Money market in India

The Money market in India correlation for short-term banks, both Indian and foreign, co-operative banks, Dis-
funds with maturity ranging from overnight to one year count and Finance House of India Ltd.(DFHI), Securities
in India including nancial instruments that are deemed trading corporation of India (STCI) participate as both
to be close substitutes of money.[1] Similar to developed lenders and borrowers and Life Insurance Corporation of
economies the Indian money market is diversied and India (LIC), Unit Trust of India(UTI), National Bank for
has evolved through many stages, from the conventional Agriculture and Rural Development (NABARD)can par-
platform of treasury bills and call money to commercial ticipate only as lenders. The interest rate paid on call
paper, certicates of deposit, repos, forward rate agree- money loans, known as the call rate, is highly volatile.
ments and most recently interest rate swaps[2] It is the most sensitive section of the money market and
The Indian money market consists of diverse sub- the changes in the demand for and supply of call loans
markets, each dealing in a particular type of short-term are promptly reected in call rates. There are now two
credit. The money market fullls the borrowing and in- call rates in India: the Inter bank call rate and the lending
vestment requirements of providers and users of short- rate of DFHI. The ceilings on the call rate and inter-bank
term funds, and balances the demand for and supply of term money rate were dropped, with eect from May
short-term funds by providing an equilibrium mecha- 1, 1989. The Indian call money market has been trans-
nism. It also serves as a focal point for the central bank's formed into a pure inter-bank market during 200607.[4]
intervention in the market. The major call money markets are in Mumbai, Kolkata,
Delhi, Chennai, Ahmedabad.

1 Structure
The Indian money market consists of the unorganised
sector: moneylenders, indigenous bankers, and unreg- 2.2 Treasury bill market
ulated Non-Bank Financial Intermediaries (e.g. Fi-
nance companies, Chit funds, Nidhis); organised sec-
Treasury bills are instrument of short-term borrowing by
tor: Reserve Bank of India, private banks, public sector
the Government of India, issued as promissory notes un-
banks, development banks and other non-banking nan-
der discount. The interest received on them is the dis-
cial companies (NBFCs) such as Life Insurance Corpo-
count, which is the dierence between the price at which
ration of India (LIC), the International Finance Corpora-
they are issued and their redemption value. They have
tion, IDBI, and the co-operative sector.
assured yield and negligible risk of default. Under one
classication, treasury bills are categorised as ad hoc, tap
and auction bills. Under another one, it is classied on
2 Instruments the maturity period like 91-days TBs, 182-days TBs, 364-
days TBs and also 10-days TBs which has two types. In
1. Call/Notice/Term money market 2. Repurchase the recent times (200203, 200304), the Reserve Bank
Agreement (Repo & Reverse Repo) market 3. Treasury of India has been issuing only 91-day and 364-day trea-
bill market 4. Commercial Bill market 5. Commercial sury bills. The auction format of 91-day treasury bill has
paper market 6. Certicate of Deposit market 7. Money changed from uniform price to multiple price to encour-
Market Mutual Fund. age more responsible bidding from the market players.[5]
The bills are of two kinds- Adhoc and regular. The adhoc
bills are issued for investment by the state governments,
2.1 Call money market semi government departments and foreign central banks
for temporary investment. They are not sold to banks and
The call money market deals in short term nance re- general public. The treasury bills sold to the public and
payable on demand, with a maturity period varying from banks are called regular treasury bills. They are freely
one day to 14 days. S.K. Muranjan commented that call marketable and commercial banks buy entire quantities
loans in India are provided to the bill market, rendered of such bills, issued on tender. They are bought and sold
between banks, and given for the purpose of dealing in on discount basis. Ad-hoc bills were abolished in April
the bullion market and stock exchanges.[3] Commercial 1997.

