Money Markets

Money markets are those markets where borrowing and lending of short term funds ( maturity 1 day to 1 year) takes place. Due to short maturity, the instruments of money market are liquid and can be converted to cash easily and thus are able to address the need of the short term surplus fund of the lenders and short term borrowing requirements of the borrowers. The interest rates get determined in the money markets.

Sectors of Indian Money Markets

Money Market in India is divided into unorganized sector and organized sector. The Unorganized market is old Indigenous market which includes indigenous bankers, money lenders etc.  Organized market includes Governments (Central and State), Discount and Finance House of India (DFHI), Mutual Funds, Corporate, Commercial / Cooperative Banks, Public Sector Undertakings (PSUs), Insurance Companies and Financial Institutions and Non-Banking Financial Companies (NBFCs).  Organized Money Market is regulated by RBI as well as SEBI.

• For more information on structure of organized money markets in India, click here

The most active segment of the money market is “Overnight Call market” or repo.

Key Features of the Indian Money Market

• In India , so far the control of the RBI over the money market has been limited. This is because of an indigenous banking system and unorganized money market. In recent year a lot of NBFC have spread their roots in the system and still the market lacks complete integration. The money market at one time was divided into several segments which were loosely connected with each other, and partly independent of each another. However, now the RBI is fully effective in the organized sector and Indian Money Market is getting closely integrated.
• In Indian Money market there are too many interest rates existed since long. One reason attributed to this is immobility of funds from one segment to another.
• In Indian Money market, the rates are seasonal and during the busy season i.e. November to May-June, funds are required to move the crops and this busy season causes lack of liquidity and hike in the interest rates. In the slack season, there are surplus funds. For this RBI has been pumping in money in the busy season and pumping out in the slack seasons.
• The short term bill market is not much popular in India. This market needs to be developed. One reasons attributed to this was that industry preferred to borrow rather than depending upon the short term bills. The RBI’s New Bill Market Scheme of the early 1970s got failed.
• In call / notice money market in India has been highly volatile and the difference between highest and lowest quotations is very high. For example in 1990, the highest rate was 70% per annum and lowest rate was 4% per annum. Similarly, in 2008-09, the highest quotation was 23 percent per annum and lowest was 1% per annum. One reasons attributed to this is also the short term money required by the Banks to maintain the RBI requirements of CRR / SLR.

Problems of Indian Money markets

Indian money market is relatively underdeveloped when compared with advanced markets like New York and London Money Markets. Various problems of money markets in India include Dichotomy, Lack of Coordination & Integration, Diversity in the Interest Rates, Seasonality in the markets, shortage of funds, absence of a developed Bill market, Inefficient management etc.

• Click here for more information on Problems of Money Markets in India.

Overall, India’s money markets are  relatively less developed and have yet to acquire sufficient depth and width.

Money Market Reforms in India

The major money market reforms came after the recommendations of S. Chakravarty Committee and Narsimham Committee. These were major changes which helped unfold the banking potential of India and shape our financial institutions to world class standards.

• Click here for more information about Money Market Reforms in India.