In every country of the world, some type of money market exists. Some of them are highly developed while others are not well developed. Prof. S.N. Sen has described certain essential features of a developed money market.
- Highly organized banking system: The commercial banks are the nerve centre of the whole money market. They are principal suppliers of short-term funds. Their policies regarding loans and advances have impact on the entire money market. The commercial banks serve as vital link between the central bank and the various segments of the highly organized banking system co-exist. In an underdeveloped money market, the commercial banking system is not fully developed.
- Presence Of A Central Bank: The Central Bank acts as the banker’s bank. It keeps their cash reserves and provides them financial accommodation in difficulties by discounting their eligible securities. In other words, it enables the commercial banks and other institutions to convert their assets into cash in times of financial crisis. Through its open market operations, the central bank absorbs surplus cash during off-seasons and provides additional liquidity in the busy seasons. Thus, the central bank is the leader, guide and controller of the money market. In an underdeveloped money market, the central bank is in its infancy and not in a position to influence and control the money market.
- Availability of Proper Credit Instruments: It is necessary for the existence of a developed money market a continuous availability of readily acceptable negotiable securities such as bills of exchange, treasury bills etc. in the market. There should be a number of dealers in the money market to transact in these securities. Availability of negotiable securities and the presence of dealers and brokers in large numbers to transect in these securities are needed for the existence of a instruments as well as dealers to deal in these instruments in an underdeveloped money market.
- Existence of Sub-Markets: The number of sub-markers determines the development of a money market. The lager the number of sub-makers, the broader and more developed will be the structure of money market. The several sub-makers together make a coherent money market. In an underdevelopment money market, the various sub-makers, particularly the bill market, are absent. Even of sub-makers exist, there is no co-ordination between them. Consequently, different money rates prevail in the sub-makers and they remain unconnected with of funds.
- Ample Resources: There must be availability of sufficient funds to finance transactions in the sub-makers. These funds may come from within the country and also from foreign countries. The London, New York and Paris money markets attract funds from all over the world. The underdeveloped money markets are starved of funds.
- Existence of Secondary Market: There should be an active secondary market in these instruments.
- Demand And Supply Of Funds: There should be a large demand and supply of short-term funds. It presupposes the existence of a large domestic and foreign trade. Besides, it should have adequate amount of liquidity in the form of large amounts maturing within a short period.
- Other factors: Besides the above, other factors also contribute to the development of a money market. Rapid industrial development leading to the emergence of stock exchange, large volume of international trade leading to the system of bills exchange, political stability, favorable conditions for foreign investment, price stabilization etc. are the other factors that facilitate the development of money market in the country.
London Money Market is a highly developed money market because it satisfies all requirements of a developed money market. If any one or more of these factors are absent, then the money market is called an underdeveloped one.