BAJAJ BROKING
August 05, 2025
4 mins read
When you think about financial markets, your first thought might be about stocks or bonds. But there’s another important segment that often operates behind the scenes—the money market. The money market is a segment of the financial market where short-term instruments are traded. These instruments typically mature within a year and are considered low risk. You might not realise it, but if you've held a fixed deposit, invested in a liquid mutual fund, or even checked your bank’s overnight rates, you’ve interacted with the money market. It plays a key role in maintaining liquidity and ensuring that financial institutions can meet short-term obligations. Whether you're managing a business or looking for safe short-term investment avenues, understanding how the money market works can help you make informed financial decisions. Knowing how this segment functions will also help you better interpret interest rate movements and short-term borrowing patterns in the economy.
Before diving into how the money market works or who uses it, it’s important to understand its basic characteristics. These features define the purpose and structure of this market.
The money market deals in financial instruments with a maturity of up to one year. This includes treasury bills, commercial papers, and certificates of deposit.
These instruments are highly liquid, meaning you can easily convert them into cash. This is especially useful when you need funds urgently or want low-risk investment options.
Most money market instruments are issued by governments, banks, or large corporations, which means the risk of non-payment is relatively low.
Transactions in the money market are generally large in volume and are usually conducted between financial institutions rather than individuals.
Since these are short-term investments, the returns are closely linked to prevailing interest rates set by central banks and market demand.
Money markets consist of various instruments that cater to the short-term funding needs of institutions and governments. Here are the most commonly used examples:
These are issued by the government to meet short-term borrowing needs. They are considered one of the safest money market instruments.
Large corporations issue these to finance short-term liabilities. They usually offer higher returns than government instruments due to slightly higher risk.
Banks issue CDs to raise funds. You can invest in these with a fixed tenure and earn interest at a pre-agreed rate.
These are interbank borrowings for very short durations, ranging from a single day to two weeks, used to manage liquidity.
These are short-term borrowing arrangements where securities are sold with a promise to repurchase them at a future date.
To understand how money markets operate, you need to look at the flow of funds between various participants. It’s all about managing short-term liquidity.
Financial institutions with surplus funds lend to those needing short-term capital. This keeps liquidity circulating in the economy.
Governments, banks, and companies issue money market instruments to raise short-term funds for working capital and operational costs.
The Reserve Bank of India regulates money market operations and may conduct repo or reverse repo operations to maintain liquidity.
These are large-ticket deals that often take place over-the-counter between banks, mutual funds, and large corporations.
Money market rates directly respond to monetary policy changes. A hike in the repo rate, for instance, affects yields on instruments like T-Bills and CDs.
The money market plays a fundamental role in the financial system by ensuring that short-term funds are available for those who need them.
It helps financial institutions maintain sufficient cash flow to meet daily obligations like withdrawals and payments.
The central bank uses money market operations to manage inflation and influence short-term interest rates.
Short-term instruments like T-Bills allow the government to manage temporary mismatches in revenue and expenditure.
It gives investors—especially corporates and institutions—a place to park funds temporarily with low risk.
By matching the demand and supply for short-term funds, the money market helps stabilise the banking system and broader economy.
The relevance of the money market cannot be overstated, especially in a growing economy like India. Its benefits extend to various sectors of the financial system.
It helps banks and financial institutions manage day-to-day cash needs without relying on long-term loans.
Funds are quickly redirected to institutions that need them, leading to better resource management in the economy.
The RBI frequently interacts with the money market to influence inflation and interest rates through liquidity management.
You can invest surplus cash in instruments like T-Bills or CDs and earn modest but safe returns.
Money market transactions keep short-term rates aligned with central bank targets, ensuring monetary stability.
Through short-term borrowing instruments, governments can manage fiscal gaps efficiently without resorting to long-term debt.
Mutual funds, insurance companies, and banks rely on the money market to invest funds temporarily and maintain balance.
By ensuring smooth fund transfers and liquidity, it boosts confidence among participants in the financial sector.
If you're considering money market instruments as an investment option, it's important to be aware of the tax implications. In India, taxation of these investments depends on the type of instrument and the holding period. Income earned from instruments like treasury bills, certificates of deposit, and commercial papers is usually taxed as interest income under the head "Income from Other Sources". This means it will be taxed according to your applicable income tax slab. If you're investing through mutual funds that invest in money market securities, the taxation will depend on the duration you stay invested. Short-term capital gains (for investments held less than three years) are added to your income and taxed accordingly. Long-term capital gains (if applicable) are taxed at 20% with indexation benefits. Being aware of these tax rules helps you plan your investments more efficiently and avoid surprises at the time of income tax return filing.
The money market is a crucial part of India's financial system, enabling institutions and governments to meet short-term funding needs. It also offers you, as an investor, a low-risk avenue to park surplus funds. From T-Bills to commercial papers, each component plays a unique role in maintaining liquidity and stability in the economy. If you're seeking an understanding of how interest rates impact borrowing costs or where corporates source their short-term funds, learning about the money market provides clarity. Whether you're an investor, business owner, or simply curious, knowing how money markets work empowers you to make better financial decisions.
Share this article: 
Share Market Holiday List 2025
29 Mar, 2025 | 3 Min. read
How to Choose the Right Broker for Your Demat Account?
08 Apr, 2024 | 7 Min. read
user guide, real time stock trading, stock market trading guide
05 Apr, 2024 | 3 Min. read
Understanding Demat Account Charges: Hidden Fees and Costs
03 Apr, 2024 | 6 Min. read
Demat Accounts Demystified: Start Your Investment Journey
30 Mar, 2024 | 3 Min. read
What is GIFT Nifty?
