ot ELLA Financial Markets Financial markets are markets through which funds required by the users are supplied by the savers of funds. With the development of the financial markets the savings that accrue to units with financial surpluses can be efficiently allocated to preferred investment outlets. In this manner real resources are made available to those who need them for the purpose of capital formation. In a complex modern economy, a system in which the demand, production technologies, and the accessibility of various sorts of raw materials can change dramatically over time, a system of financial markets facilitates the transfer of resources from financial surplus units to financial deficit units. The efficiency of the financial system lies not only in transfer of funds but the transmutation (conversion) too. The conversion of securities from direct securities into indirect securities according to the needs and requirements of savers as well as users help in enhancing the magnitude of financial flows... Financial market performs following functions: Helps in establishing fair prices of securities ¢ Enhancing the liquidity of the financial assets # Minimizing the transaction costs 275 28 MONEY MARKETS, @ Helps in Diversification and reduction in Risk @ Facilitates the better mode of operation of the payment mechanism, Segments of Financial Markets Financial markets can be divided into two segments, depending on the maturities of the financial claims, traded therein: 1, Capital Markets. 2. Money Markets. Capital Markets The Capital marketis a vital segment of Financial Market and dealsin financial claims, which have, maturities of more than one year. It is a market for long-term debt and equity shares. These are typically expected to generate a higher annualized return to investors. It is an institutional arrangement that facilitate the transfer of funds among investors. It not only represents those economic agents which are directly participating to raise resources or those who provide resources, but also those participants who execute the role of intermediaries like merchant banks and underwriting institutions, It is wide enough to encompass the private placements of debt and equity as well as organized markets like stock exchanges. The two types of capital markets are primary markets and secondary markets. Money Market Money market can be defined as a market for short-term funds with maturities ranging from overnight to one year and includes financial instruments that are considered to be close substitutes of money. It provides an equilibrating mechanism for demand and supply of 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. In the process, money market plays a central role in the monetary policy transmission mechanism by providing a key link in the operations of monetary policy to financial markets and ultimately, to the real economy. In fact, money market is the first and the most important stage in the chain of monetary policy transmission. Typically, the monetary policy instrument, effectively the price of central bank liquidity, is directly set by the central bank. In view of limited control over long-term interest rates, central banks adopt a strategy to exert direct influence on short-term interest rates. Changes in the short-term policy rate provide signals to financial markets, whereby TAXMANN®eee Ce MONEY MARKETS 29 different segments of the financial system respond by adjusting their rates of return on yavous instruments, depending on their sensitivity and the eo aaa epi EA mechanism. How quickly and effectively the mone 'S Influence the spectru i Rrends bot thé levelof devel p m of market interest rates . lopment of various segme: i i markets, particularly the money market, gments of financial Money market is also an important fund institutions, and at times, even for co: money markets couldincrease moralh: bank to function as the lender of first ing market for banks and financial rporate. Stressed conditions in the azard with banks expecting acentral resort. The term money market refers to a set of related markets in which similar financial instruments are traded. In money market the money or its equivalents are traded whose maturity period is less than one year. It meets the needs for short term funds for industry and banking sector. RBI defined the money market as “a market for short-term financial assets that are close substitutes for money, facilitates the exchange of money for the new financial claims in the primary market and also for the claims, already issued in the secondary market”. Money Market facilitates liquidity in market and also performs the role of a wholesale market of short term debt instrument. . The money markets securities are more liquid because of their short term nature. Money market encourages financial activity, by assuring borrowers (lenders) of the availability of short-term funds (returns) and lenders the avenues for deployment of the short term funds to create income. It also provides the regulators the information about the flow of funds in the economy which helps in the monetary adjustments to ensure stability in the economy. The various participants in the money market include banks, insurance company, mutual funds and corporate.