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The Indian money market is not an integrated unit. It is broadly divided into parts: the organized
and unorganized. There is compartmentalization between the two markets and as such the rates
differ in the organized sector from those of the unorganized sectors. The unorganized sector of
money market comprises the indigenous bankers and the money lenders. This is not a
homogenous sector. The organized sector is fairly integrated. Both nationalized and private
sector commercial banks constitute to core of the organized sector.
The money market is a market for overnight to short-term funds and for short term
money and financial assets that are close substitute for money. ³Short-term´ in the Indian
context, generally means a period upto one year; ³close substitute for money´ denotes any
financial asset that can be quickly converted into money minimum transaction cost and without
loss in value.
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1.| n equilibrating mechanism for evening out short-term surpluses and deficiencies.
2.| focal point of central bank intervention for influencing liquidity in the economy.
3.| reasonable access to the users of short-term funds to meet their requirement at realistic
price.
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The money market has distinct operational features as compared to the capital market.
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Moneylenders do not constitute one homogenous category. Broadly they are of three types:
1) professional moneylenders whose main activity is moneylending; 2) itinerant moneylenders,
like Pathans & Kabulis, and 3) non-professional moneylenders whose main source of income is
not money lending. The methods of operation of the moneylenders are not uniform. Their
activities are generally localized.
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The modern sector of the Indian money market is reasonably well organized and integrated. The
organized sector of the Indian money market comprises the reserve Bank of India, commercial
banks, foreign banks, cooperative banks, finance corporations, Mutual Funds and the Discount
and Finance House of India Ltd.
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T-bill is basically an instrument of short-term borrowing by the government of India. It
is particularly a kind of finance bill or a promissory note issued by the èBI on behalf of
the Government. The T-bills are used to raise short-term funds to bridge the gaps
between receipts and the expenditure of the Government of India. The main features of
T-bills are: i) they are negotiable securities ii) they are issued at discount and are repaid at
par on maturity iii) high liquidity on account of short tenure and inter-bank repos iv)
absence of default risk due to government guarantee and èBI¶s willingness to always
purchase/discount them, negligible capital depreciation; v) assured yield vi) low
transaction cost vii) eligibility for inclusion in SLè ( Statutory Liquid èatio) and viii)
purchase/ sales effected through the SGL ( Subsidiary General Ledger) account with the
èBI.
t present the following types of treasury bills are in use:
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CD is a document of title to a time deposit and can be distinguished from conventional
time deposit in respect of its free negotiability and hence, marketability. In other words,
CDs are a marketable receipts of funds deposited in a bank for fixed period at a specified
rate of interest. They are bearer documents/ instruments and are readily negotiable.
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1-| Lack of integration
2-| Lack of rational interest rates structure
3-| bsence of an organized bill market
4-| Shortage of funds in the money market
5-| Seasonal stringency of funds and fluctuations in interest rates
6-| Inadequate baking facilities
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6| The money market in India does not satisfy the criteria of a developed money market
6| The overall organization of the money market remains underdeveloped
6| Banking facilities in the country are inadequate
6| The country has also failed to develop a market in a short term asset.
6| In the absence of the popularity of short-term bonds and treasury bills an active market in
them has not emerged
6| The country also lacks the numbers of sub markets.
6| The acceptance an bill markets are almost nonexistent in the country
In ugust 1989, the government remitted the stamp duty on usance bills which was considered a
major administrative constraint in the use of bill system. However, this measure has failed to
induce use of commercial bills.
With effect from May 1, 1989 the èBI deregulated money market interest rates which proved to
be a significant step towards the activation of the money market this was expected to make
interest rates flexible and lend transparency to transactions in the money market.
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The DFHI was set up on pril 25, 1988. Its major function is to bring into the fold of the Indian
money market the entire financial system comprising the scheduled commercial banks, co-
operative banks and all India financial institutions in the public and private sectors, so that their
short-term surpluses and deficits are equilibrated at market related rated/prices through inter-
bank transactions in case of bank and through money market instruments in the case of banks
and others.
The èBI has used in the past a number of sector specific refinance facilities of which export
credit finance and food credit refinance were the most prominent.