Individuals do have problems with cash surplus and deficiencies. Whenever they have surplus savings, they enter the money market. The functions of the money market are to find a wide variety of short-term money market instruments. The investor in the money market becomes the lender as well as a borrower to manage the funds. These create not so much effect on security prices and interest rates. Because of the efficient money market, a vast network of money market player brokers and dealers are brought into contact with transactions.
In fact, the money market is more of a telephone and computer market in which participants arrange trading over the telephone or through a computer network. In our country, however, it takes a long time to confirm a transaction either because the players are not following the rules of the money market game or because the central bank as an enforceable authority often makes the matter more complicated.
In fact, the functions of the money market can be better explained with the help of the volume of selected money market instruments used such as Treasury Bills, commercial paper, bankers’ açceptance, certificate deposits, central bank borrowing, and repurchase agreements, etc. Having given the short highlight of money market functions, the important functions of the money market function are as follows:
Borrow funds from the financial intermediaries:
The money market helps the investors to borrow the funds whenever needed. So, investors become borrowers in the money market. This is how individuals would be playing the role in the money market in borrowing the funds from financial intermediaries or money market managers. In our country, however, individuals are not so much directly involved in the money market although sometimes the central bank encourages them to borrow funds to develop the money market.
Invest their surplus funds:
The money market helps investors to invest surplus funds in government securities and other short-term money market instruments. It provides an opportunity to earn in return from the money market. It depends on upon investor’s needs and preferences due to differences in demanding funds and supplying these funds when not needed.
Investing the idle cash balances:
The money market encourages individuals and business firms to invest their idle funds whenever these funds immediately used. Some interest can be earned from such idle funds by investing in the money market. Many investors have enough information about investment opportunities for making the best use of their funds due to the package of investment services offered by banks and financial institutions developing various money market instruments.
Maintain the opportunity cost foregone:
The function of the money market lies in bringing together the borrowers and lenders of funds. Banks and financial institutions can play the role of both borrowing and lending funds. At one point in time, they may borrow funds through the issue of a certificate of deposit (CDs); use deposit balances of commercial banks in the central bank of the country, and uses other short-term market instruments. At another point in time, they may lend funds to the business firms and corporations to meet their temporary cash shortages. It is because of the ability of the banks and financial institutions to play on both sides of the money market.
Make lending and borrowing go together:
Another function of the money market insists on maintaining liquidity and safety on one hand and making it possible to generate interest income from funds invested in earning assets of the money market. The money market provides dual opportunities for the investors to demand the funds whenever needed and invest the funds whenever they do not require them. This is how both costs of borrowing and return from lending can be matched to make the best use of funds. The portfolio in the short-term securities can be balanced from time to time.
Adequate protection to risk-averse investors:
Also true to the fact that the money market provides adequate protections to risk-averse investors. There is a credit rating of the short-term funds to the clients. Many investment risks can be avoided in the money market due to the short-term maturity structure. However, in the context of our country, the function of the money market although very important has not been fully explored. This is mainly due to the lack of an efficient money market.