The Indian money market is a significant part of India’s financial system that deals with short-term borrowing and lending of funds. The government, financial institutions, and companies issue money market instruments for their short-term funding needs. The Indian money market is changing quickly, and there are expected to be significant changes in 2023. The article will discuss the overview and the structure of the Indian money market, which can help analyze the future outlook of the Indian money market in 2023.
List of Contents
- What Exactly Is the Money Market?
- Money Market’s Role in India
- Indian Money Market Structure
- Money Market Instruments
- Participants in the Money Market
- Reforms in the Indian Money Market
What Exactly Is the Money Market?
The money market is a financial market for short-term securities such as government bills and commercial papers. These markets are extremely liquid and low-risk. Thus, this makes them particularly appealing to borrowers and lenders seeking rapid access to capital. Its effectiveness depends on several aspects, including the rural people’s involvement, the market system’s length and breadth, the use of technology, and the system’s administration to prevent corruption. Therefore, it is difficult to create a successful money market when the economy lacks cash and population expectations.
Money Market’s Role in India
1. Meeting the government’s financial obligations
Using treasury notes in the money markets enables governments to meet their short-term financial needs.
2. Financial policy implementation
Central banks and money markets aid in the successful execution of these policies and implement monetary policies. The goal of it is to distribute funds evenly to various economic sectors to accelerate economic growth.
3. Demand and supply balance
Money markets depend on the logical allocation of money and other resources and the mobilization of savings into diverse investment channels. This helps preserve the equilibrium between supply and demand.
4. Usage of cash in the economy
Money markets include a variety of near replacements for currency but no genuine currency. Consequently, it reduces the uses and benefits of currency.
5. Portfolio management
Different products are available in money markets to meet the diverse needs of investors and borrowers. Investors might construct a portfolio following their risk and return objectives.
6. Liquid assets for economic expansion
The money market’s instruments are very liquid. They permit more efficient management of liquidity by the government, resulting in improved borrowing and lending and enhancing economic growth.
7. Availability of funds for short-term borrowers
Money markets allow simple access to short-term borrowers’ funds, facilitating borrowing at acceptable interest rates.
Indian Money Market Structure
The Indian Money Market consists of Organized and Unorganized sectors.
The RBI controls and coordinates it methodically. It includes the following:
- India’s central bank, the Reserve Bank of India
- State Bank of India (SBI) and its seven subsidiary banks
- Twenty government-owned commercial banks
- Other listed and non-listed commercial banks
- Foreign banks
- Regional Rural Banks
- Non-bank financial institutions (NBFC) like the LIC, the GIC, subsidiaries, UTI, etc.
- Banks, quasi-government agencies, and major corporations also make their short-term excess cash accessible to the organized market.
It is not managed and regulated by the RBI. Unorganized Sectors contains the following:
- Indigenous banks
- Non-Banking Financial Companies (NBFCs)
Money Market Instruments
The money market consists of treasury bills, commercial papers, and certificates of deposit.
1. Treasury Bills
Treasury bills are money market instruments issued by the Reserve bank of India (RBI) on behalf of the federal government. These notes are often issued when funds are scarce or when the RBI seeks to manage the market’s cash liquidity. The following are its features:
- They are extremely liquid devices with a negligible danger component.
- Compensatory Treasury notes are issued at a discount relative to their face value.
- The bill’s maturity or Zero-Coupon Bonds is always one year or less than one year.
2. Commercial Paper
The term commercial paper refers to a specific sort of promissory note. They are issued by major corporations and corporations needing fast short-term loans to fulfill the demand of operating capital, seasonal variations and expenditures of share issuance, etc. Its attributes include:
- Commercial paper has an expiration date between 15 days and one year.
- They are issued at a discount and redeemed at par.
- They are extremely liquid and readily transferable money market securities.
- It is an uninsured short-term debt instrument.
3. Certificate of Deposits
These are the money market instruments issued only by commercial banks and financial organizations. Additionally, they can be provided in Demat format. The following are characteristics of certificates of deposit:
- Certificates of deposit are discounted.
- The difference between the issued price and their larger face value is the return on them.
- They are only available in multiples of one lac.
- They are extremely liquid and easily transferred.
- When issued by banks, the maturity period ranges from 7 days to a year, while when issued by other financial institutions, the maturity period ranges from 1-3 years.
Participants in the Money Market
Some of the important participants are as follows:
Corporate borrowing takes the form of promissory notes with a short maturity. After acquiring the requisite credit rating for the CP, they can issue commercial papers. Additionally, they might lend their temporary surplus to the CBLO market. When they buy certificates of deposit issued by banks and Treasury bills, they function as the lender.
