Problems of Money Market in India

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Introduction: Money Market

The money market is a financial market for short-term securities, such as treasury bills, and commercial papers. These markets are highly liquid and less risky which makes them very attractive for borrowers and lenders to access easy money. The success of a monetary market depends on various factors such as the participation of the rural population, the length, and breadth of the market system, the use of technology, and proper management of the system to keep it out of corruption.

Therefore, the creation of a successful money market is tough when there is a shortage of funds as well as aspirations of the population in the economy.

Role of Money Market in India

The role of the money market in India can be discussed under the following categories:

  • Access to money for short-term borrowers

    Money markets provide easy access to money for short-term borrowers, making it easier to borrow from markets at reasonable rates of interest.

  • Liquidity for economic growth

    The instruments of the money market are highly liquid. They facilitate better management of liquidity by the authorities leading to better borrowing and lending which turns into better economic growth.

  • Portfolio management

    Money markets have numerous instruments to suit the diverse need of investors and borrowers. Investors can build a portfolio in money markets according to their risk and return requirements.

  • Economization of use of cash

    Money markets contain various close substitutes of money but not actual money. Therefore, it economizes the uses and utilities of cash.

  • Demand and supply equilibrium

    Money markets depend on the rational allocation of money and other resources while mobilizing savings into various investment channels. This helps in maintaining supply and demand equilibrium.

  • Monetary policy implementation

    Central banks implement monetary policies and money markets help in the successful implementation of these policies. The money market aims at equidistribution of money to various sectors to increase the speed of economic growth.

  • Fulfilling financial requirements of the government:

    Governments can fulfil their short-term monetary requirements through the use of treasury bills in the money markets.

Problems of Money Market in India

Following are the problems of the money market in India:

  • Shortages of Funds

    Usually, there is a shortage of funds in the Indian Money Market due to various factors, such as low savings, inadequate banking facilities, lack of banking habits, the existence of a parallel economy, etc.

    In the last free years, there has been a palpable increase in the funds of money markets due to various schemes introduced by the government. This has made money markets richer and more accessible too.

  • Existence of Unorganised Money Market

    The unorganized sector is a major drawback of the Indian money market. The unorganized sector is out of the purview of the Reserve Bank of India. It is an exploitative sector that creates a debt trap for borrowers. Unorganized money markets are often available in rural areas where the organized sector is absent. The government of India is trying hard to contain this issue.

  • Delays in technological up-gradation

    Upgradation of technology is a major requirement for the smooth functioning of money markets. However, this is absent in many places, especially rural areas in India. The absence of quick upgradation of money markets creates a backlog which is a major problem. India’s technological impetus is changing fast which can add immense value to the money markets.

  • Absence of Well Organized Banking Sector

    There is an absence of a well-structured banking sector in India. The banking operations are concentrated in major cities and towns but rural areas are completely devoid of it. Such anomalies in demographic disparities create a bottleneck in the efficiency of money market operations.

  • No Uniformity in the rates of interest

    There are too many types of interest rates in the Indian Money Market. The borrowing rates of the government, interest rates of co-operatives, and commercial banks, lending rates of financial institutions, etc., are all different from one another. A lack of mobility of funds from one section of the money market to another. Creates such disparities which is a reason for the inefficiency of the money market in India.

  • Seasonal fluctuations

    The seasonal fluctuation of money supply and high rate of interest from November to June is a particular feature of the Indian Money market. There is a wide fluctuation in the Indian money market in interest rates from one season to another. The money markets add money into the market during the busy season and withdraw funds during the seasons when there is a lack of investments.

Money Market Reforms Introduced in India

Following are the reforms introduced in the Indian Money Market:

Introduction of New Money Market Instruments

In order to widen the scope and diversify the Indian money market, the Reserve Bank of India has introduced many types of money market instruments such as 182-Day treasury bills, 364-day treasury bills, CDs, and CPs. These instruments help the government, commercial banks, financial institutions, and corporates to raise money via the money market.

Liquidity Adjustment Facility (LAF)

The Reserve Bank of India has introduced the LAF to adjust liquidity using repos and reverse repo rates. These rates are used to stabilize short-term interest rates or call rates. Repo rates are often revised by the RBI to keep the economy in a balanced state.

Deregulation of Interest Rates

The ceiling on the interest rates on call money and on interbank short-term deposits was removed and the rates were left to be decided by the market forces. Deregulation helps commercial banks borrow money at lesser rates and helps them avail of the benefits when the interest rates on their loans are high.

Real Time Gross Settlement (RTGS) and National Electronic Fund Transfer (NEFT)

Real Time Gross Settlement (RTGS) and National Electronic Fund Transfer (NEFT) were introduced as improved payment infrastructure. These digital systems help transfer money from one entity to another quickly and more transparently. They also improve the transfer4 system by removing the paperwork and too many checks made by banking authorities.

Electronic payments

An electronic dealing system was introduced. Electronic payments are easy to initiate and process. Therefore, they remove the checkpoints and repeated interventions by humans which may lead to errors. Therefore, electronic dealings are free from random human errors.

Conclusion

The Indian money market is going through a substantial change due to government intervention and corrective measures taken to revive it. Along with increased participation of both rural and urban populations, a measured thrust on technological upgradation is aimed to turn the money market richer and more efficiently.

India is progressing fast and its money market is getting increasingly wider. However, it has to expand more to be a palpable force to impact the growing economy positively. Therefore, the government is trying hard to increase the efficiency of the money market across the regions far and wide in the country.

FAQs

Q1. Why is the money market important? Give two reasons.

Ans. The money market is important because it provides access to short-term securities that are very liquid in nature. People seeking to get cash can convert money market instruments to cash quickly without too many hardships. Money markets also offer possibilities for economic growth. That is why the money markets are so important.

Q2. Which organization oversees the organized money market?

Ans. The Reserve Bank of India (RBI) oversees the organized money market in India

Q3. How can the government raise money in the money market?

Ans. The government can raise money by offering Treasury bills in the money market.

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

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