Indian Money Market Reform
The Reserve Bank of India is the largest regulator of Indian markets. It oversees India’s monetary policy. Its control, however, is restricted to the organized sector of the economy, with the unorganised sector, which has a major presence, being mostly uncontrolled. The RBI routinely implements changes to strengthen the Indian economy, which is always in flux and developing.
The bill market plan was an essential step. However, the Indian money market remains focused on the call money market, despite attempts to build a secondary market in the post-1991 era.
The key money market changes followed the recommendations of the S. Chakravarty Committee and the Narsimham Committee. These were significant improvements that contributed to India’s banking potential and shaped our financial institutions to world-class standards. The soundness of these measures enabled our economy to readily weather the economic crisis that seized the globe in 2008.
Discount and Finance House of India Ltd. was established as part of the money market reform package. It purchases bills and other short-term securities from banks and financial institutions. It gives banks with short-term investment opportunities.
In 1992, it began buying and selling government assets on a limited scale in order to establish a secondary market. The Reserve Bank of India provides the required funding to Discount and Finance House of India Ltd. (DFHI) so that company may trade in government securities.
The institutional infrastructure in government securities has been reinforced by the introduction of Primary Dealers (PDs) in March 1995 and Satellite Dealers (SDs) in December 1996.
Similarly, the Securities Trading Corporation of India was founded in 1994 to improve the market and liquidity for dated securities, as well as to store short-term money market assets such as treasury bills. The National Stock Exchange (NSE) offers a unique trading floor for transparent and screen-based trading in all sorts of debt securities.
The RBI Act was revised in 1997 to regulate non-banking financial companies (NBFCs). A non-banking financial company (NBFC) is a corporation incorporated under the Companies Act of 1956 that makes loans and advances, acquires shares, stocks, bonds, government assets, and so on. They are comparable to banks, however they do not take demand deposits or issue checks. They must be registered with the RBI to operate in India. There are several laws that NBFCs must follow in order to function effectively in India, such as accepting deposits for a minimum term and not accepting interest rates higher than the permitted rate set by the RBI.
Money Market Mutual Funds were established in 1992 to make investing more accessible to people. These funds were launched by financial organizations and banks.
With these improvements, the money market is growing more active. The Reserve Bank of India has further opportunities to introduce new market actors and expand refinancing.
The Narasimham Committee also advocated that well-managed non-banking financial intermediaries and merchant banks be permitted to participate in the money market. As and when implemented, this will broaden the scope of the money market.
Foreign Institutional Investors (FII) are permitted to invest in all dated government securities. The policy for 1998-1999 permitted them to purchase Treasury Bills within the permissible debt limit.
The post-reform era witnessed major institutional and procedural improvements to strengthen the secondary market for government assets.
Establishing Discount and Finance House of India.
Discount and Finance House of India was established in 1988 to provide liquidity and further develop secondary market products. However, the maturities of existing products, such as CDs and CPs, were progressively reduced to promote more participation. Similarly, ad hoc treasury notes were discontinued in 1997 to prevent the automatic monetisation of budgetary deficits.
Reintroduction of 182-day Treasury Bills:
The 182-day banknotes, which were withdrawn in 1992, were resurrected in 1998-1999. The Indian money market now offers treasury bills with maturities of 14 days, 91 days, 182 days, and 364 days.
Demand for Treasury bills is no longer only driven by statutory liquidity rate concerns. The number of secondary market transactions aimed at effectively managing short-term liquidity is increasing.