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Summary of Money Market and Monetary Operations in India

Speech by Shri Deepak Mohanty, Executive Director, Reserve Bank of India This review is of the speech given by Shri Deepak Mohanty, Executive Director, Reserve bank of India, at the Seminar on Issues in Financial Markets, Mumbai, 15 December 2012. Mr. Mohanty very thoroughly describes the Money Market and Monetary Operations in India in his speech. He starts with highlighting the role of money market in general; stating that it provides an equilibrating mechanism for demand and supply for short-term funds and in the process provides an avenue for central bank intervention in influencing both the quantum and cost of liquidity in the financial system, consistent with the overall stance of monetary policy. He also avidly mentions that money market is the first and the most important stage in the chain of monetary policy transmission. According to the speaker, Money market is also an important funding market for banks and financial institutions, and at times, even for corporates. He also briefly discusses the various differences between secured and unsecured money market transactions, carefully analysing the characteristics of both the type of transactions. In addition to that, the author presents his vivid analysis of Money market in India from the very beginning of existence. After financial reforms in India began in 1990s, all domestic markets including money market, debt market and Forex market underwent significant shifts. Prior to the reforms these markets according to the author were considered by paucity of instruments, lack of depth and distortions in the market micro-structures consisting of uncollateralised call market, treasury bills, commercial bills, and participation certificates. The development of the market was a result of recommendations and policy changes from various committees viz. Chakravarty Committee (1985), Vaghul Committee (1987), Working Group (1997) and the Narasimham Committee (1998) whose major changes were introduction of certificated of deposits in 1989 and abolishment of ad hoc treasury bills in 1997. Post this period the introduction of Collateralised borrowing and lending obligations (CBLO) was introduced in 2005 to provide corporate and non-banks to manage their short term liquidity. The speaker has also given a detailed analysis of Reserve Bankss introduction of Liquidity Adjustment Facility (LAF) which helped to develop interest rate as an important instrument of monetary transmission. He has also given statistics which show that LAF provided greater flexibility to the reserve bank in determining both the quantum of liquidity as well as the rates by responding to the needs of the system on a daily basis. He has also described how growth of collateralised market vis--vis the uncollateralised market was the most significant aspect of growth of money market in India. Furthermore, the speaker has also given detailed description of Monetary operating procedure and its development with time in India, from Monetary targeting framework introduced in mid-1980s to Interim Liquidity Adjustment Facility (ILAF) in April 1999. The speaker has mentioned the key features of the new operating procedure to be changes in weighted average call money rate, repo rate being made the only independent varying policy, and initiation of Marginal Standing Facility (MSF). He provides detailed analysis of these factors bringing change to the money market over time. The speaker concludes by stating that there has been a significant improvement in monetary policy transmission under the new operating framework and has given three solutions to reinforce the process, a) need to develop micro market structure and further enhance secondary market transactions in government securities, (b) change in LAF, since the system is expected to be in deficit, and (c) to extend the yield curve beyond the overnight rate by developing a term money market.

Summary by 10102062 Subigya Basnet, BE Civil for Corporate Finance Project