An assignment on

Characteristics of a well-developed money market; Causes for under development of Indian Money market; measures taken by Indian government to tone up the Money Market.

Submitted by:Amrit Ranjan Reg.no-12397006

Characteristics of a well-developed money market:There are 11 characteristics of a well-developed money market The money market in well-developed country just likes as England and U.S.A. has the following characteristics: (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) (xi) Existence of Central Bank Highly organized commercial Banking System Existence of sub-markets Healthy competition in sub-markets Integrated structure of money market Availability of proper credit instruments Adequacy and Elasticity of funds International attraction Uniformity of interest rates Stability of prices and Highly developed Industrial system

(i) Existence of Central Bank: The role of central bank is notable in developed money-market. It plays a vital role in controlling the entire money market operations by making the availability of funds which depends upon the economic cycles. It may be done by its open market operations. (ii) Highly organized Banking System: Money market provides lone through the main dealers for short-term period in which commercial banks plays a nervous system of the money market. So, a well-developed money market is highly organized and developed commercial banking system. (iii) Existence of sub-markets: In developed money market there are various developed sub-markets such as bill markets, call money market, acceptance market, discount market etc. which is operated smoothly. We can say that the larger the number of sub-market becomes broader and more developed the structure of the money market. (iv) Prevalence of healthy competition: We know that in each sub-market there is a reasonable and healthy competition. It means that in a developed money market, there are a large number of borrowers, lenders and dealers they are active enough to achieve the purpose of its existence.

(v) Integration of sub-markets: A developed Money market will be a perfect integration among various sub-markets. Their function to do any work is interdependent. The funds which flow between the sub-market and the activities of one sub- market create effects in the other markets also. (vi) Availability of proper credit instruments: In the developed money market there are lots of necessary credit instruments such as treasury bills, promissory notes, bills of exchange which are freely available. (vii) Flexibility and adequacy of funds: The developed money market, it should be adequate resources. The flow of funds into the money market should also be flexible. That is, the flow of funds can be increased or decreased depending upon the demand for funds. (viii) International attraction: In the developed money markets there are more funds which attract foreign countries dealers, borrowers and lenders. They are eagerly coming forward to participate in the activities of developed money market. (ix) Uniformity of interest rates: In developed money market there is prevalence of uniformity in interest rates in different parts of the country. (x) Stability of prices: In developed money market the stability of prices all over the country will be a positive outcome of the effective functioning. (xi) Highly developed industrial system: The money market is functioning smoothly and it achieves the basic purpose of its existence.

Causes for under development of Indian Money market:In a well-developed money market there are necessary pre-condition for the effective implementation of monetary policy. Through the money market, central bank controls and regulates the money supply in the country. The Indian money market is not fully developed, thats why they loosely organized and suffers from many weaknesses. There are Major defects which are listed below:1. Dichotomy between Organized and Unorganized Sectors: The most important and vulnerable defect of the Indian money market is its division into two sectors: (a) the organized sector (b) The unorganized sector. There are little contact, coordination and cooperation between the two sectors through which its very difficult for the Reserve Bank to ensure uniform and effective implementations of monetary policy in both area which is under control of money market.

2. Predominance of Unorganized Sector: In the organized developed money market there is predominance of unorganized sector. These indigenous bankers occupy a significant position in the money-lending business in the rural areas it constitutes a large portion of the money market, remain outside the organized sector But in this unorganized sector, no clear-cut distinction is made between short-term and long-term and between the purposes of loans.so, they seriously restrict the Reserve Bank's control over the money market. 3. Wasteful Competition: It is also blunder defect of money control system. It does not exist only between the organized and unorganized sectors. The relation between various segments of the money market is not cordial they are loosely connected with each other and generally follow separatist tendencies. For instance, the State Bank of India and other commercial banks look down upon each other as rivals. After that competition exists between the Indian commercial banks and foreign banks. 4. Absence of All-India Money Market: An Indian money market has not been organized into a single integrated all-Indian market. It is divided into small-small segments mostly catering to the local financial needs. For instance, there is little contact between the money markets in the bigger cities, like, Bombay, Madras, and Calcutta as well as in smaller towns.

