Characteristics and Features of Indian Money Market

Indian Money Market

The RBI controls the entire operation of the organized sector of the Indian Money Market. Over the years both commercial banks and co-operative banks have come to depend more and more on the rediscounting and borrowing facilities provided by RBI, especially during the busy season. Moreover, the RBI supervises their lending policies from time to time. .

A large portion of India’s money market remains unorganized even today. They also do not always specify the purposes of finance, that is, whether finance is required for genuine productive purposes or for indulging in speculative activities. The unorganized sector of India’s money market consists of a wide range of non-banking financial institutions. Such institutions resemble banks very closely and compete with banks in attracting public deposits. But they are not under the control of the RBI. So their presence reduces the effectiveness of the RBIs control over the money market.

Seasonal scarcity of credit: An important characteristic of Indian money market is the seasonal scarcity of loanable funds and the consequent high rates of interest during the busy season. But in the off-season, banks have surplus funds. So, they are eager to lend more and often reduce the rates of interest. This is why the RBI always attempts to lessen the seasonal fluctuations in the interest rates by pumping money into the money market during busy season and withdrawing funds during the slack season. This also explains why the RBI follows two types of credit policy—one for the busy season and another for the slack season.

Lack of integration: Another feature of India’s money market is that it has several segments. But the various parts or segments are not connected with one another. Each part of the money market—such as the SBI and its subsidiaries, the foreign exchange banks, the co-operative banks and indigenous banks – carry on a particular type of banking business or provide a specific type of financial service. Each financial institution acts independently.

Absence of the market: The existence of an organized bill market is absolutely essential for linking various credit agreements with the RBI in an effective manner. No doubt there is a Treasury bill market in India. But the commercial bill market has not been fully developed. In 1970, the RBI has introduced a bill market scheme, known as the New Bill Market Scheme, under which the RBI rediscounts genuine trade bills.

Volatile call money market: The inter-bank call money market is the market for short-term funds, known as ‘money at call and short notice’. Two components of this market are the call market or overnight market and short notice market. The borrowing rate in this market is known as the call money rate. This rate is determined by the market forces, that is, by the forces of demand and supply. The demand or short-term funds originates from all types of banks—nationalized, private and foreign. Most bankers are either borrowers or lenders but most banks act as both. The major portion of funds in this market is supplied by non-banking financial institutions such as IDBI, LIC and GIC. These are also called term-lending institutions. Banks supply the balance amount of funds.

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