Money market instruments are the best assets for banks and financial institutes to lend and borrow huge amounts of money for the short term with attractive interest rates on repayment. The Indian money market started to grow nearly 20 years ago and has today reached a flexible and mature stage. The Reserve Bank of India (RBI) controls the Indian money market. The government of India has permitted private banks to operate in the Indian money market which has helped the market grow and mature. It enables healthy competition gives industries strong financial support.
The Balance of Finance
In a money market system, an institute borrows money from a bank for a short term period. The term can be of one day or one year. Even a bank can borrow money from another bank in the Indian money market system. Thus, when a bank is in need of funds, it can borrow it from another bank which has some funds to spare.
Sometimes, if a bank witnesses an opportunity to earn sizeable interest from another bank by lending money, it can borrow from other bank and prepare a fund for lending. This way, the entire system balances the demand and supply of funds of different banks.
The RBI has several financial strategies to run the Indian money market to maintain the liquidity in the market. When a bank or another institute requires a huge amount of money in a day, it increases the amount of interest rates. This maintains the liquidity of the money market. As this system has worked for banks and financial institutes, the money market has become an indispensible part of the Indian economy.
Money market and the Indian economy
One of the main reasons for the growth of the Indian money market to this level is that it has helped to balance the economy. Banks and different institutes help each other by lending money which ensures that the financial balance between them is maintained.