CHAPTER 1 : INTRODUCTION

What is money market?

A money market is basically a forum which brings together borrowers and lenders to come together for business. It is market for money or its equivalent product can be traded. It is a short term market for short term funds. According to Madden and Nadler, “a money market is a mechanism through which short-term loans are loaned and borrowed and through which a large part of the financial transactions of a particular country or of the world are cleared”.

The importance of the money market for the nation does not solely lie on its size; it lies rather in its liquidity in its capacity for furnishing cash to any part of the country at a few hours notice. What a bank balance is to the individual, the money market is to the country’s credit system. The money market is important for businesses because it allows companies with a temporary cash surplus to invest in short-term securities; conversely, companies with a temporary cash shortfall can sell securities or borrow funds on a short-term basis. In essence the market acts as a repository for short-term funds.

The basic and prime objectives of a money market are:

•   It is forum for trade of short term money market instruments which help in balancing out the deficits and the surpluses of the lenders and the borrowers.
•   It is the forum or the focus point of country where the central bank of the country can intervene and formulate monetary policies for the country and control the liquidity of money.Money market is very different from a regular stock market of a country. And money market is not a single market. It is a collection of various markets such as bill of exchange market, commercial bill market, loan market, etc. The central bank of a particular nation controls thetransactions in a money market. In the case of India, Reserve Bank of India (RBI) in the central bank which looks after the transactions and regulations of the Indian money market. RBI’s most important role in the Indian money market is to formulate new and effective monetary policies and look after its implementation also.

Players in the money market

Theoretically any one can participate in the market and yet market practices and regulatory pronouncements have placed certain restrictions on participation for each of the sub-markets in the money market.5 Some of the major participants of the money market are:

1. The Central and State Government – The central government and the state government play a very important role in regulating and in taking care of the proper functioning of the money market of a country. They appoint certain institutions which look after the working of money market and regulate it.

2. Public Sector Undertakings – The government-owned corporations are termed as Public Sector Undertakings (PSUs). In a PSU majority (51% or more) of the paid up share capital is held by central government or by any state government or partly by the central governments and partly by one or more state governments. They also play a very important role in the money market since majority of government short term bonds are with them and hence they help in liquidity of the money market.

3. Scheduled Commercial Banks – The scheduled commercial banks have a very active role in the money market. They participate in buying and selling of government bonds, loan markets, issue of certificate of deposits, etc.

4. Private Sector Companies – Private Sector Companies with cash surpluses are active investors in instruments like Fixed Deposits, Certificates of Deposit and Treasury Bills. Some of these companies with active treasuries are also active participants in the G-Sec and other debt markets.

5. Provident Funds – Provident funds invest a lot in government bonds and debt instruments leading to their active role in the money market.
6. Insurance Companies
7. Non-Banking Finance Companies (NBFC’s)

CHAPTER 2 : INDIAN MONEY MARKET

Understanding

The India money market is a monetary system that involves the lending and borrowing of short-term funds. India money market has seen exponential growth just after the globalization initiative in 1992. It has been observed that financial institutions do employ money market instruments for financing short-term monetary requirements of various sectors such as agriculture, finance and manufacturing.The performance of the India money market has been outstanding in the past 20 years.

Indian money market is divided into organized and unorganized segments. Unorganized market is old Indigenous market mainly made of indigenous bankers, money lenders etc and the Organized market is that part which comes under the regulatory purview of RBI and SEBI. The nature of the money market transactions is such that they are large in amount and high in volume and thus, the entire market is dominated by small number of large players. At the same time, the money market in India is yet underdeveloped.

Growth of money market in India

While we know that the long term financial needs of the country is taken care by the financial or the capital markets, the short term financial needs of the country are looked after by the money market. After the reforms period, India has seen a drastic change in the money market in terms of exponential growth. The working of both public and private banks in the country have improved and they are not able to meet the short term financial needs of the country quite efficiently. Functioning under the regulation and control of the Reserve Bank of India (RBI), the Indian money markets have also exhibited the required maturity and resilience over the past about two decades. Decision of the government to allow the private sector banks to operate has provided much needed healthy competition in the money markets, resulting in fair amount of improvement in their functioning.

Reserve Bank of India

The RBI .i.e. the Reserve Bank of India is the most important and the key player of the Indian Money Market. The entire organised sector of the Indian Money Market comes under the purview of the RBI only. The basic aim and purpose of RBI is to operate in the money market and ensure that the liquidity level and the short term interest rates are maintained properly so that there is economic stability and economic growth in the country.19 Another one of most important roles of RBI is that it acts as a merchant banker to the government of India. It increases and raises funds on behalf of the Indian Government.

