Constituents of money market

Money market is a centre where short term funds are supplied and demanded. Thus, the main constituents of money market are the lenders who supply and the borrowers who demand short term credit.

(I) SUPPLY OF FUNDS:- There are two main sources of supply of short term funds in the Indian money market - an unorganised indigenous sector and organised modern sector.

(II) DEMAND FOR FUNDS:- In the Indian money market the main borrowers of short term funds are(a) Central Government (b) State governments (c) local bodies, such as, municipalities, village panchayats,( d)traders ,industrialists, farmers ,exporters and importers , and general public.

SUB MARKETS OF ORGANISED MONEY MARKET

(1) CALL MONEY MARKET:- The most important component of organised money market is the call money market. It deals in call loans or call money granted for one day. Since the participants in the call money market are mostly banks it is also called interbank call money market. The banks with temporary deficit of funds form the demand side and the banks with temporary access of funds form the supply side of the call money market. The major suppliers of the funds in this market are SBI LIC, GIC, UTI IDBI and NABARD and the major borrowers are the scheduled commercial banks.

The commercial banks use their unused or surplus cash to lend for very short periods to bill brokers. The bill brokers in turn can use them to purchase bills. Such funds are borrowed at the "call rate" which varies with the volume of funds lend by the banks. When the brokers are asked to pay off loans immediately, then they borrow from SBI LIC UTI GIC etc.

(2) TREASURY BILL MARKET:- The treasury bills are short term monetary instruments issued by the Government of India at a discount and for a fixed period. There are treasury bills of varied maturities. These are 14 day and 28 day treasury bills, that are auctioned on a weekly basis, 182 days treasury bills are auctioned on a fortnightly basis and 364 days treasury bills on a monthly basis. These treasury bills provide investors with financial instruments of varying short term maturities and facilitate the cash management requirements of various segments of the economy.

(3) COMMERCIAL BILL MARKET:- Commercial bill market deals in commercial bills issued by the firm's engaged in business. These bills are generally of three months maturity. A commercial bill is a promise to pay a specified amount in a specified period by the buyer of goods to the seller of the goods. The seller, who has sold his goods on credit draws the bill and sends it to the buyer for acceptance. After the buyer or his bank write the word "accepted" on the bill , it becomes a marketable instrument and is sent to the seller. The seller can now sell the bill to his bank for cash. In times of financial crisis, the bank can sell the bills to other banks or get them rediscounted from the Reserve Bank.

(4) COLLATERAL LOAN MARKET:- It deals with collateral loans,i.e., loans back by security. In the Indian collateral loan market the commercial banks provide short term loans against government securities ,shares and debentures of the government.

(5) CERTIFICATE OF DEPOSIT AND COMMERCIAL PAPER MARKETS:- These markets deal with certificates of deposit and commercial papers. These two instruments were introduced by RBI in March 1989 in order to widen the range of money market instruments and give investors greater flexibility in the deployment of their short term surplus funds.

PARTICIPANTS IN MONEY MARKET

A large number of borrowers and lenders make up the money market. Some of the important players are :- 

(1) Central government is a borrower in the money market

(2) Public sector undertakings are the borrower's in the money market

(3) Insurance companies are usually lenders in the money market

(4) Mutual funds only lend or invest in the money market

(5) Scheduled commercial banks are both big borrowers and lenders in the money market

(6) Corporate are the borrower's in money market.