———————=—<———————— 30 Difference betwee! MONEY MARKETS n Capital Market and Mon ey Market ‘Money Market S.No. Capital Market marketisa financial market where the long term borrowin| ig and lending of funds with maturity period of more than one year take place. Capital Money market isa financial market where the short term borrowings and lending of funds witha maturity period of less than one year take place. The instruments used in money bentures, derivatives and d securities are use in capital market. The del equity backet as Instruments d| markets are treasury Dills, commercial paper, billrediscounting and certificates of deposits etc. Money market investments are safe, Capital market investments carry liquid and less risky. huge risks The regulator for Capital Market is SEBI The regulator for Money market is RBI. Capital market helps to generate funds for fixed capital. Money market facilitates funds for working capital. Features of Money Markets The following are salient features of mo} -@ Money market deals with highly ¢ It involves s Firm ney market: iquid and short term securities. ecurities which are readily transferable. s buy/sell securities in their own account and at their own risk. @ The money market is regulated by Reserve Bank of India. There isno well defined place where business is transacted in money mark of short term funds. et, It’s a system of transactions between borrowers and lenders ¢ It provides trends in liquidity and interest rates. ¢ It isa wholesale market and the role of individual is insignificant. The maturity period for most of the tr: ion i a ansactiol i overnight to one week. es @ Instrumentsinclude Certificate of Deposi i sit, T- i Govt. Securities & others. i. i Secon oheeiees| @ The risk of investments in money market is low. 8 SS ee31 MONEY MARKETS. Objectives/Functions of the money market 1. Money Market is a mechanism for movement of funds from short term surplus units to short term deficit units. 2, In money market the liquidity is infused by the interventions of Central bank. 3. Money market enables the access of short term funds at a reasonable price in the market. Need for Money Market Business needs working capital for day-to-day operations and the major component of that is Cash. Lack of adequate cash can lead to disruption in day-to-day activities of a business. T he short term mismatch of funds requirement and availability is known as short term liquidity crisis, which leads to not meeting up of day-to-day operations and hence adds cost to the firm. Excess of cash too does not bring any yield. Hence Money Market is required to coordinate between borrowers and lenders. Thus transaction in money market is in high volumes and is less risky. Constituents of Money Market The Money market is a market where the financial institutions provide to the broad range of platform to borrowers andinvestors with an opportunity to trade in different forms of short term securities. Money market consist of three segments: 1. Borrowers of Funds 2. Intermediaries 3. Market Makers.32 MONEY MARKETS Money Market Participants Issuers/ Borrowers Govt. Participants in ! Money ‘ Markets Discount Banks Houses ' Financial 5 Acceptance || _ Institutions ae ue & Houses iS Corporate | Houses Mutual & Funds % Fils Banks borrow in the money market to: Fill the gaps or temporary mismatch of funds * To meet the CRR and SLR mandatory requirements as stipulateg by the central bank # To meet sudden demand for funds Call money market serves th: Position of the banks, arising out of large outflows e role of equilibrating the short-term liquidity 1. Organised Sector: The organized sector of money market is inte; i ; y grated. It comprises of RBI Mutual Funds, Public and Private sector banks, Ceerenite Societies, a aopment banks and Financial Institutions like IDBI, IFCI, ICCI, Lic eesMONEY MARKETS: 2. Unorganised Sector: The unorganized sector of Money market Is pa Se a homogeneous Itcomprses ofthe following nat wlons mat ns Indigenous banks, Chits, Nidhis and Unregulated non-bank fina intermediaries. Money Market Instruments ‘ ews (han One The Money Market Instruments have a maturity period of less than one year. The main money market instruments are as follows: . Certificates of Deposit 1 2, Commercial Paper 3. Inter-bank participation Certificates 4. Inter-bank term money 5. Treasury Bills 6. Bill rediscounting 7. Call/Notice/Term money 8. CBLO 9. Market Repo Certificates of Deposits, oe MONEY MARKETS Certificate of Deposits (CDs) are negotiable money market instrumen, and are also known as Negotiable Certificate of Deposits. They are issug, in dematerialized form by commercial banks and financial institutions discount to face value for a specified time period. They are like bank term, deposits accounts. CDs are issued in the form of Usance Promissory Note (UPN) by financig institutionsand thetitles are easily transferable by endorsementand delivery CDs were introduced in 1989 by Reserve Bank of India with a maturity of not less than 7 days and maximum up to a year. Scheduled banks cay issue CDs for a period ranging from 1 year to 3 years. The issuance of CDs in India is governed by the Indian Negotiable Instrument, Act, 1881. The issue of CDs attracts payment of stamp duty under the Indian Stamp Act, 1899. There