CHAPTER 3 : INDIAN MONEY MARKET INSTRUMENTS

The Indian money market is per se divided into two parts namely the organised sector and the unorganised sector. The organised sector comprises of:

•  Reserve Bank of India
•   Scheduled Commercial Banks
•   Mutual Funds
•   Primary DealersAnd the unorganised sector of the Indian money market comprises of:

•   Indigenous Dealers
•   Non-Banking Financial Companies
•  Money LendersLet us take a look into the instruments which are dealt with in the Indian Money market.

  Organised Sector Instruments

1. Commercial Bills
   Commercial bills market is basically a market of instruments similar to Bill of Exchange. The participants of commercial bill market in India are banks and financial institutions but this market is not yet developed.
2. Treasury Bills
   They are also known as T-Bills. Treasury Bills are short-term, marketable zero- coupon financial instruments issued with maturities of less than one year and are issued at a discount and are redeemed at face value. These instruments constitute a useful cash management tool primarily to cover temporary shortfalls in government’s weekly cash flows and, secondly, to maintain liquidity in the domestic Treasury bill market. Treasury bills are presently issued in three maturities, namely, 91 day, 182 day and 364 day.

3. Certificate of Deposits
   A certificate of deposit is an agreement to deposit money for a fixed period with a bank that will pay you interest. A CD is typically issued electronically and may automatically renew upon the maturity of the original CD. When the CD matures, the entire amount of principal, as well as interest earned, is available for withdrawal.
4. Commercial Paper
   Commercial Paper (CP) is yet another money market instrument in India, which was first introduced in 1990 to enable the highly rated corporate sector to diversify their resources for short term fund requirements.
5. Repurchase Agreements
   A repurchase agreement, or repo for short, is a type of short-term loan much used in the money markets, whereby the seller of a security agrees to buy it back at a specified price and time. The dealer sells the government securities to investors, usually on an overnight basis, and buys them back the following day.

Unorganised Sector Instruments

1. Indigenous Bankers
   Indigenous bankers are private firms or individuals who operate as banks and as such both receive deposits and give loans. Like banks, they are also financial intermediaries. They should be distinguished h professional moneylenders whose primary business is not banking but money lending.
2. Money Lenders
   A moneylender is an individual or group that usually lends relatively small amounts of money at very high rates of interest. They include landlords, agriculturists, merchants, traders, rich widows, pensioners, advocates, teachers, or any other person who has got surplus money.
3. Non-Banking Financial Companies (NBFCs)
   A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property.

CHAPTER 4 : DEFECTS IN THE INDIAN MONEY MARKET

1. Lack of Co-ordination – There is a severe lack of Co-ordination between the unorganised sector and the organised sector of the Indian money market. Sometimes, there is even unwanted competition between them.
2. Very Narrow Coverage – The organized banking system is still a very large component of the Indian money market. The Indian banking system widely covers metropolitan cities and the towns. But, The organized sector of the banking system is conspicuous by its absence in many rural areas.
3. Absence of Bill Market – The existence of a well-organised bill market is essential for the proper and efficient working of money market. Unfortunately, in spite of the serious efforts made by the Reserve Bank of India, the bill market in India has not yet been fully developed. Thus, an organised bill market in the real sense of the term has not yet been fully developed in India.
4. Dichotomy – The most important defect of the Indian money market is its division into two sectors: (a) the organised sector and (b) the unorganised sector. So there is very less co-ordination between both the sectors which in turn leads to a very chaotic situation at times.
5. Only Domestic Coverage – Finally, the Indian money market mainly targets domestic market so, it is very difficult to attract foreign funds.The main reason seems to be that rupee is not a major currency in the leading foreign exchange markets of the world.

6. Under Developed Banking Habits – In spite of rapid branches expansion of banks and spread of banking to unbanked and rural centres, the banking habits in India are still underdeveloped.

CHAPTER 5 : CONCLUSION

It depends on the economic trends and market situation that RBI takes a step forward to ease out the disparities in the market. Whenever there is a liquidity crunch, the RBI opts either to reduce the Cash Reserve Ratio (CRR) or infuse more money in the economic system. In a recent initiative, for overcoming the liquidity crunch in the Indian money market, the RBI infused more than Rs 75,000 crore along with reductions in the CRR.

The money market in a country plays a very important role. It is very important that a country’s money market is efficient enough to produce good outcomes for the country in terms of implementation of good monetary policies, cash flows and good liquidity ratio.