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IndexSr Particulars pg
1 Introduction
2 Indian Money Market
3 Meaning Of Money Market
4 Definition of money market
5 History Of Indian Money Market
6 Committee
7 Objectives of Money Market
8 Scope Of Indian Money Market
9 Features / Characteristics Of Indian Money Market
10 Participants In The Money Market
11 Structure of Indian Money Market
12 Primary Dealers
13 Reforms In Indian Money Market
14 The Role of the Reserve Bank of India
15 Growth Of Money Market In India
16 Diverse Functions
17 Future of Money Market
18 Development in Money Market
19 Link between the call money and other market
20 Review Of Literature
21 Significance of money market
22 Advantages of money market
23 Defects or Drawbacks of Money Market
24 Conclusion
25 Bibliography
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IntroductionThe seventh largest and second most populous country in the world, India has long
been considered a country of unrealized potential. A
new spirit of economic freedom is now stirring in
the country, bringing sweeping changes in its wake.
A series of ambitious economic reforms aimed at
deregulating the country and stimulating foreign
investment has moved India firmly into the front
ranks of the rapidly growing Asia Pacific region and unleashed the latent strengths
of a complex and rapidly changing nation.
India's process of economic reform is firmly rooted
in a political consensus that spans her diverse
political parties. India's democracy is a known and
stable factor, which has taken deep roots over nearly
half a century. Importantly, India has no
fundamental conflict between its political and
economic systems. Its political institutions have
fostered an open society with strong collective and individual rights and an
environment supportive of free economic enterprise.
India's time tested institutions offer foreign investors a transparent environment
that guarantees the security of their long term
investments. These include a free and vibrant
press, a judiciary which can and does overrule the
government, a sophisticated legal and accounting
system and a user friendly intellectual
infrastructure. India's dynamic and highly
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competitive private sector has long been the
backbone of its economic activity. It
accounts for over 75% of its Gross Domestic
Product and offers considerable scope for
joint ventures and collaborations.
Today, India is one of the most exciting
emerging money markets in the world.
Skilled managerial and technical manpower
that match the best available in the world and
a middle class whose size exceeds the
population of the USA or the European
Union, provide India with a distinct cutting edge in global competition.
The average turnover of the money market in India is over Rs. 40,000 crores daily.
This is more than 3 percents of the total money supply in the Indian economy and
6 percent of the total funds that commercial banks have let out to the system. This
implies that 2 percent of the annual GDP of India gets traded in the money market
in just one day. Even though the money market is many times larger than the
capital market, it is not even fraction of the daily trading in developed markets.
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Indian Money MarketFinancial market is classified as :
Financial market
Money market Capital market
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Meaning Of Money MarketMoney market refers to the market where money and highly liquid marketable
securities are bought and sold having a maturity period of one or less than one
year. It is not a place like the stock market but an activity conducted by telephone.
The money market constitutes a very important segment of the Indian financial
system. The highly liquid marketable securities are also called as ‘ money market
instruments’ like treasury bills, government securities, commercial paper,
certificates of deposit, call money, repurchase agreements etc.
The major player in the money market are Reserve Bank of India
(RBI), Discount and Finance House of India (DFHI), banks,
financial institutions, mutual funds, government, big corporate
houses. The basic aim of dealing in money market
instruments is to fill the gap of short-term liquidity
problems or to deploy the short-term surplus to gain income on that.
The money market is a market for lending and borrowing of short-term funds.
Money market deals in funds and financial instrument having a maturity period of one day to one year.
The instruments in the money market are close substitutes for money as they are of short-term nature and highly liquid.
Money market is not a place (like the stock market). It is in fact, a mechanism undertaken by telephone.
Also, it is a collection of markets for several financial instruments such as call money market, commercial bill market, etc
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Definition Of Money Market
According to the McGraw Hill Dictionary of Modern Economics, “money market
is the term designed to include the financial institutions which handle the purchase,
sale, and transfers of short term credit instruments. The money market includes the
entire machinery for the channelizing of short-term funds. Concerned primarily
with small business needs for working capital, individual’s borrowings, and
government short term obligations, it differs from the long term or capital market
which devotes its attention to dealings in bonds, corporate stock and mortgage
credit.”
Following definitions will help us to understand the concept of money market.
According to the Reserve Bank of India, “money market is the centre for dealing,
mainly of short term character, in money assets; it meets the short term
requirements of borrowings and provides liquidity or cash to the lenders. It is the
place where short term surplus investible funds at the disposal of financial and
other institutions and individuals are bid by borrowers’ agents comprising
institutions and individuals and also the government itself.”
According to Crowther, "The money market is a name given to the various firms and institutions that deal in the various grades of near money."
According to Nadler and Shipman, "A money market is a mechanical device
through which short term funds are loaned and borrowed through which a large
part of the financial transactions of a particular country or world are degraded. A
money market is distinct from but supplementary to the commercial banking
system."
These definitions help us to identify the basic characteristics of a money market. A
money market comprises of a well organized banking system. Various financial
instruments are used for transactions in a money market. There is perfect mobility
of funds in a money market. The transactions in a money market are of short term
nature.
History Of Indian Money
Market:
Till 1935, when the RBI was set up the Indian money market remained highly
disintegrated, unorganized, narrow, shallow and therefore, very backward. The
planned economic development that commenced in the year 1951 market an
important beginning in the annals of the Indian money
market. The nationalization of banks in 1969, setting up
of various committees such as the Sukhmoy Chakravarty
Committee (1982), the Vaghul working group (1986), the
setting up of discount and finance house of India ltd.
(1988), the securities trading corporation of India (1994)
and the commencement of liberalization and globalization
process in 1991 gave a further fillip for the integrated and
efficient development of India money market.
Sukhumoy Chakravarty Committee
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The call money market for India was first recommended by the
Sukhumoy Chakravarty .Committee was set up in 1982 to review the
working of the monetary system. They felt that allowing additional non-
bank participants into the call market would not dilute the strength of
monetary regulation by the RBI, as resources from non-bank participants
do not represent any additional resource for the system as a whole, and
their participation in call money market would only imply a
redistribution of existing resources from one participant to another. In
view of this, the Chakravarty Committee recommended that additional
nonbank participants may be allowed to participate in call money market
The Vaghul Committee
The Vaghul Committee (1990), while recommending the introduction of
a number of money market instruments to broaden and deepen the
money market, recommended that the call markets should be restricted
to banks. The other participants could choose from the new money
market instruments, for their short -term requirements. One of the
reasons the committee ascribed to keeping the call markets as pure inter-
bank markets was the distortions that would arise in an environment
where deposit rates were regulated, while call rates were market
determined .
Objectives Of Money
Market
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Money market is an important part of the economy. It plays very significant functions. As mentioned above it is basically a market for short term monetary transactions. Thus it has to provide facility for adjusting liquidity to the banks, business corporations, non-banking financial institutions (NBFs) and other financial institutions along with investors.
A well developed money market serves the following objectives:
Providing an equilibrium mechanism for ironing out short-term surplus and
deficits. It means to keep a balance between the demand for and supply of
money for short term monetary transactions.
