Money Market and Capital Market

Characteristics of Money Market…
Liquidity – Quick conversion of money
Minimum transaction cost & no loss in value
The money market provides a reasonable source to those who require short
term funds to meet their requirements at a minimum cost.
The money market is the major mechanism through which the central bank
influences liquidity.
In a money market, funds may be borrowed for periods varying from a day, a
week, 3 to 6 months and against different types of instruments such as bills of
exchange, short term securities, banker’s acceptances, etc called near money.
The short term requirements of borrowers & provides liquidity or cash to the
lenders.

Distinction Between Money Market and Capital Market
Capital market is meant the market for long term funds, while money market is
meant for short term funds.
1) A Money market deals in short term funds, whereas capital market deals in
long term funds.
2) Money Market – Commercial banks
Capital Market – Investment banks
3) Money market – Short term credit instruments
Trade bills / bankers acceptances / Treasury bills / Short term governments
bonds
Capital Market – Long term securities of government & semi government
institutions.

Functions & Significance of Money Market
The basic function of the money market is to provide facilities for adjustment of
liquidity positions of commercial banks, business corporations, non banking
financial institutions & other investor.
 The main functions of money markets…….
1) The flow of funds to the most important uses throughout the country.
2) It provides funds to finance production & distribution.
3) It helps to promote economic growth of the money market.
4) The money market constitutes a highly efficient mechanism for credit
control.
5) It enables the business community to economize its use of cash by inducing
it to invest extra funds for short periods.
 The significance of the money market is described as …
1) Helps trade & industry.
Provide adequate finance to trade & industry.
2) Channel to non banking financial institutions.
3) Outlets to commercial banks funds.
4) Serves as a good barometer.
5) Development of capital market
The capital market is dependent on the money market.
6) Helps the Central Bank.
7) Capital Formation.
Help in selection of profitable securities.
8) Establishes Equilibrium
Establish equilibrium between demand & supply of money.
9) Public Debt Policy

Dealers in the Money Market
 Lenders – Suppliers of short term funds
Central Bank / Commercial Bank / Discount houses / Acceptance houses / Bill
Brokers / Insurance companies / Financial corporations / Business houses
Commercial banks This is the most important suppliers of shot term funds.
Central bank This is the lender of last resort.
Acceptance houses They merely accept commercial bills of exchange
Bill Brokers Provide short term funds to businessmen by purchasing
their bills of exchange
Discount houses
Insurance companies Short term funds by granting the loans
Financial corporations
 Borrowers
Government / Semi government institutions / Commercial banks / Industrial &
business concerns / Stock exchange dealers / Farmers & Private individuals.
The Government This is the biggest borrower.
Semi Government Borrow short term funds through the sale of bonds &
debentures.
Commercial banks Raise short term funds from the public by way of deposits.
Call loans
Central Bank In the way of rediscounting of treasury bills & eligible
commercial bills or advances against approved securities.
Rediscounting of treasury bills & eligible commercial bills or
advances against approved securities
Business & Industrial concern
Short term funds from commercial banks & also from non
banking financial institutions for working capital requirements.
Stock exchange
dealers
Secure very short term loans called call loans from commercial
banks for financing their stock exchange transactions.
Farmers Short term funds from commercial banks & agricultural banks.
Private individuals Borrow money from commercial banks for meeting their
household or personal requirements.