Concept of Money Market

Concept of Money Market

As money became a commodity , the money market became a component of the financial markets for assets involved in short-term borrowing, lending, buying and selling with original maturities of one year or less. Trading in the money markets is done over the counter, is wholesale. Various instruments like Treasury bills, commercial paper, bankers’ acceptances, deposits, certificates of deposit, bills of exchange, repurchase agreements, federal funds, and short-lived mortgage-and asset-backed securities do exist. It provides liquidity funding for the global financial system. Money markets and capital markets are parts of financial markets. The instruments bear differing maturities, currencies, credit risks, and structure. Therefore they may be used to distribute the exposure.


In economics, market does not mean a particular place. Instead, the market is a process of buying and selling of goods by making contract through different mediums. Hence, money market also does not denote a particular place. The money market refers to the whole area where money is bought and sold. To be more precise, money market is simply a process of buying and selling of money. Unlike a stock exchange, the money market is not a particular place but is a system. The transactions may take place between different persons by telephone, fax without personal meeting. The short-term funds are transacted in the money market. In general the term of the loan is less than one year. Hence, the evidence of credit having maturity of less than one year is the instruments of money market. The main function of the money market is to make available working capital to the business and loan to the government. It also makes available loans for the speculation of goods and securities. The business firms use the money market to distribute wages and salaries, repair equipments, pay energy charge, taxes and so on. The government uses it to meet the deficit in public revenue. The finance companies use it to provide loans to the consumers. The banks use it to meet the temporary deficit in reserve. All these credit are only for up to one year.


The meaning of money market becomes clear from the following definitions:-According Dudley G. Luckett -‘The money market is a market for short term (less than one year) loans. Its very name suggests that it is money that is being bought and sold“.


In the words of J.A. Cocharan, “The money market is a market which trades in short term, highly liquid, negotiable debt instruments of one year or less in maturity“.


World Bank has defined the money market as, “A market in which short term securities such as treasury bills, certificates of deposits and commercial bills are traded“.


In a strict sense we can say that money market is that market which provides loan for short term . It mainly duster the activities of the discount houses, commercial banks and the central bank of the country. In India or Pakistan like State bank, Commercial Banks, Co-operative banks and saving banks provide the short term loans. So money market in India or Pakistan mainly consists upon these institutions.

In brief, the money market is a means of exchange of short term credit. It is quite different from the capital market which deals in long term credit.



One Response

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