Money market in India

Money market in India

The Indian Money Market is a monetary mechanism which deals with short-term financial asset, which are close substitutes for money. "It is a market for short - term funds with maturity ranging from over night to one year and includes financial instruments that are deemed to be close substitutes of money."[1] The evolution of Indian Money Market is diversified and it has covered many stages. From the conventional platform of treasury bills and call money to recent times of commercial paper, certificate of deposit, repos, FRAs and IRS, it has progressed and expanded manifolds.

The Indian Money Market is multifarious in nature as it consist of diverse sub-markets, each dealing in a particular genre of short-term credit. Money market fulfills the borrowing and investment requisites of providers and users of short-term funds and balances demand for and supply of short-term funds by providing an equilibrium mechanism. It also contribute in determining focal point for Central Bank for its intervention in the market.


Structure of Indian Money market

Indian Money Market comprises of the unorganised sector: moneylenders, indigenous bankers, chit funds; organised sector: Reserve Bank of India, Private bank, Public sector banks, Development banks and other Financial Institutions like LIC, UTI, IFC, IDBI alongwith co-operative sector.

Instruments of Money Market

Call money market

Call money market is a financial market which deals in short term finance, repayable on demand with a maturity period varying from one day to 15 days. S.K. Muranjan commented that call loans in India are provided to the bill market, rendered between banks, and given for the purpose of dealing in the bullion market and stock exchanges.[2] Commercial banks, both Indian and foreign, co-operative banks, Discount and Finance House of India Ltd.(DFHI), Securities trading corporation of India (STCI) participate as both lenders and borrowers and Life Insurance Corporation of India (LIC), Unit Trust of India(UTI), National Bank for Agriculture and Rural Development (NABARD)can participate only as lenders. Interest rate paid on call money loans is called Call Rate which is highly volatile in nature. It is the most sensitive section of the money market and the changes in the demand for and supply of call loans are promptly reflected in call rates. There are now two call rates in India: the Inter bank call rate and the lending rate of DFHI. The ceilings on the call rate and inter-bank term money rate were dropped, with effect from May 1, 1989. The Indian call money market has been transformed into a pure inter-bank market during 2006-07. [3] The major call money markets are located in Mumbai, Kolkata, Delhi, Chennai, Ahmedabad.

Treasury Bill Market

Treasury bills are instrument of short-term borrowing by the Government of India, issued as promissory notes under discount. The interest received on them is the discount which is the difference between the price at which they are issued and their redemption value. They have assured yield and negligible risk of default. Under one classification, treasury bills are categorised as ad hoc, tap and auction bills and under another classification it is classified on the maturity period like 91-days TBs, 182-days TBs, 364-days TBs and two types of 14-days TBs. In the recent times (2002-03, 2003-04), the Reserve Bank of India has been issuing only 91-day and 364-day treasury bills. the auction format of 91-day treasury bill has changed from uniform price to multiple price to encourage more responsible bidding from the market players.[4]

Ready Forward Contract(Repos)

Repo is an abbreviation for Repurchase agreement, which involves a simultaneous "sale and purchase" agreement.[5] When banks have any shortage of funds, they can borrow it from Reserve Bank of India or from other banks. The rate at which the RBI lends money to commercial banks is called repo rate, a short term for repurchase agreement. A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate increases borrowing from RBI becomes more expensive.[1]. The repo rate in India is currently 8.25 % as of September 2011.

Money Market Mutual Fund

Money market mutual funds invests money in specifically, high quality and very short maturity based money market instruments. The RBI has approved the establishment of very few such funds in India. In 1997, only one MMMF was in operation, and that too with very small amount of capital.[6]

Reserve bank of India & the Indian Money market

The influence of Reserve Bank of India's exercising power over the Indian money market is almost confined to the organised banking structure only. The unorganized sector which comprises mostly of indigenous bankers and non-banking financial companies, occupies important position in the money market have not been integrated properly with the rest of the money market. [7]

Reforms of Indian Money Market

The recommendations of the Sukhmoy Chakravarty Committee on the Review of the Working of the Monetary system, and the Narasimham Committee Report on the Working of the Financial System in India, 1991, Reserve bank of India has initiated a series of money market reforms basically directed towards efficient discharge of its objectives. Reserve bank of India reduced the ceiling rate on bank advances and on inter-bank call and short notice money. There has been an exorbitant decline in the minimum lending rate of commercial banks and public sector development financial institutions from 18% in 1990-91 to 10.5% in 2005-06.[8]

See Also

Commercial paper
Commercial paper in India
Certificate of Deposit
Money Market
Treasury Bill Market
Repurchase agreement


  1. ^ "REPORT ON CURRENCY AND FINANCE". Reserve Bank of India. Retrieved 4 October 2011. 
  2. ^ S.K. Muranjan (1952). Modern Banking in India. Bombay: Kamala Publishing House. pp. 98, 138. 
  3. ^ Bhole L.M., Mahakud Jitendra. Financial Institutions and Markets (Fifth ed.). New Delhi: Tata McGraw-Hill Education Pvt Ltd.. pp. 603. ISBN 9780070080485. 
  4. ^ "RBI, Annual Report, 2002-03". p. 188. 
  5. ^ D.K. Murthy, Venugopal. Indian Financial System. I.K. International Publishing House Pvt. Ltd.. pp. 20. ISBN 8188237884. 
  6. ^ D.K. Murthy, Venugopal. Indian Financial System. I.K. International Publishing House Pvt. Ltd.. pp. 24. ISBN 8188237884. 
  7. ^ Ruddar Datt & K.P.M.Sundharam (2010). "49". Indian Economy (Sixty one ed.). S. Chand & Co. Ltd.. pp. 864, 865. ISBN 81-219-0298-3. 
  8. ^ Ruddar Datt & K.P.M.Sundharam (2010). "49". Indian Economy (Sixty one ed.). S. Chand & Co. Ltd.. pp. 865. ISBN 81-219-0298-3. 

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