money marke

7/28/2019 Money MARKE

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Introduction Financial markets are functionally classified into (a) money

market and (b) capital market. This classification is on the basis

of term of credit, i.e., whether the credit is supplied for a short

period or long period.

Money market refers to institutional arrangements which deal

with short-term funds. Capital market, on the other hand, deals

in long-term funds.

Money market is a short-term credit market which deals with

relatively liquid and quickly marketable assets, such as, short-

term government securities, treasury bills, bills of exchange, etc.


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Definition of money market

According to Crowther, "The money market is a collective

name given to the various firms and institutions that deal with

various grades of near-money."

The Reserve Bank of India defines money market "as the

centre for dealing, mainly of a short-term character, in

monetary assets; it meets the short-term requirements of

borrowers and provides liquidity or cash to the lenders.


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Definition of money market

The money market is a wholesale debt market

for low-risk, highly-liquid, short-term

instrument. Funds are available in this market

for periods ranging from a single day up to a

year. This market is dominated mostly by

government, banks and financial institutions.


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A developed money market plays an important role in the

financial system of a country by supplying short-term funds

adequately and quickly to trade and industry. The money

market is an integral part of a countrys economy. Therefore,

a developed money market is highly indispensable for the

rapid development of the economy. A developed money

market helps the smooth functioning of the financial system

in any economy in the following ways:

Importance Of Money Market


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Development Of Trade And Industry: Money market is an important

source of financing trade and industry. The money market, through

discounting operations and commercial papers, finances the short-term

working capital requirements of trade and industry and facilities the

development of industry and trade bothnational and international.

Development Of Capital Market: The short-term rates of interest and

the conditions that prevail in the money market influence the long-terminterest as well as the resource mobilization in capital market. Hence, the

development of capital market depends upon the existence of a

developed money market.

Importance Of Money Market


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Smooth Functioning of Commercial Banks: The money market

provides the commercial banks with facilities for temporarily

employing their surplus funds in easily realisable assets. The banks

can get back the funds quickly, in times of need, by resorting to the

money market. The commercial banks gain immensely by

economizing on their cash balances in hand and at the same time

meeting the demand for large withdrawal of their depositors. It also

enables commercial banks to meet their statutory requirements of

cash reserve ratio (CRR) and Statutory Liquidity Ratio (SLR) by

utilishing the money market mechanism.


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Effective Central Bank Control: A developed money

market helps the effective functioning of a central bank. It

facilities effective implementation of the monetary policy of a

central bank. The central bank, through the money market,

pumps new money into the economy whenever require . The

central bank, thus, regulates the flow of money so as to

promote economic growth with stability.


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Formulation Of Suitable Monetary Policy: Conditions prevailing in

a money market serve as a true indicator of the monetary state of an

economy. Hence, it serves as a guide to the Government in formulating

and revising the monetary policy then and there depending upon the

monetary conditions prevailing in the market.

Non-Inflationary Source Of Finance To Government: A developed

money market helps the Government to raise short-term funds through

the treasury bills floated in the market. In the absence of a developed

money market, the Government would be forced to print and issue more

money or borrow from the central bank. Both ways would lead to an

increase in prices and the consequent inflationary trend in the economy.


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Call money market

Treasury bills market

Markets for commercial paper

Certificate of deposits

Bills of Exchange

Money market mutual funds

Promissory Note

Instruments in Money Market


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Structure of Indian Money Market

(i) The money market in India comprises two sectors:(a) organised sector, and (b) unorganised sector.

(ii)The organised sector consists of the Reserve Bank of India, the State

Bank of India with its seven associates, twenty nationalisedcommercial banks, other scheduled and non-scheduled commercial

banks, foreign banks, and Regional Rural Banks. It is called organised

because its part is systematically coordinated by the RBI.

(iii) Non-bank financial institutions such as the LIC, the GIC and

subsidiaries, the UTI also operate in this market, but only indirectly

through banks, and not directly.


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(iv) Quasi-government bodies and large companies also make

their short-term surplus funds available to the organised

market through banks.

(v)Cooperative credit institutions occupy the intermediary

position between organised and unorganised parts of the

Indian money market. The cooperative societies at the local

level are loosely linked with it.


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(vi)The unorganized sector consists of indigenous banks and

money lenders. It is unorganised because activities of its parts

are not systematically coordinated by the RBI.

(vii)The money lenders operate throughout the country, but

without any link among themselves.

(viii)Indigenous banks are somewhat better organised because

they enjoy rediscount facilities from the commercial banks

which, in turn, have link with the RBI. But this type of

organisation represents only a loose link with the RBI.


