Money markets are said to be the first to alter as a currency appreciates or depreciates. This is due to the fact that it deals in short-term products that are nearly cash equivalents. These short-term financial instruments are very liquid, easily tradable, and transferable between buyers and sellers. Contrary to traditional tools, which have lengthy maturity times, you obtain immediate returns because the holding period is shorter than a year. The term “money market” refers to various devices that deal with different levels of near-money rather than a market itself. These are primarily unsecured debt securities with a fixed interest rate.
The security has no collateral to support it, and there is a substantial theoretical chance of non-repayment. Money market instruments, on the other hand, have a high credit rating that guarantees issuers won’t default, making them a preferred option for investors searching for places to store their money for the short term and receive fixed returns on it. Money market instruments are financial products with a short-term maturity of a maximum of 1 year that are used by the issuer as a tool to raise funds.
It’s critical to maintain the flow of funds in a financial market. Money markets are an essential component of the financial system in any economy, especially today when the entire world may be viewed as one enormous market.
1. Treasury Bills
2. Commercial Bills
3. Certificate of Deposit
4. Commercial Paper
5. Call Money
- Encourages saving
In general, those who play money market instruments are making short-term investments and looking to make money. The investment is made to meet the investor’s needs. It gives the investor the freedom to proceed with his investment plans as he sees fit, regardless of how much money or how long he wishes to put aside. Maintaining money in the loop benefits the financial system. There are several money market products that provide favourable returns and keep the security of invested funds.
- Creates accessible funds
Institutions in both the private and public sectors require short-term borrowing to cover their operating capital needs. They can actually succeed by utilizing money market instruments and obtaining the financing they require through a middleman. In this sense, the money market instruments contribute to the growth of both domestic and international trade and industry.
- Use of extra money
Since it is not being used, money that is kept in reserve weighs on the financial market. Because they are typically seen as surplus, the funds are usually kept inactive. They should also be kept out of the circle to meet any immediate needs that could occur because investing is viewed as a long commitment that is not thought to be particularly liquid. By investing in money market instruments, one may be sure that the instrument can be readily sold off because it is very liquid and there is no need to commit to the investment for an extended period of time.
- Government Assistance
Treasury bills are a tool used by the government to obtain short-duration loans from the money market. It is a low-on-interest financial product. By providing lower interest on loans and safe investments, it benefits the government. Normally, borrowing money from the Reserve Bank, the country’s central bank would cause inflation to rise, placing a burden on the financial market and automatically changing every part of the monetary market.
- Enhances financial mobility
A financial system’s primary goal is to facilitate the movement of money. Transferring money from one industry to another is made easier by the money market via its money market instruments. Any sector of the economy must have financial mobility in order to grow.
- Encourages business owners
It might be difficult for medium-sized and small businesses to obtain loans with low-interest rates. These enterprises can secure their financing supply thanks to the money market. Additionally, it gives these businesses the chance to offer bills of exchange at a discount.
Any nation’s financial system depends on its money markets and its money market instruments. These markets, which rank among the biggest in the globe, act as a conduit for the flow of cash. They also aid in the efficient application of monetary policy. Through the money market, the central banks have good control of the banking system, which has an impact on business. It promotes investing and conserving while bolstering the safety of financial assets. The money market is a factor that balances the supply and demand of loan-worthy funds. Savings are directed into investing channels to accomplish this.
Without the movement of money through the money market, a financial system cannot function, making the money market’s role essential.