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.’