INDIAN MONEY MARKET

Meaning
The Money Market is a market for lending and borrowing of short-term funds. It deals in funds and financial
instruments having a maturity period of one day to one year. It covers money and financial assets that are
close substitutes for money. The instruments in the money market are of short term nature and highly liquid.

Q.1 Discuss the structure (OR) components of Indian money market.

The Indian money market consists of two segments, namely organized sector and unorganized sector. The
RBI is the most important constituents of Indian money market. The organized sector is within the direct
purview of RBI regulation. The unorganized sector comprises of indigenous bankers, money lenders and
unregulated non-banking financial institutions.
The structure or components of Indian money market is depicted in the chart 5.1.

STRUCTURE OF
INDIAN MONEY
MARKET

ORGANISED UNORGANISED
SECTOR SECTOR

 Call and Notice Money Market  Indigenous Bankers

 Treasury Bills Market  Money Lenders
 Commercial Bills Market  Unregulated Non-Bank Financia
 Market for Certificates of Deposits (CDs)  Intermediaries (Chit Funds, Nidhis and
 Market for Commercial Papers (CPs) Loan Companies)
 Repos Market  Finance Brokers
 Money Market Mutual Funds (MMMFs)
 Discount & Finance House of India (DFHI)

(A) Organized Money Market Instruments and Features

1. Call and Notice Money Market: Under call money market, funds are transacted on overnight basis. Under
notice money market funds are transacted for the period between 2 days and 14 days. The funds lent in the
notice money market do not have a specified repayment date when the deal is made. The lender issues a
notice to the borrower 2-3 days before the funds are to be paid. On receipt of this notice, the borrower will
have to repay the funds within the given time. Generally, banks rely on the call money market where they
raise funds for a single day.
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 The main participants in the call money market are commercial banks (excluding RRBs), co- operative banks
and primary dealers. Discount and Finance House of India (DFHI), Non-banking financial institutions such
as LIC, GIC, UTI, NABARD etc. are allowed to participate in the callmoney market as lenders.

2. Treasury Bills (T-Bills): Treasury bills are short-term securities issued by RBI on behalf of Government of
India. They are the main instruments of short term borrowing by the Government. They are useful in
managing short-term liquidity. At present, the Government of India issues three types of treasury bills through
auctions, namely – 91 days, 182-day and 364-day treasury bills. There are no treasury bills issued by state
governments. With the introduction of the auction system, interest rates on all types of TBs are being
determined by the market forces.

3. Commercial Bills: Commercial bill is a short-term, negotiable, and self-liquidating instrument with low
risk. They are negotiable instruments drawn by a seller on the buyer for the value of goods delivered by
him. Such bills are called trade bills. When trade bills are accepted by commercial banks, they are called
commercial bills. If the seller gives some time for payment, the bill is payable at future date (i.e. usance
bill). Generally the maturity period is upto 90 days. During the usance period, if the seller is in need of
funds, he may approach his bank for discounting the bill. Commercial banks can provide credit to
customers by discounting commercial bills. The banks can rediscount the commercial bills any number of
times during the usance period of bill and get money.

4. Certificates of Deposits (CDs): CDs are unsecured, negotiable promissory notes issued at a discount to the
face value. They are issued by commercial banks and development financial institutions. CDs are
marketable receipts of funds deposited in a bank for a fixed period at a specified rate of interest.
CDs were introduced in India in June 1989. The main purpose of the scheme was to enable commercial banks
to raise funds from the market through CDs. According to the original scheme, CDs were issued in multiples
of Rs.25 lakh subject to minimum size of an issue being Rs.1 crore. They had the maturity period of 3 months
to one year. They are freely transferable but only after the lock in period of 45 days after the date of issue.

5. Commercial Papers (CPs): Commercial Paper (CP) is an unsecured money market instrument issued in
the form of a promissory note with fixed maturity. They indicate the short-term obligation ofan issuer. They
are quite safe and highly liquid. They are generally issued by the leading, nationally reputed, highly rates
and credit worthy large manufacturing and finance companies is the public as well as private sector. CPs
were introduced in India January 1990. CPs were launched in India with a view to enable highly rated
corporate borrowers to diversify their sources of short-term borrowings and also to provide an additional
instrument to investors. RBI has modified its original scheme in order to widen the market for CPs.
Corporates and primary dealers (PDs) and the all India financial institutions can issue CPs. A corporate can
issue CPs provided they fulfill the following conditions:
(a) The tangible net worth of the company is not less than Rs.4 crore.
(b) The company has been sanctioned working capital limit by banks or all India financial institutions, and
(c) The borrowed account of the company is classified as a standard asset by the financing institutionor bank.
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5. Repos: A repo or reverse repo is a transaction in which two parties agree to sell and repurchase the same
security. Under repo, the seller gets immediate funds by selling specified securities withan agreement to
repurchase the same at a mutually decided future date and price. Similarly, the buyer purchases the securities with
an agreement to resell the same to the seller at an agreed date and price. The repos in government securities were
first introduced in India since December 1992. Since November 1996, RBI has introduced “Reverse Repos”, i.e. to
sell government securities through auction.

