The money market is where governments, banks, and corporations borrow and lend money for short periods — days to one year. It is the financial system's plumbing — ensuring that institutions with excess cash can lend to those who need it temporarily. Money market instruments are low-risk, highly liquid, and pay modest returns.
Key instruments: Treasury bills (government), commercial paper (corporations), certificates of deposit (banks), repurchase agreements (repos), and call money (overnight interbank lending). The repo rate — the rate at which the RBI lends to banks — is the most important money market rate in India.
Money market funds — which invest in these instruments — hold over $6 trillion in the US alone. After interest rates rose in 2022-2023, money market funds became enormously popular, offering 5%+ yields with near-zero risk. The Reserve Primary Fund "breaking the buck" (falling below $1 NAV) during the 2008 crisis triggered a panic that nearly froze global short-term lending.