Question

Explain the role of the money market in India.

Explain the role of money market in India (any four)

Answer 1

Money market is a financial market wherein lending and borrowing of short-term funds take place. It is a market for ‘near money’ i.e. short-term instruments. These instruments are highly liquid, less risky, and easily marketable with a maturity period of one year or less than one year.

The role of the money market in India can be explained as follows:

1. Short-term requirements of borrowers: Money market provides access to sources of funds to borrowers in order to meet their short-term requirements at reasonable interest rates.
   
2. Liquidity Management: Money market is a dynamic market. It facilitates better management of liquidity and money in the economy by the monetary authorities. This, in turn, leads to economic stability and development of the country.
3. Portfolio Management: Money market deals with different types of financial instruments that are designed to suit the risk and return preferences of the investors. This enables the investors to hold a portfolio of different financial assets which in turn, helps in minimizing risk and maximizing returns.
4. Equilibrating mechanism: Through the rational allocation of resources and mobilization of savings into investment channels, the money market helps to establish equilibrium between the demand for and supply of short-term funds.
5. Economizes the use of cash: Money market deals with various financial instruments that are close substitutes of money and not actual money. Thus, it economizes the use of cash.
6. Implementation of monetary policy: Monetary policy is implemented by the central bank. It aims at managing the quantity of money to meet the requirements of different sectors and to increase the pace of economic growth. A well-developed money market ensures the successful implementation of the monetary policy. It also guides the central bank in developing an appropriate interest policy.
7. Financial requirements of the government: Money market helps the government to fulfill its short-term financial requirements on the basis of Treasury Bills (T-bills).