Functions of Money Market
The money market deals with short-term loanable cash, whereas the capital market focuses on long-term investments.
The money market facilitates the lending and borrowing of short-term cash, as well as the clearing of many financial transactions inside a nation.
The money market is separated into two types: direct, negotiated, or client money markets, and open, impersonal money markets. In the former, banks and financial institutions provide funding to local clients as well as major cities such as London for direct lending. In the open money market, idle funds from around the country are moved via intermediaries to the New York City or London markets.
These intermediaries include the Federal Reserve Banks of the United States and the Bank of England in England, as well as commercial banks, insurance firms, business corporations, brokerage houses, financing businesses, and state and local government securities dealers. The money market is a dynamic market in which new money market instruments are created and exchanged, and more players are allowed to participate in it.
Use of Surplus Funds:
It allows banks and other entities to profitably employ extra cash for a limited period of time. These institutions include not just commercial banks and other financial institutions, but also major non-financial enterprises, states, and municipal governments.
It offers short-term finance for public and commercial entities to meet working capital needs. It is accomplished by discounting trade invoices with commercial banks, discount houses, brokers, and acceptance houses. Thus, the money market promotes the growth of business, industry, and trade both inside and beyond the nation.
The money market offers cheap interest rates for borrowing short-term capital via treasury bills, which benefits the government. On the other hand, suppose the government issued paper money or borrowed from the central bank. It would create inflationary pressures on the economy.
No need to borrow from banks.
The development of a developed money market reduces the need for commercial banks to borrow from the central bank. If the former’s reserves fall short of cash needs, they may call in part of their borrowing from the money market. Commercial banks prefer to recall loans rather than borrow from central banks at higher interest rates.
The money market facilitates the flow of capital across sectors, promoting financial mobility. The free flow of capital is critical for the growth of trade and industry in an economy.
A strong money market supports the central bank’s monetary policy. The money market allows central banks to exert control over the banking sector and so impact commerce and industry.
The money market maintains balance between demand and supply for loanable cash. This is accomplished by directing savings to investment channels. In this approach, it aids in the logical allocation of resources.
The money market plays a crucial role in ensuring financial assets are liquid and secure. It thereby promotes savings and investment.
The money market’s focus on near-money assets, rather than money itself, allows for more efficient cash management. It so offers a quick and secure means of moving monies from one location to another, greatly benefiting trade and industry.
Monetary policy promotes the country’s monetary integration, directs credit flow based on policy priorities, mobilizes community savings, promotes capital formation, and maintains an appropriate price and demand structure.