Importance of Money 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