Organization of Money Market, Defects, Dealers

The money market is a regulated exchange where people may lend and borrow short-term, high-quality debt instruments with typical maturities of one year or less. It allows governments, banks, and other major organizations to sell short-term securities to meet their immediate cash flow requirements. Individual investors may also use money markets to invest modest sums of money in a low-risk environment.

Structure of Indian Money Markets

Organized Sector: This sector includes governments, the RBI, other commercial banks, rural banks, and even foreign banks. This sector is organized and controlled by the RBI. Other businesses, including as the LIC and UTI, are also involved in this area, although not directly. Other significant corporations and businesses operate in this industry via banks.

The unorganized sector includes indigenous banks, local money lenders, hundis, and so forth. Their operations are unregulated by the RBI or any other agency, hence they are classified as the unorganized sector.

Structure of the Indian Money Market:

(i) India’s money market is divided into two sectors: organized and unorganized.

(ii) The organized sector includes the Reserve Bank of India, State Bank of India, seven associates, twenty nationalized commercial banks, other scheduled and non-scheduled commercial banks, foreign banks, and Regional Rural Banks. It is said to be organized because the RBI systematically coordinates its components.

(iii) Non-bank financial institutions, including LIC, GIC, and UTI subsidiaries, participate in this market indirectly via banks rather than directly.

(iv) Banks facilitate the transfer of short-term excess cash from quasi-government organizations and major corporations to the organized market.

(v) Cooperative credit institutions bridge the gap between organized and unorganized segments of the Indian money market. These institutions have a three-tier structure. At the top are state-owned cooperative banks. Locally, there are primary credit societies and urban cooperative banks. Given their scale, methods of operation, and interactions with the RBI and commercial banks, only state and central cooperative banks should be included in the organized sector. Local cooperative societies are loosely tied to it.

(vi) The unorganized sector comprises of indigenous banks and money lenders. It is disorganised because the RBI does not properly coordinate the work of its constituent sections.

(vii) Money lenders operate independently throughout the nation.

(viii) Indigenous banks benefit from rediscounts from commercial banks linked to the RBI, making them more organized. However, this sort of entity has only a tenuous connection with the RBI.

Money market instruments traded on the money market include:

Certificate of Deposit.

A certificate of deposit may be used to lend large sums of money to an organization. The working process is comparable to that of a fixed deposit, with the exception that the former has a larger bargaining capacity and lesser liquidity.

Commercial paper is a promissory note issued by companies to raise short-term finance. It is insecure, thus it can only be utilized by large-cap enterprises with a strong market reputation.

These debt instruments have maturities ranging from 7 days to one year, and consequently attract lower interest rates than identical securities offered in the capital market.

Commercial paper may only be issued by organizations with excellent credit ratings, making it a secure investment. Money market funds allow individual investors to indirectly engage in the commercial paper market. Commercial paper has a maturity date ranging from one to nine months.

Treasury Bills

These are only issued by a country’s central government when it needs money to pay short-term commitments.

These securities do not pay interest, but they do enable an investor to earn capital gains since they are offered at a discount and the full face value is paid at maturity.

Treasury notes are an ideal investing instrument for inexperienced investors seeking for low-risk solutions. Treasury notes are backed by the government, thus the default risk is small, making them an ideal investment option for risk-averse investors.

Repurchase agreements

Repo is a short-term borrowing mechanism in which the issuer guarantees that the funds will be repaid (repurchased) in the future.

A repurchase agreement (repo) is a kind of short-term borrowing in which you sell an asset with the promise to buy it at a better price at a later date. It is often utilized by government securities dealers who sell Treasury bills to a lender and then promise to buy them at a later date for an agreed-upon price.

Repurchase agreements often include the trade of government securities. They are tied to market interest rates and supported by the government.

Banker’s Acceptance

A banker’s acceptance is one of the most popular money market products traded in the financial industry, representing a loan granted to the specified bank with a written assurance of future repayment.

The holder of the acceptance may opt to sell it on a secondary market, allowing investors to benefit from the short term investment. The maturity date is normally between one and six months after the issue date.

Money market products are sold wholesale over the counter, thus an individual investor cannot acquire them in conventional amounts.

Supply of funds:

The Indian money market has two primary sources of supply for short-term funds:

(a) Unorganized indigenous sector.

(b) Organized the contemporary sector.

(i) The unorganized sector includes many indigenous bankers and community money lenders. It is disorganized because the Reserve Bank of India does not regulate or coordinate its actions.

(ii) Organized Sector: The Indian money market is organized and includes the Reserve Bank of India, State Bank of India and its associate banks, Indian joint stock commercial banks (scheduled and non-scheduled), exchange banks that finance foreign trade, cooperative banks, and other special institutions like the Industrial Development Bank of India and State Finance.

(g) Banks make cash accessible to the money market on behalf of quasi-government agencies and significant corporations.

Money Market Defects

Until 1969, the banking system was not well-organized, resulting in sluggish branch development. Following nationalisation, there was a huge amount of work put into this direction. A well-developed banking system is critical for the money market. Currently, the absence of branches in rural regions impedes the circulation of cash. With a concentration on profitability, there may be some issues with this account.

Overall, the Indian money market is rather underdeveloped. In no circumstance can it be compared to the London or New York money markets. In addition to the traits mentioned above, a variety of other variables contribute to this.

For example, a lack of continuous supply of bills, a developed acceptance market, a commercial bills market, short-term asset dealers, and coordination among various segments of the money market.

India’s bill market is undeveloped. A well-organized bill market, or discount market for short-term bills, is required for an efficient interface between credit agencies and the Reserve Bank of India. The causes behind this scenario include historical, such as a preference for cash over bills, etc.

The Reserve Bank of India began making efforts in this area in 1952. However, a new and legitimate bill market was established in 1970. There has been a significant improvement since then.

Seasonal variation is a prominent feature of the money market. Interest rates in the money market vary greatly from one period to the next throughout the year. The busiest season is from November to June. During this time, crops from rural regions are transported to cities and other locations. The widespread variations cause issues in the money market. The Reserve Bank of India aims to reduce seasonal fluctuations in the money market by addressing interest rate disparities between government borrowing rates, commercial bank lending rates, co-operative bank rates, and financial institution rates.

This was mostly due to a lack of movement of monies from one sub-segment to another. However, as the financial industry has changed, various interest rates have adjusted swiftly to changes in bank rates.

One major issue is the absence of integration across various parts or functionaries. However, with the passage of the Banking Companies Regulation Act in 1949, the situation has altered dramatically. The RBI is now virtually completely functional in this area thanks to numerous sections of the RBI Act and the Banking Companies Regulation Act.

The Indian money market is characterized by an unorganized portion, which is a significant issue. In this market sector, both the objective and the time span are unclear. This section thrives on this trait.

This chapter weakens the RBI’s involvement in the money markets. The RBI’s efforts to bring indigenous bankers into the statutory framework have had little success.