Money market in India
The Indian money market cannot be seen as a cohesive entity. It is basically separated into two parts: unorganised and organized portions. There are significant distinctions between the unorganised and organised segments of the Indian money market.
The money market in India is a sector for short-term funds with maturities ranging from overnight to one year in India, as well as financial products that are considered near substitutes for money. Similar to industrialized countries, the Indian money market is diverse and has evolved through various phases, from the traditional foundation of treasury bills and call money to commercial paper, certificates of deposit, repos, forward rate agreements, and, most recently, interest rate swaps.
The Indian money market is divided into submarkets, each of which deals with a certain sort of short-term loan. The money market meets the borrowing and investing needs of short-term fund suppliers and consumers, as well as balancing demand and supply via an equilibrium mechanism. It also acts as the focal point for the central bank’s market interventions.
While money lenders and indigenous bankers make up the unorganized sector, the organized sector is made up of nationalized and private sector commercial banks, foreign banks, co-operative banks, and the Reserve Bank of India (RBI). The unorganized component of the Indian money market is not homogeneous and integrated, while the organized sector is reasonably interconnected.
Unorganised Sector of the Indian Money Market:
The unorganized part of the Indian money market includes unregulated non-bank financial intermediaries, indigenous bankers, and money lenders, operating in both small villages and large cities. Their lending operations are mostly limited to small towns and villages. Farmers, craftsmen, small dealers, and small-scale producers who do not have access to contemporary banks are typical borrowers in this unorganized sector.
The unorganised money market in India is made up of the following parts.
- i) Indigenous bankers:
Indigenous bankers are people and private companies who accept deposits and provide loans, essentially operating as small banks. Their operations are completely unregulated. During the ancient and medieval centuries, local bankers were quite active. However, when modern banking developed, especially following the arrival of the British, local bankers’ businesses suffered.
Furthermore, as commercial and cooperative banks have grown in size, indigenous bankers’ operating areas have shrunk even further. Even now, a few thousand indigenous bankers continue to operate in the country’s western and southern regions, engaged in traditional banking.
Indigenous bankers are divided into four subgroups: Gujarati Shroffs, Multani-or Shikarpuri Shroffs, Chettiars, and Marwari, Kayast. Gujarati Shroffs mostly operate in Mumbai, Kolkata, and Gujarat’s industrial and commerce centers. The Multani or Shikarpuri Shroffs operate mostly in Mumbai and Chennai. The Chettiars are mostly located in the south.
The Marwari Shroffs are mostly active in Mumbai, Kolkata, the tea estates of Assam, and several other places of North-East India. Among the four aforementioned categories, Gujarati indigenous bankers are regarded the most strong in terms of business volume.
Indigenous bankers are mostly involved in both banking and non-banking businesses, which they do not want to divide. Their lending activities remain mostly unregulated and unmanaged. They charge exorbitant interest rates and are not impacted by the Reserve Bank of India’s bank rate policy.
(ii) Unregulated non-bank financial intermediaries:
There are many sorts of unregulated non-bank financial intermediaries in India. They are mostly comprised of loan or finance businesses, chit funds, and ‘nidhis’. A large number of financial firms in India gather huge sums of money in the form of deposits, borrowings, and other revenues.
They often provide loans to wholesale dealers, resellers, artists, and other self-employed individuals at a high interest rate ranging from 36 to 48 percent.
There are many sorts of chit funds in India. They do business in practically all states, however the majority of their activity is located on Tamil Nadu and Kerala. Furthermore, there are ‘nidhis’ functioning in South India, which are mutual benefit funds limited to its members.
(iii) Money lenders:
Moneylenders advance loans to small borrowers such as marginal and small farmers, agricultural labourers, artisans, factory and mine workers, low-wage workers, small traders, and so on at extremely high interest rates, while also engaging in various malpractices to manipulate these poor borrowers’ loan records.
There are roughly three sorts of moneylenders:
(i) Professional moneylenders focused entirely on lending.
(ii) Illicit moneylenders, including Kabulis and Pathans.
(iii) Non-professional money lenders.
Moneylenders’ operations are very localized, and their tactics are not standard. Moneylenders’ lending operations are completely unregulated and unmanaged, resulting in the worst possible abuse of small borrowers.
