The vital question is why the money market is needed. There are several reasons to answer this vital question for the students and other those engaged in the business of finance and capital market. This helps to explain the nature and essential role of the money market.
The first reason is that it is not so easy for the money market participants such as the government, individuals, and institutions to match their timing of cash inflows and outflows. Because of this lack of perfect harmony in funds flow to each other, they have to enter the money market for the following roles:
Raising the funds whenever needed:
The money market has an important role to play in raising the funds whenever needed for the industries, firms, government, and households. The industries and firms can issue securities to manage the funds and government can borrow funds from the money market. The households can sell their holdings of securities in the money market.
Supplying the funds:
The money market helps the investors to invest their funds with various alternatives of getting expected return. They can earn reasonable interest or income from the supply of funds in the money market. This is the case when they excess liquidity to convert their money into securities.
Meet its day-to-day expenditures:
The money market helps the government in getting the funds for paying salaries to employees, clearing the bills due to office Supplies, meeting the cost of repairs, fuel costs, and other administrative costs to match the tax collection period. At other times, certain unexpected expenses can be paid through a raising of funds from the money market until the revenues do not come in time.
Raising and investing temporary funds:
The government can raise temporary funds from the money market through the issue of treasury bills. In such a case, the government becomes the borrower in the money market. At other times when the government has already collected taxes, it usually flushes with funds to purchase the treasury bills and becomes the lender in the money market. The government may also make investments in attractive financial assets to increase revenue.
Synchronize cash inflows and cash outflows:
The money market helps in the timing of cash receipts and disbursement of càsh inflows and outflows. Moreover, business firms have cash shortages and they can match the funds from the money market by issuing various short-term market instruments or borrowing directly from the networks of financial intermediaries engaged in the money market. They become the borrowers in the money market to meet their temporary cash deficiencies as well as lenders to invest when they have surplus cash.
However, when they have adequate cash surplus because of their ability to collect the funds from customers, they become the lenders in the money’ market. They may also invest in short-term money market instruments. They become leaders in the capital market.
They invest their idle cash balances in short-term marketable securities and get it converted into cash whenever needed. But in our country, business firms have not developed to such an extent to play both the roles of borrowers and lenders in the money market. The scope exists for them provided they develop the needed business culture of being efficient and viable in undertaking business activities.