Functions of Money Market

26th January 2021 0 By indiafreenotes

Money market is the market for short-term loanable funds, as distinct from the capital mar­ket which deals in long-term funds.

Money mar­ket is also defined as a mechanism through which short-term funds are loaned and borrowed and through which a large part of the financial transac­tions of a particular country are cleared.

The money market is divided into direct, negotiated, or customers’ money market and the open or impersonal money market. In the former, banks and financial firms supply funds to local customers and also to larger centres such as London for direct lending. In the open money market, idle funds drawn from all-over the country are transferred through intermediaries to the New York City market or the London market.

These intermediaries comprise the Federal Reserve Banks in the USA or the Bank of England in England, commercial banks, insurance companies, business corporations, brokerage houses, finance companies, state and local government securities’ dealers. The money market is a dynamic market in which new money market instruments are evolved and traded and more participants are permitted to deal in the money market.

Use of Surplus Funds:

It provides and opportunity to banks and other institutions to use their surplus funds profitably for a short period. These institutions include not only commercial banks and other financial institutions but also large non-financial business corporations, states and local governments.

Provides Funds:

It provides short-term funds to the public and private institutions needing such financing for their working capital requirements. It is done by discounting trade bills through commercial banks, discount houses, brokers and acceptance houses. Thus the money market helps the development of commerce, industry and trade within and outside the country.

Helps Government:

The money market helps the government in borrowing short-term funds at low interest rates on the basis of treasury bills. On the other hand, if the government were to issue paper money or borrow from the central bank. It would lead to inflationary pressures in the economy.

No Need to Borrow from Banks:

The existence of a developed money market removes the necessity of borrowing by the commercial banks from the central bank. If the former find their reserves short of cash requirements they can call in some of their loans from the money market. The commercial banks prefer to recall their loans rather than borrow from the central banks at a higher rate of interests.

Helps in Financial Mobility:

By facilitating the transfer for funds from one sector to another, the money market helps in financial mobility. Mobility in the flow of funds is essential for the development of commerce and industry in an economy.

Helps in Monetary Policy:

A well-developed money market helps in the successful implementation of the monetary policies of the central bank. It is through the money market that the central banks is in a position to control the banking system and thereby influence commerce and industry.

Equilibrium between Demand and Supply of Funds:

The money market brings equilibrium between the demand and supply of loanable funds. This it does by allocating saving into investment channels. In this way, it also helps in rational allocation of resources.

Promotes Liquidity and Safety:

One of the important functions of the money market is that it promotes liquidity and safety of financial assets. It thus encourages savings and investments.

Economy in Use of Cash:

As the money market deals in near-money assets and not money proper, it helps in economising the use of cash. It thus provides a convenient and safe way of transferring funds from one place to another, thereby immensely helping commerce and industry.

The monetary policy takes care of promotional aspects such as:

(i) Monetary integration of the country,

(ii) Directing credit flow according to policy priorities,

(iii) Assisting in mobilisation of the savings of the community,

(iv) Promotion of capital formation and

(v) Maintain an appropriate structure of relative prices and demand containment.