What Is meant by money market? Explain any two instruments used in money market.
Money market is the market for short-term funds. It provides means for raising funds for meeting short-term needs of cash on one hand and deployment of surplus funds for short period on the other. Instruments in money market are:
(i) Call money It is a method used by commercial banks to borrow funds from each other to be able to maintain the Cash Reserve Ratio (CRR). It is a short-term finance repayable on demand, with a maturity period of 1 day to 15 days.
The interest paid on call money loans is known as the call rate. It is a highly fluctuating rate that changes from day-to-day and sometimes even from hour-to-hour.
(ii) Commercial bill It is a bill of exchange used to finance the working capital requirement of a business firm. It is a short-term, unsecured promissory note, negotiable and transferable by endorsement and delivery with a fixed maturity period.
When the seller makes credit sales, it draws a bill of exchange on the buyer, to pay the amount on certain date. On acceptance by buyer, it becomes a trade bill. This trade bill, when presented to the bank for discounting, and the bank accepts it, is called commercial bill.