What is Money Market Definition and Meaning in India – Capital Market

Money Market Definition

Money Market Definition

The money market is a market for overnight to short-term money, and for a short-term fund and the financial asset that are close substitutes for money Short term in Indian context means a period up to one year. Close substitute for money means any financial asset, which can be quickly converted into money.

The major participants in this market are the commercial banks, the other financial intermediaries, large corporate and the Reserve Bank of India. The RBI plays a major role and occupies a strategic position in these markets. It influences the availability and cost of credit. The objectives of these markets to provide

  1. A mechanism for evening out short-term surpluses and deficiencies.
  2. A focal point of central bank intervention for influencing liquidity in the economy.
  3. A reasonable access to the users of short-term funds to meet their requirements at the real cost.

In the money market, the operations are of short duration as compared to capital markets. There is a large number of participants in the money market. The depth of this market depends on the number of participants. This is a wholesale market.

The volumes here are very large, and therefore there is a need for professionals to operate in these markets. Trading here is conducted mainly on telephones, followed by written confirmation from both the parties

Call Money Markets

Another popular segment of these markets is the Call Money market. This market is essentially used by banks, financial institutions, and mutual funds. The institutions that have excess funds would lend to the other institutions that are in need of some short-term funds.

Many banks borrow in these a markets overnight liquidity. Banks many times require funds for settling their cheques, clearing accounts and since they have to balance these accounts every day, they are forced to borrow overnight in these markets. The call money rates are normally determined by the demand-supply situation prevailing on almost day to day basis.

The money market mutual funds are also an important player in these markets. They can park their funds in these markets. These funds are highly liquid and a lot of funds can move in and out of these markets at a short notice.

The Reserve Bank of India has said they would prefer to phase out these markets and switch the trades to the REPO markets as they are more disciplined and can be tracked better. We will have to wait and see what type of developments take place in these markets in the future.


Discount and Finance House of India Ltd. The RV jointly with the public sector banks and all India financial institutions set up the Discount and Finance I louse of India Ltd. as an autonomous financial intermediary.

It was conceived with the main objective of increasing the transactions of the money market assets. The main function of DHFI is to smoothen the short-term liquidity imbalances by developing an active secondary market. DHFI participates in call/notice/term money markets both as borrower and lender, purchased and sold T bills, commercial bills, commercial paper and certificate of deposits.

Primary Dealers

The objectives of PD’s include:

  • Strengthening the infrastructure in the government securities market including money markets to make them vibrant.
  • To ensure the development of underwriting and market making for government securities.
  • To improve the secondary market trading system.

Money Market Instruments

  1. T Bills
  2. Commercial Paper (CP)
  3. Certificates of Deposits (CDs)
  4. Money Market Mutual Funds
  5. Repos and Reverse Repos Market

T-bills were introduced to stabilize the money markets. They are sold on the of the fortnightly auction, but the amount, however, is not specified in advance. These bills have been instrumental in reducing the net RBI credit to the government.

They have become extremely popular due to their higher have coupled with liquidity and safety and are being used as the benchmark. They have also widened the money market and provided an innovative outlet for the surplus funds.

14 – Days Intermediate

T-Bills The participants in these bills are state governments, foreign central banks, and specified bodies. These are non-transferable and are issued only in book-entry forms and would be redeemed at par. The government uses T-bills to tide over its short-term mismatches between its revenues and expenditure.

Since this is borrowings by the government they are absolutely safe and have almost no risk. Banks park their liquidity in these instruments. he T-Bills are issued for 14, 91,180 or 364 days. This means that these are short-term borrowings. T-B ills can also be traded in secondary markets as well. This provides liquidity to the investors.

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