The largest lender and borrowers in the money market are scheduled commercial banks. They borrow and lend cash on the call money market, short-notice market, repo, and reverse repo markets. They also borrow from the RBI and IDBI in the rediscounting market. They lend in the market for commercial paper by purchasing commercial papers issued by corporations and listed public sector organizations. Additionally, they borrow through issuing certificates of deposit to corporations.
3. Mutual Funds
They provide a variety of plans for the public’s diverse investing objectives. Money Market Mutual Fund Plans or Liquid Schemes are the names of the numerous schemes. Its purpose involves the purchase of money market instruments. They provide the best liquidity to investors by allowing withdrawals with a day’s notice or cashing in units using bank automated teller machines. They neither borrow nor invest outside.
4. Insurance Companies
General and life insurance companies are typical money market lenders. Due to their cash excess, they do not borrow. They have been major investors after the creation of CBLO (Collateralized Borrowing and Lending Obligations). Insurance businesses spend more of their assets on capital market products than money market securities. Due to the relatively lengthy terms of their lending programs, their significance is somewhat diminished.
5. Public Sector Undertakings
Government entities whose shares are traded on a stock market may issue commercial paper to finance their operating capital. The public sector undertakings are solely money market borrowers. They seldom loan out their surplus.
6. Central Government
The Federal Government assumes the borrower’s position in the money market (T-Bills) by issuing treasury bills. T-Bills constitute a risk-free product and are issued by the RBI. They are granted for 91 days, 182 days, and 364 days. Due to the risk-free nature of T-Bills, banks, corporations, and numerous other organizations purchase them and lend them to the government as part of its short-term borrowing program.
Reforms in the Indian Money Market
1. Introduction of New Money Market Instruments
The Reserve Bank of India has created many products, such as 182-Day treasury bills, 364-Day treasury bills, CDs, and CPs, to broaden and diversify the Indian money market. These instruments aid the government, commercial banks, financial institutions, and corporations in raising capital through the money market.
2. Liquidity Adjustment Facility (LAF)
The Reserve Bank of India created the LAF. The purpose of these rates is to stabilize short-term interest rates or call rates. The RBI often updates repo rates to maintain economic equilibrium.
3. Deregulation of Interest Rates
The interest rate ceiling on demand deposits and short-term interbank deposits was eliminated, leaving the rates to be determined by market forces. As a result of deregulatory efforts, commercial banks can borrow money at lower interest rates and reap the rewards when loan interest rates are high.
4. Real Time Gross Settlement (RTGS) and National Electronic Fund Transfer (NEFT)
As an improvement to the payment infrastructure, Real Time Gross Settlement (RTGS) and National Electronic Fund Transfer (NEFT) were established. These digital platforms provide the swift and transparent transfer of funds from one entity to another. They also enhance the transfer4 method by eliminating paperwork and excessive banking authority checks.
5. Electronic Payments
A mechanism for electronic transactions was implemented. Electronic transactions are simple to start and process. As a result, they eliminate the checkpoints and repetitive human interventions that might lead to mistakes. Consequently, computerized transactions are devoid of random human mistakes.
In short, the money market is a specialized venue for short-term trading assets. Its high liquidity makes it a popular choice for investors, buyers, and sellers of short-term securities. However, investors should avoid the unorganized sector due to its exploitative character and high-interest rates on the loans it offers consumers. Additionally, India’s organized sector is fairly robust. Therefore, people can approach a well-established, organized money market for their demands. As its monitor, the RBI plays a crucial role in administration and inspection. Therefore, in the event of any exploitation, investors can seek a resolution from the authorities.
The Money Market is a financial market where short-term financial products are traded, such as Treasury bills, commercial papers, and certificates of deposit. It is a system for short-term borrowing and lending, often shorter than a year. By supplying financial institutions with liquidity and supporting the execution of monetary policies by the central bank, the Money Market is vital to the general functioning of the economy.
The nature of the financial instruments exchanged on each of them is the key distinction between the Indian money market and the capital market. The Money Market focuses on short-term debt securities, such as treasury bills and commercial papers, whereas the Capital focuses on long-term debt securities, such as stocks, bonds, and debentures. Due to the short-term nature of the products exchanged, the Money Market is seen as having a lower level of risk than the Capital. The Money Market is largely utilized by banks and financial institutions to satisfy their short-term funding needs, whereas the Capital is utilized by corporations and people for long-term investment and fundraising.
On the Indian money market, products such as Treasury bills, commercial papers, certificates of deposit, call money, and term money are exchanged.
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