Money Market
Q 1: What is Money Market? What are
the important functions performed by it?
Ans. A.MEANING OF MONEY MARKET:-
A money market is a
market for borrowing and lending of short-term funds. It deals in funds and
financial instruments having a maturity period of one day to one year. It is a
mechanism through which short-term funds are loaned or borrowed and through
which a large part of financial transactions of a particular country or of the
world are cleared.
It is different from stock market. It is not a single
market but a collection of markets for several instruments like call money
market, Commercial bill market etc. The Reserve Bank of India is the most
important constituent of Indian money market. Thus RBI describes money market
as “the centre for dealings, mainly of a short-term character, in monetary
assets, it meets the short-term requirements of borrowers and provides
liquidity or cash to lenders”.
II. PLAYERS OF MONEY MARKET :-
In money market transactions of large amount and high
volume take place. It is dominated by small number of large players. In money
market the players are :-Government, RBI, DFHI (Discount and finance House of
India) Banks, Mutual Funds, Corporate Investors, Provident Funds, PSUs (Public
Sector Undertakings), NBFCs (Non-Banking Finance Companies) etc.
III.
FUNCTIONS OF MONEY MARKET :-
1) It caters to the short-term financial needs of the
economy.
2) It helps the RBI in effective implementation of
monetary policy.
3) It provides mechanism to
achieve equilibrium between demand and supply of short-term funds.
4) It helps in allocation of
short term funds through inter-bank transactions and money market Instruments.
5) It also provides funds in non-inflationary way to
the government to meet its deficits.
6) It facilitates economic development.
Q.2: Explain the structure or
components of Indian Money Market. (Mar. ‘11)
OR
What are the principal constituents
of Indian Money Market?
Ans. A) COMPONENTS I CONSTITUENTS / STRUCTURE OF INDIANMONEY MARKET :-
Indian money market is characterized by its dichotomy
i.e. there are two sectors of money market. The organized-sector and unorganized-sector. The organized
sector is within the direct purview of RBI regulations. The unorganized sector
consists of indigenous bankers, money lenders, non-banking financial
institutions etc.
STRUCTURE OF INDIAN MONEY MARKET
Organised Sector Unorganised
Sector
Call and Notice Money Market Indigenous Bankers
Treasury Bill Market Money Lenders
Commercial Bills
NBFI
Certificate
of Deposits
Commercial Papers
Money Market Mutual Funds
The
REPO Market
DFHI
I.
Organized Sector Of Money Market
:-
Organized Money Market is not a single market, it
consist of number of markets. The most important feature of money market
instrument is that it is liquid. It is characterized by high degree of safety
of principal. Following are the instruments which are traded in money market
1)
Call And Notice Money Market :-
The market for extremely short-period is referred as
call money market. Under call money market, funds are transacted on overnight
basis. The participants are mostly banks. Therefore it is also called
Inter-Bank Money Market. Under notice money market funds are transacted for 2
days and 14 days period. The lender issues a notice to the borrower 2 to 3 days
before the funds are to be paid. On receipt of notice, borrower have to repay
the funds.
In this market the rate at which funds are borrowed
and lent is called the call money rate. The call money rate is determined by
demand and supply of short term funds. In call money market the main
participants are commercial banks, co-operative banks and primary dealers. They
participate as borrowers and lenders. Discount and Finance House of India
(DFHI), Non-banking financial institutions like LIC, GIC, UTI, NABARD etc. are
allowed to participate in call money market as lenders.
Call money markets are located in big commercial
centres like Mumbai, Kolkata, Chennai, Delhi etc. Call money market is the
indicator of liquidity position of money market. RBI intervenes in call money
market as there is close link between the call money market and other segments
of money market.
2)
Treasury Bill Market (T - Bills)
:-
This market deals in Treasury Bills of short term
duration issued by RBI on behalf of Government of India. At present three types
of treasury bills are issued through auctions, namely 91 day, 182 day and364day treasury bills. State government does not issue any treasury
bills. Interest is determined by market forces. Treasury bills are available
for a minimum amount of Rs. 25,000 and in multiples of Rs. 25,000. Periodic auctions
are held for their Issue.
T-bills are highly liquid, readily available; there is
absence of risk of default. In India T-bills have narrow market and are
undeveloped. Commercial Banks, Primary Dealers, Mutual Funds, Corporates,
Financial Institutions, Provident or Pension Funds and Insurance Companies can
participate in T-bills market.
