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Money and Money Market

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Money and Money Market

Money and Money Market

shape Introduction

Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts in a particular country or socio-economic context or is easily converted to such a form.

The money market became a component of the financial markets for assets involved in short-term borrowing, lending, buying and selling with original maturities of one year or less. Trading in money markets is done over the counter and is wholesale.

shape Concept

Money is a current medium of exchange in the form of coins and banknotes.

Different types of Money:
There are three different types of money are Metallic money, Paper money, Acceptable money.

1. Metallic Money:
Money made up of any metal is called Metallic Money. it refers to various coins that are made up of various metals like gold, silver, nickel, copper.
Standard money is further classified into standard money and token money.
Standard money/coins are made up of gold and silver. Token money/coins are generally made up of cheaper metals like copper, nickel, etc.

2. Paper Money:
Money made up of paper is called Paper money. Paper money consists of currency notes issued by the government of India. paper money has the following types.
Representative money: The paper money which is fully backed by the gold and silver reserves is called representative paper money.
Convertible paper money: The paper money which is converted into standard coins.
In convertible paper money: The paper money which is not converted into standard coins.
Fiat money: The paper money which circulates on the authority of the government is Fiat money.

3. Acceptable Money:
On the basis of general acceptability, money can be categorized into legal tender money and non-legal tender money.

Functions of Money:
The functions of money are divided into following types

1. Medium of Exchange:
When money is used to intermediate the exchange of goods and services, it is performing a function as a medium of exchange. It thereby avoids the inefficiencies of a barter system.

2. Measure of Value:
A unit of account is a standard numerical monetary unit of measurement of the market value of goods, services, and other transactions. Also known as a “measure” or “standard” of relative worth and deferred payment, a unit of account is a necessary prerequisite for the formulation of commercial agreements that involve debt.

3. Standard of deferred payment:
While the standard of deferred payment is distinguished by some texts, particularly older ones, other texts subsume this under other functions.A “standard of deferred payment” is an acceptable way to settle a debt – a unit in which debts are denominated, and the status of money as legal tender, in those jurisdictions which have this concept, states that it may function for the discharge of debts.

4. Store of value:
To act as a store of value, a money must be able to be reliably saved, stored and retrieved – and be predictably usable as a medium of exchange when it is retrieved. The value of the money must also remain stable over time. Some have argued that inflation, by reducing the value of money, diminishes the ability of the money to function as a store of value.

Money Market:
The cluster of financial institutions that deal in short-term securities and loans, gold and foreign exchange are termed as money market.

Functions of Money Market:
Because of short development term, the instruments of money business sector are liquid and can be changed over to money effectively and in this way can address the need of the transient surplus asset of the banks and fleeting getting prerequisites of the borrowers. The functions of the Money market are

  • Money Market provides an equilibrating mechanism for demanding and supply of short-term funds.
  • Money Market enables borrowers and lenders of short-term funds to fulfill their borrowing and investment requirements at an efficient market clearing price.
  • They help in maintaining liquidity in the economy.
  • Money Markets help in effective implementation of the RBI’s monetary policy.

Types of Money market:
In Indian money market Reserve Bank of India plays an important role and it controls the money market.
Money market is mainly divided into two types

1. Organised Sector:
It comprises of all public sector banks and foreign exchange banks except RBI.

2. Unorganized Sector:
It comprises of domestic bankers money lenders. they don’t have given any financial validity or certification by any financial institution.

Securities related to Money market:
1. Certificate of Deposit:
A Saving certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate and can be issued in any denomination. CDs are generally issued by commercial banks and are issued by the federal deposit insurance corporation(FDIC).

2. Treasury Bill:
The bill market is a sub-market of the money market in India. There are two types of bills. Treasury Bills and commercial bills. While Treasury Bills or T-Bills are issued by the Central Government; Commercial Bills are issued by financial institutions.

3. Commercial Bill:
This bill is a short-term, negotiable and self-liquidating risk with low risk. it enhances the liability to make payment in a fixed date, when a goods bought on credit. the banks discount this bill by keeping a certain margin and credits the proceeds.

4. Soliciting Funds:
Those funds which are used to meet temporary cash demands. They are repayable on demand and their maturity period ranges from 1 to 15 days.

Inflation in India is calculated as per Wholesale Price Index (WPI). 435 commodities are used for the WPI based inflation calculation and base year for the WPI calculation is 1993-94. The WPI is available at the end of every week (generally Saturdays), for a period of one year ended that day.

Classification of Inflation:
Inflation is classified on the basis of increase in price, inflation can be classified as follows

1. Creeping Inflation: This inflation is a slow inflation, in this type of inflation price increases about at the rate of 2% per year.

2. Moderate Inflation: This can be differently defined around the world, given the different inflation histories, one could consider an inflation as moderate when it ranges from 5% to 25-30%. for some countries the higher part of this range is already ‘high inflation’.

3. Demand Pull Inflation: It is asserted to arise when aggregate demand in an economy outpaces aggregate supply. it involves inflation rising as real gross domestic product rises and unemployment falls.