Providing a focal point for central bank intervention
for the influencing liquidity in the economy.
Providing access to users of short-term money to
meet their requirements at a Reasonable price
To promote economic growth. Money market can do
this by making funds available to various units in the
economy such as agriculture, small scale industries,
etc.
To provide help to Trade and Industry. Money market provides adequate
finance to trade and industry. Similarly it also
provides facility of discounting bills of exchange for
trade and industry.
To help in implementing Monetary Policy. It
provides a mechanism for an effective
implementation of the monetary policy.
To help in Capital Formation. Money market makes available investment
avenues for short term period. It helps in generating savings and investments
in the economy.
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Money market provides non-inflationary sources of finance to government.
It is possible by issuing treasury bills in order to raise short loans. However
this does not leads to increases in the prices.
Apart from those, money market is an arrangement which accommodates banks
and financial institutions dealing in short term monetary activities such as the
demand for and supply of money.
Scope Of Indian Money Market
The India money market is a monetary system that involves the lending and
borrowing of short-term funds. India money market has seen exponential growth
just after the globalization initiative in 1992. It has been observed that financial
institutions do employ money market
instruments for financing short-term
monetary requirements of various
sectors such as agriculture, finance and
manufacturing. The performance of the
India money market has been
outstanding in the past twenty years.
Central bank of the country - the
Reserve Bank of India (RBI) has
always been playing the major role in
regulating and controlling the India
money market. The intervention of
RBI is varied - curbing crisis
situations by reducing the cash
reserve ratio (CRR) or infusing more
money in the economy.
Features / Characteristics Of Indian Money Market
Every money is unique in nature. The money market in developed and developing
countries differ markedly from each other in many senses. Indian money market is
not an exception for this. Though it is not a developed money market, it is a
leading money market among the developing countries.
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Indian Money Market has the following major characteristics:-
Dichotomic Structure: It is a significant aspect of the Indian money market. It
has a simultaneous existence of both the organized money market as well as
unorganized money markets. The organized money market consists of RBI, all
scheduled commercial banks and other recognized financial institutions.
However, the unorganized part of the money market comprises domestic money
lenders, indigenous bankers, trader, etc. The organized money market is in full
control of the RBI. However, unorganized money market remains outside the
RBI control. Thus both the organized and unorganized money market exists
simultaneously.
Seasonality: The demand for money in Indian money market is of a seasonal
nature. India being an agriculture predominant economy, the demand for money
is generated from the agricultural operations. During the busy season i.e.
between October and April more agricultural activities takes place leading to a
higher demand for money.
Multiplicity of Interest Rates: In Indian money market, we have many levels
of interest rates. They differ from bank to bank from period to period and even
from borrower to borrower. Again in both organized and unorganized segment
the interest rate differs. Thus there is an existence of many rates of interest in
the Indian money market.
Lack of Organized Bill Market: In the Indian money market, the organized
bill market is not prevalent. Though the RBI tried to introduce the Bill Market
Scheme (1952) and then New Bill Market Scheme in 1970, still there is no
properly organized bill market in India.
Absence of Integration: This is a very important feature of the Indian money
market. At the same time it is divided among several segments or sections
which are loosely connected with each other. There is a lack of coordination
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among these different components of the money market. RBI has full control
over the components in the organized segment but it cannot control the
components in the unorganized segment.
High Volatility in Call Money Market: The call money market is a market for
very short term money. Here money is demanded at the call rate. Basically the
demand for call money comes from the commercial banks. Institutions such as
the GIC, LIC, etc suffer huge fluctuations and thus it has remained highly
volatile.
Limited Instruments: It is in fact a defect of the Indian money market. In our
money market the supply of various instruments such as the Treasury Bills,
Commercial Bills, Certificate of Deposits, Commercial Papers, etc. is very
limited. In order to meet the varied requirements of borrowers and lenders, It is
necessary to develop numerous instruments.
Participants In The Money Market
The transactions in the money market are of high volume involving large amount.
So, money market is dominated by a small number of large players.
Some of the important players in the money market are:
Reserve Bank Of India.
Discount and finance House of India.
Financial Institution.
Non-banking finance companies.
Securities Trading Corporation of India.
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Public sector undertakings (PSU).
The role of important players in the money market is
discussed below:
*RESERVE BANK OF INDIA:
The reserve Bank of India is the most important
player in the Indian Money Market.
The Organized money market
comes under the direct regulation of
the RBI.
The RBI operates in the money
market is to ensure that the levels of
liquidity and short-term interest
rates are maintained at an optimum
level so as to facilitate economic
growth and price stability.
RBI also plays the role of a merchant banker to the government. It issues
Treasury Bills and other Government
Securities to raise funds for the government..
The RBI thus plays the role of an
intermediary and regulator of the money
market.
*GOVERNMENT:
The Government is the most active player
and the largest borrower in the money market.
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It raises funds to make up the budget deficit.
The funds may be raised through the issue of Treasury Bills (with amaturity
period of 91day/182day/364 days) and government securities.
*CORPORATE FIRMS:
Corporate firms operate in the money market to raise short-term funds to
meet their working capital requirements.
They issue commercial papers with a maturity period of 7 days to 1 year.
These papers are issued at a discount and redeemed at face value on
maturity.
These corporate firms use both organized and unorganized sectors of money
market.
*BANKS:
Commercial Banks play an important role in the money market.
They undertake lending and borrowing of short term funds.
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The collective operations of the banks on a day to day basis are very
predominant and hence have a major impact and influence on the interest
rate structure and the liquidity position.
*FINANCIAL INSTITUTIONS:
Financial institutions also deal in the money market.
They undertake lending and borrowing of short-term funds.
They also lend money to banks by rediscounting Bills of Exchange.
Since, they transact in large volumes, they have a significant impact on the
money market.
*INSTITUTIONAL PLAYERS:
They Consist of Mutual Funds, Foreign
Institutional Players, Insurance Firms, etc.
Their level of Participation depends on the
regulations.
For instance the level of participation of
the FIIs in the Indian money market is
restricted to investment in Government
Securities.
*DISCOUNT HOUSES AND PRIMARY DEALERS:
They are the intermediaries in the money market.
Discount Houses discount and rediscount commercial bill and Treasury
Bills.
Primary Dealers were introduced by RBI for developing an active secondary
market for Government securities.
They also underwrite Government Securities.
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Structure of Indian Money
Market - Chart
The entire money market in India can be divided into two parts. They are
organized money market and the unorganized money market. The unorganized
money market can also be known as an unauthorized money market. Both of these
components comprise several constituents. The following chart will help you in
understanding the organizational structure of the Indian money market.
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StructureThe Indian money market consists of two main sectors:
1) ORGANISED SECTOR:
The RBI is the apex institution that controls and monitors all the
organizations in the organized sector.
Also, the organized money market is composed of various
components/ instruments that are highly liquid in nature.
The instruments traded are call money, treasury bills, commercial bills,
certificate of deposits, commercial papers, repos etc.
