Structure of Money Market: Key Components & Instruments
05 March 2025 · Sachin Gadekar
The money market is a crucial part of the financial system, facilitating short-term borrowing and lending to ensure liquidity and stability in an economy.
Understanding the Money Market and Its Role in Finance
The money market is a crucial part of the financial system, facilitating short-term borrowing and lending to ensure liquidity and stability in an economy. In India, it is regulated by the Reserve Bank of India (RBI) and consists of various instruments and participants.
Structure of the Money Market
The money market can be divided into two key segments:
1. Organized Money Market
The organized segment is regulated and structured, ensuring transparency and efficiency. Key components include:
Call Money Market – Short-term borrowing and lending between banks.
Treasury Bills (T-Bills) – Government-backed securities with maturities of up to one year.
Commercial Papers (CPs) – Unsecured short-term instruments issued by corporations.
Certificates of Deposit (CDs) – Time deposits issued by banks with fixed maturity.
Repo & Reverse Repo Market – Short-term agreements to buy and sell securities with an obligation to repurchase.
2. Unorganized Money Market
This segment operates informally and includes:
Indigenous Bankers – Private lenders providing short-term credit.
Moneylenders & Chit Funds – Traditional financial institutions catering to small borrowers.
Key Functions of the Money Market
1. Liquidity Management – Helps businesses and governments manage short-term cash needs.
2. Monetary Policy Implementation – RBI uses money market instruments to regulate liquidity.
3. Credit Allocation – Facilitates efficient distribution of funds among financial institutions.
4. Interest Rate Determination – Short-term rates influence long-term lending in the economy.
Frequently Asked Questions (FAQs)
1. What is the money market?
The money market is a segment of the financial system where short-term borrowing and lending of funds occur, usually for a period of less than a year. It ensures liquidity and financial stability.
2. Who regulates the money market in India?
The Reserve Bank of India (RBI) regulates the money market in India, ensuring smooth functioning and financial discipline.
3. What are the major instruments of the money market?
The key money market instruments include Treasury Bills (T-Bills), Commercial Papers (CPs), Certificates of Deposit (CDs), Repo and Reverse Repo Agreements, and Call Money Market transactions.
4. How does the money market help investors?
Investors use the money market to park surplus funds in short-term instruments, ensuring safety, liquidity, and reasonable returns on investments.
5. What is the difference between the money market and the capital market?
The money market deals with short-term financial instruments (less than a year), while the capital market deals with long-term securities like stocks and bonds.