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Explain the role of money market in India ?

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(A) Meaning: 

Money market is a market for lending and borrowing short term funds.

It is a market for near money.

It deals in short term instruments like trade bills, government securities, promissory notes, etc.

Money market centres are located at Mumbai, Delhi and Kolkata. Money market consists of organised as well as unorganised sector.

Role of Money Market in India:

1. Portfolio Management : Money market deals with different types of financial instruments which are designed to suit the risk and return preferences of the investors.

This enables the investors to hold a portfolio of different financial assets which in turn, helps in minimizing risk and maximizing returns.

2. Implementation of monetary policy : Various monetary policies are implemented by the Central Bank, with an aim to manage the quantity of money, to meet the requirements of different sectors of the economy and to increase the pace of economic growth. Money market ensures successful implementation of these monetary policies. It also guides the central bank in developing an appropriate interest policy.

3. Growth of Commerce, Industry and Trade : Money market facilitates discounting bills of exchange to local and international traders who are in urgent need of short-term funds. It also provides working capital for agriculture and small scale industries.

4. Financial requirements of the Government : Money market helps the Government to fulfil its short term financial requirements on the basis of Treasury Bills.

5. Economizes the use of cash : Money market deals with various financial instruments that are close substitutes of money and not actual money. Thus, it economizes the use of cash.

6. Equilibrating mechanism : Money market helps to establish equilibrium between the demand for and supply of short term funds by allocating rationally the available resources and thus mobilizing the savings of public into fruitful investment channels.

7. Liquidity Management : Money Market, through the monetary authorities facilitates better management of liquidity and money in the economy. This, in turn, leads to economic stability and development of the country.

8. Short-term requirements of borrowers : Money market provides short-term financial needs of the borrowers at reasonable prices.

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