3)
Commercial Bills :-
Commercial bills are short term, negotiable and self
liquidating money market instruments with low risk. A bill of exchange is drawn
by a seller on the buyer to make payment within a certain period of time.
Generally, the maturity period is of three months. Commercial bill can be
resold a number of times during the usance period of bill. The commercial bills
are purchased and discounted by commercial banks and are rediscounted by
financial institutions like EXIM banks, SIDBI, IDBI etc.
In India, the commercial bill market is very much
underdeveloped. RBI is trying to develop the bill market in our country. RBI
have introduced an innovative instrument known as “Derivative .Usance
Promissory Notes, with a view to eliminate movement of papers and to facilitate
multiple rediscounting.
4)
Certificate Of Deposits (CDs) :-
CDs are issued by Commercial banks and development
financial institutions. CDs are unsecured, negotiable promissory notes issued
at a discount to the face value. The scheme of CDs was introduced in 1989 by
RBI. The main purpose was to enable the commercial banks to raise funds from
market. At present, the maturity period of CDs ranges from 3 months to 1 year.
They are issued in multiples of Rs. 25 lakh subject to a minimum size of Rs. 1
crore. CDs can be issued at discount to face value. They are freely
transferable but only after the lock-in-period of 45 days after the date of
issue.
In India the size of CDs market is quite small.
In 1992, RBI allowed four financial institutions
ICICI, IDBI, IFCI and IRBI to issue CDs with a maturity period of. one year to
three years.
5)
Commercial Papers (CP) :-
. Commercial Papers were introduced in January 1990.
The Commercial Papers can be issued by listed company which have working
capital of not less than Rs. 5 crores. They could be issued in multiple of Rs.
25 lakhs. The minimum size of issue being Rs. 1 crore. At present the maturity
period of CPs ranges between 7 days to 1 year. CPs are issued at a discount to
its face value and redeemed at its face value.
6)
Money Market Mutual Funds (MMMFs)
:-
A Scheme of MMMFs was introduced by RBI in 1992. The
goal was to provide an additional short-term avenue to individual investors. In
November 1995 RBI made the scheme more flexible. The existing guidelines allow
banks, public financial institutions and also private sector institutions to
set up MMMFs. The ceiling of Rs. 50 crores on the size of MMMFs stipulated
earlier, has been withdrawn. MMMFs are allowed to issue units to corporate
enterprises and others on par with other mutual funds. Resources mobilized by
MMMFs are now required to be invested in call money, CD, CPs, Commercial Bills
arising out of genuine trade transactions, treasury bills and government dated
securities having an unexpired maturity up to one year. Since March 7, 2000
MMMFs have been brought under the purview of SEBI regulations. At present there
are 3 MMMFs in operation.
7)
The Repo Market;-
Repo was introduced in December 1992. Repo is a
repurchase agreement. It means selling a security under an agreement to
repurchase it at a predetermined date and rate. Repo transactions are affected
between banks and financial institutions and among bank themselves, RBI also
undertake Repo.
In November 1996, RBI introduced Reverse Repo. It
means buying a security on a spot basis with a commitment to resell on a
forward basis. Reverse Repo transactions are affected with scheduled commercial
banks and primary dealers.
In March 2003, to broaden the Repo market, RBI allowed
NBFCs, Mutual Funds, Housing Finance and Companies and Insurance Companies to
undertake REPO transactions.
8)
Discount And Finance House Of
India (DFHI)
In 1988, DFHI was set up by RBI. It is jointly owned
by RBI, public sector banks and all India financial institutions which have
contributed to its paid up capital.It is playing an important role in
developing an active secondary market in Money Market Instruments. In February
1996, it was accredited as a Primary Dealer (PD). The DFHI deals in treasury
bills, commercial bills, CDs, CPs, short term deposits, call money market and
government securities.
II. Unorganized Sector Of Money Market :-
The economy on one hand performs through organised
sector and on other hand in rural areas there is continuance of unorganised,
informal and indigenous sector. The unorganised money market mostly finances
short-term financial needs of farmers and small businessmen. The main
constituents of unorganized money market are:-
1)
Indigenous Bankers (IBs)
Indigenous bankers are individuals or private firms
who receive deposits and give loans and thereby operate as banks. IBs accept
deposits as well as lend money. They mostly operate in urban areas, especially
in western and southern regions of the country. The volume of their credit
operations is however not known. Further their lending operations are
completely unsupervised and unregulated. Over the years, the significance of
IBs has declined due to growing organised banking sector.
