Funds #

  • Waterfall approach- for the valuation of money market and debt securities.
  • Money Market Mutual Funds (MMMF) are short-run liquid investments which invest in high-quality money market instruments such as Treasury Bills (T-Bills), Repurchase Agreements (Repos), Commercial Papers and Certificate of Deposits. It is an open-ended mutual fund.
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 Final Result – CIVIL SERVICES EXAMINATION, 2023.   Udaan-Prelims Wallah ( Static ) booklets 2024 released both in english and hindi : Download from Here!     Download UPSC Mains 2023 Question Papers PDF  Free Initiative links -1) Download Prahaar 3.0 for Mains Current Affairs PDF both in English and Hindi 2) Daily Main Answer Writing  , 3) Daily Current Affairs , Editorial Analysis and quiz ,  4) PDF Downloads  UPSC Prelims 2023 Trend Analysis cut-off and answer key

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UDAAN PRELIMS WALLAH
Comprehensive coverage with a concise format
Integration of PYQ within the booklet
Designed as per recent trends of Prelims questions
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