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THE DETAILED STRUCTURE OF INDIAN MONEY

MARKET

I.Organised Structure

1.Reserve bank of India

2.DFHI(discount and finance

house of India)

3.Commercial banks

i-Public sector banks

--SBI with 7 subsidiaries

--Cooperative banks

--20 nationalised banks

ii-Private banks

--Indian Banks--Foreign banks

4.Development bank-

IDBI,IFCI,ICICI,NABARD,EXI

M,L IC,GIC,UTI,ect.,

II.Unorganised sector1.Indigenous banks2.Money lenders3.Chits4.Nidhis

III.Co-operative sectors1.State cooperative->central cooperative banks--Primary Agri credit societies--Primary urban banks2.State Land developmentbanks*-->central land development banks-->Primary land development

banks

* -> Now known as Agricultureand Rural Development Banks


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Organized sector of the Indian Money Market

SubmarketParticipating

Institutions Call Money market

Treasury bill market

The repo market

Commercial & Trade

Bill Market

Certificate of

Deposits Market

Commercial Paper

Market

Money market Mutual

Funds

RBI

DFHI

Banks

Development

Financial Institutions

Investment Finance

Companies

Mutual Funds

Treasury bills

Repos

Inter Bank Call Money

Commercial & Trade

Bills

Commercial Paper

Certificates of Deposits

Participation Certificates

Instruments


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Characteristics of Indian Money MarketIndian Money Market has the following major features or characteristics.

Dichotomic Structure : It is a significant aspect of the Indian money

market. It has a simultaneous existence of both the organized money

market as well as unorganised money markets. The organized money

market consists ofRBI, all scheduled commercial banks and other

recognized financial institutions. However, the unorganized part of

the money market comprises domestic money lenders, indigenous

bankers, trader, etc. The organized money market is in full control of

the RBI. However, unorganized money market remains outside the

RBI control. Thus both the organized and unorganized money market

exists simultaneously.
http://kalyan-city.blogspot.com/2010/09/functions-of-reserve-bank-of-india-rbi.htmlhttp://kalyan-city.blogspot.com/2010/09/commercial-banks-definitions-primary.htmlhttp://kalyan-city.blogspot.com/2010/09/commercial-banks-definitions-primary.htmlhttp://kalyan-city.blogspot.com/2010/09/functions-of-reserve-bank-of-india-rbi.html


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Characteristics of Indian Money Market

Seasonality : The demand for money in

Indian money market is of a seasonal nature.

India being an agriculture predominant

economy, the demand for money is generated

from the agricultural operations. During the

busy season i.e. between October and April

more agricultural activities takes place leading

to a higher demand for money.


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Multiplicity of Interest Rates : In Indian money

market, we have many levels of interest rates. Theydiffer from bank to bank from period to period and even

from borrower to borrower. Again in both organized

and unorganized segment the interest rates differs. Thus

there is an existence of many rates of interest in the

Indian money market.

Lack of Organized Bill Market : In the Indian money

market, the organized bill market is not prevalent.

Though the RBI tried to introduce the Bill Market

Scheme (1952) and then New Bill Market Scheme in

1970, still there is no properly organized bill market in

India.


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Absence of Integration : This is a very important

feature of the Indian money market. At the same time it

is divided among several segments or sections which

are loosely connected with each other. There is a lack of

coordination among these different components of the

money market. RBI has full control over thecomponents in the organized segment but it cannot

control the components in the unorganized segment.


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High Volatility in Call Money Market : The call money market is

a market for very short term money. Here money is demanded at

the call rate. Basically the demand for call money comes from the

commercial banks. Institutions such as the GIC, LIC, etc suffer

huge fluctuations and thus it has remained highly volatile.

Limited Instruments : It is in fact a defect of the Indian money

market. In our money market the supply of various instruments

such as the Treasury Bills, Commercial Bills, Certificate of

Deposits, Commercial Papers, etc. is very limited. In order to meet

the varied requirements of borrowers and lenders, It is necessary to

develop numerous instruments

Drawbacks of Indian Money


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Drawbacks of Indian Money

Market

Though the Indian money market is considered as the advancedmoney market among developing countries, it still suffers from

many drawbacks ordefects. These defects limit the efficiency of

our market. Some of the important defects or drawbacks of Indian

money market are :-

Absence of Integration : The Indian money market is broadlydivided into the Organized and Unorganized Sectors. The former

comprises the legal financial institutions backed by the RBI. The

unorganized statement of it includes various institutions such as

indigenous bankers, village money lenders, traders, etc. There is

lack of proper integration between these two segments.

Multiple rate of interest : In the Indian money market, especially

the banks, there exists too many rates of interests. These rates vary

for lending, borrowing, government activities, etc. Many rates of

interests create confusion among the investors.


