Importance of Money Market:
1. Development of Trade and Industry: Money market is an important source of financing trade and industry. The money market, through discounting operations and commercial papers, finance the short-term working capital requirements of trade and industry and facilitates the development of industry and trade both national and international.
2. Development of capital market: The short-term rates of interest and the conditions that prevail in the money-market influence the long-term interest as well as the resource mobilization in capital market. Hence the development of capital market depends upon the existence of a developed money market.
3. Smooth Functioning of Commercial Banks: The money market provides the commercial banks with facilities for temporarily employing their surplus funds in easily realizable assets. The banks can get back the funds quickly, in times of need by economizing their cash balances in hand and at the same time meeting the demand for large withdrawal of their depositors.
4. Effective Central Bank control: A developed money market helps the effective functioning of a central bank. It facilitates effective implementation of the monetary policy of a central bank. The Central bank, through the money market, pumps new money into the economy in slump and siphons it off in boom.
5. Formulation of Suitable monetary policy: Conditions prevailing in a money market serve as a true indicator of the monetary state of an economy. Hence, it serves as a guide to the government in formulating and revising the monetary policy then and there depending upon the monetary conditions prevailing in the market.