is no lock in period for CDs. They are generally issued to individuals, corporations, trusts, funds and associations. They are issued at a discount rate to the face value, determined by the investors. For the repayment of CDs no grace period is provided. However if there is holiday on the date of maturity, the payment is to be made by the issuing tate ee the immediate preceding working day. Buy- Back of CDs is also lowed. Commercial Paper Commercial Paper (CP) is a short-term borrowing by corporate, financial institutions, primary dealers from the money market, It is an unsecured instrument issuedin the physical form (Usance Promissory Note) or demat form. It was initiated by RBI in 1990. It enables the corporate borrowers to meet the need for short term borrowings at competitive rates through the market. CP issued in physical form is freely transferable by endorsement and delivery. The credit rating companiesin India like Credit Rating Information Services of India Ltd (CRISIL), the Investment Information and Credit Rating Agency tA XMANN?MONEY MARKETS of India limited (ICRA), Credit analysis and research Ltd. (CARE) or the FITCH Rating India Private limited provide ratings to the participants for issuing commercial Paper. CP is issued as per the guidelines of RBI and with minimum denomination of 8 5 lacs and its multiples thereof. The rate of interest on CP is related to the yield on the one year government bond. cp can be issued by the high rated corporate (corporate borrowers, jmary dealers, satellite dealers and all-India financial institutions) whose tangible net worth is more than % 4 crore. The investment in CP is as per the limits set by Securities and Exchange Board of India and can be bought by individuals, banking companies, other corporate bodies registered or incorporated in India and unincorporated bodies, Non-Resident Indians (NRIs) and Foreign Institutional Investors (Fs). Thereis no security requirement against investments in CP, thus it is a very risky instrument. The maturity period of issue ranges between 7 days to one year from the date of issue. Treasury Bills (T-Bills): Atreasury billis also called as T-Bills. The Government of India issues T-Bills to meet the requirement for short term borrowing, The treasury bills are jssued ata discount-to-face value and their maturity period ranges between 14 to 364 days. The longer the maturity period for T-bills, the higher the interest rate on them the investor can earn, T.Bills can be purchased by banks, primary dealers, State Governments, provident funds, financial institutions, insurance companies, NBFCs, FIIs (as per prescribed norms), and NRIs as an investor through the secondary market where it has been previously issued. Presently in India the Government hasissued the following types of treasury bills through auctions like 91-day, 182-day and.364-day. T-Bills can also be purchased at an auction where price is fixed through a competitive bidding process generally at a discount and redeemed at par. For example: An investor buys T-Bills of € 100 face value at a discount for Z 90. But at the time of maturity of T-Bills, it is redeemed at = 100. Thus investor gains 10 on the T-bills investments as an interest. The State Government does not have an option to issue any treasury bills. The minimum amount for which treasury bills are available in market is 25,000. The investments can be in the multiple of % 25,000 only. The issue priceand the discount are to be calculated at each auction. The 91-day T-bills are auctioned by RBI weekly, whereas the Central Government auctions the182-day T-bills and 364-days T-bills on a fortnightly basis.36 MONEY MARKETS CBLO (Collateralized Borrowing and Lending Obligation) A CBLO is one of the money market instruments available in electron; book entry form. It represents an obligation between borrower and lenden, as per the terms of the loans. The maturity period ranges from one day t ninety days. As per RBI guidelines this can also be extended upto one yea, They are approved and developed by RBI and Clearing Corporation o India (CCIL) in 2003. Itis an online trading system where major participant, in the lender side are mutual funds and insurance companies. In case of borrowers the major participants are nationalized banks, primary dealer and non financial companies. In CBLO, the borrower has the obligation to repay the money borrowed a apredetermined future date. The lender has an authority to receive money lent at the predetermined future date. There is a charge on security helq by CCIL. By providing a dealing system, CCIL has an authority to enable participants to borrow and lend funds, The dealing systems available are: ¢ Indian Financial Network (INFINET): This is a closed group formed by the members of the Negotiated Dealing System (NDS), who gen. erally have an account with RBL Internet gateway: This enables the dealing system for those entities which do not maintain a Current account with RBI. Entities like banks, financial institutions, primary dealers, mutual funds and co-operative banks who are members of NDS can participate in CBLO transactions. The Non-NDS members like corporates, co-operative banks, NBFCs, Pension/Provident Funds, Trusts etc. can, however, participate only by obtaining the