Indian Money Market
The Features of Money Market in India have been briefly discussed below:
- Existence of Unorganized Money Market: The Major defect of the Indian money Market has always been the existence of the indigenous bankers who do not distinguish between short-term and long-term finance.
During the last 60 years, there is a whole lot of non-banking financial companies who raise funds from the general public but who are generally outside the control and supervision of RBI
- Absence of Integration: An important defect of the Indian money market at one time was the division of the money market into several segments or sections, loosely connected to each other.
- Diversity in Money Rates of Interest: Another defect of the Indian money market related to the existence of too many rates of interest – the borrowing rate of the Government, the deposit and lending rates of commercial banks, deposit and lending rates of cooperative banks, etc. The basic reason for the existence of so many rates of interest simultaneously is the immobility of funds from one section of the money market to another.
- Seasonal Stringency of Money: A very striking characteristic of the Indian money market was the seasonal monetary stringency and high rates of interest during a part of the year.
- Absence of the Bill Market: Another defect of the Indian money market was the absence of a bill market or a discount market for short term bills. A well organized bill market is necessary for linking up the various credit agencies ultimately and effectively to RBI. No bill market was developed in India due to certain historical accidents?such as the practice of banks keeping a large amount of cash for liquidity purposes, preference of industry and trade for borrowing rather than re-discount in bills, the improper drafting of the bazar hundi, the system of cash credit as the main form of borrowing from banks, the preference of cash transactions in certain lines of activity, the absence of warehousing facilities for storing agriculture produce and the high stamp duty on usance bills.
- Highly volatile call money market: Even before 1935, the call money rates used to rise to 7 to 8 per cent during the busy season, while in the slack season they fell to as low as ½ per cent per annum. Despite all the efforts made by RBI to moderate the fluctuations in the call money rates, the latter have continued to be highly volatile.
RBI attempts to moderate the fluctuations through supporting the market with additional funds when there is short supply to funds and high call rates and absorbing the additional funds when the call market has large surplus funds. In general, however, RBI has failed to check the high volatility of the call money market in India in certain period.
- Absence of a well-organized Banking System: Another major defect of the Indian money market was the absence of a well-organized banking system. Branch banking was extremely slow before bank nationalization in 1969. The extreme sluggishness in the movement of funds and the existence of different interest rates are the result of slow branch banking in the country.
- Availability of credit instruments: Till 1985-86, the India money market did not had adequate short-term paper instruments. Apart from the call money market, there was only the Treasury bill market. At the same time, there were no specialist dealers and brokers dealing in different segments of the Indian money market and in different kinds of paper instruments. It is only after 1985-86 that RBI started introducing new paper instruments such as 182 days treasury bills, later converted to 364 days treasury bills, certificates of deposits (CDs) and commercial paper (CPs).
In view of all the above mentioned limitations, we may come to the conclusion that the Indian money market is relatively under developed.