March 25, 2025 | 6 mins read
Advantages and Disadvantages of Sovereign Gold Bond (SGB) Investment
September 27, 2024 | 9 Min. read
Manufacturing Sector in India
September 27, 2023 | 4 Min. read
Forex Market Hours in India – Know the Best Timings
June 16, 2024 | 6 Min. read
How to Avoid LTCG Tax on Mutual Funds?
December 26, 2024 | 6 Min. read
Gold Price In India Today
May 19, 2025 | 5 Min. read
Why Gold Rate is Increasing?
November 29, 2024 | 3 Min. read
No result found
A bank is not a money market, but it actively participates in money market transactions. Banks use the money market to manage short-term funding needs, invest surplus funds, and maintain liquidity. They act as intermediaries between borrowers and lenders in various short-term financial instruments within the money market.
Money markets function through the trading of short-term debt instruments such as treasury bills, certificates of deposit, and commercial paper. Participants include banks, governments, corporations, and financial institutions. These instruments help manage liquidity, facilitate short-term borrowing and lending, and ensure stable cash flow in the financial system.
Money markets are used by banks, corporations, mutual funds, insurance companies, and governments. These entities rely on money markets to park surplus cash, obtain short-term funding, or manage liquidity needs. Retail investors also gain indirect exposure through money market mutual funds or savings products linked to money market returns.
It is called a money market because it deals in short-term financial instruments, often referred to as “money” due to their high liquidity and short maturities. These instruments typically mature within one year and are used to manage immediate financial obligations rather than long-term investment or capital formation.
The primary objectives of a money market are to provide liquidity, enable short-term borrowing and lending, maintain monetary stability, and support the central bank’s policy implementation. It also offers investors a secure avenue for short-term investment while ensuring efficient allocation of capital in the financial system.
Money markets are classified based on the type of instrument traded, such as interbank markets, call money markets, treasury bills, and commercial paper markets. They may also be categorised by participants or trading platforms, including organised exchanges and over-the-counter arrangements, depending on the regulatory structure and market sophistication.
The money market plays a crucial role in ensuring liquidity in the financial system. It helps institutions meet short-term obligations, supports the implementation of monetary policy, and contributes to interest rate stability. It also offers a low-risk investment option for short-term surplus funds held by various participants.
The capital market deals with long-term funding through instruments like shares and bonds, while the money market handles short-term instruments with maturities of up to one year. Capital markets focus on wealth creation and investment, whereas money markets ensure liquidity and short-term financial stability in the economy.
Disclaimer :
The information on this website is provided on "AS IS" basis. Bajaj Broking (BFSL) does not warrant the accuracy of the information given herein, either expressly or impliedly, for any particular purpose and expressly disclaims any warranties of merchantability or suitability for any particular purpose. While BFSL strives to ensure accuracy, it does not guarantee the completeness, reliability, or timeliness of the information. Users are advised to independently verify details and stay updated with any changes.
The information provided on this website is for general informational purposes only and is subject to change without prior notice. BFSL shall not be responsible for any consequences arising from reliance on the information provided herein and shall not be held responsible for all or any actions that may subsequently result in any loss, damage and or liability. Interest rates, fees, and charges etc., are revised from time to time, for the latest details please refer to our Pricing page.
Neither the information, nor any opinion contained in this website constitutes a solicitation or offer by BFSL or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service.
BFSL is acting as distributor for non-broking products/ services such as IPO, Mutual Fund, Insurance, PMS, and NPS. These are not Exchange Traded Products. For more details on risk factors, terms and conditions please read the sales brochure carefully before investing.
Investments in the securities market are subject to market risk, read all related documents carefully before investing. This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.
For more disclaimer, check here : https://www.bajajbroking.in/disclaimer
Level up your stock market experience: Download the Bajaj Broking App for effortless investing and trading
Open Your Free Demat Account
Enjoy low brokerage on delivery trades
|
Please Enter Mobile Number
Open Your Free Demat Account
Enjoy low brokerage on delivery trades
|
TRENDING CALCULATORS AND STOCKS ON BAJAJ BROKING
POPULAR STOCKS: Tata Motors Share Price Infosys Share Price IRFC Share Price SBI Card Share Price Cipla Share Price NBCC Share Price IDFC First Bank Share Price IRCTC Share Price PNB Share Price Vodafone Idea Share Price Axis Bank Share Price JSW Steel Share Price Bandhan Bank Share Price SBI Share Price Tata Steel Share Price ONGC Share Price Ashok Leyland Share Price Paytm Share Price Subex Share Price DLF Share Price Reliance Share Price HDFC Bank Share Price Suzlon Share Price IOC Share Price HUL Share Price Asian Paints Share Price Bank Of Baroda Share Price ITC Share Price TCS Share Price HFCL Share Price Icici Bank Share Price Tata Chemicals Share Price CDSI Share Price MRF Share Price Tata Power Share Price Adani Green share price BPCL Share Price Vedanta Share Price Dmart Share Price Hindalco Share Price LIC Share Price SAIL Share Price Adani Port Share Price IEX Share Price Nalco Share Price L&T Share Price Adani Power Share Price BHEL Share Price Bajaj Finance Share Price Canara Bank Share Price Indusind Bank Share Price Gail Share Price Yes Bank Share Price Wipro Share Price Happiest Minds Share Price Coal India Share Price Maruti Share Price Reliance Power Share Price
INDIAN INDICES: Nifty 50 Share Price SENSEX Share Price Nifty Next 50 Share Price BSE100 Share Price Nifty Bank Share Price LRGCAP Share Price Nifty 100 Share Price MIDCAP Share Price Nifty 200 Share Price SMLCAP Share Price Nifty 500 Share Price BSE500 Share Price Nifty Midcap 50 Share Price ALLCAP Share Price NIFTY SMLCAP 50 Share Price BSE200 Share Price India VIX Share Price BSEIPO Share Price
