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Reviewed by May 18, 2022| Updated on
Money market is a component of financial markets dealing with debt instruments that allow short term borrowing for institutions. For individual investors, the closest they can invest money is investing in a money market instruments based mutual fund. Money market is largely characterized by its debt instruments that have very low returns, high liquidity and are very safe.
Most money market instruments can be borrowed for a term of 1 day or 1 year. Institutions and traders usually borrow these instruments in large volumes to meet their short-term cash flow needs. Participants of such a market include governments, banks, other large organizations etc. Most commonly traded money market instruments include commercial papers, treasury bills, bills of exchange, certificates of deposits, repurchase agreements/repo, banker’s acceptance, call money and more. Money market is traditionally exchanged over the counter, and on stock exchanges on a wholesale basis i.e. in large volumes and all at once for any duration. Many organizations seek money market instruments to meet their cash needs, which becomes essential in a speedily digitizing world. Contrary to how small the money market seems, this market strengthens the operations of many organizations. Those who want to avail money at the earliest can easily acquire it from the money market, and institutions that have an excess of funds can consider making effective investments in the market instead of letting them sit idle.
RBI is the regulator of the money market, which thus helps in regulating the liquidity and money supply in the economy. Organizations always need funds for their working capital requirements, therefore turning funds into money market instruments can be beneficial for the lender and the borrower. Many money market instruments are credible assets for national and international trade, which is an added bonus to many organizations to channel their surplus into these investments.