Indian Money Market: Features, Defects and Reforms

After reading this article you will learn about the Indian Money Market:- 1. Features of the Indian Money Market 2. Defects of the Indian Money Market 3. Reforms.

Features of the Indian Money Market:

In money market short term surplus funds with banks, financial institutions and others are bid by borrowers, i.e., individuals, companies and the Government. In the Indian money market RBI occupies the pivotal position. The Indian money market can be dividend into two sectors i.e. unorganised and organised.

The organised sector comprises of Reserve Bank of India, SBI group and commercial banks-foreign, public sector and private sector. The financial institutions also participate to a limited extent. The unorgnaised sector consists of indigenous bankers and money lenders.

The orgnaised money market in India has number of sub-markets such as the treasury bills market, the commercial market and inter-bank call money market.

Defects of the Indian Money Market:

1. Existence of Un-organised Money Market:

The most important defect of the Indian money market is the existence of unorganised segment. In this segment of the market the purpose as well period are not clearly demarcated. In fact, this segment thrives on this characteristic.

This segment undermines the role of the RBI in the money market. Efforts of RBI to bring indigenous bankers within statutory frame work have not yielded much result.

2. Lack of Integration:

Another important deficiency is the lack of integration of different segments or functionaries. However, with the enactment of the Banking Companies Regulation Act 1949, the position has changed considerably. The RBI is now almost fully effective in this area under various provisions of the RBI Act and the Banking Companies Regulation Act.

3. Disparity in Interest Rates:

There have been too many interest rates prevailing in the market at the same time like borrowings rates of government, the lending rates of commercial banks, the rates of co-operative banks and rates of financial institutions.

This was basically due to lack of mobility of funds from one sub- segment to another. However, with changes in financial sector the different rates of interest have been quickly adjusting to changes in the bank rate.

4. Seasonal Diversity of Money Market:

A notable characteristic is the seasonal diversity. There are very wide fluctuations in the rates of interest in the money market from one period to another in the year. November to June is the busy period. During this period crops from rural areas are moved to cities and parts. The wide fluctuations create problems in the money market. The Reserve Bank of India attempts to lessen the seasonal fluctuations in money market.

5. Lack of Proper Bill Market:

Indian Bill market is an underdeveloped one. A well orgnaised bill market or a discount market for short term bills is essential for establishing an effective link between credit agencies and Reserve Bank of India. The reasons for this situation are historical, like preference for cash to bills etc.

Reserve Bank of India started making efforts in this direction in 1952. However, a new and proper bill market was introduced in 1970. There has been substantial improvement since then.

6. Lack of a well Organised Banking System:

Till 1969, the branch expansion was very slow. There was tremendous effort in this direction after nationalisation. A well-developed banking system is essential for money market. Even, at present the lack of branches in rural areas hinders the movement of funds. With emphasis on profitability, there may be some problems on this account.

In totality it can be said that Indian Money Market is relatively under developed. In no case it can be compared with London Money Market or New York Money Market. There are number of factors responsible for it in addition to the above discussed characteristics.

For example, lack of continuous supply of bills, a developed acceptance market, commercial bills market, dealers in short term assets and co-ordination between different sections of the money market.

Reforms in the Indian Money Market:

Since its inception, particularly after independence, the Reserve Bank of India has been making efforts to remove the defects of the Indian money market. The organised sector of the market is relatively well knit and differences between various sectors of the market have been reduced.

The bill market scheme was one very important step. But the Indian money market is still centred on the call money market although efforts have been made to develop secondary market in post 1991 period.

Vaghul Committee on Money Market, Sukhmoy Chakravarty Committee on the Review of the working of the Monetary System and Narasimham Committee on the working of Financial System has made important recommendations on the Indian money market. The Reserve Bank of India has started the process of implementation of these recommendations.

1. Development of Money Market Instruments:

The Reserve Bank of India has played an important role in the introduction of new money market instruments. These new instruments are 182 days treasury bills, longer maturity bills, dated Government securities, certificates of deposits and commercial papers, 3—4 days repos and 1 day repos from 1998-99.

Traditionally, the 91 days treasury bills have been the main instrument used by Government of India for raising short term funds. The investments came from commercial banks. In January 1993, the Government of India introduced the system of weekly out time, which has become quite popular.

The Government has been raising nearly Rs. 16,000 crores through his measurement. The interest rate variations in these bills have been between 7.15 to 11 per cent. Indian money market is following the unique practice of converting treasury bills into dated securities of 2 years or 5 years, normally carrying interest rate of 12 per cent.

Reintroduction of 182 days treasury bills:

The 182 days bills, which were discontinued in 1992, have been reintroduced from 1998-99. Now Indian money market has 14 days, 91 days, 182 days and 364 days treasury bills.

Demand for Treasury bill is no longer exclusively linked with statutory liquidity rates considerations. The secondary market transactions aiming at effective management of short term liquidity are on the increase.

2. Deregulation of Interest Rates:

Deregulation of interest rates helps banks to accustom to better pricing of assets and liabilities and to the need to manage interest rates across their balance sheet.

The process of reduction of interest rate regulations started in 1988, when Reserve Bank of India removed the ceiling of 16.5 per cent and fixed a minimum of 16 per cent p.a. In 1989, the ceiling on the interest rates on inter-bank call market, inter-bank short term deposits etc. was also removed and the interest rates got linked to market forces.

In accordance with the recommendations of Narasimham Committee in November 1991, the interest rates were further deregulated. The interest rates have been almost completely deregulated in April 1998.

3. Institutional Development:

The post reforms period saw significant institutional development and procedural reforms aimed at developing a strong secondary market in government securities.

Discount and Finance House of India Ltd:

Has been set up as a part of the package of reforms of the money market. It buys bills and other short term papers from banks and financial institutions. It provides short term investment opportunity to banks.

To develop a secondary market in Government securities, it started buying and selling securities to a limited extent in 1992. To enable Discount and Finance House of India Ltd. (DFHI), to deal in Government securities, the Reserve Bank of India provides necessary refinance.

The institutional infrastructure in government securities has been strengthened with the system of Primary Dealers (PDs) announced in March 1995 and that of Satellite Dealers (SDs) in December 1996.

Similarly, Securities Trading Corporation of India was established in 1994, to provide better market and liquidity for dated securities, and to hold short term money market assets like treasury bills. The National Stock Exchange (NSE), has an exclusive trading floor for transparent and screen based trading in all types of debt instruments

4. Money Market Mutual Funds:

In 1992 setting up of Money Market Mutual Funds was announced to bring it within in the reach of individuals. These funds have been introduced by financial institutions and banks.

With these reforms the money market is becoming vibrant. There is further scope of introducing new market players and extending refinance from Reserve Bank of India.

Narasimham Committee has also proposed that well managed non-banking financial intermediates and merchant bank should also be allowed to operate in the money market. As and when implemented this will widen the scope of money market.

5. Permission to Foreign Institutional Investors (FII):

FII’s are allowed to operate in all dated government securities. The policy for 1998-99 had allowed them to buy treasury Bills’ within approved debt ceiling.