The organized money market is further diversified with the establishment of
the Discount and finance House of India, and Money market Mutual Funds.
The Instruments Of The Organized Money Market Are:-
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i) CALL MONEY AND NOTICE MONEY MARKET:
The call money market is the most important segment of the Indian money
market. It is also
called as inter-bank
call money market.
Under call money
market, funds are
transacted on an
over-night.
Generally, banks
rely on call money
market where they
raise funds for a
single day.
The notice money market funds are transacted for a period of 2 to 14 days.
The loans are to be repaid at the option of either the lender or the borrower.
The rate at which funds are borrowed / lent in this market is called the call
money rate.
The call money rate (that depends on depends on demand for and supply of
funds) is highly variable from day to day and from centre to centre.
The main participants in the call money market are commercial banks
(excluding RRBs), co-operative banks and primary dealers.
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The Discount and finance House of India and non-
banking financial institutions like LIC, GIC, UTI,
NABARD, etc, also participate in the call money
market.
Call money markets are generally concentrated in
large commercial centre like Mumbai, Delhi, Chennai, Kolkata and
Ahmadabad.
The RBI intervenes in the call money market because it is highly sensitive
and it is the indicator of liquidity position in the organized money market.
ii) TREASURY BILLS MARKET:
Treasury bills are short-term securities issued by the RBI on behalf of the
Government of India.
Treasury bills are of three types: 91 day treasury bills, 182 days treasury
bills and 364 day treasury bills.
Since these bills are issued through auctions, interest rates on all types of
treasury bills are determined by market forces.
Treasury bills are highly liquid and are readily available.
They give assured yields at a low transaction cost.
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Treasury Bills are eligible for inclusion in the SLR.
Moreover, they have negligible capital depreciation.
Treasury Bills are available for a minimum amount of Rs 25000 and in
multiples of RS 25000.
Treasury Bills are traded in the secondary market. Commercial banks,
Primary Dealers, Mutual Funds, Corporate, and Financial Institutions,
Provident / Pension funds and Insurance companies participate in the
treasury Bills Market.
However Treasury Bills Market in India is very narrow and undeveloped.
iii) COMMERCIAL BILLS:
A commercial bill is a short- term, negotiable, self–liquidating instrument drawn
by the seller on the buyer for the value of goods delivered by him.
Such bills are called trade bills / bills of exchange and when they are
accepted by banks, they are called commercial bills.
Generally the bill is payable at a future date (mostly, the maturity period is
up to 90 days).
During this period, the seller may discount the bill with the banks. The
commercial banks may rediscount these bills with FIs like EXIM bank,
SIDBI, IDBI, etc.
Thus, commercial bills are very important for providing short-term credit to
trade and commerce.
Derivative usance promissory notes:
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In order to eliminate movement of papers and to facilitate multiple
rediscounting, the RBI introduced Derivative Usance promissory Notes
(DPNs).
These are backed by commercial bills having usance period up to 90days.
Since they are exempted from stamp duty, institutions can easily rediscount
these bills.
Discount and finance House of India trade in DPNs drawn by commercial
banks as well as DPNs sold to investors.
iv) CERTIFICATES OF DEPOSITS: (CDs)
Certificates of Deposits are unsecured, negotiable promissory notes issued
by commercial banks and development financial institutions.
CDs are marketable receipts of funds deposited in a bank for a fixed period
at a specified rate of interest.
They are highly liquid and riskless money market instruments.
CDs were originally introduced in India to enable commercial banks to raise
funds from the market.
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The RBI has modified its original scheme for CDs. the following are the recent
guidelines for the issue of CDs:-
a. ELIGIBILITY: CDs can be issued by commercial banks (except RRBs and
Local Area Banks) and financial institutions that have been permitted to
raise short-term loans by RBI.
b. AMOUNT: while banks can issue CDs depending on the requirements,
financial institutions can issue CDs within the limit fixed by the RBI.
c. MINIMUM SIZE: the minimum size of an issue for a single investor is Rs
1 lakh and it can be increased in multiples of Rs 1 lakh.
d. DISCOUNT RATE: CDs are issued at a discount to face value. Bank /
Financial institutions are free to determine discount rates on floating rate
basis.
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e. INVESTORS: CDs are issued to individuals, corporations, companies,
trusts, etc.
f. TRANSFERABILITY: CDs are freely transferable by endorsements /
delivery. However dematted CDs have to transferred as per specified
procedures. There is no lock-in period for CDs.
g. MATURITY: Commercial banks can issue CDs with a maturity period
between 7 days to 1year. Financial institutions can issue CDs with amaturity
period between 1 year to 3 years.
h. RESERVE REQUIREMENTS: CDs are subject to CRR and SLR since
banks have to report CDs to RBI.
i. LOANS / BUY-BACK: Commercial banks / FIs cannot give loans against
CDs. Similarly, they cannot buy-back their own CDs before maturity period.
j. FORMAT: Banks /FIs should issue CDs only in the dematerialized form.
However, investors have the option to
seek CDs in physical form.
Due to absence of a well-developed
secondary market in CDs, the size of CD
market in India is quite small.
v) COMMERCIAL PAPERS:
Commercial paper is an unsecured,
highly liquid money market instrument
in the form of a promissory note / a dematerialized form through any of the
depositories registered with SEBI.
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It has fixed maturity whereby the purchaser is promised a fixed amount at a
future date.
Commercial paper are issued by leading nationally reputed manufacturing
and finance companies (Public / private sector).
They are issued on a discount to face value.
Commercial papers are issued (by corporates / primary dealers / all India
financial institutions) on the following conditions:
a) The tangible net worth of the issuing company should not be less than RS4
crores.
b) The working capital limit of the company has been sanctioned by banks
/financial institution.
c) The borrowal a/c of the company is rated as a standard asset by banks /financial
institutions.
All eligible participants should have a minimum rating P2 from CRISIL.
Commercial Papers have maturity period between 7days and 1year from the
date of issue.
CPs are issued in denominations of Rs 5 lakhs (minimum) or multiples of
Rs5 lakhs.
Individuals, banks, corporate bodies, NRIs and FIIs can invest in
commercial papers.
Every issuer must appoint an IPA (Issuing and Paying Agent) for issuance of
commercial papers. Only a scheduled commercial bank can act as an IPA.
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vi) REPOS AND REVERSE
REPOS:
The RBI achieves the
function of maintaining
liquidity in the money market
through REPOS / REVERSE
REPOS.
The repo / reverse repo is a
very important money market
instrument to facilitate short-term liquidity adjustment among banks,
financial institutions and other money market players.
A repo / reverse repo is a transaction in which two parties agree to sell and
repurchase the same security at a mutually decided future date and price.
From the seller’s point of view, the transaction is called a repo; whereby the
seller gets immediate funds by selling the securities with an agreement to
repurchase the same at a future date.
Similarly, from the buyer’s point of view, the transaction is called a reverse
repo, whereby the purchaser buys the securities with an agreement to resell
the same at a future date.