2)
Money Lenders (MLs)
They are those whose primary business is money
lending. Money lending in India is very popular both in urban and rural areas.
Interest rates are generally high. Large amount of loans are given for
unproductive purposes. The operations of money lenders are prompt, informal and
flexible. The borrowers are mostly poor farmers, artisans, petty traders and
manual workers. Over the years the role of money lenders has declined due to
the growing importance of organised banking sector.
3)
Non - Banking Financial Companies
(NBFCs)
They consist of :-
1.
Chit Funds
Chit funds are savings institutions. It has regular
members who make periodic subscriptions to the fund. The beneficiary may be
selected by drawing of lots. Chit fund is more popular in Kerala and Tamilnadu.
Rbi has no control over the lending activities of chit funds.
2.
Nidhis :-
Nidhis operate as a kind of mutual benefit for their
members only. The loans are given to members at a reasonable rate of interest.
Nidhis operate particularly in South India.
3.
Loan Or Finance Companies
Loan companies are found in all parts of the country.
Their total capital consists of borrowings, deposits and owned funds. They give
loans to retailers, wholesalers, artisans and self employed persons. They offer
a high rate of interest along with other incentives to attract deposits. They
charge high rate of interest varying from 36% to 48% p.a.
4.
Finance Brokers
They are found in all major urban markets specially in
cloth, grain and commodity markets. They act as middlemen between lenders and
borrowers. They charge commission for their services.
Q. 3:Explain the main features of
Indian Money Market.
OR
State the drawbacks I defects of Indian Money Market?
Ans. A)FEATURES I DEFICIENCIES OF INDIAN MONEY MARKET
Indian money market is relatively underdeveloped when
compared with advanced markets like New York and London Money Markets. Its'
main features / defects are as follows
1. Dichotomy:-
A major feature of Indian Money Market is the
existence of dichotomy i.e. existence of two markets: -Organised Money Market
and Unorganised Money Market. Organised Sector consist of RBI, Commercial
Banks, Financial Institutions etc. The Unorganised Sector consist of IBs, MLs,
Chit Funds, Nidhis etc. It is difficult for RBI to integrate the Organised and
Unorganised Money Markets. Several segments are loosely connected with each
other. Thus there is dichotomy in Indian Money Market.
2. Lack Of Co-ordination And Integration :-
It is difficult for RBI to integrate the organised and
unorganised sector of money market. RBT is fully effective in organised sector
but unorganised market is out of RBI’s control. Thus there is lack of
integration between various sub-markets as well as various institutions and
agencies. There is less co-ordination between co-operative and commercial banks
as well as State and Foreign banks. The indigenous bankers have their own ways
of doing business.
3. Diversity In Interest Rates :-
There are different rates of interest existing in
different segments of money market. In rural unorganised sectors the rate of
interest are high and they differ with the purpose and borrower. There are
differences in the interest rates within the organised sector also. Although
wide differences have been narrowed down, yet the existing differences do
hamper the efficiency of money market.
4. Seasonality
Of Money Market :-
Indian agriculture is busy
during the period November to June resulting in heavy demand for funds. During
this period money market suffers from Monetary Shortage resulting in high rate
of interest. During slack season rate of interest falls &s there are plenty offunds available. RBI has taken steps to reduce the
seasonal fluctuations, but still the variations exist.
5. Shortage Of Funds :-
In Indian Money Market demand for funds exceeds the supply. There
is shortage of funds in Indian Money Market an account of various factors like
inadequate banking facilities, low savings, lack of banking habits, existence
of parallel economy etc. There is also vast amount of black money in the
country which have caused shortage of funds. However, in recent years
development of banking has improved the mobilisation of funds to some extent.
6. Absence Of Organised Bill Market :-
A bill market refers to a mechanism where bills of
exchange are purchased and discounted by banks in India. A bill market provides
short term funds to businessmen. The bill market in India is not popular due to
overdependence of cash transactions, high discounting rates, problem of
dishonour of bills etc.
