The Reserve Bank of India defines a “Money Market” as a venue for buying and selling short-term financial assets. In both the primary and secondary markets, assets can serve as money, offering an alternative to cash. Another way to express it is that the money market facilitates the buying and selling of assets with maturities of one year or less. Lenders and borrowers are typical instances of these tools. The most traded features in the money market are those with great liquidity and a short duration. There are numerous types of enterprises in the money market, including commercial banks, acceptance houses, and non-banking financing firms (NBFCs). We’ll look at the types of money market and talk about the related topics in this area.
The money market is a type of business that provides people with cash for short-term requirements. Most money market loans are short-term, lasting one year or less. The money market, which is part of the financial market, buys and sells short-term assets having original periods of one year or less. Why? Assets with a maturity of less than a year are treated like any other commodity. The money markets consist of wholesale transactions conducted over the counter.
Types of Money Market
The money markets of the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) trade a wide range of products. This category contains a wide range of financial items, including treasury bills, CDs, commercial paper, and repurchase agreements. The securities sold in the money market are extremely straightforward to sell. As a result, it is a risk-free investment. Take a look at these types of money market to expand your knowledge.
Eurodollars
Eurodollars, which are kept in foreign institutions and priced in dollars, are not subject to the Federal Reserve’s laws. Banks in the Cayman Islands and the Bahamas store large amounts of euros. Their interest rate is slightly greater than that of US government debt, which encourages large corporations, money market funds, and foreign organizations to invest in them.
Call Money
This market category includes scheduled commercial banks, which can lend or borrow money quickly, such as for 14 days. This is essential if you want to keep track of your daily cash flows accurately. Because interest rates are determined by the market, they fluctuate swiftly as supply and demand vary. Along similar lines, everyone understands that interest rates can fluctuate significantly at times.
Commercial Bills
Bills of exchange act similarly to commercial bills, another sort of money market instrument. Companies distribute them to meet their short-term cash requirements. Liquidity has improved significantly with these financial assets. This way, if someone needs money quickly, it can transfer from one individual to another.
Banker’s Acceptances
A banker’s acceptance is a short-term loan that a bank secures. In international business, banker’s acceptance is commonly utilized. It’s essentially a postdated cheque that guarantees payment for anything brought into the nation. When banker’s acceptances are on sale for a lower price, you can purchase and sell them on the secondary market.
Repos
The repo, or “repurchase agreement,” is a type of money market transaction that involves short-term loans. Someone outside of the government purchases government securities, such as treasury bills, with the intention of repurchasing them from the seller at a specific price and date. The terms “reverse repo” and “repurchase agreement” (repo) are often used interchangeably. During this form of transaction, the seller pledges to buy back the security from the buyer at a later date. The buying price also includes an interest rate known as the repo rate. A repossession can provide an excellent return on investment for the buyer while also providing a short-term cash boost to the seller.
Money Market Accounts
“Money market account” refers to a specific sort of savings account. Even while some issuers offer interest, account holders can only withdraw a set amount of money at a time or write checks against the account on a regular basis. Government regulations limit the withdrawal amount. If you meet these prerequisites, the bank will promptly convert it to a checking account. The bank calculates the interest on a money market account daily, automatically depositing it into the account monthly.
Treasury Bills
The US Treasury Bill is a key tool in the exchange market. Currently, they are increasing at various rates. This is something that the Indian government offers at a discount for periods ranging from 14 to 364 days. When these assets mature, they are returned at face value, despite having been sold at a discount. It’s not surprising. You can purchase TBs as a corporation, group, or individual.
Certificates of Deposit (cds)
Most people don’t view CDs as money market funds due to their ability to be purchased for terms of up to ten years. Some CDs have durations as short as three to six months, while others have much longer maturities. The same principle that works for money market accounts also applies to longer durations and larger balances, resulting in higher rates. In August 2021, rates on one-year CDs ranged between 0.50% and 0.70%, with the exact range determined by the amount invested. Certificates of deposit (CDs), unlike money market accounts, provide fixed interest rates that do not alter during the deposit’s term. When you withdraw money from a certificate of deposit (CD) early, you are normally charged a fee.
Money Market Funds
On the wholesale money market, you can only deal with banks and other financial institutions that can lend and borrow between $5 million and more than $1 billion each transaction.Many people can acquire these items at once via mutual funds. The net asset value (NAV) goal for these funds is always to reach $1. While the economy suffered in 2008, only one fund fell below that level. In the end, this made it more difficult for them to venture into riskier companies. This created a lot of concern in the market, resulting in a flight of capital.
Commercial Paper
Companies can raise short-term working capital by selling corporation bonds (CPs). That is why it is not equivalent to obtaining a bank loan. The length of a business paper can also change, but it usually ranges from fifteen days to a year. The Reserve Bank of India is in charge of establishing rules for current accounts. So, before releasing a CP into the market, a corporation must first obtain approval from the RBI. The issuer must set the price of CP lower than its face value. The marketplace also determines the discount rate.
Certificate of Deposit
Most business banks allow a sort of negotiable term deposit known as a Certificate of Deposit, or CD. Typically, a promissory note is utilized for distribution. Individuals, businesses, and trusts can receive CDs. Scheduled commercial banks can also issue certificates of deposit (CDs) for a fee. These can last anywhere from three months to one year. When a bank issues it, the loan has a minimum period of one year and a maximum of three years.
FAQ
Who Uses the Money Market?
The “money market” refers to the place where short-term debt (less than one year old) is purchased and traded. For example, one of its primary responsibilities is to ensure that governments and businesses continue to receive tax revenue while investors earn a good return.
What are the Limitations of the Money Market?
Money markets have drawbacks like lower returns and the absence of Federal Deposit Insurance Corporation coverage for all instruments. Because of these advantages and disadvantages, a money market fund can be both a good and a risky investment.
What are the Main Purposes of Money Markets?
The money markets play an important role in capital allocation, ensuring that all financial institutions have enough cash, and mitigating short-term risk. Markets are also crucial in determining credit and the major payment systems used to settle company transactions.
Final Remarks
Short-term buying and selling, as well as giving and borrowing, are all possible in the money market. The stock market, on the other hand, is all about long-term lending and borrowing. Consumers and businesses can actively invest their spare cash in venues called “capital markets.” The Indian government’s financial officials are in charge of monitoring the capital markets. It is their responsibility to ensure that corporations do not defraud their customers. When performing various business tasks, keep in mind that types of money market plays an important role in the overall process. Gain a different perspective on advantages of money market topic by reading this insightful analysis.