The RBI, commercial banks and primary Dealers deal in the repos and
reverse repo transactions.
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The financial institutions can
deal only in the reverse repo
transactions i.e. they are allowed
only to lend money through
reverse repos to the RBI, other
banks and Primary dealers.
The maturity date varies from 1
day to 14 days.
The two types of repos are:
a. Inter-bank repos (the transaction takes place between banks and DFHI).
b. RBI repos (The repos / reverse repos are undertaken between banks and the
RBI to stabilize and maintain liquidity in the market).
Repos and Reverse Repos are used for following purposes:-
a. for injection / absorption of liquidity.b. to create an equilibrium between the demand for and supply of short-term
funds.c. to borrow securities to meet SLR requirements.d. to increase returns on funds.e. to meet shortfall in cash positions.
vii) DISCOUNT AND FINANCE HOUSE OF INDIA (DFHI)
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The Discount and Finance House of India is jointly owned by the RBI, the
public sector banks and all India financial institutions.
The DFHI helps in developing and stabilizing the money market by
stimulating activity in the money
market
instruments and developing secondary market in
those instruments.
The DFHI deals in treasury bills, commercial
bills certificates of deposits, commercial papers,
short term deposits, call money market and govt
securities. It also participates in repo operations.
Thus, the DFHI has helped corporate entities,
banks and financial institutions to invest their
short-term surpluses in money market
instruments.
viii) MONEY MARKET MUTUAL FUNDS:
(MMMFs):
The RBI introduced Money Market Mutual Funds to enable small investors
to participate in the money market. Thus, MMMFs mobilizes saving of
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mutual funds and invest them in such money market instruments that mature
in less than one year.
The following are the important
features of MMMFs:-
a. MMMFs can be set by scheduled
commercial banks and public finance
institutions.
b. Individuals, corporates, etc can invest in
MMMFs.
c. the lock-in period has been reduced to 15
days.
d. MMMFs are under the regulation of SEBI.
e. NRIs and Overseas Corporate Bodies can invest in MMMFs (on anon-
repatriation basis) floated by commercial banks / public sector financial
institutions / private sector financial institutions. However, they do not need
separate permission from the RBI.
f. MMMFs are ideal for investors seeking low-risk investment for short-term
surpluses.
2) UNORGANISED SECTOR:
The unorganized Indian money market mainly comprises of indigenous bankers, money lenders and unregulated non-banking financial intermediaries.
Though they may exist in urban centres, their activities are mainly concentrated in rural areas. In fact, 36% of rural households depend on these for their financial requirement.
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The main components of unorganized money market are:
i) INDIGENOUS BANKERS:
These financial intermediaries operate as banks by receiving deposits, giving loans and dealing in ‘hundies’ (The hundi is a short term indigenous bill of exchange)
The rate of interest varies from market to market / bank to bank. However they do not solely depend on deposits, they may use their own
funds. They are called by different names like
‘Kathawals’, ‘Saraf’, ‘Shroffs’,’Chettis’,etc. They provide loans to trade and industry and
agriculture.
The main advantages of indigenous bankers are simple and flexible operations, informal approach, personal contact, quick services and availability of timely funds.
However, they have their drawbacks like a very high rate of interest (18%to 36%), combining banking with trade, interest in non-banking activities like general merchants, brokers, etc.
ii)MONEY LENDERS:
Money lenders predominate in villages and they deal in the business of lending money.
Their interest rates are very high Loans are given to agricultural labourers, marginal and small farmers,
artisans, factory workers, etc for unproductive purposes. Their services are prompt, informal and flexible.
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iii) UNREGULATED NON_BANK FINANCIAL INTERMEDIARIES
# Chit funds:
a. They are saving institutions wherein members make regular contribution to the fund.
b. The fund is given to some member by bids / draws.
c. Chit funds are famous in Kerala and Tamil Nadu.
#Nidhis:
a. They are mutual benefit funds as loans are given to members (from the deposits made by members themselves) at a reasonable rate of in terest.
b. The loans are generally given for purposes like house construction /repairs.Nidhis are prevalent in South India
# Loan companies:
a. Loan Companies (also called as finance companies) have capital in the form of borrowings, deposits or owned funds.
b. They attract deposits by offering high rate of interest and other ince ntives.c. Loans are also given at a very high rate of
interest (36% t0 48% p.a).
d. Traders, small-scale industries and self-employed people are the main participants.
iv) FINANCE BROKERS:
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They are found in all major urban markets, especially in cloth market, commodity market and grain market.
They are intermediaries between lenders and borrowers.
Primary Dealers The system of Primary Dealers (PDs) in the Government Securities
Market was introduced by Reserve Bank of India in 1995 to strengthen
the market infrastructure of Government Securities.
DFHI was set up by RBI in March 1988 to activate the Money Market.
It got the status of Primary Dealer in February 1996. Over a period
of time, RBI divested its stake and DFHI became a subsidiary of State
Bank of India (SBI).
SBI had also set up a subsidiary in 1996 for doing PD business
namely SBI Gilts Limited.
Both these companies were merged in 2004 to become the largest Primary
Dealer in the country
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Primary Dealers can also be referred to as Merchant Bankers to Government of
India as only they are allowed to underwrite primary issues of government
securities other than RBI
PDs are allowed the following activities as core activities:
1. Dealing and underwriting in Government securities.
2. Dealing in Interest Rate Derivatives.
3. Providing broking services in Government securities.
4. Dealing and underwriting in Corporate / PSU / FI bonds/ debentures.
5. Lending in Call/ Notice/ Term/ Repo/ CBLO market.
6. Investment in Commercial Papers.
7. Investment in Certificates of Deposit.
8. Investment in debt mutual funds where entire corpus is invested in
debt securities.
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Reforms In Indian Money Market
Indian Government appointed a committee under the chairmanship of Sukhamoy
Chakravarty in 1984 to review the Indian monetary system. Later Narayanan
Vaghul working group and Narasimham Committee was also set up. As per the
recommendations of these study groups and with the financial sector reforms
initiated in the early 1990s, the government has adopted following major reforms
in the Indian money market.
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i)Deregulation of the Interest Rate :
In recent period the government has adopted an interest rate policy of liberal nature. It lifted the ceiling rates of the call money market, short-term deposits, bills rediscounting, etc.
Commercial banks are advised to see the interest rate change that takes place within the limit
There was a further deregulation of interest rates during the economic reforms.
Currently interest rates are determined by the working of market forces except for a few regulations :
The RBI has deregulated interest rates on deposits (except saving deposits) as well as on advances (except on export credit for a period of180days before shipment).
The ceiling on the call money market, inter-bank short-term deposits, bill rediscounting and inter-bank participation has been removed and the rates are decided on market forces.
This ensures healthy competition and improves efficiency.
ii) Introduction of New Money Market Instruments:
The RBI introduced new money market instruments to diversify the Indian money market and make it more effective.
These include instruments such as 182-day treasury bill, 364-day treasury bill, commercial papers and certificates of deposits.
