You are on page 1of 6

c c


  
u  
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.

6 
 


 

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.

^   
   
The money market has distinct operational features as compared to the capital market.

i)| The operations are for short durations.


ii)| The money market is the institutional source of working capital to the industry.
iii)| There are a large number of participants in the money market.
iv)| The money market is the wholesale market.
v)| The transactions in the money market are on a µsame day settlement¶ basis.
vi)| The money market consists of a number of interrelated sub-markets such as the call
market, the commercial bill market, the treasury market, the commercial paper
market, the certificates of deposit market and so on.
º       
 u      



À|º     


       
There are several types of unregulated non-bank financial intermediaries. mong these the most
prominent are: (i) financial companies (ii) chit funds and (iii) nidhis. Finance companies
generally give loans to retailers, wholesale traders, artisans and other self-employed person.
Since finance companies charge high rates of interest varying from 36 to 48 percent, normally
corporate firms do not borrow from these companies. The chit funds are savings institutions.
They are of various types lacking any standardized form. They have regular members who make
periodical subscriptions to the fund. The nidhis operate particularly in South India. In their
character they are like some kind of mutual benefit funds as their dealings are restricted only to
the members. Since the nidhis operate in the unregulated credit market, there is hardly any
information available about the amount of lending business done by them.

À|u    


Indigenous bankers are individuals or private firms which receive deposits and give loans and
thereby operate as banks. Since their activities are not regulated, they belong to the unorganized
segment of the money market. Indigenous bankers do not constitute a homogenous group. They
may be classified under four main sub-groups: Gujrati Shroffs, Multani or Shikarpuri Shroffs,
Chettiars and Marwari Kayas.

À|    
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.

·      
 u      
  
   
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.

Broadly the principal constituents of the Indian money market are:


| 6     
The call money market consists of overnight and money at short notice for period upto 14
days. It is meant to balance the short-terms needs of banks. The call money market exists
in almost all developed money markets. It is generally the most sensitive part of the
financial system. ny change in flow of funds and the demand for them is clearly
reflected in it.
‰
  The interest rate paid on call loans is known as the call rates. The call rate
varies from day-to-day and often from hour to hour. It is very sensitive to changes in
demand for the supply of call loans. The call rates are influenced by number of factors:
| asy/Tight liquidity conditions in the market affect the call rate.
| èeserve requirement relating to maintenance of Cèè affects the call rates
| Aolatile forex market conditions also affect call rates.

|     


Commercial bill is a short-term, negotiable and self-liquidating instrument with low risk.
It is written instrument containing an unconditional order signed by the maker, directing
to pay a certain amount of money only to a particular person or to bearer of the
instrument. Bills of exchange are drawn by the seller on the buyer for the value of the
goods delivered by him. Such bills are called trade bills. When the trade bills are
exchanged by the commercial banks, they are commercial bills.

| 6    
 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:

14- Day Intermediary Treasury Bills


14- Day uction Treasury Bills
91- Day Treasury Bills
182- Day Treasury Bills
364- Day Treasury Bills
| 6    
èepo is money market instrument which helps in collateralised short-term borrowing and
lending through sales/purchase operations in debt instrument. Under a repo transaction,
securities are sold by their holder to an investor with an agreement to repurchase them at
a predetermined rate and date. Initially repos were allowed in the Central government
treasury bills and dated securities created by converting some of the treasury bills. In
order to make the repos market an equilibrating force between the money market and the
government securities market, the èeserve Bank of India generally allowed repo
transactions in all government securities and treasury bills of all maturities.

| 6  
  
   
 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.

|      


CP is a short-term instrument of raising funds by corporate. It is essentially a sort of
unsecured promissory note sold by the issuer to the investor or via some agent like
merchant banker or a security house. The issuance of commercial paper is not related to
any underlying self-liquidating trade. Therefore, maturity of this instrument is flexible.
Usually borrowers and lenders adopt a maturity of a CP to their needs.

  
u      
    
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

º      
      u   
     u 
 
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.

u         


Over the past two decades or so four money market instruments have been introduced. These are
182 - day treasury bills, 364- day treasury bills, certificates of deposits and commercial papers.

u  
 

   
    ^    
u 
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.

u      


 
MMMFs were introduced in India in pril 1991. MMMFs provide an additional short-term
avenue to investors and bring money market instruments within the reach of individuals.
   !     
The call/notice money market was mainly an interbank market until 1990. During the 1990s the
èBI¶s policy relating to entry into the call/notice money market was liberalized to provide more
liquidity despite the recommendation of the Aaghul Committee that the call money market
should be restricted to banks.

          


      
The constraints of term money market such as statutory pre-emptions on inter-bank liabilities,
cash credit system of financing, the regulated interest rate structure, the high degree of volatility
in the call money rates, availability of sector-specific refinance, the scarcity of money market
instruments of varying maturities and inadequate assets liability management discipline among
banks were removed by the èBI in recent years and as a result, there is some activity in the term
money market.

   
 
  
 
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.

You might also like