Money Market in India

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What is a Money Market?

Money market is a part of the financial market where short-term securities with high liquidity are traded. The money market is a popular component of financial markets where securities of short-term maturities of one year or less, such as commercial papers and treasury bills are bought and sold.

  • Money markets are popular for over-the-counter trading where securities are traded in a wholesale process. The money market is an ideal place for investors and other participants to borrow and lend for the short term.

  • The money market consists of negotiable financial instruments which are used by companies to raise funds. Some of these instruments are commercial papers, treasury bills, and certificates of deposit. All financial instruments in the money market are highly liquid which means they can be converted to cash quickly.

  • Although the money market is the best place to invest in liquid assets, it has some risks. One of these risks is the chance of default on securities. Money markets have many participants, such as financial institutions and dealers who borrow and/or loan securities.

  • The money market is less regulated and less organized than capital markets. It provides lesser returns than capital markets to the investors but the variety of products in the money market is more than in capital markets.

  • Money markets offer an easier or less complex way to withdraw money. These markets differ from capital markets in the sense that the investments in the money market are for shorter periods while the investments in capital markets are for longer periods of time.

Structure of Indian Money Market: Organized and Unorganized sectors

The table below explains the differences between organized and unorganized sectors in the Indian money market structure:

Organized Sector Unorganized Sector
The organized sector of the money market in India consists of the Reserve Bank of India, and commercial banks, and the companies lending money. The financial intermediaries such as the Life Insurance, Unit Trust of India, Credit and Investments Corporation of India, Land Mortgage Banks, Cooperative Banks, Insurance Companies, etc. and call loan brokers, and stock brokers are also part of it. The unorganized sector is made up of indigenous bankers, money lenders, traders, commission agents, etc., some of these components combine money lending with trade and other activities.
In general, the part of the money market that broadly comes under the regulations of the Reserve Bank comes under the organized sector. The part that is out of the purview of the RBI constitutes the unorganized sector.
The interest rates in organized money markets are low and therefore borrowers are not exploited in this sector. The interest rates in the unorganized sector are high and borrowers are exploited in this sector of the money market.
The organized sector of the money market is operational in urban, semi-urban, and certain rural areas. The unorganized money market is operational in rural and remote regions where the organized sector is not present.
Components of the Money Market in Organized Sector

The organized sector of the money market in India is made up of the following components:

Reserve Bank of India

The Reserve Bank of India, also called RBI, is India's central bank that is responsible for the regulation of the Indian banking system. It comes under the management of the Ministry of Finance, Government of India. RBI is responsible for the issue, control, and maintaining the supply of the Indian currency, the rupee.

Bharatiya Reserve Bank Note Mudran (BRBNML) is a specialized division of RBI for printing & minting Indian currency notes (INR). RBI’s National Payments Corporation of India regulates the payment and settlement systems in India. Deposit Insurance and Credit Guarantee Corporation is one of its specialized divisions for the reason of providing insurance for deposits and guaranteeing credit facilities to all Indian banks.

Before the establishment of the Monetary Policy Committee in 2016, RBI had full control over monetary policy in the country. RBI was established on 1 April, 1935 in accordance with the Reserve Bank of India Act, 1934.

Commercial Banks

Commercial banks are the financial institutions that offer checking account services, provide various loans, accept deposits, and offer basic financial products like certificates of deposit (CDs) and savings and current accounts to individuals and some small business units. Commercial banks are the institutions where most people go for their banking needs.

Commercial banks’ process of making money comes from the money earned by interest from loans such as mortgages, business loans, auto loans, and personal loans. Customer deposits help these banks with the capital to make these loans. Currently, there are more than a dozen commercial banks in India including both public and private sectors. Some of these banks are the State Bank of India, ICICI Bank, HDFC Bank, and Union Bank of India.

Cooperative Banks

Co-operative banks are crucial for rural financing, as they offer to fund areas under agriculture, milk, livestock, personal finance, self-employment, setting up of small-scale industries, etc.

The financial entities known as co-operative banks are established on a cooperative basis and they belong to their members. The customer of a cooperative bank is also one of its owners. These cooperative banks provide a range of regular banking and financial services. However, the main focus of cooperative banks is on the rural population.

Indian co-operative banks are registered under the States Cooperative Societies Act. They also come under the regulation of the Reserve Bank of India (RBI) under two laws - the Banking Regulations Act, 1949, and the Banking Laws (Co-operative Societies) Act, 1955.

Development Finance Institutions

The development finance institutions, also called development finance companies, are organizations managed by the government or other charitable institutions to provide funds or monetary help for low-capital projects. These projects are meant for borrowers who are unable to get them from commercial lenders. Development finance institutions (DFIs) are intermediaries between public aid and private investment that facilitate international capital flows.

Discount and Finance House of India (DFHI)

Discount and Finance House of India (DFHI) was established in 1988. It is jointly owned by RBI, public sector banks, and other Indian financial institutions. DFHI plays a crucial role in developing the active secondary market in Money Market Instruments. Since 1996, GFHI is assigned the status of a Primary Dealer (PD). It deals in treasury bills, commercial papers, CDs, CPs, short-term deposits, call money markets, and government securities.

Conclusion

The money market is a special place to deal in short-term securities and it is a favorite option for participants who want to invest, buy or sell short-term securities because they have high liquidity. However, people should avoid the unorganized sector because it is exploitative in nature and often charges exorbitant rates for the loans it provides to individuals.

Furthermore, in India, the organized sector is quite strong too. Therefore, people have the option to knock on the doors of a well-established organized money market for their needs. The RBI, as the guardian of the money market, plays a key role in management and observation. So, in case of any exploitative issue, the participants can ask for a solution from authorities.

FAQs

Q1. How is the sector-wise distribution of the Indian money market?

Ans. The Indian money market is divided into organized and unorganized sectors. The market that directly comes under the purview of RBI is called the organized sector while the one that is independent is called the unorganized sector.

Q2. Which is the largest commercial bank in India?

Ans. The State Bank of India or SBI is the largest commercial bank in India.

Q3. The customer of a cooperative bank is also one of its owners. True or False?

Ans. True.

raja
Updated on 13-Oct-2022 11:19:47

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