4. Cost Push Inflation: A phenomenon in which the general price levels rise due to increases in the cost of wages and raw material. cost push inflation develops because the higher costs of production factors decreases in aggregate supply in economy.

5. Galloping Inflation: When inflation rises to 10% or greater it wreaks absolute havoc on the economy. money loses value so fast that business and employee income can’t keep up with costs and prices.

6. Suppressed Inflation: Existing inflation disguised by government price controls or other interference’s in the economy such as subsidies.

7. Hyper Inflation: Hyper inflation is when the prices skyrocket more than 50% a month. it is fortunately very rare. Infact most examples of hyper inflation have occurred when the government printed money recklessly to pay for war.
Effects of Inflation:
The impact of inflation in Indian economy decreases the purchasing power of dollar and increases the value of goods and commodities. The below are the effects of inflation on different sectors-

Manufacturing Categories: Businessman, farmer, industrialist comes under this sector.

Investor Category: An investor is a person who allocates capital with the expectation of a financial return. The financial return types of investments include gambling and speculation, equity, debt securities, real estate, currency, commodity, derivatives like put and call options etc.

Salaried Category: Inflation usually hurts your buying power. that’s because rising prices means you have to pay more for the same goods and services.

Consumer Categories: Inflation is not good for consumer. because buying power decline and prices of goods increases.

Debtor and Creditor Categories: Benefit comes under debtor categories in the session of inflation in the compression of creditors.
Measures to check Inflation:
A variety of methods and polices have been proposed and used to control inflation.

Monetary Measures:
Government and Central Banks primarily use monetary policy to control inflation. Central banks increase the interest rate, slow or stop the growth of the money supply and reduce the money supply.

Administrative Measures:
The authority to take the decisions on this front is this, front is the executive branch of government under this ban export of constrained materials, maintain the central issue price, particularly for rice and wheat, allot rice and wheat under open market sale scheme and many more.

Fiscal Measures:
Measures taken by the government to control inflation are Decrease in Public expenditure, Delay in payment of old debts, increase in taxes, overvaluation of money.

Effects of Inflation in Indian Economy:

  • Increase in price and good service
  • Decrease real income
  • Lower domestic saving rates
  • Development of Banking and insurance sector
  • Moral degration of society

Calculation of Inflation in India:
Inflation is usually measured based on certain indices. There are two categories of indices for measuring inflation.

1. Wholesale Price Index(WPI):
It is the index that is used to measure the change in the average price level of goods traded in wholesale market.

2. Consumer Price Index(CPI):
It is a statistical time-series measure on weighted average of prices of a specified set of goods and services purchased by consumers. It is a price index that tracks the prices of a specified of consumer goods and services, providing a measure of inflation.

Foreign Currency Crisis, 1991:
The 1991 crisis triggered by balance of payment pressures, was due to a fiscal profligacy of the 1980s. in 1991 rupee was over valued by more than 20%.

Foreign Exchange Regulation Act (FERA):
It was passed in 1947 which was amended in 1973. the new FERA came into force from 1st January 1974. The aim of FERA was the conservation of India’s foreign exchange reserves, judicious use of foreign exchange, using mainly in this sector requires foreign technology.

Foreign Exchange Management Act(FEMA):
FERA was repealed in 1998 and FEMA was enacted. No unauthorized person would be allowed to deal in foreign exchange. the authorized person could sell , draw foreign exchange from any authorized person on current account transaction, subject to approval of RBI.

Anti Money Laundering Act, 2002:
It is an indian law passed in 2002 to prevent money laundering and to provide for confiscation of property derived from money laundering.

shape Quiz

1. Metallic money is made up of?

    A. Gold
    B. Silver
    C. Copper
    D. All of the Above

Answer: Option D

2. Paper money is made up of?

    A. Paper
    B. Gold
    C. Silver
    D. Nickel

Answer: Option A

3. A medium of exchange is used to make payments for?

    A. Goods
    B. Services
    C. Both A and B
    D. None of these

Answer: Option C

4. Which of the following plays central role in money market?

    A. SBI
    B. Government of India
    C. RBI
    D. None of these

Answer: Option C

5. _____ is defined as a sustained increase in the general level of prices for goods and services?

    A. SBI
    B. Treasury Bill
    C. Commercial Bill
    D. Inflation

Answer: Option D

6. When the Anti-money laundering Act was passed?

    A. 2000
    B. 2002
    C. 2004
    D. 2006

Answer: Option B

7. When was the Foreign exchange regulation Act passed?

    A. 1954
    B. 1945
    C. 1947
    D. 1958

Answer: Option C

8. FEMA stands for?

    A. Foreign exchange management Act
    B. Foreign exchange money Act
    C. Foreign exchange management authority
    D. Foreign export management Act

Answer: Option A

9. _____ is used to measure the change in the average price levels of goods traded in wholesale market?

    A. Wholesale Price Index
    B. Consumer Price Index
    C. Product Price Index
    D. All of the Above

Answer: Option A

10. _____ is a statistical time-series measure on weighted average of prices of a specified set of goods and services purchased by consumers?

    A. Wholesale Price Index
    B. Consumer Price Index
    C. Product Price Index
    D. None of the above

Answer: Option B