Money markets — an arena for liquidity management
On the other hand, capital market securities may be equity or debt securities. In the context of debt securities, there are two terms used in the context of their tenure, which differ in meaning. The original term to maturity of a security is its term to maturity as of the date of issue. Obviously, it will not change subsequently.
However, the actual term to maturity of a security is its current term to maturity, which will decline with the passage of time. Money market securities will, consequently, have an actual term to maturity of one year or less.
The money market is for managing imbalances between inflows and outflows. For any economic agent, be it a private business or a government entity, the times at which inflows are realised will rarely, if ever, be perfectly synchronised with the times at which expenditure is scheduled. Take the Indian government for instance. It collects income tax once a quarter. Thus, inflows are lumpy. However, expenditure on account of wages, salaries, fuel bills and other items will be incurred on virtually a daily basis.
Consequently, even if the government were to have a budget surplus for the financial year as
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