Meaning of Money Market:

The money market refers to a part of the financial market where short-term lending and borrowing of funds takes place. It deals with financial instruments with high liquidity and short maturities, that is less than one year. The member participants in the money market are banks, financial institutions, corporations, governments. The Components of money market include treasury bills, commercial paper, certificates of deposit, repurchase agreements, and short-term bonds.

The money market plays a very important role in facilitating liquidity and financing facilities for various participants in the economy.

The Components of money market are:

• Promissory note: It is a bill written promise on the part of a businessman for sum of money at an agreed future date. Promissory note is drawn by debtor and has to be accepted by the bank in which debtor has his account the due for payment after 90 days with 3 days grace.

• Bill of exchange or commercial bills: Bill of exchange also called draft. It is short term negotiable financial instrument consisting of an order in written addressed of one person (the seller of the goods) to another (the buyer) requiring the letter to pay on demand (a right draft) or at a fixed or determinable future time. (a time draft) a certain sum. In other words a bill of exchange is a written order binding one party to pay a fixed sum of money to another party on demand at a pre determined data.
• Treasury bill: Major instrument of the money markets is the Treasury bill which is issued for varying periods of less than one year. Treasury bill are issued by the government of India at a discount generally between 91 days and 364 days .There are 3 types of treasury bill in India that is 91 days, 182 days, 364 days.
• Call and notice money: There is the call money market in which funds are borrowed and lend for one day. In notice market, they are borrowed and lent up to 14 days without any security but deposit receipt is issued to the lender by the borrower who repays the borrowed amount with interest on call in India. Commercial banks and co operative banks borrow and lend funds in this market. But other financial institution participates only as lenders of funds.
• Interbank term market: This market is exclusively for commercial and co operative banks in India which borrows and lends funds for a period of over 14 days and up to 90 days without any collateral security at market determined rates.
• Certificate of deposits: Rupees are issued by commercial banks; discount rate is determined by the market. The maturity period is between 3 months and 12 months.
• Commercial paper: These are issued by highly rate companies to raise short term working capital requirement directly from the market instead of borrowing from the banks. CP is promise by the borrowing company to repay the loan at a specific date normally a period of 3 to 6 months.

also read: explain the supply of money.