FINANCIAL SYSTEM

A financial system functions as an intermediary and facilitates the flow of funds from the areas of surplus to the areas of deficit
Seekers of funds [ business firms and government]
Flow of funds [ savings] Flow of financial services / incomes & financial claims

Suppliers of funds [ households]

FUNCTIONS PERFORMED BY A FINANCIAL SYSTEM A financial system determines both the cost and volume of credit Effects of raise and fall of cost of funds on
Consumption Production Savings Liquidity Employment function of the economy Growth function

Payment function

Risk function

Policy function

FINANCIAL MARKETS
It is a market in which financial assets are created or transferred. Financial asset represent a claim to the payment of a sum of money sometime in the future and/or periodic payment in the form of interest or dividend.
Financial markets in India

Money market

Capital market

Derivative market

Foreign Exchange market

MONEY MARKET
As per RBI guidelines a market for short term financial assets that are close substitute for money, facilitates the exchange of money in primary and secondary market. The money market is a mechanism that deals with the lending and borrowing of short term funds (less than a year) A segment of the financial markets in which financial instruments with high liquidity and very short maturities are traded.

three broad functions of money market

1) It should provide an equilibrating mechanism to even out demand for and supply of short-term funds. 2) It should provide a focal point for central bank intervention for influencing liquidity and general level of interest rates in the economy. 3) It should provide reasonable access to providers and users of short-term funds to fulfil their borrowing and investment requirements at an efficient market clearing price.

Characteristics of Money Market Transactions Short Term in Nature Instruments with very low risk are used Very low transaction costs No transactions hassles Very high volumes Thus the money market efficiency depends on Low cost transactions Information availability, and Large number of participants

Money market instruments in India

Treasury bills Certificate of deposits Repos[repurc hase Agreements]

Commercial papers

Call money

MM Instruments