Question

How does financial institutions participate in money market?

Answer 1

Money Market is composed of short term, highly liquid and low risk securities. Here, Investment is done in Treasury Bill, Certificate of Deposit, commercial paper of companies, etc.Over the Counter Trades are done in money market and in wholesale.It is used by participants as way of lending and borrowing on short term basis.

Financial Institutions such as banks, NBFC's, and acceptance houses are major participants in Money market.

Commercial bank use short term deposit for financing trade for short term periods. Commerical bank invest their short term funds in discounting bills of exchange to facilitate trade and commerce by mobilising the flow of money.Commercial bank also lend through promissory notes, advances or overdrafts to borrowers such as  individuals, companies to provide short term financial assistance and charge interest on finance provided. Finance is generally provided based on the needs and creditworthiness of borrower.The aim of commercial bank is that fund invested ( issue of money market instruments) not only remain liquid but also earn high interest on them.

In addition to commerical bank there are also non banking financial intermerdiaries i.e. NBFC who resort to lending and borrowing of short term funds in money market.

Central Bank also known as apex institution uses money market instruments to control money supply and credit to ensure stability in the economy. Central bank use short term interest to control inflation and deflation in the economy.

Acceptance house is the main institutions dealing in bill market. It act as intermediary between importers and exporters and between lenders and borrowes in the short run.These houses specialised in acceptance of commercial bills.