Objectives and Characteristics of Money Market

Objectives and Characteristics

Objectives of Money Market

well-developed Money Market serves the following objectives:

1. Providing an equilibrium mechanism for ironing out short-term surplus and deficits.

2. Providing a focal point for Central Bank intervention for influencing liquidity in the company.

3. Providing access in uses to users of short-term money to meet their requirements at a reasonable price.

Characteristics of Money Market

1. Short-term Funds

It is a market purely for short-term funds or financial assets called near money.

2. Maturity Period

It deals with financial assets having a maturity period upto one year only.

3. Conversion of Cash

It deals with only those assets which can be converted into cash readily without loss and with minimum transaction cost.

4. No Formal Place

Generally, transactions take place through phone, i.e., oral communication. Relevant documents and written communications can be exchanged subsequently. There is no formal place like stock exchange as in the case of a capital market.

5. Sub-markets

It is not a single homogeneous market. It comprises of several sub-markets each specialising in a particular type of financing. E.g., Call Money Market, Acceptance Market, Bill Market.

6. Role of Market

The components of a money market are the Central Bank, Commercial Banks, Non-Banking Financial Companies, Discount Houses and Acceptance House. Commercial banks generally play a dominant role in this market.

7. Highly Organized Banking System

The Commercial Banks are the nerve centre of the whole money market. They are the principal suppliers of short-term funds. The commercial banks serve as vital link between the Central Bank and the various segments of the money market.

8. Existence of Secondary Market

There should be an active secondary market for these instruments.

9. Demand and Supply of Funds

There should be a large demand and supply of short-term funds. It presupposes the existence of a large domestic and foreign trade.

10. Wholesale Market

It is a wholesale market and the volume of funds or financial assets traded in the market is very large.

11. Flexibility

Due to greater flexibility in the regulatory framework, there are constant endeavours for introducing new instruments.

12. Presence of a Central Bank

The central bank keeps their cash reserves and provides them financial accommodation in difficulties by discounting their eligible securities. Through its open market operations the central bank absorbs surplus cash during off-seasons and provides additional liquidity in the busy seasons.