The money market is the market in which financial institutions, national treasuries, central banks, commercial banks, fund managers, insurers, etc, place their assets or borrow short term (less than one or two years). With the adoption of floating exchange rates, currencies have become a commodity like any other property that is bought and sold. The money market is essential to the functioning of financial markets.
Banks face central banking reserve requirements and demand for cash (estimated average 15% of deposits, but varies depending on the time and place). This also incorporates activities, such as Send Money to the USA from India.
If each bank extends credit based on market share of deposits, the banking market is balanced. But if this is not the case, to adjust their cash in central bank money, banks will turn to the money market that will allow them to place, with other banks and financial institutions, their surpluses or get them to finance their monetary needs, after clearing daily transactions.
The interventions of the central bank in the market correspond to refinancing. The operations of the central bank’s discount rate and open market operations, together with the rules repurchasing of certain monetary assets regulate this market.
Due to excessive abundance of liquidity of financial institutions, market rates may be lower than the refinancing rate of the Central Bank. If there is tension in the money market, providing liquidity (refinancing ) by the central bank is likely to regulate the situation.
When (as was the case in 2008) no bank no longer trust each other, this may block inter bank loans or lead to high lending rates. This blocks the money market and imposes massive refinancing by central banks to allow commercial banks to cover their monetary needs.
Instruments
Among the cash instruments, which are the direct refinancing instruments include interbank lending, that is, unsecured, which is the most risky, more structured, yet the most common in the money market. Interbank loans pledged or pensions on assets identified but not delivered to the counterparty.
The repurchase or repo, short for repurchase agreement, that is, borrowing cash pledged by simultaneous spot sale of marketable financial assets (bonds, treasury bills, certificates of deposit, etc.) that unravel at the end by buying the same assets.
The debt securities in the short term, de facto products being mainly Treasury bills issued by the National Treasury, certificates of deposit issued by banks and paper notes issued by companies. Securities theoretically accessible to individuals, mainly government bonds, also short-term bonds issued by local authorities or companies and currency deposits for Sending Money to India
