Importance of Money Market and Capital Market for an Economy

Development of Trade and Industry

    • It is an important source of financing trade and industry, as it provides for short-term funds adequately and quickly
    • The money market, through discounting operations and commercial papers, finances the short-term working capital requirements of trade and industry and facilities the development of industry and trade both — national and international

Development Of Capital Market

    • The short-term rates of interest and the conditions that prevail in the money market influence the long-term interest, as well as the resource mobilization in capital market

Smooth Functioning of Commercial Banks

    • The money market provides the commercial banks with facilities for temporarily employing their surplus funds in easily realizable assets. The banks can get back the funds quickly, in times of need, by resorting to the money market
    • It also enables commercial banks to meet their statutory requirements of cash reserve ratio (CRR) and Statutory Liquidity Ratio (SLR) by utilizing the money market mechanism

Effective Central Bank Control

    • A developed money market helps the effective functioning of a central bank.
    • It facilities effective implementation of the monetary policy of a central bank

Formulation Of Suitable Monetary Policy

    • Conditions prevailing in a money market serve as a true indicator of the monetary state of an economy.
    • Hence, it serves as a guide to the Government in formulating and revising the monetary policy, depending upon the monetary conditions prevailing in the market

Non-Inflationary Source of Finance To Government

    • A developed money market helps the Government to raise short-term funds through the treasury bills floated in the market
    • In the absence of a developed money market, the Government would be forced to print and issue more money or borrow from the central bank; Both of which would lead to an increase in prices and the consequent inflationary trend in the economy
  • It is only with the help of capital market, long-term funds can be raised by the business community
    • Existing companies, because of their performance will be able to expand their industries and also go in for diversification of businessdue to the capital market
  • Capital markets help individuals generate wealth and invest in their futures
    • It provides opportunity for the public to invest their savings in attractive securities which provide a higher return.
    • Also, capital market provides an opportunity for the investing publicto know the trend of different securities and the conditions prevailing in the economy
  • Further, capital markets provide the fuel for companies or entrepreneurs to turn an idea or industry innovation into an actual company or expansion for an existing firm
    • This in turn creates jobs and spurs economic growth
  • A well-developed capital market is capable of attracting funds even from foreign country. Thus, foreign capital flows into the country through foreign investments
  • Capital market is the barometer of the economy,by which one can assess the economic conditions of the country, which further helps government to take suitable action
  • Capital market provides opportunities for different institutionssuch as commercial banks, mutual funds, investment trust; etc., to earn a good return on the investing funds.
    • They employ financial experts who are able to predict the changes in the market and accordingly undertake suitable portfolio investments
  • Capital markets match borrowers and investors, acting as shock absorbers during times of economic stress or market turmoil, when bank lending can dry up.
    • By diversifying risk, capital markets provide a stable source of fuel for companies, governments and therefore economies.