The financial system of any country is a conglomeration of sub-market, viz. money, capital and forex markets. The flow of funds in these markets is multi-directional depending upon liquidity, risk profile, yield pattern, interest rate differential or arbitrage opportunities, regulatory restrictions, etc.

The role of money market in the overall financial system is prime in as much as the market acts as an equilibrating mechanism for evening out short term surpluses and deficits and provides a focal point for Central Bank’s intervention to bring out variations in liquidity profile in the economy.

As the Indian economy gets integrated with the global economy, the demand for borrowing and lending options for the corporates and the financial institutions increases everyday. Known as the money market instruments, mutual funds, money market mutual funds, government bonds, treasury bills, commercial paper, certificates of deposit, repos (or, ready- forward purchases) offer various short-term alternatives.

The major players in the money market are the Reserve Bank of India and financial institutions like the UTI, GIC, and LIC.

The distinction between banks and term-lending institutions is getting blurred, with banks extending term loans and financial institutions setting up their commercial banking outfits. Depositors withdraw and deposit cash daily while corporates withdraw the loan amount as and when the need arises, i.e., when they have to make payments to their suppliers, etc.

As a result, the balance, or net inflow or net outflow of cash, is not zero at the end of the day or the week or the fortnight. Hence, the need for an inter-bank call money market in the world seems over.

Money Market is the market for short-term funds, generally ranging from overnight to a year. It helps in meeting the short-term and very short-term requirements of banks, financial institutions, firms, companies and also the government.

On the other hand, the surplus funds for short periods, with the individuals and other savers, are mobilised through the market and made available to the aforesaid entities for utilisation by them.

Thus, the money market provides a mechanism for evening out short-term liquidity imbalances within an economy. Hence, the presence of an active and vibrant money market is an essential pre-requisite for growth and development of an economy.

Distinct features of money market as it is one market but collection of markets, such as, call money, notice money, repose, term money, treasury bills, commercial bills, certificate of deposits, commercial papers, inter-bank participation certificates, inter-corporate deposits, swaps futures, options, etc. and is concerned to deal in particular type of assets, the chief characteristic is its relative liquidity.

All the sub-markets have close inter-relationship and free movement of funds from one sub-market to another. There has to be network of large number of participants which will add greater depth to the market.

The activities in the money market tend to concentrate in some centre which serves a region or an area; the width of such area may vary considerably in some markets like London and New York which have become world financial centres.

Where more than one market exists in a country, with screen-based trading and revolutions in information technology, such markets have rapidly becoming integrated into a national market. In India, Mumbai is emerging as a national market for money market instruments.

The Indian money market has a dichotomic structure. It has a simultaneous existence of both the organized money market as well as unorganised money markets. The organised money market consists of RBI, all scheduled commercial banks and other recognised financial institutions.

However, the unorganised part of the money market comprises domestic money lenders, indigenous bankers, trader, etc. The organised money market is in full control of the RBI. However, unorganised money market remains outside the RBI control.

The market should be able to provide an investment outlet for any temporarily surplus funds that may be available. Thus, there must be supply of temporarily idle cash that is seeking short-term investment in an earning asset.

There must also exist a demand for temporarily available cash either by banks or financial institutions for the purpose of adjusting their liquidity position and finance the carrying of the relevant assets in their balance sheets. The money market in India has been undergoing rapid transformation in the recent years in the wake of deregulation process initiated by government of India/Reserve Bank of India.

The institutions of Primary Dealers (PDs) and Satellite Dealers have been set up as specialised institutions to facilitate active secondary market for money market instruments. New money market instruments have been introduced and more institutions have been permitted as players in the market.

Interest rates in respect of all money market instruments have been completely freed and are allowed to be fixed in terms of market forces of demand and supply.

The Reserve Bank of India, however, in due course of time, recognised the need for an active secondary money market in India especially in the context of the setting up subsidiaries by many banks for operating mutual funds schemes and ever expanding business of the Unit Trust of India, Life Insurance Corporation of India, Industrial Development Bank of India and other financial institutions which needed avenues for the deployment of funds, flowing in regularly.

Reserve Bank of India (RBI) is the most important participant of money market which takes requisite measures to implement monetary policy of the country.

As the Central bank, RBI regulates the money market in India and injects liquidity in the banking system, when it is deficient or contracts the same in opposite situation.

The money market in India is an important source of finance to industry, trade, commerce and the government sector for both national and international trade through bills- treasury/commercial, commercial papers and other financial instruments and provides an opportunity to the banks to deploy their surplus funds so as to reduce their cost of liquidity.

The money market also provides leverage to the Reserve Bank of India to effectively implement and monitor its monetary policy.