MONEY MARKET

OVERVIEW OF MONEY MARKET IN

INDIA - An Empirical Analysis
Abstract

The purpose of this study is to examine the importance and functioning of money market in India. The
economic reform affects the financial sectors and money market in India. This study uses secondary
data in the form of financial reports BSESENSEX, NSESENSEX, Call Rate, 91 Days gilt, 1year gilt,
5 Year gilt and 10 Year gilt data. The results and analysis of the descriptive statistics shows that
variation in BSESENSEX 4.022251749% and NSESENSEX 95.11545397% and among money market
instruments fluctuation is 12.03829558% maximum for call rate and minimum 1.038118569% for
5 year gilt age bond.

body, organised banking system, existence of developed

sub-markets, easy short-term funding, intangible location,
developed capital market, transpiring state of economy
and wholesale money market in the financial system. The
basic objective of Indian money markets is to strengthen
the overall financial system in providing steady source of
funds in addition to deposits allowing alternative financing
structures, healthy savings instrument and competition.
Money market, as an aid to capital market, constitutes
Prof. Anupam Sahoo an important segment in the financial system (Basu, A.
State Aided College Teacher 2015). Indian money market plays an omnipotent role in
Sundarban Hazi Desarat College providing short-term funds and loans to trade, industry
Pathankhali and commerce. Corporate sector and legal entities procure
24 Parganas (South) their required amount of finance, operating exchange and
a.sahoosssc@gmail.com working capital from money market in an easy, affordable
risk, volatile interest rate, steadily accessible and transpiring

S
INTRODUCTION marketable manner.
triving towards a vibrant economy, India is at
the forefront of developing nations even with an SIGNIFICANCE OF MONEY MARKET
agile economic situation imminent from the end The financial market of a country is composed of two
of 2007. With the influx of new economic policy, markets; one is money market and the other is capital
money markets constitute an important imperative to short- market. This is outlined in brief as follows.
term loan market in the Indian financial system. Money 1. Very Narrow and Specific Sense: The market is
market is an instrument and quick device for ensuring, meant for trading of money on call with notice or without
providing and rearing easy funding arrangement comprising notice for short-term corporate funding where lenders are
treasury bill market (T-Bills), Central Government securities mainly commercial banks and borrowers are firms and
(Gilt-edged securities), call money market, commercial money brokers.
papers, certificate of deposit market, commercial bill 2. Liquid Assets: The market is mainly for call money
market, interbank participation, term loan, interest rate market and certificate of deposit market which deals
swaps, money market mutual funds and re-purchase with money trading for a period of overnight to several
agreement market. With the organised money market and months notice in fulfilling short-term requirements of
developed call money financing market, India veils herself funds by commercial banks and money brokers that plays
into a matured and well-shaped structured economy over the an important role both in supplying funds and borrowing
globe. Indian money market exhale into an imponderable money for very short periods for maintaining cash reserve
character of stock market consisting of apex regulatory ratios.

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 MONEY MARKET
3. Monetary Theory Sense: This concept is used FEATURES OF INDIAN MONEY MARKET
occasionally in monetary theory where it may refer only Structured and developed money market exhales into
market of loanable funds. a filtered, matured and strengthened banking system
invigorating economic development of a nation. Indian
money markets have the following features.
1. Regulatory Authority: Indian financial system
strongly demands creation of safety nets in intra-day
monetary transactions.
2. Structured Banking System: Indian banking and
financial system contributes to the domestic economic
growth for the fourth consecutive year and is expected to
show even stronger growth in 2015.
3. Developed Sub-Money Markets: Indian money
market is the collection of eight sub-money markets which
are (i) Call money market (ii) Treasury bill market (iii)
CALL MONEY MARKET Repo market (iv) Reverse Repo market (v) Commercial bill
The market for liquid money is called money market. It market (vi) Certificate of deposits market (vii) Commercial
is the constituent part of Indian sub-money markets. Market Paper market and (viii) Money Market Mutual Funds
in which brokers and dealers borrow money to satisfy market (MMMF).
their credit needs either to finance their own inventory of 4. Transient Period Market Funds: The markets for
securities or to cover their customers’ margin account is money is called money market; mostly sluggish in nature
call money market. The call money rate depends on the on the movement of funds. The inter-bank call money
following market forces. market is the market for money at call and short notice.
1. Accessibility: A money market investment culminates 5. Mechanism to Capital Market: With the onset of
in the return of the principal amount at maturity. This period open economy on 24th July, 1991 money markets constitute
can be set between one day and thirteen months, which an important segment in financial system and facilitates
makes them more accessible. an invigorative vibrant financial instrument in the capital
2. Market Risk Factor: The money markets are in market.
continuous flux. Because risk is lower than investing in 6. Absence Trade Bill Market: The Indian money
stock market shares, it makes use of a money market market presently does not contain any bill market; two
facility more predictable. important segments of the money market are acceptance
3. Return on Investment: Better interest rate returns can market and commercial bill market.
be obtained than keeping the money in a current account. 7. New Money Market Instruments: With the advent
The higher the amount invested, the higher the rate of of liberalised economy in India, the Central Government
return. in collaboration with the Reserve Bank of India as apex
4. Withdrawal Facilities: Most money market central bank of the country issues some credit controlling,
investments offer the investor some degree of freedom liquidity mitigating and interest rate swapping instruments
to make withdrawals. Quite often the investor can make such as Repo, Reverse Repo, Certificates of deposits,
between two and five withdrawals during the period of the Commercial Papers, Treasury Bills and Government Gilt-
investment, depending on the length of the maturity period. age bonds to even out unnecessary volatility in liquidity
and interest rate impulse.
5. Market Liquidity: Liquidity is the ease with which
an investment can be converted into cash. 8. Lack of Integration: Indian money market has several
segments, institutions and sub-markets in money trading.
The individual financial institutions and private banks act
independently India.

