The money market is a market where short term securities are bought and sold, which implies that in money market securities which are of less than 1 year maturity are traded in the money market. It includes securities like certificate of deposits, commercial paper, treasury bills etc… Given below are the various function which are performed by the money market –
1. Money market is a medium through which demand and supply for short term funds are matched and therefore it helps the financial institutions as well as the banks to meet there short term demand for money. There are situations when banks need money only for 2 or 3 days and that’s where money market can be extremely helpful.
2. Through money market central bank can also influence the general liquidity available with the banks and general level of interest rates in the economy. Central banks can perform this by either purchasing or selling the treasury bills in money market.
3. Money market also helps those entity’s which have excess cash with them, because those entity’s can lend that cash in money market to the borrowers and earn interest on idle funds available with them.
4. Money market also keeps the short term interest rates in check by matching the requirements of lenders with borrowers of money.