Associate Membership to the CBLO Segment. Repos or Repurchase Agreements Reposarealso knownas repurchase agreement. Itisa short term borrowing where one party who sells the security agrees to repurchase it in future, The securities for Repo transaction are government approved securities like treasury Bills, and Central/State Government securities. Repo (repurchase agreement) instruments enable collateralized short- term borrowing through the selling of debt instruments. For the seller the transaction is a repo as he agrees to repurchase it at a specified date and rate. Whereas for the buyer it is a reverse repo as he agrees to buy the security now and sells it in future. The seller agrees to buyback the securities at a rate which includes the interest charged by the buyer for allowing purchasing securities from the ee37 MONEY MARKETS seller. The seller requires funds so he repurchases the securities by paying interest to the buyer, Call/Notice/Term Money Call money is an important constituent of Indian Money Market. It is a market where money is borrowed or lent on demand and has a maturity ranging between one day and two weeks. It is also known as Inter-bank call money market, The main purpose of Call/Notice market is to facilitate the commercial banks to bridge the gaps of shortfall of funds, to meet the sudden requirement of funds out of large outflows, and to fulfil the stipulated requirements of RBI such as the Cash Reserve Ratio (CRR) and the Statutory Liquidity Requirements (SLR). The difference among call money, notice money and term money is in terms of the period of maturity of the borrowed money. Call money is defined as the money borrowed or lent for a single day and repaid on the next working day. There 1S an exception of holiday or Sunday in this case as the transaction is only for overnight basis. Notice money is defined. as the money borrowed or lent for a period ranging between two to fourteen days. There is no collateral security required in these type of requirements as they are of short term nature. If the funds are transacted for more than 14 days then it is called as “Term Money’.RBI fixes the prudential limits for transaction in Call/Notice Market which keeps on changing from time to time. Scheduled Commercial Banks, Co-operative banks and Primary dealers are the borrowers in call/notice market. The non-banking financial institutions are not permitted to transact in the call/notice market since 2005. Important lenders in the call/notice market are commercial banks, cooperative banks and primary dealers. Features of Call Market: 1. There is no collateral required in call market and loans are made available on clean basis. 2. The call money market facilitates the redistribution of surplus day to day funds among banks by curbing temporary deficit of funds. 3. The call market enables facilitates banks to economize their cash. 4. Call money market is a very competitive and sensitive market. 5, Call money helps to improve the liquidity position of banks and other financial institutions. TAXMANN®38 MONEY MARKETS Commercial Bills Commercial bills facilitate short term liquidity to banks in need of fund, This Money market instrumentis an important method of providing credit to customers by banks by discounting commercial bills at prescribed discoun, rates. The bill market scheme was introduced by RBI in 1952 and later a new scheme called bills rediscounting was introduced in 1970. The bills drawn and accepted between the buyer and seller are called trade bills. When these bills are accepted by the commercial banks, they are calleq commercial bills. The commercial bill can be rediscounted in the commercial] bill rediscount market. It helps the commercial banks to get money before the maturity date. According to RBI, only those commercial bills whose maturity period is not more than 90 days from date of rediscounting and which have been created out of a commercial transaction of sale of goods can be rediscounted. Role of a Central Bank The function of the central bank of a country is to control and monitor the banking and financial system of the country. In India, the Reserve Bank of India (RBI) is the Central Bank. The main role of RBI is related to the Indian economy, and the banksare an instrument to help RBImake changes according to different macroeconomic facets of the Indian economy. There are 3 ultimate goals of a central bank 1, Economic Growth - higher the better, but should be sustainable 2. Controlling Inflation. 