DESCRIPTIVE STATISTICS OF MONEY MARKET YIELD RATE

DESCRIPTIVE STATISTICS TABLE
BSESENSEX NSESENSEX Call Rate 91Daysgilt 1year gilt 5 Year gilt 10 Year gilt

Mean 30879.84 8101.206 5.325106 7.390000 7.466596 7.881277 7.771064

Median 26218.91 7948.950 5.700000 7.420000 7.450000 7.890000 7.760000

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 MONEY MARKET

Maximum 227835.2 8657.590 5.840000 7.500000 7.610000 8.000000 8.810000

Minimum 24893.81 7558.800 3.500000 7.020000 7.190000 7.610000 7.510000

Std. Dev. 29371.50 325.8509 0.641052 0.115683 0.094115 0.081817 0.170590

COV(Mean)% 4.022251749 95.11545397 12.03829558 1.565399 1.2604806 1.038118569 1.26048068

COV(Median)% 4.099294875 112.0241078 11.24652632 1.55907 1.26328859 1.036970849 1.263288591

Skewness 6.622129 0.263412 -1.483124 -2.466413 -0.797225 -1.913965 4.771840

Kurtosis 44.91127 1.488139 3.826148 7.862742 4.148839 7.085302 30.83354

Jarque-Bera 3783.431 5.019728 18.56724 93.95893 7.563286 61.37954 1695.501

Probability 0.000000 0.081279 0.000093 0.000000 0.022785 0.000000 0.000000

Sum 1451352. 380756.7 250.2800 347.3300 350.9300 370.4200 365.2400

Sum Sq. Dev. 3.97E+10 4884226. 18.90357 0.615600 0.407455 0.307923 1.338647

Observations 47 47 47 47 47 47 47

SOURCE: RBI DAILY DATA BASE FROM 23.07.2015 (THURSDAY)—06.10.2015(MONDAY)

ANALYSIS AND INTERPRETATION bond, that of 5-year gilt-age bond is 1.0381185 per cent and
1. Arithmetic Mean (Average): From the above lastly for 10-year gilt-age bond the volatility is 1.260481
descriptive statistics table, the average values of money per cent. The relative fluctuation of BSE Sensex-30 from
market call rate for 47 days study period is 5.325106 per its average index is 4.022251749 per cent during the forty-
cent. Similarly, the central values of 91 days T Bill are 7.39 seven days study period and that of NSE Sensex-50 is
per cent. Again, the arithmetic mean of 1-year gilt rate is 95.11545397 per cent.
7.466596 per cent and for 5-year gilt age rate is 7.881277 5. Median Centred Money Market Volatility [Risk
per cent and 10-year gilt rate is 7.771064 per cent. Lastly, Factor (Regarding Median)]: The call money market
the average index of BSE Sensex-30 is 30879.84 and that volatility strength is 11.24652632 per cent for forty-seven
of NSE Sensex-50 is 8101.206. days study period, 91-days treasury bill is 1.55907 per
2. Median Statistics: The median values of money cent, 1.26328859 per cent for 1-year gilt-age bond, that
market call rate are 5.7 per cent, 7.42 per cent for 91 days of 5-year gilt-age bond is 1.036970849 per cent and lastly
Treasury bills, 7.45 per cent for 1-year gilt-age bonds, 10-year gilt-age bond volatility is 1.2663288591 per cent.
7.89 per cent for 5-year gilt-age bonds and 7.76 per cent The relative volatility of BSE Sensex-30 from its median
for 10-year gilt-age bonds. Similarly, the average median index value is 4.099294875 per cent during the forty-
index of BSE Sensex-30 is 26218.91 and that of NSE seven days study period and that of NSE Sensex-50 is
Sensex-50 is 7948.95. 112.0241078 percent.
3. Standard Deviation (SD): The dispersion value of
MONEY MARKET VOLATILITY AT A GLANCE
money market call rate is 0.641052 per cent; that of 91-days
Treasury bill is 0.115683 per cent; 1-year gilt-age bond is (FOR FORTY-SEVEN DAYS DAILY DATA)
0.094115 per cent; for 5-year gilt-age bond is 0.081817
per cent and lastly for 10-year gilt age bond is 0.170590
per cent. Similarly, the deviation of BSE Sensex-30 from
its average index is 29371.50 and that of NSE Sensex-50
is325.8509.
4. Mean Centred Money Market Volatility [Risk
Factor (Regarding Mean)]: The call money market
volatility strength is 12.03829 per cent for forty-seven
days study period, variability of 91-days treasury bill is
1.565399 per cent, 1.260481 per cent for 1-year gilt-age

