Money Market in India

Money Market

Money market is that segment of financial markets that deal in short-term securities and loans, gold and foreign exchange are termed as money market. Money has a time value and therefore, the use of it, is bought and sold against payment of interest. Short-term money is bought and sold in the money market and long-term money in the capital market. Neither the money market nor the capital market exists in one physical location. The money market is a key component of the financial system, as it is the function of monetary operations conducted by the central bank (RBI) in its pursuit of monetary policy with maturity ranging from overnight to one year and includes financial instruments that are deemed to be close substitutes of money. 

In our country, Money Markets are regulated by both RBI and SEBI. Indian money market is divided into organized and unorganized segments. Unorganized market is old Indigenous market mainly made of indigenous bankers, money lenders etc.  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. Thus, the entire market is dominated by small number of large players.  At the same time, the money market in India is yet underdeveloped. The key players in the organized money market include Governments (Central and State), Discount and Finance House of India (DFHI), Mutual Funds, Corporate, Commercial / Cooperative Banks, Public Sector Undertakings (PSUs), Insurance Companies and Financial Institutions and Non-Banking Financial Companies (NBFCs).

Structure of Indian Money Market

       Organised Sector                                                Unorganised Sector

•        Call or Notice Money                                        Indigenous Bankers
•        Treasury Bills                                                    Money Lenders
•        Certificates of Deposits
•        Commercial Papers
•        Commercial Bills
•     The Repo Market (Repurchase Agreements)

Call Money

Call or notice money is an amount borrowed or lent on demand for a very short period. If the period is greater than one day and up to 14 days it is called notice money, otherwise the amount is known as call money. No collateral security is needed to cover these transactions. The call market enables the banks and institutions to even out their day-to-day deficits and surpluses of money. Co-operative banks, commercial banks and primary dealers are allowed to borrow and lend in this market for adjusting their cash reserve requirements. This is completely inter-bank market. Interest rates are market determined. In view of the short tenure of these transactions, both borrowers and lenders are required to have current accounts with RBI.

Treasury Bills (T-Bills)

These bills are money market instruments to finance the short-term requirements of the Government of India. These are discounted securities and thus are issued at a discount to face value. The interest received on them is the discount. The return to the investor is the difference between the maturity value and issue price. The market that deals with treasury bills is called Treasury bill market. T-Bills are issued by the Central Government to secure short-term loans. These bills are sold by the Reserve Bank on behalf of the government. These are bought by the Reserve Bank, commercial banks, non-banking financial intermediaries. LIC, UTI and GIC. T-Bills are most liquid, because Reserve Bank is always ready to buy and discount them.

These are the lowest risk category instruments for the short term. RBI issues Treasury bills at a prefixed day and for a fixed amount. There are three types of T-Bills.

91-day T-bill:- Maturity is in 91 days, it is auctioned on every Friday of every week and the notified amount for auction is Rs 100 crores.

182-day T-bill:- Maturity is in 182 days, it is auctioned on every alternate Wednesday, which is not a reporting and notified amount for auction is Ts 100 crores.

364-day T-bill:- Maturity is 64 days, it is auctioned on every alternate Wednesday which is reporting week and the notified amount for the auction is Ts. 500 crores.

Commercial Bills

The commercial bills are issued by the seller (drawer) on the buyer (drawee) for the value of goods delivered by him. These bills are of 30 days, 60 days or 90 days maturity.

If the seller is in need of funds, he may draw a bill and send it to the buyer for seller is in need of funds, he may draw a bill and send it to the buyer for acceptance. The buyer accepts the bill and promises to make payment on the due date. He may also approach his bank to accept the bill. The bank charges a commission for the acceptance of the bill and promises to make the payment if the buyer defaults. Once this process in accomplished, the seller can sell it in the market. This way a commercial bill becomes a marketable investment. Usually, the seller will go to the bank for discounting the bill. The bank will pay him after deducting the interest for the remaining period of the bill and service charges form the face value of the bill. The interest rate is call the discount rate on the bills.

Certificate of Deposits (CDs)

CDs are issued by Commercial banks and development financial institutions. CDs are unsecured, negotiable promissory notes issued at a discount to the face value. The scheme of CDs was introduced in 1989 by RBI. The main purpose was to enable the commercial banks to raise funds from market. At present, the maturity period of CDs ranges from 3 months to 1 year. They are issued in multiples of Rs. 25 lakh subject to a minimum size of Rs. 1 crore. CDs can be issued at discount to face value. They are freely transferable but only after the lock-in-period of 45 days after the date of issue.

Commercial Papers

Commercial papers are usually known as promissory notes which are negotiable short-term unsecured and are generally issued by companies and financial institutions which have working capital of not less than Rs. 5 crores, at a discounted rate from their face value. The fixed maturity for commercial papers is between 7 days to 1 year.  The purposes with which they are issued are - for financing of inventories, accounts receivables, and settling short-term liabilities or loans. The return on commercial papers is always higher than that of T-bills. Companies which have a strong credit rating, usually issue CPs as they are not backed by collateral securities. Corporations issue CPs for raising working capital and they participate in active trade in the secondary market. It was in 1990 that Commercial papers were first issued in the Indian money market.

The Repo Market (Repurchase Agreements)

These are transaction in which two parties agree to sell and repurchase the same security. Under such an agreement the seller sells specified securities with an 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 on an agreed date in future at a predetermined price. Such a transaction in called Repo when viewed from the perspective of the buyer of securities that is the party acquiring fund. It is called Reverse Repo when viewed from the perspective of supplier of funds.

Unorganised Sector of Money Market

The economy on one hand performs through organised sector and on other hand in rural areas there is continuance of unorganised, informal and indigenous sector. The unorganised money market mostly finances short-term financial needs of farmers and small businessmen. The main constituents of unorganised money market are:-

Indigenous Bankers (IBs)

Indigenous bankers are individuals or private firms who receive deposits and give loans and thereby operate as banks. IBs accept deposits as well as lend money. They mostly operate in urban areas, especially in western and southern regions of the country. The volume of their credit operations is however not known. Further their lending operations are completely unsupervised and unregulated. Over the years, the significance of IBs has declined due to growing organised banking sector.

Money Lenders (MLs)

They are those whose primary business is money lending. Money lending in India is very popular both in urban and rural areas. Interest rates are generally high. Large amount of loans are given for unproductive purposes. The operations of money lenders are prompt, informal and flexible. The borrowers are mostly poor farmers, artisans, petty traders and manual workers. Over the years the role of money lenders has declined due to the growing importance of organised banking sector.