Government, commercial banks, financial institutions and corporates can raise funds through these instruments.
The RBI has also reduced the minimum investment amount and the minimum maturity period to expand the investor base for CDs and CPs.
iii) Money Market Mutual Funds (MMMFS)
37
38
In order to provide additional short-term investment revenue, the RBI encouraged and established the Money Market Mutual Funds (MMMFs) in April 1992. MMMFs are allowed to sell units to corporate and individuals. The upper limit of 50 crore investments has also been lifted. Financial institutions such as the IDBI and the UTI have set up such funds.
The RBI introduced Money Market Mutual Funds to enable small investors to participate in the money market. Thus, MMMFs mobilizes saving of mutual funds and invest them in such money market instruments that mature in less than one year.
The following are the important features of MMMFs:-
MMMFs can be set by scheduled commercial banks and public finance institutions.
Individuals, corporate, etc can invest in MMMFs. The lock-in period has been reduced to 15 days. MMMFs are under the regulation of SEBI. NRIs and Overseas Corporate Bodies can invest in MMMFs (on anon-
repatriation basis) floated by commercial banks / public sector financial institutions / private sector financial institutions. However, they do not need separate permission from the RBI.
MMMFs are ideal for investors seeking low-risk investment for short-term surpluses.
Resource mobilized through this scheme can be invested in money market instruments as well as in rated corporate bonds / debentures with a maturity period up to 1 year.
iv)Establishment of the DFHI : The Discount and
Finance House of India (DFHI) was set up in April 1988 to impart liquidity in the
money market. It was set up jointly by the RBI, Public sector Banks and Financial
Institutions. DFHI has played an important role in stabilizing the Indian money
market.
39
v)Liquidity Adjustment Facility (LAF) : The RBI introduced LAF as an
important tool for adjusting liquidity through REPOS and REVERSE REPOS. This
stabilizes short-term interest rates / call rates in the money market. Through the
LAF, the RBI remains in the money market on a continue basis through the repo
transaction . LAF adjusts liquidity in the market through absorption and or
injection of financial resources. ~
vi)Electronic Transactions : In order to impart
transparency and efficiency in the money market
transaction the electronic dealing system has been
started. It covers all deals in the money market.
Similarly it is useful for the RBI to watchdog the
money market.
vii)Establishment of the CCIL : The Clearing
Corporation of India limited (CCIL) was set up in April
2001. The CCIL clears all transactions in government
securities, and repose reported on the Negotiated Dealing
System. The Clearing Corporation of India LTD (CCIL)
was registered under the Companies Act 1956, with the
State Bank Of India as the chief promoter.
The CCIL clears all transactions in government securities and repos reported
on the NDS (Negotiated Dealing System) of the RBI.
It also clears rupee / us dollar foreign exchange spot and forward deals.
All trades in government securities below Rs 20 crores have to be settled
through the CCIL.
40
Trades in government securities
above 20 crores can be settled
through the CCIL or the RBI.
viii) Reduction In Crr And Slr :
The RBI has brought about considerable
reduction in the Cash Reserve Ratio (CRR)
and the Statutory Liquidity Ratio.
This reduction improves the liquidity of
banks and they can lend more money in the
market.
x) Remittance of Stamp Duty:The RBI has remitted the stamp duty on bills to
make the bill market more popular in India.
In fact the bill market is not developed in India due to:
High discount rates
Over dependence on cash / cheque transact ions.
Greater chances of dishonour.
xi) REPOS AND REVERSE REPOS:
The RBI introduced Repos in Dec 1992 and Reverse Repos in
November1996.
Repos and Reverse Repos bring about a balance in the short-term
fluctuations in the liquidity existing in the money market.
41
Also, they provide a short-term avenue to the banks to park their surplus
funds in the money market.
xii) Development Of Inter-Bank Call And Notice Money market:
The call and notice money market is an inter-bank market all over the world.
So, the NARSHIMAM Committee recommended that we adopt the same
policy in India.
However, the RBI had permitted the non-banking institutions to participate
in the call and notice money market as lenders.
So the RBI is now taking steps to gradually reduce the role of non-banking
institutions and transform the call and notice money market into a pure
interbank money market.
42
xiii) Regulation Of Non-Banking Financial Corporations:
A non-banking financial corporation (NBFC)
cannot carry on any business of financial
institution (including acceptance of Public
Companies accepting public deposits are
required to comply with all the directions on
They are obliged to submit regular returns to the
xii) Recovery Of Debts:
For speedy recovery of debts, the RBI has set up Special Recovery Tribunals
in 1993.
These provide legal assistance to banks to recover
xiii) Minimum Lock-In Period:
In October 2004, the RBI reduced the minimum
lock-in period for term deposits (below Rs 15
Thus, the depositor can deposit money for 7 days
This increases the term-deposits with the banks.
Thus, the money can be effectively deployed in the market.
43
These are major reforms undertaken in the money market in India. Apart from
these, the stamp duty reforms, floating rate bonds, etc. are some other prominent
reforms in the money market in India. Thus, at the end we can conclude that the
Indian money market is developing at a good speed.
The Role of the Reserve Bank of India
The Reserve Bank of India is the most important constituent of the money market.
44
The market comes within the direct preview of the Reserve Bank of India
regulations.
The RBI intervenes in the call money
indirectly in two ways-
By providing lines of
finance/additional funding to the
DFHI andother call money dealers.
By conducting repo auction Additional funding is provided through REPO
auctions which increase liquidity in the market and bring down call money
rates. RBI’s reverse repo auction absorbs excess liquidity in the economy
and push up the call rates.
The aims of the Reserve Bank’s operations in the money market are:
To ensure that liquidity and short term interest rates are maintained at levels
Consistent with the monetary policy objectives of maintaining price
stability.
45
To ensure an adequate flow of credit to the productive sector of the economy
and To bring about order in the foreign exchange market.
The Reserve Bank of India influence liquidity and interest rates through a
number of operating instruments - cash reserve requirement (CRR) of banks,
conduct of open market operations (OMOs), repos, change in bank rates and
at times, foreign exchange swap operations.
Steps taken by Rbi :
Both the borrowers and the lenders are required to have current accounts
with the Reserve Bank of India.
This will facilitate quick and timely debit and credit operations.
The call market enables the banks and institutions to even out their
day to day deficits and surpluses of money.
Banks especially access the call market to
borrow/lend money for
adjusting their cash reserve requirements
(CRR).
The lenders having steady inflow of funds
(e.g. LIC, UTI) look at the
call market as an outlet for deploying funds on short term basis
46
Entry Barriers
The entry into this field is restricted by RBI.
Commercial Banks, Co-operative Banks and Primary Dealers are allowed to
borrow and lend in this market.
Specified All-India Financial Institutions, Mutual Funds, and certain
specified entities are allowed to access to Call/Notice money market only as
lenders.
Reserve Bank of India has recently taken steps to make the call/notice
money market completely inter-bank market.
Hence the non-bank entities will not be allowed access to this market
beyond December 31, 2000 .