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Drawbacks of Indian Money Market

Insufficient Funds or Resources : The Indian economy with its seasonal

structure faces frequent shortage of financial recourse. Lower income, lower

savings, and lack of banking habits among people are some of the reasons for

it.

Shortage of Investment Instruments : In the Indian money market, variousinvestment instruments such as Treasury Bills, Commercial Bills, Certificate

of Deposits, Commercial Papers, etc. are used. But taking into account the

size of the population and market these instruments are inadequate.

Shortage of Commercial Bill : In India, as many banks keep large funds forliquidity purpose, the use of the commercial bills is very limited. Similarly

since a large number of transactions are preferred in the cash form the scope

for commercial bills are limited.
http://kalyan-city.blogspot.com/2011/06/what-is-investment-meaning-and-types-of.htmlhttp://kalyan-city.blogspot.com/2011/06/what-is-investment-meaning-and-types-of.html


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Drawbacks of Indian Money Market

Lack of Organized Banking System : In India even through we have abig network of commercial banks, still the banking system suffers from

major weaknesses such as theNPA, huge losses, poor efficiency. The

absence of the organized banking system is major problem for Indian

money market.

Less number of Dealers : There are poor number of dealers in the short-

term assets who can act as mediators between the government and the

banking system. The less number of dealers leads to the slow contactbetween the end lender and end borrowers.

These are some of the major drawbacks of the Indian money market; many

of these are also the features of our money market.
http://kalyan-city.blogspot.com/2011/07/non-performing-assets-npa-meaning-types.htmlhttp://kalyan-city.blogspot.com/2011/07/non-performing-assets-npa-meaning-types.html


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Money market & Role of RBI


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Reserve Bank Of India

As the Central Bank of the county, the Reserve Bank of India plays a very

significant role in the Indian Money Market. It manages the liquidity in the

money market by granting refinance facilities to the banks and by stipulating

the reserve requirements.

Cash Reserve Ratio (CRR) and Statutory Liquidity Requirements (SLR)

are the principal tools to affect the liquidity with the banks.

when the banking system has excess liquidity, Reserve Bank of India raises the

Cash Reserve Ratio (CRR) and thus, impounds the surplus liquidity and

vice-versa. Statutory Liquidity requirement is raised to divert bank funds

mainly to Government and other approved securities and thereby reducing

liquidity with banks.


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Role of RBI in Money MarketFirstly the central bank could do this by setting a necessary reserve ratio,

which would restrict the ability of the commercial banks to increase the

money supply by loaning out money. If this condition were above the

ratio the commercial banks would have wished to have then the banks

will have to create fewer deposits and make fewer loans then they could

otherwise have profitably done. If the central bank imposed this

requirement in order to reduce the money supply, the commercial banks

will probably be unable to borrow from the central bank in order to

increase their cash reserves if they wished to make further loans. They

might try to attract further deposits from customers by raising their

interest rates but the central bank may retaliate by increasing the

necessary reserve ratio.


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Role of RBI in Money Market

The central bank can influence the supply of money through

special deposits. These are deposits at the central bank which

the banking sector is required to lodge. These are then

frozen, thus preventing the sector from accessing them even

though interest is paid at the average Treasury bill rate.

Making these special deposits reduces the level of the

commercial banks operational deposits which forces them to

cut back on lending.


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The supply of money can also be prohibited by the central bank by adjusting its

interest rate which it charges when the commercial banks wish to borrow money

(the discount rate). Banks generally have a ratio of cash to deposits which they

consider to be the minimum safe level. If command for cash is such that their

reserves fall below this level they will able to borrow money from the central

bank at its discount rate. If market rates were 8% and the discount rate were also

8%, then the banks might decrease their cash reserves to their minimum ratio

knowing that if demand exceeds supply they will be able to borrow at 8%. The

central bank, even if, may raise its discount rate to a value above the market

level, in order to encourage banks not to reduce their cash reserves to the

minimum during excess loans. By raising the discount value to such a level, the

commercial banks are given an incentive to hold more reserves thus reducing the

money multiplier and the money supply.


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Another way the money supply can be affected by the central bank

is through its operation of the interest rate. By raising or lowering

interest rates the demand for money is respectively reduced or

increased. If it sets them at a certain level it can clear the market at

level by supplying sufficient money to match the demand.

Alternatively it could fix the money supply at a convinced rate and

let the market clear the interest rates at the balance. Trying to fix

the money supply is not easy so central banks regularly set the

interest rate and provide the amount of money the market demands.


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The central bank may also involve the money supply through

operating on the open market. This allows it to influence the

money supply through the financial base. It may choose to

either buy or sell securities in the marketplace which will

either inject or remove money respectively. Thus the

monetary base will be affected causing the money supply to

modify.

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