Meaning of Money Market: A money market is a market for short-term loans. The dealers in the money market comprise various institutions. The borrowers (or buyers)
include government and private institutions. The lenders include various financial and other institutions and individuals. The commodities traded in this market are various types of monetary assets, like the bills, government bonds, etc.
The Reserve Bank defines money market as “The center for dealings, mainly of short-term character, in monetary assets; it meets the short-term requirements of borrowers and provides liquidity or cash to the lenders. It is the place where short-term surplus invisible funds at the disposal of financial and other institutions are bid by borrowers, again comprising institutions and individuals and also by the government.” Thus, the major function of the market is to provide finance for short term to various public and private institutions. The money
market deals in various kinds of loans. Each may be said to constitute a market by itself, like call money market, bill market, collateral loan market, etc. The money market is a
broad term for all these markets put together.
Money Market and Capital Market: While operations of money market are limited to short-term loans, a capital market is the market for long-term loans. Such loans are
demanded by business houses, governments, and consumers wanting to purchase durable consumer goods. Some of these borrowings are done directly by the borrowers from the
general public by the issue of various instruments. But a substantial part of the loans in a capital market is supplied by the financial intermediaries that form part of the capital market. These intermediaries get their funds primarily from the savings of households to
be available for long-term financing of investment and consume goods expenditure.
Constituents of the Indian Money Market: The Major constituents of the Indian money market can be classified into three groups, viz.
• Organized sector
• Unorganized sector
• Co-operative sector
Organized Sector: The main constituents of the organized sector are the Reserve Bank, the State Bank and the various commercial banks. Quasi-government bodies and large-
sized commercial firms also operate in this market as lenders and financial intermediaries, such as loan brokers and general finance and stock brokers take part in the transactions.
The Unorganized Sector: The Unorganized Market on the indigenous market comprises
the indigenous bankers and moneylenders, working both in rural and urban areas. In this
market, there is no clear demarcation between short-term and long-term finance, nor even between the purposes of finances, inasmuch a there is usually nothing on a hundi (which is indigenous bill of exchange) to indicate whether it is for financing trade, or for providing financial accommodation; in other words, whether it is a genuine trade bill or a
financial paper. By and large, these bills are accommodation bills.
Co-operative Sector: A somewhat intermediate position between the organized and unorganized sectors of the money market is occupied by the co-operative credit institutions. These institutions were set up mainly with a view to supplanting the indigenous sources of rural credit, particularly the moneylenders, since the credit provided by the moneylenders was subject to many drawbacks, especially high interest rates. While considerable progress has been made in fulfilling this objective in the last few years, the total credit requirements of the rural sector have also increased
considerably. The Reserve Bank has stepped up substantially the credit assistance to this sector and to supplement the efforts of the co-operative sector, regional rural banks and commercial banks are also entering the rural economy in a big way. With the notable increase in the number of commercial bank branches in the rural areas in the last decade, closer link have been forged between the co-operative credit system and the organized money market, particularly with the State Bank of India.
Composition of the Organized Market: The organized money market consume of
• Call money market
• Bill market
• Collateral loan market
Call Money Market: It comprises dealings primarily among banks. It is the most sensitive section of the money market. The rates of interest in this market vary from time
to time according to the volume of transactions, being higher in the busy season than in the slack season.
Bill Market: It comprises dealings in short-term bills of exchange, including Hindus of the indigenous bankers. Bill market in India has developed quite late—it had its real
beginning only after the introduction by the Reserve Bank of its New Bill Market Scheme in 1970. Since then, although this market is developing, it is as yet not a very prominent
feature of the Indian money market.
Collateral Loan Market: It forms, by and large, the largest and the best developed section of the money market. It this market, loans are given against the security of government bonds, shares of first class companies, agriculture and manufactured
commodities, and bullion and jewellery.
Shortcomings of the Indian Money Market: The major defects of the Indian money market are as follows:
• Dichotomy of the Market. The money market is divided into two sections, viz. organized sector and the unorganized sector. The two sectors work independently with little coordination between their activities. The organized sector is quite
well-nit presently with the Reserve Bank exercising an effective control over the activities of the commercial banks. This control has been further facilitated by the nationalization of major commercial banks in 1962.
The unorganized sector remains outside the purview of the Reserve Bank control and acts independently. The relation between the organized and unorganized sector is loose, and the transactions and the rates in the two do not always move together.
There is, however, a certain degree of relationship between the two sectors that has developed in recent years. The indigenous market often depends on funds provided by the organized market particularly during the busy season when the indigenous bankers rediscount their hundis with the commercial banks. With the
growth and rapid spread of co-operative institutions, regional rural banks and commercial banks, the grip of the indigenous bankers is getting loosened gradually. A number of suggestions have also been made in the recent past to bring these banks within the purview of the Reserve Bank control.
• Multiplicity of Money Rates: In the Indian money market, till recently a number of different money rates used to exist. The call money rate, the hundi rate of the indigenous bankers, the loan rate of commercial banks, and the bazaar rates of small traders, all used to exist at the same time with fairly wide differences between them. All these rates used to move independently and at times in
different directions. With the Reserve Bank operating more forcefully in the
money market, these disparities are getting narrowed down, although these have not been completely eliminated.
• Variance in interest rates at different centers: Another feature of the Indian money market is the simultaneous existence of divergent rates of interest at different centers in the country, like Bombay, Calcutta and Madras. Divergent rates lead to fluctuations in the prices of securities and reactions on movement of
trade, since funds do not move from one center to another. Although the Reserve Bank has rationalized and cheapened the system of remittance of funds between different parts of the country and has thereby helped in equalizing the rates at different centers, a certain amount of variance still does exist.
• Seasonal Stringency of Money: Depending on the volume of transactions and ensuring demand for funds, calendar year can be divided into two parts, viz., (a) busy season, and (b) slack season. Busy season stretches between the end of
October to the end of April 1
This season requires finance for the post-harvest movement of agricultural commodities from the producers to final consumers, form meeting the needs of seasonal industries like sugar, and to some extent coal, and for meeting the generally higher tempo of economic activity in the post- monsoon period. The incidence of the closing of accounts of the Government at
the end of the financial year in March also adds to the element of season for the demand for money and credit.
• An Underdeveloped Bill Market: Seasonality of the transactions leads to pressures on the liquidity of the banking system. These pressures can be eased by the bill market in which the commercial banks can get short-term financial accommodation by rediscounting bills of exchange in their possession. The bill market in India is still in its infancy. The infant character of the Bill Market at
times reduces the effectiveness of the various monetary instruments adopted by the Reserve Bank to affect the level of economic activity in the country. It would be seen from the above discussion that he Reserve Bank has been pursuing a course of action that consistently aims at reforming the structure of the Indian money market, so that its control could be more effective and meaningful. Given the structure of the market, in which the Reserve Bank has.