Moneylenders have become an unavoidable evil in the lack of adequate institutional sources of credit for the lower segments of society. Although many measures have been implemented to regulate moneylenders’ operations, they are not enforced owing to a lack of political will, resulting in the exploitation of small borrowers.
Organized Sector of Indian Money Market:
The Reserve Bank of India (RBI), the State Bank of India, commercial banks, cooperative banks, foreign banks, finance companies, and the Discount or Finance House of India Limited make up the organized components of the Indian money market. The Indian money market is well-integrated and structured.
Mumbai, Kolkata, Chennai, Delhi, Bangalore, and Ahmedabad are the major organized sectors of the Indian money market. The Mumbai money market is well-organized, with RBI and commercial bank headquarters, two prominent well-developed stock exchanges, a bullion exchange, and a reasonably structured market for government securities. All of this has brought the Mumbai money market on level with the New York money market in the United States and the London money market in England.
The primary elements of the organized sector of the Indian money market are:
(i) Call Money Market.
(ii) The Treasury Bill market.
(iii) The commercial bill market.
(iv) The Certificates of Deposit Market.
(v) Money Market for Mutual Funds
(vi) Commercial Paper Market.
(i) Call Money Market.
The call money market is the most prevalent kind of established money market. It is a very sensitive component of the financial system that clearly reflects any changes. The call money business in India is centered on Mumbai, Chennai, and Kolkata, with Mumbai being the most prominent. Lending and borrowing activities in such markets last just one day.
The call money market is also known as the interbank call money market. Normally, scheduled commercial banks, cooperative banks, and the Discount and Finance House of India (DFHI) engage in this market. However, in an exceptional scenario, the LIC, UTI, GIC, IDBI, and NABARD may function as lenders in this call money market. In this sector, brokers are often prominent players.
- Treasury Bill Market:
Treasury bill markets are exchanges for treasury bills. In India, such treasury bills are the Central Government’s short-term liabilities, with terms of 91 and 364 days, respectively. Treasury bills are often issued to cover a government’s temporary revenue imbalance over spending at a given moment. However, in India, treasury bills are now regarded a permanent source of income for the Central Government.
In India, the RBI holds around 90% of all treasury notes. Since April 1, 1997, India has replaced ad hoc treasury bills with ways and means advances to fund the Central Government’s transitory deficits.
iii) Commercial Bill Market:
The Commercial bill market is a sub-market that often deals with trade bills or commercial bills. It is a kind of bill that is often drawn by one merchant enterprise on another as a result of commercial transactions.
The goal of producing a business bill is to refund the seller if the customer fails to pay when due. However, in India, the commercial bill market is not as established. This is mostly due to the prevalence of the cash credit system in bank lending, the inability of major buyers to commit to a payment schedule connected to the commercial bill, and the absence of a consistent method in drawing bills.
Commercial bills are a credit instrument that is very valuable for businesses and banks. At the end of March 1996, India’s outstanding commercial invoices rediscounted by banks with various financial institutions totaled just Rs 374 crore.
(iv) Certificate of Deposit (Cd) Market:
The RBI established the certificate of deposit (CD) in India in March 1989 with the express purpose of broadening the spectrum of money market instruments and providing more flexibility in the generation of short-term excess funds for investors. Initially, scheduled commercial banks offer CDs in multiples of Rs 25 lakh, with a minimum of Rs 1 crore.
CD maturity periods ranged from three months to a year. In 1993, six financial institutions in India were authorized to issue CDs for periods ranging from one to three years: IDBI, ICICI, IFCI, IRBI, SIDBI, and the Export and Import Bank of India.
Banks often pay high rates of interest on CDs. In 1995-96, the money market’s severe circumstances prompted bankers to mobilize a significant quantity of resources via CDs. In recent years, the outstanding amount of CDs issued by commercial banks has almost quadrupled, from Rs 8,017 crore in March 1995 to Rs 16,316 crore as of March 29, 1996.
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v) Commercial Paper Market:
In India, Commercial Paper (CP) was introduced into the money market in January 1990. A listed business with operating capital of at least Rs 5 crore may issue CP. Again, the CP may be issued in multiples of Rs 25 lakhs, with a minimum of Rs 1 crore and a maturity term ranging from three to six months. CPs would be easily transferred via endorsement and delivery.