1
2 6 REFERENCES

2.3 Ready forward contract (Repos) banks are advised to see the interest rate change that takes
place within the limit. There was a further deregulation
Repo is an abbreviation for Repurchase agreement, which of interest rates during the economic reforms. Currently
involves a simultaneous sale and purchase agreement.[6] interest rates are determined by the working of market
When banks have any shortage of funds, they can borrow forces except for a few regulations. Money Market Mu-
it from Reserve Bank of India or from other banks. The tual Fund (MMMFs) : In order to provide additional
rate at which the RBI lends money to commercial banks short-term investment revenue, the RBI encouraged and
is called repo rate, a short term for repurchase agreement. established the Money Market Mutual Funds (MMMFs)
A reduction in the repo rate will help banks to get money in April 1992. MMMFs are allowed to sell units to corpo-
at a cheaper rate. When the repo rate increases borrowing rate and individuals. The upper limit of 50 crore invest-
from RBI becomes more expensive.. ments has also been lifted. Financial institutions such as
the IDBI and the UTI have set up such funds. Establish-
ment of the DFI : The Discount and Finance House of
2.4 Money market mutual funds India (DFHI) was set up in April 1988 to impart liquid-
ity in the money market. It was set up jointly by the RBI,
Money market mutual funds invest money in specically, Public sector Banks and Financial Institutions. DFHI has
high-quality and very short maturity-based money market played an important role in stabilizing the Indian money
instruments. The RBI has approved the establishment of market. Liquidity Adjustment Facility (LAF) : Through
very few such funds in India. In 1997, only one MMMF the LAF, the RBI remains in the money market on a con-
was in operation, and that too with very small amount of tinue basis through the repo transaction. LAF adjusts liq-
capital.[7] uidity in the market through absorption and or injection
of nancial resources. Electronic Transactions : In or-
der to impart transparency and eciency in the money
3 Reserve Bank of India market transaction the electronic dealing system has been
started. It covers all deals in the money market. Simi-
larly it is useful for the RBI to watchdog the money mar-
The inuence of the Reserve Bank of India's power over
ket. Establishment of the CCIL : The Clearing Corpo-
the Indian money market is conned almost exclusively
ration of India limited (CCIL) was set up in April 2001.
to the organised banking structure.It is also considered to
The CCIL clears all transactions in government securi-
be the biggest regulator in the markets. There are cer-
ties, and repurchase agreements (repos) reported on the
tain rates and data which are released at regular intervals
Negotiated Dealing System. Development of New Mar-
which have a huge impact on all the nancial markets in
ket Instruments : The government has consistently tried
INDIA. The unorganised sector, which consists mostly
to introduce new short-term investment instruments. Ex-
of indigenous bankers and non-banking nancial com-
amples: Treasury Bills of various duration, Commercial
panies, although occupying an important position in the
papers, Certicates of Deposits, MMMFs, etc. have been
money market have not been properly integrated with the
introduced in the Indian Money Market.
rest of the money market.[8]

5 See also
4 Reforms
Commercial paper
The recommendations of the Sukhmoy Chakravarty
Committee on the Review of the Working of the Mone- Commercial paper in India
tary system, and the Narasimham Committee Report on Certicate of deposit
the Working of the Financial System in India, 1991, The
Reserve Bank of India has initiated a series of money
market reforms basically directed towards the ecient
discharge of its objectives. The bank reduced the ceiling
6 References
rate on bank advances and on inter-bank call and short-
[1] Report on Currency and Finance (PDF). Reserve Bank
notice money. There has been a signicant lowering of of India. Retrieved 4 October 2011.
the minimum lending rate of commercial banks and pub-
lic sector development nancial institutions from 18% in [2] Structure & Functions of Money Market in India. GK-
199091 to 10.5% in 200506.[9] Today. Retrieved 22 April 2015.

Reforms made in the Indian Money Market are:- Dereg- [3] S.K. Muranjan (1952). Modern Banking in India. Bom-
ulation of the Interest Rate : In recent period the gov- bay: Kamala Publishing House. pp. 98, 138.
ernment has adopted an interest rate policy of liberal na- [4] Bhole L.M., Mahakud Jitendra. Financial Institutions and
ture. It lifted the ceiling rates of the call money market, Markets (Fifth ed.). New Delhi: Tata McGraw-Hill Edu-
short-term deposits, bills rediscounting, etc. Commercial cation Pvt Ltd. p. 603. ISBN 978-0-07-008048-5.
 3

[5] RBI, Annual Report, 200203 (PDF). p. 188.

[6] D.K. Murthy, Venugopal. Indian Financial System. I.K.

International Publishing House Pvt. Ltd. p. 20. ISBN
81-88237-88-4.

[7] D.K. Murthy, Venugopal. Indian Financial System. I.K.

International Publishing House Pvt. Ltd. p. 24. ISBN
81-88237-88-4.

[8] Ruddar Datt & K.P.M.Sundharam (2010). 49. Indian

Economy (Sixty one ed.). S. Chand & Co. Ltd. pp. 864,
865. ISBN 81-219-0298-3.

[9] Ruddar Datt & K.P.M.Sundharam (2010). 49. Indian

Economy (Sixty one ed.). S. Chand & Co. Ltd. p. 865.
ISBN 81-219-0298-3.
4 7 TEXT AND IMAGE SOURCES, CONTRIBUTORS, AND LICENSES

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