Growth Of Money Market
In India
47
While the need for long term financing is met
by the capital or financial markets, money
market is a mechanism which deals with
lending and borrowing of short term funds. Post
reforms period in India has witnessed
tremendous growth of the Indian money
markets. Banks and other financial
institutions have been able to meet
the high expectations of short term
funding of important sectors like the
industry, services and agriculture.
Functioning under the regulation and
control of the Reserve Bank of India
(RBI), the Indian money markets
have also exhibited the required
maturity and resilience over the past
about two decades. Decision of the
government to allow the private
sector banks to operate has provided much needed healthy competition in the money
markets, resulting in fair amount of improvement in their functioning.
Money market denotes inter-bank market where the banks borrow and lend among
themselves to meet the short term credit and deposit needs of the economy. Short
term generally covers the time period upto one year. The money market operations
help the banks tide over the temporary mismatch of funds with them. In case a
particular bank needs funds for a few days, it can borrow from another bank by
paying the determined interest rate. The lending bank also gains, as it is able to earn
48
interest on the funds lying idle with it. In other words, money market provides
avenues to the players in the market to strike equilibrium between the surplus funds
with the lenders and the requirement of funds for the borrowers. An important
function of the money market is to provide a focal point for interventions of the RBI
to influence the liquidity in the financial
system and implement other monetary
policy measures.
Quantum of liquidity in the banking
system is of paramount importance, as it
is an important determinant of the
inflation rate as well as the creation of
credit by the banks in the economy.
Market forces generally indicate the
need for borrowing or liquidity and the
money market adjusts itself to such
calls. RBI facilitates such
adjustments with monetary policy
tools available with it. Heavy call for
funds overnight indicates that the
banks are in need of short term funds
and in case of liquidity crunch, the
interest rates would go up.
Depending on the economic
situation and available market
trends, the RBI intervenes in the money market through a host of interventions. In
case of liquidity crunch, the RBI has the option of either reducing the Cash Reserve
49
Ratio (CRR) or pumping in more money supply into the system. Recently, to
overcome the liquidity crunch in the Indian money market, the RBI has released
more than Rs 75,000 crore with two back-to-back reductions in the CRR.
In addition to the lending by the banks and the financial institutions, various
companies in the corporate sector also issue fixed deposits to the public for shorter
duration and to that extent become part of the money market mechanism selectively.
The maturities of the instruments issued by the money market as a whole, range
from one day to one year. The money market is also closely linked with the Foreign
Exchange Market, through the process of covered interest arbitrage in which the
forward premium acts as a bridge between the domestic and foreign interest rates.
Determination of appropriate interest for deposits or loans by the banks or the other
financial institutions is a complex mechanism in itself. There are several issues that
need to be resolved before the optimum rates are determined. While the term
structure of the interest rate is a very important determinant, the difference between
the existing domestic and international interest rates also emerges as an important
factor. Further, there are several credit instruments which involve similar maturity
but diversely different risk factors. Such distortions are available only in developing
and diverse economies like the Indian economy and need extra care while handling
the issues at the policy levels.
50
Diverse FunctionsMoney markets are one of the most important mechanisms of any developing
economy. Instead of just ensuring that the money market in India regulates the flow
of credit and credit rates, this mechanism has emerged as one of the important policy
tools with the government and the RBI to control the monetary policy, money
supply, credit creation and control, inflation rate and overall economic policy of the
State.
Hence, the first and the foremost function
of the money market mechanism is
regulatory in nature. While determining
the total volume of credit plan for the six
monthly period, the credit policy also
aims at directing the flow of credit as per
the priorities fixed by the government according to the needs of the economy. Credit
policy as an instrument is important to ensure the availability of the credit in
adequate volumes; it also caters to the credit needs of various sectors of the
economy. The RBI assists the government to implement its policies related to the
credit plans
through its
statutory control
over the banking
system of the
country.
51
Monetary policy, on the other hand,
has longer term perspective and
aims at correcting the imbalances in
the economy. Credit policy and the
monetary policy, both complement
each other to achieve the long term
goals determined by the
government. It not only maintains
complete control over the credit
creation by the banks, but also
keeps a close watch over it. The
instruments of monetary policy, including the repo rate, cash reserve ratio and bank
rate are used by the Central Bank of the country to give the required direction to the
monetary policy.
Inflation is one of the serious economic problems that all the developing economies
have to face every now and then. Cyclical fluctuations do affect the price level
differently, depending upon the demand and supply scenario at the given point of
time. Money market rates play a major role in controlling the price line. Higher rates
in the money markets reduce the liquidity in the economy and have the effect of
reducing the economic activity in the system. Reduced rates, on the other hand,
increase the liquidity in the market and bring down the cost of capital substantially,
thereby increasing the investment. This function also assists he RBI to control the
52
overall money supply in the economy. Such operations supplement the efforts of
direct infusion of newly printed notes by the RBI .
Future of
Money
Market
Financial openness is said to be
a situation under which the
residents of one country are in a
position to trade their assets with residents of another country. A slightly mild
definition of openness may be referred to as financial integration of two or more
economies. In recent years, the process of globalization has made the money market
operations and the monetary policy tools quite important. The idea is not only to
regulate the economy and its money markets for the overall economic development,
but also to attract more and more
foreign capital into the country.
Foreign investment results in
increased economic activity, income
and employment generation in the
economy. Free and unrestricted flow
of foreign capital and growing
integration of the global markets is
53
the hallmark of openness of
economies.
Indian experience with open markets
has been a mixed one. On the
positive side, the growth rate of the
country has soared to new levels and
the foreign trade had been growing at
around 20 per cent during the past few years. Foreign exchange reserves have
burgeoned to significantly higher levels and the country has achieved new heights in
the overall socio-economic development. The money
market mechanism has played a significant role in rapid
development of the country during the post-reforms era.
On the flip side, the post-reforms period has witnessed
relatively lesser growth of the social sector. Money
market mechanism has kept the markets upbeat, yet the
social sector needs more focused attention. With the base
of the economy now strengthened, the money market
mechanism must also focus on ensuring that proper direction is provided to the
credit flows so that the poorest sections of the society also gain.
54
Development
in Money
Market
Integration of unorganized sector with the organized sector.
Widening of call Money market.
Introduction of innovative instrument
55
Offering of Market rates of interest.
Promotion of bill culture
Entry of Money market mutual funds
Setting up of credit rating agencies.
Adoption of suitable monetary policy
Establishment of DFHI
Setting up of security trading corporation
of India ltd. (STCI)
The money market is a mechanism that deals
with the lending and borrowing of short term
funds. The India Money Market has come of age
in the past two decades. In order to study the
money market of India in detail, we at first need
to understand the parameters around which the
money market in India revolves.
The performance of the Indian Money Market is
heavily dependent on real interest rate that is
the interest rate that is inflation adjusted.
Though the money market is free from interest
56
rate ceilings , structural barriers and other institutional factors can be held
responsible for creating distortions in India Money Market. Apart from the call
market rates, the other interest rates in the Indian Money Market usually do not
change in the short run.