6. Discount and Finance House of India (DFHI): It was set up by RBI in April 1988 with the objectiveof
deepening and activating money market. It is jointly owned by RBI, public sector banks and all India financial
institutions which have contributed to its paid up capital.
The DFHI deals in treasury bills, commercial bills, CDs, CPs, short-term deposits, call money market and
government securities. The presence of DFHI as an intermediary in the money market has helped the
corporate entities, banks, and financial institutions to invest their short-term surpluses in money market
instruments.

7. Money Market Mutual Funds (MMMFs): RBI introduced MMMFs in April 1992 to enable small
investors to participate in the money market. MMMFs mobilizes savings from small investors and invest
them in short-term debt instruments or money market instruments such as call money, repos, treasury bills,
CDs and CPs. These instruments are forms of debt that mature in less than a year.

(B) UNORGANIZED SECTOR OF INDIAN MONEY MARKET

The unorganized Indian money market is largely made up of indigenous bankers, money lenders and
unregulated non-bank financial intermediaries. They do operate in urban centers but their activities are largely
confined to the rural sector. This market is unorganized because it’s activities are not systematically
coordinated by the RBI.

The main components of unorganized money market are:

1. Indigenous Bankers: They are financial intermediaries which operate as banks, receive deposits and give
loans and deals in hundies. The hundi is a short term credit instrument. It is the indigenous bill of exchange.
The rate of interest differs from one market to another and from one bank to another. They do not depend on
deposits entirely, they may use their own funds.

2. Money Lenders: They are those whose primary business is money lending. Money lenders predominate in
villages. However, they are also found in urban areas. Interest rates are generally high. Large amount of loans
are given for unproductive purposes. The borrowers are generally agricultural labourers, marginal and small
farmers, artisans, factory workers, small traders, etc.

3. Unregulated non-bank Financial Intermediaries: The consist of Chit Funds, Loan companies and others.
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(a) Chit Funds: They are saving institutions. The members make regular contribution to the fund. The collected
funds is given to some member based on previously agreed criterion (by bids or by draws). Chit Fund is more
famous in Kerala and Tamilnadu.

(b) Nidhis: They deal with members and act as mutual benefit funds. The deposits from the members are the
major source of funds and they make loans to members at reasonable rate of interest for the purposes like
house construction or repairs. They are highly localized and peculiar to South India. Both chit funds and
Nidhis are unregulated.

(1) Gilt- Edged Market:

Gilt-edged market is also known as the government securities market. As the securities are riskfree, they
are known as gilt-edged i.e. the best quality securities.
The investors in the gilt-edged market are predominantly institutions. They are required by law to invest a
certain portion of their funds in these securities. These institutions include commercial banks, LIC, GIC, and
the provident funds.
The transactions in the government securities market are very large. Each transaction may run into several
crores or even hundred crores of rupees. Since June 1992, government securities have been mostly issued
sealed bid auctions.
RBI plays a dominant role in the gilt-edged market through its open market operations. Thus,
government securities are the most liquid debt instruments.

(2) The Industrial Securities Market:

It is a market of shares, debentures and bonds which can be bought and sold freely.

This market is divided into two categories:

(A) Primary Market:

The new issue market called the primary market and (b) old issue market, commonly known as stock
exchange or stock market. It is called the secondary market.
The new issue market is concerned with the raising of new capital in the form of shares, bonds and
debentures. Many public limited companies often raise capital through the primary market for expanding their
business. It may be noted that the new issue market is important because of its impact on economic growth of
the country.

(B) Secondary Market:

The stock exchange market or the secondary market is a market of the purchase and sale of quoted or listed
securities. It is a highly organized market for regulating and controlling business in buying, selling and
dealing in securities.

(3) Financial Institutions:We have mentioned that there are special financial institutions which provided long-
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 term capital to the private sector in the capital market. These institutions are called Development Financial
Institutions.

(4) Financial Intermediaries:The Indian capital market has shown steady improvement after 1951. During the
Five-Year Plans, Capital market has witnessed rapid growth. Both the volume of saving and investment have
shown phenomenal improvement. In fact, in the last two decades, the volume of capital market transactions
has increased substantially. Besides, its functioning has been diversified indicating the growth of the Indian
economy.

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