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Indian Money Market

Money Market Money market refers to a mechanism whereby on the one hand borrowers manage to obtain short-term loanable funds and on the other, lenders succeed in getting creditworthy borrowers for their money. Commercial banks are the most important lenders. They also create credit.

The Indian money market is broadly divided into two parts 1. Unorganized Money Market 2. Organized Money Market

The rates of interest differ in the two markets.

1. Unorganized Money Market Comprises the indigenous bankers and the moneylenders. Services offered by organized money market hardly reached to remote parts like villages.
As a result, farmers, artisans, small scale producers and traders can not have access to the borrowing facilities offered by the organized money market comprising commercial, banks, co-operative banks and other regulated financial institutions. The only option for them to borrow money from moneylenders. Types of lenders Unregulated non-bank financial intermediaries i) Finance Companies ii) Chit Funds iii) Nidhis Indigenous bankers Moneylenders

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Unregulated non-banking financial intermediaries In India there are several types of unregulated non-banking financial intermediaries. Among these the most prominent are

(i) Finance companies Finance companies generally give loans to retailers, wholesale traders, artisans and other self-employed persons. Since finance companies charge high rates of interest varying from 36 to 45 per cent, corporate firms do not borrow from these companies.

(ii) Chit funds The chit funds are saving institutions. They are of various types lacking any standardized form. A chit fund has regular members who make periodical subscriptions to the fund. The periodic collection is given to some member of the chit fund selected on the basis of previously agreed criterion. (iii) Nidhis Nidhis operate in the unregulated credit market for mutual benefits of members.

2. Indigenous Bankers Indigenous bankers are individuals or private firms which receive deposits and give loans and thereby operate as banks. Since their activities are not regulated, they belong to the unorganised segment of the money market.

Indigenous bankers to not constitute a homogenous group. Broadly they may be classified under four main sub-groups Gujarati Shroffs, Multani or Shikarpuri Shroffs, Chettiars and Marwari Kayas. The Gujarati Shroffs operate in Mumbai, Kolkata and industrial and trading cities of East Gujarat.
The Marwari Shroffs are active in Kolkata, Mumbai, tea-gardens of Assam and other parts of North-East India. The Multani or Shikarpuri Shroffs are found mainly in Mumbai and Chennai

The Chettiars are concentrated in the South.

3. Moneylenders Moneylenders do not constitute one homogeneous category. Broadly they are of three types : (1) Professional moneylenders whose main activity is money lending (2) Itinerant money lenders like Phathans and Kabulis (3) Non-professional money lenders whose main source of income is not money lending. The method of operation of the money lenders are not uniform. Their activities are generally localised.

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Organised Money Market

The organised sector of the Indian money market comprises the RBI, commercial banks, foreign banks, cooperative banks, finance corporations, Mutual Funds and the Discount and Finance House of India Limited (DFHI). Mumbai, Kolkata, Delhi, Chennai, Ahmedabad and Bangalore are the principal centres of the organised sector of the Indian money market, of which Mumbai is the most prominent. The principal constituents of the Indian money market are 1. Call money market 2. The Treasury Bill Market 3. The Repo Market 4. The Certificate of Deposits Market 5. The Commercial Paper Market and

1. The Call Money Market The call money market consists of overnight and money at short notice for periods upto 14 days. It is meant to balance the short-term needs of banks. The call money market exists in almost all developed money markets. It is generally the most sensitive part of the financial system. Any change in flow of funds and the demand for them is clearly reflected in it. The response is generally quick. In India, the call money market is centred at Mumbai, Kolkata and Chennai.

2. The Treasury Bills Market


Treasury Bills are the instruments of short term borrowing by the Central/State govt. They are promissory notes issued for a fixed period. These were first issued in India in 1917.
Treasury Bills are issued to raise funds for meeting expenditure needs and also provide outlet for parking temporary surplus funds by investors. Treasury bills can be purchased by any one (including individuals) except State govt. These are issued by RBI and sold through fortnightly or monthly auctions at varying discount rate depending upon the bids. Minimum amount of face value Rs.1 lack and in multiples there of. There is no specific amount/limit on the extent to which these can be issued or purchased. This instrument is normally issued for 14 days, 91 days, 182 days and 364 days. 14-Day Intermediate Treasury Bills

3. Repo Market Repo is an instrument for borrowing funds by selling securities with an agreement to repurchase the said securities on a mutually agreed further date at an agreed price which includes interest for the funds borrowed. The reverse of the repo transaction is called reverse repo which is lending of funds against buying securities with an agreement to resell the said securities on a mutually agreed future date at an agreed price which includes interest for the funds lent.

4. Certificate of Deposits (CD) Certificate of Deposit is a certificate issued by a bank to depositors of funds that remain on deposit at the bank for a specified period. The CDs are similar in the traditional term deposits but are negotiable and tradable in the short-term money markets. CDs could initially be issued only by scheduled commercial banks in multiple of Rs 10 lakh subject to the minimum size of an issue being Rs 1 crore. Their maturity varied between 7 days to 3 years.

5. Commercial Paper (CP) Commercial Paper (CP) is a short-term instrument of raising funds by corporates. It is essentially a sort of unsecured promissory note sold by the issuer to the investor or via some agent like a merchant bank or a security house. The issuance of commercial paper is not related to any underlying self liquidating trade. So, maturity of this instrument is flexible.

Characteristics of the Indian Money Market


1. 2. 3. 4. 5. Lack of integration Lack of rational interest rates structure Absence of an organized bill market Shortage of funds in the money market Seasonal stringency of funds and fluctuations in interest rates 6. Inadequate banking facilities

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