It is due to this disparity
between the opposite forces
that is prevalent in the money
market in India that a well defined
income path cannot be traced.
Owing to the deregulation of the interest rate in the early nineties following the
economic reforms laid down by the then finance minister Dr. Manmohan Singh,
studies concerning the behavior of interest rate were restricted. However the
liquidity of the market makes it a good subject for empirical research.
To analyze the interest rate that characterizes the Indian Money Market, the
following elements need to be covered:
The term structure of interest rate.
57
The difference between domestic and international interest rates.
The market
structure
differences
between the
auction
markets that clear continuously and the customer markets.
The credit speed between
instruments involving similar maturity but diverse risk factor. Such is the
distortion in the Indian Money Market.
Link between the call
money and other market
There is inverse relation between call rates and short-term money market instrument
such as certificate of deposit and commercial paper.
When call rates peak to high level , bank raise more funds through CD.
When call rates are lower , many bank fund CP by borrowing from call money and
earn profits through arbitrage between money market segment.
A large issue of Govt. securities also affect call money rates. when banks
subscribe to large issue of G-sec, liquidity is sucked out from banking system. This
increases the demand for fund in call money market which pushes up call
money rates.
Increase in CRR also increases call money rates.
Call money market and foreign exchange market are related. When call rates rise ,
bank borrow dollars from their overseas branches, swap them for rupees and
lend them in the call money market.
At the same ,they buy dollars forward in anticipation of their repayment
liability. This pushes forward the premium on the rupee-dollar exchange rate.
58
Re v iew Of Literature
Article: India call money ends near reverse repo rate, cash ample
Reuters,2/ 9/ 2009, Indian overnight money rates brought down to near the reverse
repo rate of 3.25% on Wednesday as this cash surplus in the system will help
banks meet their reserve needs comfortably. Cheaper money available at the
collateralized borrowing and lending obligation (CBLO) also eased pressure on the
inter-bank cash rates. At that day banks were guided to report their position to RBI
once in two weeks. This amendment crated a expectation on liquidity resistance.
Some analysts said the central bank may start rolling back the liquidity as early as
December 2009, as the already pressured consumer prices could pose significant
inflationary threat to the economy, amid easy cash conditions Overnight rates are
supported around the reverse repo rate because banks holding surplus funds could
also deploy the same with central bank at that rate in its daily liquidity adjustment
auctions.
Article: Money Market Integration in India: A Time Series Study
59
60
Rastogi Nikhil, Says Indian financial markets have come a long way from the
highly controlled pre-liberalization era. He signifies that the main focus is on
achieving efficiency, which is the hallmark of any developed financial market.
This research paper tests the efficiency and extent of integration between financial
markets empirically at the short end of the market.The rates, mainly taken for the
purpose of this study, comprise the call market rate, CD (Certificate of Deposit)
rate, CP (Commercial Paper) rate, 91-day T-bill (Treasury bill) rate and 3-month
forward premium. The results, though promising, are mixed. In his research he
concluded that although markets have achieved integration in some of its branches,
they have still to achieve full integration. This has absolute implications on the
monetary policy of the Reserve Bank of India.(RBI) since changes in one market
(gilt market) can be used to regulate the other market (forex market).
Article: Market efficiency and financial markets integration in India
Prusty Sadananda, June,2007, The author explored the impact of economic reforms
on the integration of various segments of the financial market in India through the
time series tools during the period from March 1993 to March 2005. The major
findings were: (i) various segments of the financial market in India have achieved
market efficiency, (ii) the 91-day Treasury bill rate is the appropriate 'reference
rate' of the financial sector in India, (iii) the financial markets in India are largely
integrated at the short-end of the market, and (iv) the long- end of the market is
integrated with the short-end of the market. The above findings suggest that
monetary policy should rely more on interest rate and asset price channels to
control inflation.
Significance of money
market
Wide-ranging reforms have been undertaken to develop the money market and
strengthen its role in the transmission mechanism of monetary policy. Three major
considerations that have guided rationalization of the structure in the money
market are: (i) ensuring balanced development of various constituents of the
money market, especially the growth of the collateralized market Vis-à-vis the
uncollateralized market; (ii) preserving integrity and transparency of the money
market by ensuring better disclosure of information; and (iii) rationalizing various
classes of participants across different market segments in order to strengthen the
efficacy of the LAF of the Reserve Bank. It provides a stable source of fund to
banks in addition to deposits, allowing alternative financing structure.
As a result of various reform measures, the money market in India has undergone
significant transformation in terms of volume, number of instruments and
participants, and adoption of risk management practices.
Market Development
Greater Flexibility for Participants in the Call Money Market
In view of the transformation of the call money market into a pure inter-bank
market, there is a need to consider greater flexibility to banks and PDs to borrow or
lend in this market, provided they have put in place appropriate risk management
61
systems which would address the asset-liability mismatches in their balance sheets.
In this context, banks have already started operating in an environment that
requires greater harmonization between sources and deployment of funds for asset-
liability management (ALM) purposes. Direct regulation in the form of prudential
limits on borrowing and lending eventually would need to graduate to a system,
where such limits are taken care of by banks’ own internal systems of ALM
framework. This would correct large mismatches between sources and uses of
funds by banks and thereby help the Reserve Bank in the proper assessment of
market conditions for the conduct of its liquidity management operations. There is
also, at the same time, a greater need for closely monitoring the movements of call
money rates.
Extension of the Repo Market
It has been the endeavor of the Reserve Bank to develop the repo market not only
for easing pressure from the uncollateralized call money market but also to
facilitate the emergence of a short-term rupee yield curve for pricing fixed income
securities. At present, only Central and State Governments securities are eligible
for market repo. However, State Government securities do not have wider
acceptability as there are hardly any repo operations based on them. As the fixed
income money market has been overwhelmingly dependent upon Central
Government securities, there is a need to consider broad-basing the pool of eligible
securities. In future, the growth of market repo will be driven by the “short selling”
activity in the government securities market as a repoed security can now be
delivered up to five days in view of the recent changes in the regulations governing
short sales
62
Development of a Vibrant Term Money Market
The term money market has not developed for several reasons. One of the major
reasons for this is that market participants have been unable to take a long-term
view of interest rates despite availability of Treasury Bills of varying maturities
and a reasonably developed swap market. In order to enable market participants to
take a long-term view on interest rates, it is imperative that the ALM framework is
strengthened and greater flexibility is allowed to the personnel managing treasury
operations in banks. The skewness in liquidity in the money market in terms of
chronic lenders and borrowers would get corrected as banks develop better ALM
systems. The development of the term money market is vital for strengthening
proper linkages between the foreign exchange market and the domestic currency
market, which, in turn, would provide an impetus to the derivative segment.
