Financial system of any country consists on different sub-markets as money, capital and forex markets. The flow of funds in these markets is multi-directional depending upon liquidity, risk profile, yield pattern, interest rate differential or arbitrage opportunities, regulatory restrictions, etc. The role of money market in the overall financial system is prime in as much as the market acts as an equilibrating mechanism for evening out short term surpluses and deficits and provides a focal point for Central Bank’s intervention to bring out variations in liquidity profile in the economy. It is short-term market meant to meet short term financial needs ranging from fortnight to 1 year.
Distinction between Capital and Money Market
Capital Markets are meant to finance capital requirements by way of shares and bonds, whereas Money Markets are meant to finance short term working fund requirements. Money Markets are meant to enter financial arrangements of less than 1 year whereas in capital markets, arrangements are made longer than a year. In terms of volume, money markets are lot larger than capital markets. Unlike the Capital Markets that deal in Shares and Bonds, there are many types of instruments to deal in Money markets such as Interbank Call Money, Notice Money upto 14 days, Short-term deposits upto 3 Months, 91 days Treasury Bill, 182 days Treasury Bill, Commercial Paper, etc.