What are the main Components of Money Market?

The various institutions in the money market generally include the following:

1. Central Bank:

It is naturally to be the leader of all banks. It is the bank, which is entrusted with the task of controlling the issue of money and funds to the market and regulates credit facilities provided by various other institutions.

2. Commercial Banks:

They play a vital role in the money market. They make ad­vances, discount bills and lend against the promissory notes and the like. They also take help of the market in solving their liquidity problems.

3. Discount Houses:

Discount houses are special institutions for rediscounting the bills of exchange. They usually deal in three kinds of bills.

(a) The domestic bills

(b) The foreign bills and

(c) The government treasury bills.

The discount houses borrow huge funds for short periods from the commercial banks and RBI and Sinvest them in discounting bills. But before discounting a trade bill of ex­change, the Discount House insists that it should be accepted by an Acceptance House.

4. Acceptance Houses:

Acceptance Houses are institutions which specialize in accept­ing bills of exchange. Generally they are merchant bankers. They act as second signatories on the bills of exchange. That is they guarantee the bills of a trader whose financial stand­ing is not known, for making the bill negotiable.

They maintain correspondents in impor­tant towns of various places within and outside the country to collect information about the creditworthiness and financial position of the customers, who seek the assistance of the Acceptance Houses. For their service, they charge a small amount of commission but en­sure great security for the bills discounted by the Discount Houses.

5. Bill Brokers:

The “Bill Brokers” intimately know their customers and act as intermediaries between the sellers and buyers of bill for a small commission. Sometimes, these bill brokers discount bills on their own account.

The money market includes the following important sub-markets in the traditional sense:

Money Market

i. The market for extremely short period loans.

ii. Money at call and short notice

iii. The rate in this market is the “call money rate.”

iv. The rate is deter­mined by the de­mand and supply of funds.

v. Money is lent mainly to the bill brokers and stock exchange dealers.

Merits

i. The money can be taken back when needed.

ii. Earn interest by quick lending of idle cash.

iii. Promote stock ex­change transac­tions.

iv. The market for the acceptance of trade bills.

v. The main opera­tors in this mar­ket are the ‘Ac­ceptance houses’ and the commer­cial banks.

Demerits

i. Promotes the op­erations of dis­count houses.

ii. Making the bills negotiable.

Bill Market

i. Market for short- term bills.

ii. Buying and sell­ing of short dated papers, bills, etc.

iii. It includes com­mercial bill mar­ket and Treasury bill market

Merits

i. Helps the govern­ment by market­ing of treasury bills.

ii. Helps the other sectors as well.

Collateral Loan Market

i. Important section of the money market.

ii. It takes the form of loans over drafts, cash cred­its.

iii. The loans and ad­vances are cov­ered by collabo­rates like govern­ment securities, gold silver, stocks of corporations, merchandise, etc.