3. Reducing Unemployment. ; The RBI was established in 1935. It was nationalized in 1949, The RBI plays role of regulator of the banking system in India. The Banking Regulation Act, 1949 and the RBI Act, 1953 have given the RBI the power to regulate the banking system. f ; RBI : Controller and Supervisor of Banking Systems The RBI has been assigned the role of controlling and supervising the i banking system in India. The RBI is responsible for controlling the overall operations of all banks in India. These banks may. be: Public sector banks @ Private sector banks I @ Foreign banks g ma wesnernr® _ iMONEY MARKETS @ Co-operative banks, or @ Regional rural banks The control and supervisory roles of the Reserve through the following: @ Issue of Licence: Under the Banking Regulation Act, 1949, the RBI has been given powers to grant licenses to units to commence new banking operations. The RBI also grants licenses to existing banks for opening new branches. Under the licensing policy, the RBI provides banking services in areas that do not have this facility. @ Prudential Norms: The RBI issues guidelines for credit control and management. The RBI is a member of the Banking Committee on Banking Supervision (BCBS). As such, they are responsible for im- plementation of international standards of capital adequacy norms and asset classification. @ Corporate Governance: The RBI has power to control the appoint- ment of the chairman and directors of banks in India. The RBI has powers to appoint additional directors in banks as well. @ KYC Norms: To curb money laundering and prevent the use of the banking system for financial crimes, The RBI has “Know Your Cystomer“ guidelines. Every bank has to ensure KYC norms are applied before allowing someone to open an account. @ Transparency Norms: This means that every bank has to disclose their charges for providing services and customers have the right to know these charges. @ Risk Management: The RBI provides guidelines to banks for taking the steps that are necessary to mitigate risk. They do this through risk management in basel norms. Bank of India is done @ Audit and Inspection: The procedure of audit and inspection is con- trolled by the RBI through off-site and on-site monitoring system. On-site inspection is done by the RBI on the basis of “CAMELS”. Capital adequacy; Asset quality; Management; Earning; Liquidity; System and control. i Major functions of the RBI are as follows: 1. Issue of Bank Notes: Section 22 of the RBI Act gives authority to the RBI to issue currency notes. The RBlalso takes action to control circulation of fake currency. The Reserve Bank of India has the sole right to issue currency notes except one rupee notes which are issued by the Ministry of Finance. rea eae40 MONEY MARKETS Currency notes issued by the Reserve Bank are Soke unin legal tender throughout the country. This geneen : n oO Mot issue function with the Reserve Bank has a number of ‘ antag, (i) it brings uniformity in notes issue; (ii) it makes ia i effect, State supervision; (iii) it is easier to control and eae le credit j accordance with the requirements in the economy, and (iv) it Keen, faith of the public in the paper currency. 2. Banker to Government: As the banker to the government theResery, Bankmanages the banking needs of the government. Ithas to-maintaj, and operate the government's deposit accounts. It collects Teceipt, of funds and makes payments on behalf of the government. It r Tesents the Government of India as the member of the IMF and the World Bank. 3. Custodian of Cash Reserves of Commercial Banks: The commercial banks hold deposits in the Reserve Bank and the latter has the custody of the cash reserves of the commercial banks, . Custodian of Country's Foreign Currency Reserves: The Reserve Bank has the Custody of the country’s reserves of in. ternational currency, and this enables the Reserve Bank to deal with crisis connected with adverse balance of payments Position. 5. Foreign Exchange Control: The RBI plays a crucial role in foreign exchange transactions, It does due diligence on every foreign trans. action, including the inflow and outflow of foreign exchange. It takes steps to stop the fall in value of the Indian Rupee. The RBI also takes necessary steps to control the current account deficit. RBI gives Support to promote exports from the country. 6. Lender of Last Resort: The commercial banks approach the Reserve Bank of India in times of emergency to tide over financial difficulties, and the Central Bank comes to their rescue as a lender of last resort, 7. Central Clearance and Accounts Settlement: Since commercial banks have their surplus cash reserves deposited in the Reserve Bank of India, it is easier to deal with each other and settle the claim of each on the other through book keeping entries in the books of the Central Bank. The clearing of accounts has now become an essential function of the Reserve Bank of India. Controller of Credit: Credit is controlled by the Reserve Bank in accordance with the economic priorities of the government. RBI has a Control on bank TAXMANN® aIMONEY MARKETS . Liquidity credit through Cash Reserve Ratio (CRR) and rae iq Ratio (SLR) which commercial banks have to m Policy 9, RBI is the Regulator of Financial System through Monetary i mone: The Government intervenes to control the interest Soe y supply in the economy through Fiscal and Monetary policy. i OL i f money but the number of institutions can affect the supply o k i atest impact on the money supply is made by the Reserve Ban! and the commercial banks. i i It reviews the The RBI formulates monetary policy twice a year. we licy every quarter as well. The main objectives of ae monetary policy are to control the Inflation by Monitoring dutter key indicators like GDP and inflation. The RBI undertakes Open market operations and Interest rate control through repo rate, reverse repo rate, and bank rate. A repo transac- tion is one in which a bank or financial institution sells government securities or bonds to the RBI, which charges interest on