11.2          ndian    onom
                                                                day-to-day trading.4 The ‘repo rate’ of the time
        IntroductIon                                            (announced by the RBI) works as the guiding
     The market of an economy where funds are                   rate for the current ‘discount rate’. Borrowings
     transacted between the fund-surplus and fund-              in this market may or may not be supported by
     scarce individuals and groups is known as the              collaterals. In the money market the financial
     financial market (definition).1 The basis of               assets, which have quick conversion quality into
     transaction is either interest or dividend. This           money and carry minimal transaction cost, are
     market might have its organised (institutionalised)        also traded.5 Money market may be defined as a
     as well as non-organised (unregulated/non-                 market where short-term lending and borrowing
     institutionalised) segments in an economy.                 take place between the cash-surplus and cash-
          Financial markets in every economy are having         scarce sides.
     two separate segments today, one catering to the                 The market operates in both ‘organised’ and
     requirements of short-term funds and the other to          ‘unorganised’ channels in India. Starting from
     the requirements of long-term funds.2 The short-           the ‘person-to-person’ mode and converting into
     term financial market is known as the money                ‘telephonic transaction’, it has now gone online in
     market, while the long-term financial market is            the age of internet and information technology.
     known as the capital market. The money market              The transactions might take place through the
     fulfils the requirements of funds for the period           intermediaries (known as brokers) or directly
     upto 364 days (i.e., short term) while the capital         between the trading sides.
     market does the same for the period above 364              Need for Money Market: Income generation
     days (i.e., long term).3 A brief discussion on the         (i.e., growth) is the most essential requiremnt of
     Indian financial market is given below.                    any economic system. In the modern industrial
                                                                economies creation of productive assets is not an
        IndIan Money Market                                     easy task, as it requires investible capital of long-
                                                                term nature. Long-term capital can be raised either
     Money market is the short-term financial market
                                                                through bank loans, corporate bonds, debentures
     of an economy. In this market, money is traded
                                                                or shares (i.e., from the capital market). But once a
     between individuals or groups (i.e., financial
                                                                productive asset has been created and production
     institutions, banks, government, companies, etc.),
                                                                starts there comes the need of another kind
     who are either cash-surplus or cash-scarce. Trading
                                                                of capital, to meet the day-to-day shortfalls of
     is done on a rate known as discount rate which
                                                                working capital. It means that only setting-up of
     is determined by the market and guided by the
                                                                firms does not guarantee production as these firms
     availability of and demand for the cash in the
                                                                keep facing fund mismatches in the day-to-day
        1.   Based on the discussion in P.A. Samuelson and W.D. production process. Such funds are required only
             Nordhaus, Economics (New Delhi: Tata McGrawHill,   for a short period (days, fortnights or few months)
             2005), pp. 543–45.
        2.   Based on J.E. Stiglitz and C.E. Walsh, Economics       4.  In the capital market, money is traded on interest rate as
             (New York: W.W. Norton & Campany, 2006),                   well as on dividends. Long-term loans are raised on well-
             pp. 612–14.                                                defined interest rates, while long term capital is raised on
        3.   See Reserve Bank of India, Report on Currency and          dividends through the sale of shares.
             Finance (New Delhi: Government of India, multiple       .  Such financial assets are nown as close su stitutes
             years).                                                    for money.’