Money Markets In finance, the money market is the global financial market for short-term borrowing and lending.

It provides short-term liquidity funding for the global financial system. The money market is where short-term obligations such as Treasury bills, commercial paper and bankers acceptances are bought and sold. The money market consists of financial institutions and dealers in money or credit who wish to either borrow or lend. Participants borrow and lend for short periods of time, Money market trades in shortterm financial instruments commonly called paper. This contrasts with the capital market for longerterm funding, which is supplied by bonds and equity. The core of the money market consists of banks borrowing and lending to each other, using commercial paper, repurchase agreements and similar instruments. These instruments are often benchmarked (i.e. priced over and above) to the London Interbank Offered Rate (LIBOR). Consider this example. IDBI Bank needs to pay SBI Rs.10 Crores balancing figure at the end of the day. This transaction happens by requesting RBI to increase the account balance of SBI by 10 Crores and corresponding decrease in the account balance of IDBI. Now with this the balances or total money with IDBI reduces. But it might be requiring that money for transactions with its other customers. This means a party (IDBI), which wants to borrow money now. There might be another institution that might be having surplus money that it does not require in the near future, say ICICI Bank having surplus money for15 days (the same duration that IDBI wants it for). So we have ICICI loaning IDBI Rs.10 Crores for 15 days at an agreed rate. This was a MONEY MARKET transaction. More specifically, Money Market provides short-term finance (for a period less than 1 year.) The parties involved in Money Markets are Central Bank, Commercial Banks, FIs, Mutual Funds and Primary Dealers. (The extension of Money Market is Capital Market where finance is transacted for a period longer than 1 year, in form of both Debt & Equity) Money Markets exist because of the fundamental need of Working Capital Management where balance between Liquidity and Profitability is of high importance. The market provides a conduit for Cash surplus and deficient organizations to transact and reach an equilibrium regarding the cost of funds (interest rates.) The borrowing and lending in money markets is high volume, low risk and short-term. Because it is short-term, transaction costs are high relative to the interest that can be earned. And because transaction costs are high relative to the interest that can be earned, transactions in the money market tend to be for very large amounts. Short-term is generally understood as less than one year, although, in fact, most money market activity is concentrated in terms to maturity between overnight and one-week. When do Banks participate in Money Market: Need to Take Debt (Borrow Money) When they fall short of statutory Reserve requirements may be due to a change in rates or next 2 points. When they fall short of funds to meet withdrawal requirements from customers When they fall short of funds to lend at more attractive rates

Need to Loan When they have surplus idle funds.

Debt

(Lend

Money)

Can individual investors invest in Money markets? One of the main differences between the money market and the stock market is that most money market securities trade in very high denominations and so individual investors have limited access to them. The easiest way for individual investors to gain access to the money market is with a money market mutual fund, or sometimes a money market bank account. These accounts and funds pool together the assets of thousands of investors and buy the money market securities on their behalf. Although, some money market instruments like treasury bills may be purchased directly or through other large financial institutions with direct access to these markets. Money markets are markets for financing the short term fund requirements of Government, Banks, Corporate and other Financial Institutions. Like any other markets there are intermediaries like Dealers who make transactions possible and easy for these participants. The instruments in the market are to a great extent governed by Central Banks (RBI in Case of India) policies regarding supply of money, hence inflation, in the economy and the rates of interest. The efficient operation of the markets is very crucial for any developed economy to enable the large institutions get easy access to cheap funds, hence enabling them maintain the important balance between profitability and liquidity.

Striking a balance on money market funds

Since the financial crisis of 2008, money market funds have been the subject of fierce debate. Regulators say money market funds need to be fundamentally transformed to prevent them from creating too much systemic risk. The fund industry has pushed back, trying to preserve the utility of money market funds for millions of investors. Fortunately, a smart compromise exists that would reform the riskiest money market funds while protecting retail investors.