Justify the following statements.
1. Financial markets acts as link between investor and borrower.
(1) A financial market Is a market place where trading or exchange of various financial Instruments and assets take place. The price of these assets depend on Its demand and supply In the respective market.
(2) Financial Market acts as a link between one who Invests money or lends money and other one who borrows or uses money.
(3) Hence, financial markets connect the investors to the borrowers and bridge the gap between the two for mutual benefits,
(4) Thus, it Is rightly Justified that, financial markets acts as link between Investor and borrower.
2. Money market makes available short term finance through different instruments.
(1) Money market Is a market for short-term loan or financial assets. It meets the short-term requirements of borrowers and provides liquidity or cash to lenders, (2) In the money market, only those financial instruments are traded which are Immediate substitute for money, Some of these Instruments are:
• Cell money and Notice money
• Treasury Bills (T – Bills)
• Trade Bills / Commercial Bills
• Commercial Papers (CPs)
• Certificate of Deposits (CDs)
• Government Securities
• Repo or Repurchase Agreement
• Money Market Mutual Funds (MMFS)
(3) Financial Instruments traded in money market helps in fulfilling the short term and very short term requirements of the companies, banks, financial institution, government agencies and so forth.
(4) Thus, it Is rightly justified that, money market makes available short term finance through different instruments.
3. Capital market is useful for corporate sector.
(1) Private Sector Companies or Corporates Issue Commercial Papers (CPs) and corporate debentures.
(2) Commercial Papers (CPs) are short-term, negotiable, discounted debt Instruments. They are Issued in the form of unsecured promissory notes.
(3) Corporate debentures are coupon bearing, medium to long term instruments which are Issued by corporations when they want to access loans to finance projects and working capital requirements
(4) Thus, it is rightly justified that capital market is useful for corporate sector.
4. There are many participants in money market.
Some of the participants In money market are as follows:
1) Reserve Bank of India : It Is the most important participant In the money market. Through the money market, RBI regulates money supply and implements its monetory policy. It Issues government securities on behalf of the government and also underwrites them. It acts as an Intermediary and regulator of the market.
2) Central and State Government : Central Government Is a borrower in the Money Market, through the issue of Treasury Bills (T-Bills). The T-Bilis are issued through the Reserve Bank of India (RBI). The T-BIlls represent zero risk Instruments. Due to Its risk free nature banks, corporates, etc. buy the T-Bills and lend to the government as a part of Its short-term borrowing programme. The state governments issue bonds called as State Development Loans.
3) Public Sector Undertakings (PSU): Many listed government companies can Issue commercial paper In order to obtain Its working capital.
4) Scheduled Commercial Banks : Scheduled commercial banks are very big borrowers and lenders in the money market. They borrow and lend in call money market, short notice market, Repo and Reverse Repo market.
5) Insurance Companies : Both the general and life Insurance companies are usual lenders in the money market. They Invest more in capital market instruments. Their role In the money market is limited.
6) Mutual Funds: Mutual Funds offer varieties of schemes for the different Investment objectives of the public. Mutual funds schemes are liquid schemes. These schemes have the Investment objective of Investing In money market instruments.
7) Non Banking Finance Companies (NBFCs) : NBFCs use their surplus Funds to Invest In government securities, bonds etc. (Example of NBFC – Unit Trust of India)
8) Corporates : Corporates borrow by issuing commercial papers which are nothing but short-term promissory Notes. They are the lender to the banks when they buy the certificate of deposit Issued by the banks.
9) Primary Dealers : Their main role is to promote transactions in government securities. They buy as well as underwrite the government securities.
Thus, it is rightly justified that, there are many participants in money market.