Question

State with reason whether you agree or disagree with the following statement:

Money market plays an important role in India.

Options

• Agree

• Disagree

Answer 1

I agree with the above statement.

Reasons:

The role of money market in India can be explained with the help of the following points:

1. Meeting the short-term requirements of the borrower: Due to the money market, the short-term financial needs of the borrower are met at realistic interest rates.
2. Liquidity management: The money market facilitates better management of liquidity and money in the economy by the monetary authorities. As a result, the country enjoys economic stability and economic development.
3. Portfolio management: The money market deals with different types of financial instruments that are designed to suit the risk and return preferences of investors. This enables the investors to manage portfolios to minimise the risks and to maximise the returns.
4. Equilibrating mechanism: The money market leads to the rational allocation of financial resources. The money market accelerates savings in the investment stream. The money market helps to strike a balance between the demand for and the supply of short term funds.
5. Meeting the financial requirements of the government: The money market helps the government to fulfil its short-term financial needs on the basis of the Treasury Bills.
6. Implementation of monetary policy: The main objective of monetary policy is to manage the quantity of money in the economy. In India, monetary policy is implemented by the Reserve Bank of India. Monetary policy makes it possible to meet the economic needs of different sectors of the economy and accelerate economic growth. The money market guides the Reserve Bank of India in developing appropriate interest rates. Thus, a fully developed money market in the economy helps in the successful implementation of monetary policy.
7. Economising the use of cash: The money market is not about the actual money but about various financial instruments that are close substitutes to money. As a result, the money market helps to use cash sparingly.
8. Promoting the growth of commerce, industry and trade: Local traders as well as international traders who are in need of short-term funds have the facility to discount bills of exchange in the money market. The money market provides working capital for agro-industries and small-scale industries. As a result, the money market drives the growth of commerce, industry and trade in the country.