7. Inadequate Banking Facilities :-
Though the commercial banks, have been opened on a
large scale, yet banking facilities are inadequate in our country. The rural
areas are not covered due to poverty. Their savings are very small and mobilization
of small savings is difficult. The involvement of banking system in different
scams and the failure of RBI to prevent these abuses of banking system shows
that Indian banking system is not yet a well organized sector.
8. Inefficient And Corrupt Management :-
One of the major problem of Indian Money Market is its
inefficient and corrupt management. Inefficiency is due to faulty selection,
lack of training, poor performance appraisal, faulty promotions etc. For the
growth and success of money market, there is need for well trained and
dedicated workforce in banks. However, in India some of the bank officials are
inefficient and corrupt.
B. CONCLUSION :-
The above features / defects of Indian Money Market
clearly indicate that it is relatively less developed and has yet to acquire
sufficient depth and width. The deficiencies are slowly and steadily overcomed
by policy measures undertaken by RBI from time to time.
Q. 4: Explain the reforms introduced
by RBI to strengthen the money market in India.
OR
Discuss the measures to strengthen the Indian Money
Market?
Ans. A) REFORMS I MEASURES TO STRENGTHEN THE INDIAN MONEYMARKET:-
On the recommendations of S. Chakravarty Committee and
Narasimhan Committee, the RBI has initiated a number of reforms.
1. Deregulation Of Interest Rates :-
RBI has deregulated interest rates. Banks have been
advised to ensure that the interest rates changed remained within reasonable
limits. From May 1989, the ceiling on interest rates on call money, inter-bank
short-term deposits, bills rediscounting and inter-bank participation was
removed and rates were permitted to be determined by market forces.
2. Reforms In Call And Term Monev Market :-
To provide more liquidity RBI liberalized entry in to
call money market. At present Banks and primary dealers operate as both lenders
and borrowers. Lenders other than UTI and LIC are also allowed to participate
in call money market operations. RBI has taken several steps in recent years to
remove constraints in term money market. In October 1998, RBI announced that
there should be no participation of non-banking institutions in call / term
money market operations and it should be purely an interbank market.
3. Introducing New Money Market Instruments:-
In order to widen and diversify the Indian Money
Market, RBI has introduced many new money market instruments like 182 days
Treasury bills, 364 days Treasury bills, CD3 and CPs. Through these
instruments, the government, commercial banks, financial institutions and
corporates can raise funds through money market. They also provide investors
additional instruments for investments.
4. Repo :-
Repos were introduced in 1992 to do away. With short
term fluctuations in liquidity of money market. In 1996 reverse repos were
introduced. RBI has been using Repo and Reverse repo operations to influence
the volume of liquidity and to stabilise short term rate of interest or call
rate. Repo rate was 6.75% in March 2011 and reverse repo rate, was 5.75%.
5. Refinance By RBI :-
The RBI uses refinance facilities to various sectors
to meet liquidity shortages and control the credit conditions. At present two
schemes of refinancing are in operations :- Export credit refinance and general
refinance.
RBI has kept the refinance rate linked to bank rate.
6. MMMFs:-
Money Market Mutual Funds were introduced in 1992. The
objective of the scheme was to provide an additional short-term avenue to the
individual investors. In 1995, RBI modified the scheme to allow private sector
organisation to set up MMMFs. So far, three MMMFs have been set up one each by
IDBI, UTI and one in private sector.
7. DFHI:-
The Discount and Finance House of India was set up on
25th April 1988. It buys bills and other short term paper from banks and
financial institutions. Bank can sell their short term securities to DFHI and
obtain funds in case they need them, without disturbing their investments.
8.
The Clearing Corporation Of India
Limited (CCIL) :-
CCIL was registered in 2001 under the Companies Act,
1956 with the State Bank of India as Chief Promoter. CCIL clears all transaction
in government securities and repos reported on NDS (Negotiated Dealing System)
of RBI and also Rupee / US $ foreign exchange spot and forward deals.
9. Regulation Of NBFCs:-
In 1997, RBI Act was amended and it provided a
comprehensive regulation for non bank financial companies (NBFCs) sector.
According to amendment, no NBFC can carry on any business of a financial
institution including acceptance of public deposit, without obtaining a
Certificate of Registration from RBI. They are required to submit periodic
returns to RBI.
10.
Recovery Of Debts:-
In 1993 for speedy recovery of debts, RBI has set up special
Recovery Tribunals. The Special Recovery Tribunals provides legal assistance to
banks to recover dues.
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