5. Inadequate Banking Facilities: Indian money market is not adequate to meet the financial need of the economy. Although, there have been rapid expansion of bank branches in now a days specially after the nationalization of banks but vast rural areas still existing without banking facilities. As per the current scenario to the size and population of the country, the banking institutions are not enough to fulfill the requirement. 6. Shortage of Capital: Indian money market normally suffers from the shortage of capital funds. The unavailability of capital in the money market is not so sufficient to meet the needs of industry and trade in the country. The main reasons behind the shortage of capital are (A) low saving capacity of the people (B) Inadequate banking facilities, particularly in the rural areas (C) Undeveloped banking habits among the people. 7. Seasonal Shortage of Funds: A Major demerit of the Indian money market is the seasonal stringency of credit and higher interest rates during a part of the year. Mostly, shortage invariably appears during the busy months from November to June when there is excess demand for credit and carrying on the harvesting and marketing operations in agriculture. Overall, the interest rates rise in this period. On the other side, during the slack season from July to October the demand for credit and the rate of interest decline sharply irreversible. 8. Diversity of Interest Rates: This is also one of the defect of Indian money market is the multiplicity and disparity of interest rates. The Central Banking Enquiry Committee written in 1931 that: "The fact that a call rate of 3/4 per cent and a hundi rate of 3 per cent or bank rate of 4 per cent and a Bazar rate of small traders of 6.25 per cent and a Calcutta Bazar rate for bills of small trader less than 10 per cent can exist simultaneously indicates an extraordinary sluggishness of the transection of credit between various markets". The interest rate also differs in various centers in metro city like Bombay, Calcutta, etc. Variations in the interest rate structure are highly volatile due to the credit immobility because of inadequate costly and time-consuming means of transferring money among them. Disparities in the interest rates affect the smooth and effective functioning of the money market adversely. 9. Absence of Bill Market: To efficient working of money market its necessary to well-organized bill market. Unfortunately, in spite of the serious efforts made by the RBI, the bill market in India is not yet fully developed. The short-term bills form a much smaller proportion of the bank finance in India in comparison to that in the advanced countries.

 Measures taken by Indian government to tone up the Money Market:There are some of the reforms made in the Indian Money Market are:-

1. Deregulation of the Interest Rate:

Recently, the government had adopted an interest rate policy of liberal nature. It put up the ceiling rates of the call money market, short-term deposits, bills rediscounting, etc. Commercial banks are always advised to see the interest rate change that takes place within the limit. Now days, interest rates are determined by the working of market forces except for a few regulations.

2. Money Market Mutual Fund (MMMFs) :

To provide additional support for short-term investment RBI encouraged and established the Money Market Mutual Funds (MMMFs) in April 1992. MMMFs are allowed to sell their units to corporate and individuals. The upper limit of 50 cores investment has also been lifted. There are some of the financial institutions such as the IDBI and the UTI have set up such funds.

3. Establishment of the DFI :

The Discount and Finance House of India (DFHI) was set up in April 1988 to impart liquidity of the money market. It was set up jointly by the RBI and Public sector Banks and Financial Institutions. DFHI has played an crucial role in stabilizing the Indian money market.

4. Liquidity Adjustment Facility (LAF) :

Through the LAF, the RBI regulate money market on a continue basis through the repo transaction and it adjusts liquidity in the market through absorption and or injection of financial resources. 5. Electronic Transactions: To impose transparency and efficiency in the money market transaction the electronic dealing system has been started. It covers all deals of the money market. Similarly it is useful for the RBI to watch the money market.

6. Establishment of the CCIL :

The Clearing Corporation of India limited (CCIL) was set up in April 2001 to clear all transactions in government securities, and repose reported on the Negotiated Dealing System. 7. Development of New Market Instruments : The government has regularly tried to introduce new short-term investment instruments. As Examples: Treasury Bills of various durations, Commercial papers, Certificates of Deposits, MMMFs, etc. these all have been introduced in the Indian Money Market. These are some of the major reforms undertaken by the money market in India. Apart from these there are some other prominent reforms like the stamp duty reforms and floating rate bonds which are used in the money market in India. Overall, we can conclude that the Indian money market is developing at a good speed.