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 MONEY MARKET
SENSEX VOLATILITY IN INDIA CONCLUSION AND recommendations
(FOR FORTY-SEVEN DAYS DAILY DATA) 1. Policy Restructuring: India being a developing nation
needs investment infusion either from Government or private
sector which predisposes affordable investment environment
to enhance capital market functioning, investment decisions
and banking system.
2. Infrastructure Development: Infrastructure is a
precondition and imperative to growth and development in
financial system especially the money market and commodity
market. While infrastructure improvement merits a close
attention, one is not so sure if the extent of the reforms and
the quantum of investment inflow are positively related.
SUGGESTIONS FOR FURTHER IMROVEMENTS 3. Government Intervention: A continuous improvement
IN INDIAN MONEY MARKET in financial markets is the need of the hour. Innovation,
Money market in India is now more vibrant and volatile integration, involvement and inclusive (four I model) growth
in nature. It is now more advanced that what it 10 years ago. initiatives are the need of the hour. Comparative experience
However, in order to improve the money market further seems to clearly favour such a policy stance on financial
and strengthen its structure and smoothening functions the markets.
following strategic steps are necessary: 4. Market Expansion: As an expansionary monetary policy,
1. Improvement in Bill Market: Bill markets have to be if the Reserve Bank of India (RBI) cuts interest rates, it will
expanded with the direct linking and involvement of Reserve automatically tend to increase the overall demand in economy
Bank of India. Rediscounting facilities are to be increased in in the form of cheap money to infuse investment and to
a popularised manner giving concentration on the bill as an augment consumer spending, reducing cost of mortgage
instrument of finance. repayments, reaping greater household disposable income
2. Money Market Product Diversification: The money and encouraging spending, reducing rupee value making
market products have to be increased and more and more exports cheaper and increasing the demand for exports
credit instruments should be introduced. In addition to that .Ultimately these will enable the central bank to pursue a
the number of participants in the call money market and policy of quantitative easing and pave the way for market
short notice market have to be increased as it will improve expansion.
the functioning of Discounting and Finance House of India
Ltd. (DFHI). EPILOGUE
3. Augmenting Money Market Participants: Presently In order to create an efficient financial system, money
non-banking financial institutions are participating less market environment policy makers’ prime job is to stabilise
compared to other banking participants. To improve the money the market by introducing new financial instruments and
market trading system, participants’ diversification is an urgent diversified products.
need of the hour through measures such as permitting hire- The study is subject to the following caveats. First, our
purchase and leasing companies as well as merchant banking sample period and accordingly the sample size are somewhat
companies to actively participate in the money market. limited due to forty-seven days daily data. Secondly the,
4. Restrictions on Call Money Trading: Commercial banks sample data was collected through BSE website which
and primary dealers are to be confined within the purview were grouped, compiled and computed for analysis and
of call money trading restrictions to improve the money interpretation. Despite these potential limitations, the analysis
market system and ultimately from stock market functioning and interpretation to some extent augment our understanding
as there exists a close relation between capital market and on the nature of movement of money market yield rate and its
money market. impulse on stock market in India with cross-country capital
infusion and global technology transmission across economic
5. Concentration on Rural Banking: Rural India represent regions invigorating growth and development in financial
eighty per cent of Indian population and it lacks banking markets. With the interest rate cut there is no denying the fact
facilities. Hence banking services ought to be spread in rural that revival of financial market system may take a longer time
areas along with reduction of banking transaction costs. and it needs stronger initiatives to emulate the peak growth
6. Non-Performing Assets: Banking over dues is serious achieved in the recent past. Further, it will be adaunting task
concern in today. Non-performing assets of banks, particularly to meet the twelfth plan target of financial sector growth.
public sector banks have increased by leaps and bounds. It
needs to be controlled. A robust, resilient and sustainable References:
banking policy action has to be implemented. 1. A. Bose and Sibasish Dutta (2015)--Indian Financial system
7. Market Economy: Because of slump in global crude and Financial Market Operations.
prices Indian counterpart is no exception and call money 2. Satistical Methods (2005)—S.P.Gupta.
market and stocks are under pressure and RBI sought to 3. Barry,C.B. and J.Brown (1984), Differential Information
and the Small Firm Effect, Journal of Financial Economics,
play down the fears because market should not be scared of
13,283 (294).
volatility as it would be transient in nature.

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