Money market in India

Structure

The Indian money market consists of the unorganised sector: moneylenders, indigenous bankers, and unregulated Non-Bank Financial Intermediaries (e.g. Finance companies, Chit funds, Nidhis); organised sector: Reserve Bank of India, private banks, public sector banks, development banks and other non-banking financial companies (NBFCs) such as Life Insurance Corporation of India (LIC), the International Finance Corporation, IDBI, and the co-operative sector.

Instruments

1. Call/Notice/Term money market 2. Repurchase Agreement (Repo & Reverse Repo) market 3. Treasury bill market 4. Commercial Bill market 5. Commercial paper market 6. Certificate of Deposit market 7. Money Market Mutual Fund.

Call money market

The call money market deals in short term finance repayable on demand, with a maturity period varying from one day to 14 days. S.K. Muranjan commented that call loans in India are provided to the bill market, rendered between banks, and given for the purpose of dealing in the bullion market and stock exchanges. Commercial banks, both Indian and foreign, co-operative banks, Discount and Finance House of India Ltd.(DFHI), Securities trading corporation of India (STCI) participate as both lenders and borrowers and Life Insurance Corporation of India (LIC), Unit Trust of India(UTI), National Bank for Agriculture and Rural Development (NABARD)can participate only as lenders. The interest rate paid on call money loans, known as the call rate, is highly volatile. It is the most sensitive section of the money market and the changes in the demand for and supply of call loans are promptly reflected in call rates. There are now two call rates in India: the Inter bank call rate and the lending rate of DFHI. The ceilings on the call rate and inter-bank term money rate were dropped, with effect from May 1, 1989. The Indian call money market has been transformed into a pure inter-bank market during 2006–07. The major call money markets are in Mumbai, Kolkata, Delhi, Chennai, Ahmedabad.

Treasury bill market

Treasury bills are instrument of short-term borrowing by the Government of India, issued as promissory notes under discount. The interest received on them is the discount, which is the difference between the price at which they are issued and their redemption value. They have assured yield and negligible risk of default. Under one classification, treasury bills are categorised as ad hoc, tap and auction bills. Under another one, it is classified on the maturity period like 91-days TBs, 182-days TBs, 364-days TBs and also 10-days TBs which has two types. In the recent times (2002–03, 2003–04), the Reserve Bank of India has been issuing only 91-day and 364-day treasury bills. The auction format of 91-day treasury bill has changed from uniform price to multiple price to encourage more responsible bidding from the market players. The bills are of two kinds- Adhoc and regular. The adhoc bills are issued for investment by the state governments, semi government departments and foreign central banks for temporary investment. They are not sold to banks and general public. The treasury bills sold to the public and banks are called regular treasury bills. They are freely marketable and commercial banks buy entire quantities of such bills, issued on tender. They are bought and sold on discount basis. Ad-hoc bills were abolished in April 1997.

Ready forward contract (Repos)

Repo is an abbreviation for Repurchase agreement, which involves a simultaneous "sale and purchase" agreement. When banks have any shortage of funds, they can borrow it from Reserve Bank of India or from other banks. The rate at which the RBI lends money to commercial banks is called repo rate, a short term for repurchase agreement. A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate increases borrowing from RBI becomes more expensive.[1].

Money market mutual funds

Money market mutual funds invest money in specifically, high-quality and very short maturity-based money market instruments. The RBI has approved the establishment of very few such funds in India. In 1997, only one MMMF was in operation, and that too with very small amount of capital.

Reserve Bank of India

The influence of the Reserve Bank of India's power over the Indian money market is confined almost exclusively to the organised banking structure.It is also considered to be the biggest regulator in the markets. There are certain rates and data which are released at regular intervals which have a huge impact on all the financial markets in INDIA. The unorganised sector, which consists mostly of indigenous bankers and non-banking financial companies, although occupying an important position in the money market have not been properly integrated with the rest of the money market.

Reforms

The recommendations of the Sukhmoy Chakravarty Committee on the Review of the Working of the Monetary system, and the Narasimham Committee Report on 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 efficient discharge of its objectives. The bank reduced the ceiling rate on bank advances and on inter-bank call and short-notice money. There has been a significant lowering of the minimum lending rate of commercial banks and public sector development financial institutions from 18% in 1990–91 to 10.5% in 2005–06.

Reforms made in the Indian Money Market are:- Deregulation of the Interest Rate : In recent period the government has adopted an interest rate policy of liberal nature. It lifted the ceiling rates of the call money market, short-term deposits, bills rediscounting, etc. Commercial banks are advised to see the interest rate change that takes place within the limit. There was a further deregulation of interest rates during the economic reforms. Currently interest rates are determined by the working of market forces except for a few regulations. Money Market Mutual Fund (MMMFs) : In order to provide additional short-term investment revenue, the RBI encouraged and established the Money Market Mutual Funds (MMMFs) in April 1992. MMMFs are allowed to sell units to corporate and individuals. The upper limit of 50 crore investments has also been lifted. Financial institutions such as the IDBI and the UTI have set up such funds. Establishment of the DFI : The Discount and Finance House of India (DFHI) was set up in April 1988 to impart liquidity in the money market. It was set up jointly by the RBI, Public sector Banks and Financial Institutions. DFHI has played an important role in stabilizing the Indian money market. Liquidity Adjustment Facility (LAF) : Through the LAF, the RBI remains in the money market on a continue basis through the repo transaction. LAF adjusts liquidity in the market through absorption and or injection of financial resources. Electronic Transactions : In order to impart transparency and efficiency in the money market transaction the electronic dealing system has been started. It covers all deals in the money market. Similarly it is useful for the RBI to watchdog the money market. Establishment of the CCIL : The Clearing Corporation of India limited (CCIL) was set up in April 2001. The CCIL clears all transactions in government securities, and repurchase agreements (repos) reported on the Negotiated Dealing System. Development of New Market Instruments : The government has consistently tried to introduce new short-term investment instruments. Examples: Treasury Bills of various duration, Commercial papers, Certificates of Deposits, MMMFs, etc. have been introduced in the Indian Money Market.