Understanding the Relationship Between Capital Market and Money Market
The relationship between the capital market and money market is significant as they are interconnected in various ways. Both markets cater to different fund requirements, but share common features such as inter-related interest rates, common institutions, similar users of funds, and common investors. Commercial banks often serve both markets, and users may access funds from either market based on their specific needs and investment policies.
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Presentation Transcript
FINANCIAL MARKETS
Relationship Between Capital Market And Money Market Conceptually, these two markets are different from each others. Money market refers to the market for short term funds whereas capital market refers to the market for long term funds. But the money and capital market are not independent, they are closely related because of these following reasons-
...Relationship Between Capital Market And Money Market 1. Inter-related interest rates:- The long term and short term markets are interrelated because sometimes the short term interest rate affects the long term interested and vice versa. A rise in the short term interest rate reflecting the condition of credit stringency which is likely to be followed by a rise in long term interest rates.
...Relationship Between Capital Market And Money Market 2. Common Institutions:- Some Institutions such as commercial banks serve both the money and capital markets. The dealers in short term market also purchase and sell long term bonds and security in the capital market.
...Relationship Between Capital Market And Money Market 3. Similar users:- The users of fund may get funds, from either type of the market. A corporation needs funds for additional inventory might borrower, short term loan by selling commercial paper or by negotiating bank loan through money market whereas it might also float a bond issue or sell share for working capital purpose in capital market.
...Relationship Between Capital Market And Money Market 4. Common investors:- The suppliers/investors of funds may choose to supply funds to either one market or both markets depending upon their investment policies and available rate of return.
