Money Market and Its Functions
The money market is used by a wide array of participants, from a company raising money by selling commercial paper into the market to an investor purchasing CDs as a safe place to park money in the short term. The money market is typically seen as a safe place to put money due the highly liquid nature of the securities and short maturities, but there are risks in the market that any investor needs to be aware of including the risk of default on securities such as commercial paper.
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 and is wholesale. Various instruments exist, such as 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.
Functions of Money Market
A well-organised and developed money market can help a country to achieve economic growth and stability. It performs a diversity of functions in the banking structure of the economy. They are:
(a) Money market provides outlets to commercial banks, non-banking financial concerns, business corporations and other investors for their short-term funds. It enables them to use their excess reserves in profitable investment.
(b) Money market also provides short-term funds to businessmen, industrialists, traders etc. to meet their day-to-day requirements of working capital. Money market plays a crucial role in financing both internal as well as international trade.
(c) Money market provides short-term funds not only to private businessmen but also to government and its agencies.
(d) Money market enables businessmen, with temporary surplus funds, to invest them for a short period.
(e) Money market serves as a medium through which the central bank of the country exercises control on the creation of credit.
(f) Money market is also of great help to the government.