(vi) Money Market Mutual Funds.
In April 1992, the Reserve Bank of India (RBI) created a system for Money Market Mutual Funds (MMMFs). The primary goal of this strategy was to provide an extra short-term opportunity for individual investors. This idea has received little interest since the first instructions were unappealing. Thus, in November 1995, the RBI implemented several relaxations to make the plan more appealing and flexible.
The present standards enable banks, governmental financial institutions, and private financial organizations to establish MMMFs. In the meanwhile, MMMF investment limitations in specific products have been deregulated. Since April 1996, the RBI has permitted MMMFs to offer units to corporations and other entities on the same terms as mutual funds.
According to the most recent statistics available from the Association of Mutual Funds, the total assets under management (AUM) of all mutual fund institutions in the nation was at Rs 5,06,692.6 crore. The country’s top five mutual funds are Reliance MF, ICICI Prudential MF, UTI-MF, HDFC MF, and Franklin Templeton MF. As of March 31, 2008, Reliance MF had Rs 90,937.94 crore in assets under management (AUM).
The industry body Assocham Chamber recently conducted a survey on “MF Growth Patterns” and found that the Mutual Fund industry grew by 25% between 1999 and 2007, reaching Rs 4,67,000 crore, and the trend is expected to continue as MFs become a preferred choice for both rural and urban retail investors.
The mutual fund sector is expected to expand at a compound annual rate of 30% over the next three years, reaching Rs 9,50,000 crore, according to the poll. The proportion of privately managed MF operators in the whole MF business is predicted to shrink to 70% from the present estimate of 82%. The decline would be the consequence of private players forming alliances with international partners.
Features
- It is a market only for short-term funds.
- The money market, unlike the stock exchange, is not limited by geography. Financial institutions dealing with monetary assets may be dispersed throughout a large geographical region.
- It refers to all transactions involving money or monetary assets.
- Even though there are many money market hubs, such as Mumbai, Calcutta, and Chennai, they are not distinct autonomous markets, but rather are interconnected and interdependent.
- It is not a single, homogenous market. There are other submarkets, including the call money market and the bill market.
- The money market connects the RBI and banks while also providing information on monetary policy and management.
- Transactions may be completed without the involvement of brokers.
- Money markets exchange a variety of instruments.
Importance
Help to the Central Bank:
Though the central bank can operate and influence the banking system in the absence of a money market, the presence of a developed money market makes the central bank’s operations smoother and more efficient.
The money market benefits the central bank in the following ways:
(a) The money market’s short-run interest rates serve as an indication of the country’s monetary and banking circumstances, guiding the central bank to conduct an appropriate banking policy.
(b) The sensitive and interconnected money market enables the central bank to exert swift and extensive influence over submarkets, resulting in successful policy execution.
Self-Sufficiency of the Commercial Bank:
A developed money market enables commercial banks to become self-sustaining. In an emergency, when commercial banks are short of cash, they do not need to go the central bank and borrow at a higher interest rate. On the other hand, people may satisfy their needs by withdrawing their previous short-term loans from the money market.
Profitable Investments:
The money market allows commercial banks to invest their surplus reserves profitably. The primary goal of commercial banks is to generate revenue from their reserves while also maintaining liquidity to fulfill depositors’ unpredictable cash demands. In the money market, commercial banks’ surplus reserves are invested in near-money assets (for example, short-term bills of exchange), which are highly liquid and quickly convertible into cash. Thus, commercial banks benefit without sacrificing liquidity.
Finance Trade:
The money market plays an important role in funding both domestic and international commerce. Commercial financing is made accessible to traders via bills of exchange, which are discounted by the bill market. Acceptance houses and discount markets serve to finance international commerce.
Financial Industry:
There are two ways that the money market helps industries grow:
(a) The money market assists businesses in obtaining short-term loans to cover their working capital needs via the use of financing bills, commercial papers, and so on.
(a) Industries often need long-term borrowing from the capital market. However, the capital market is dependent on the character and circumstances of the money market. Short-term money market interest rates have an impact on long-term capital market interest rates. Thus, the money market indirectly benefits industries via its relationship with and influence over the long-term capital market.