Page 52 - DCOM304_INDIAN_FINANCIAL_SYSTEM

Unit 3: Financial Markets

 The money market is concerned with intermediation of short-term funds from savers to Notes
those who need them for meeting their working capital requirements and allocation of
the funds in an efficient manner among competing uses in the economy, thereby
contributing to growth through increased investment and through enhanced efficiency in
resource utilisation.
 By nature, the transactions that take place in the money market are of high volumes,
involving large amounts. Hence, the market is dominated by a relatively small number of
large players. Market Makers (Primary Dealers, etc.)
 Discount houses perform the function of discounting/rediscounting the commercial bills
and T-Bills.
 On the other hand, acceptance houses are specialized agencies which accept the bills of
exchange on behalf of their clients for a commission.

 An active bill market becomes a prerequisite for the services of the discount and acceptance
houses. In addition, some of these intermediaries act as underwriters to the government
securities and also have the option to be their market makers. The various money market
players, can be segregated into different categories based on their activity in the market,
i.e., they can be only lenders, lenders and borrowers/issuers, investors or intermediaries.
Certain players may have more than one role to play.

3.10 Keywords

Acceptance Houses: Are specialized agencies which accept the bills of exchange on behalf of
their clients for a commission.
Bill Market: Is a market where short-term papers or bills are traded. These bills include bills
of exchange and treasury bills.
Call/Notice money market: Is a market where the day-to-day surplus funds, mostly of banks
are traded.

Commercial Bill: It is an instrument used in the Indian money market to finance the movement
and storage of agricultural and industrial goods in domestic and foreign trade.
Commercial Paper: It enable highly rated corporate borrowers to diversify their sources of
short-term borrowing and also to provide an additional instrument to investors.
Derivative Promissory Notes: Under this instrument, banks were permitted to issue derivative
usance promissory note for a period not exceeding 90 days under the strength of underlying
bills.
Discount Houses: It performs the function of discounting/rediscounting the commercial bills
and T-Bills.
Money Market: Is a market for short-term funds and covers money and financial assets that are
close substitutes for money.
Repo: It refers to a transaction in which a participant acquires fund immediately by selling
securities and simultaneously agreeing for repurchase of the same or similar securities after
specified period of time at a given price.

3.11 Review Questions

1. What are the various money market instruments available in India?

2. What is the role of the money market in a financial system?

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