Relook at Inter-Bank Participation Certificates
Inter-Bank Participation Certificates, which can be used for evening out short-term
liquidity mismatches by banks, were introduced in October1988 in order to infuse
greater degree of flexibility in their credit portfolios. In view of rapid credit growth
in recent years, interest in IBPCs has again arisen. In this context, since
considerable time has elapsed since the guidelines on the scheme of IBPCs were
issued, the IBPC scheme with respect to duration, quantum in terms of the
proportion to the loan amount ,eligible participants and transferability of IBPCs
needs a thorough review. Depending on the results of such a review, extending the
use of this instrument could also facilitate the asset liability management by banks,
63
improve day-to-day liquidity management and help develop a market for credit risk
transfer instruments between banks.
Futures on Policy Linked Interest Rates
Going forward, an Indian variant of the Federal Funds Futures on interest rates
linked to the Reserve Bank’s key policy rates may emerge. Trading in the futures
market would reveal important information about market expectation on the future
course of monetary policy. For instance, the trading of the Federal Funds Futures
provides key information to the Federal Open Market Committee (FOMC) in the
US in formulating its monetary policy.
Promoting Financial Stability
Default risk in the money market has the potential to create a contagion in the
financial markets and, therefore, needs to be mitigated. In this regard, experiences
of developed economies show that generally the self-regulatory organizations
(SROs) regulate activities of participants in the money market in terms of their
capital adequacy and conduct of business. Also, default resolution in most of these
markets is undertaken through the Contract Law and the Bankruptcy Law. In view
of international experience, there may be a case for empowering a suitable self-
regulatory organization appropriately to act as a catalyst for the development of
market microstructure.
One of the fundamental forces that could contribute to more organic integration
across various segments of the financial market is the technological up gradation of
the payment and settlement system. The accomplishment of virtual Public Debt
Office(PDO) and Deposit Accounts Department (DAD) at the Reserve Bank,
64
coupled with the operationalization of the centralized funds management system
(CFMS).
Advantages Of Money
Market
A liquid money market provides an effective source of long term finance to
borrower
A liquid and vibrant money market is necessary for the development of a capital
market, foreign exchange market and market in derivative instruments.
Helps in pricing different floating interest products
It helps in :
Development of trade & industry.
Development of capital market.
Smooth functioning of commercial banks.
Effective central bank control.
Formulation of suitable monetary policy.
65
Non inflationary source of finance to government.
Defects or Drawbacks of Money Market
Though the Indian money market is considered as the advanced money market
among developing countries, it still suffers from many drawbacks or defects. These
defects limit the efficiency of our market.
66
Some of the important drawbacks of Indian Money Market are :-
1. MULTIPLE RATE OF INTEREST: In the Indian money market, especially
the banks, there exists too many rates of interests. These rates vary for lending,
borrowing, government activities, etc. Many rates of interests create confusion
among the investors.
2. DICHOTOMY: Dichotomy i.e. existence of two markets (organized money
market and unorganized money market) is a major defect of the Indian Money
Market. The unorganized money market comprises of indigenous bankers,
moneylenders, chit funds, nidhis , loan companies and finance brokers that do
not come under the control and supervision of the RBI. This unorganized sector
is mainly concentrated in the rural areas and it does not differentiate between
short term and long term finance and between the purposes of finance. This puts
a limit on the RBI’s control over the money market.
3. LACK OF INTEGRATION: The RBI finds it difficult to integrate the
organized and the unorganized money market. While the RBI can control and
supervise the working of the organized sector effectively, the heterogeneous
67
unorganized sector is out of RBI’s control. There is no uniformity in the
practices and operations of the unorganized money market. Moreover, the
interest rates in both the markets are also different. Thus there is lack of
integration in the Indian money market.
4. MULTIPLICITY IN INTEREST RATES: There is diversity in rates of
interest in the Indian money market. This multiplicity in the interest rates is due
to lack of mobility of funds from one section of the money market to another.
The rates differ from institution to institution even for funds of the same
duration. Although the wide differences are being narrowed down, the existing
differences do hamper the efficiency of the money market.
5. ABSENCE OF ORGANISED BILL MARKET: The existence of a well-
organized bill market is essential for effective linking up various credit
agencies. It refers to a mechanism where bills of exchange are purchased and
discounted by commercial banks / financial institutions. The bill market is not
yet developed in India due to the following reasons:
Banks keeping large amount of cash.
Preference for borrowing rather than discounting bills.
Overdependence on cash / cheque transactions.
High stamp duty on usance bill, etc.
6. SHORTAGE OF FUNDS: The Indian money market is characterized by
shortage of funds. Various factors like inadequate banking facilities, low
savings, lack of banking habits, existence of parallel economy, etc lead to
shortage offends. Thus, demand for short-term funds far exceeds the supply.
This results in high interest rate. However now banks are flush with funds
68
especially in urban area as people prefer to invest their money with banks rather
than keeping them as deposits in the unorganized sector.
7. SEASONAL STRINGENCY OF MONEY: Since agriculture continues to
play a major role in the Indian economy, farm operations do influence the
demand for and supply of money. Thus seasonal stringency of money and high
interest rate during the busy season (November to June) is a striking feature of
the Indian money market. Also, there a wide fluctuations in the interest rates
from one reason to another. However, the RBI makes attempt to reduce the
fluctuations by adding money into the money market during the busy season
and withdrawing the funds during the slack season.
8. INADEQUATE CREDIT INSTRUMENTS: The Indian money market
lacked adequate short-term paper instruments till1985-86. Only call money
market and bill market existed. Also there were no specialized dealers / brokers
in the money market. After 1985-86 the RBI Introduced new credit instruments
in the market like CDs, CPs, MMMF, etc, but they are not yet fully developed
in India.
9. ABSENCE OF a WELL-ORGANISED BANKING SECTOR IN
RURALAREA: There is poor banking system in the rural area due to the
problems of overheads and maintenance of branches. The commercial bank
branches in rural area are only 40% of the total bank branches. This also
hampers the development of money market in India.
10.INEFFICIENT AND CORRUPT MANAGEMENT: Faulty selection, lack
of training, poor performance appraisal and faulty promotions result in
inefficiency and corruption in the banking sector. This adversely affects the
success and performance of money market. These are some of the major
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drawbacks of the Indian money market; many of these are also the features of
our money market.
Conclusion
The money market is a vibrant market, affecting our everyday lives. As the short-
term market for money, money changes hands in a short time frame and the players
in the market have to be alert to changes, up to date with news and innovative with
strategies and products. The withdrawal of non-bank entities from the inter-bank
call-money market is linked to the improvement of settlement systems. Any time-
bound plan for the evolution of a pure inter-bank call/notice money market would
be ineffective till the basic issue of settlements is addressed.
In brief, various policy initiatives by the Reserve Bank have facilitated
development of a wider range of instruments such as market repo, interest rate
swaps, CDs and CPs. This approach has avoided market segmentation while
meeting demand for various products. These developments in money markets have
enabled better liquidity management by the Reserve Bank
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Bibliography
www.google.com
http://business.mapsofindia.com/india-market/money.html
RBIs site --- http://rbi.org.in
SBI DFHI’s site --- http://sbidfhi.com/
Indian Institute Of Banking & Finance --- http://www.iibf.org.in
http://kalyan-city.blogspot.com/
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