it. Known gs the repo rate, the RBI uses it to infuse liquidity in the system. In the reverse repo transaction, the RBI sells or releases bonds to drain out excess liquidity. These transactions are carried out daily as part of the central bank’s liquidity management operations, and are cur- rently not traded on the exchange. Another way in which the money supply can be affected by the cen- tral bank is through its operation. of the interest rate. By raising or lowering interest rates the demand for money is respectively reduced or increased. The RBI regulates the Indian banking and financial system by issuing broad guidelines and instructions also. It helps in Maintaining peo- ple’s confidence in the banking and financial system, and Provides different tools for customers’ help, such as acting as the “Banking Ombudsman.” Monetary Policy Monetary policy refers to the use of certain regulatory tools under the control of the RBI in order to regulate the availability, cost and use of money and credit. There are several direct and indirect tools which RBI can use to regulate the financial markets and maintain stability. Important ones are discussed below: Cash Reserve Ratio (CRR): CRR is the minimum amount of cash that commercial banks have to keep with the RBI at any given point in time. RBI (i i ng on ne GQ)e MONEY MARKETS uses CRR either to drain excess liquidity from the additional funds needed for the srowth of the economy OF to Tele For example, if the RBI reduces the CRR from 5% t ‘ banks will now have to keep a lesser Proportion of their om it meang th RBI making more money available for business, Similar posts wit e to increase the CRR, the amount available with iy banks ean deci { S do SLRisthe amount that commergj " to keep gold or Sovernment approved secu iti of their total deposits, i wry increases the Repo ice versa. As a tool to ig it more expensive Sto estrict the availability of money, Similarly, the RBI will do the exact ite i i eae ict Opposite ina deflationary Reverse Repo Rate: The rate at which the RBIis willing to borrow from the commercial banks is called reverse Tepo rate. If the RBI increases the The Repo Rate and the Reverse Repo Rate are important tools with which the RBI can control the. availability and the ‘supply of money in the economy, Over the last decade, there has been substantial development in the Indian money market in terms of depth, variety of instruments and efficiency. This has enabled the Reserve Bank to change its monetary operations from direct quantity based instruments to indirect interest rate based instruments to enhancethe efficiency of; monetary transmission consistent with international best practice, Taynsann®MONEY MARKETS ney Market in India Mo in India began in th _,gncial reforms in India began in the early 19906 ineluding the reforms pe rant ck dp a ral characte by paucitY of stn oer of ahcdtiate ates WMal Gealy jem ted of ateralized ills, sci pills and participation Certificates, Rani ane AES co) A Developments in Money Market since the 1990s : Abolition of ad hoc treasury bills in April 1997 i rullfle dged LAF in June 2000, 3, CBLO for corporate and non-bank participants introduced in 2003 4, Minimum maturity of CPs shortened by October 2004 dential limits on exposure of bank: ‘i 5 Prien Apri 2005 ‘s and PDs to call/notice 6, Maturity of CDs gradually shortened by April 2005 7, Transformation of callmoney market * py August 2005 8, Widening of collateral base by making State Government securities » (SDLs) eligible for LAF operations since April 2007 9, Operationalisation ofascreen-based negotiated system (NDS-CALL) for all dealings in the call/notice'and the term money markets in September 2006. The reporting of all such transactions made compulsory through NDS-CALL in November 2012. 10. Repo in corporate bonds allowed in March 2010. 11. Operationalisation of a reporting platform for secondary market transactions in CPs and CDs in July 2010. 12. The Withdrawal of interest rate ceilings in the money market; 13. Introduction of auctions in treasury bills; intoapure inter-bank market 14. Gradual move away from the cash credit system to a loan-based system. Maturities of other existing instruments such as CP and CDs were also gradually shortened to encourage wider participation. Most importantly, the ad hoc treasury bills were abolished in 1997 thereby putting a stop to automatic monetisation of fiscal deficit. This enhanced the instrument independence of the Reserve Bank of India. Banks generally have a ratio of cash to deposits which they consid- €r to be the minimum safe level. If command for cash is such that a i a ae ee44 MONEY MARKETS their reserves fall below this level they will able to borrow * from the central bank at its discount rate. If market Tates w, ef and the discount rate were also 8%, then the banks might degre. t their cash reserves to their minimum ratio knowing that if q ay exceeds supply they will be able to borrow at 8%. The central}, even if, may raise its discount rate to a value above the market lev in order to encourage banks not to reduce their cash reserves tone minimum during excess loans, By raising the discount value to Sug, a level, the commercial banks are given an incentive to hold More reserves thus reducing the money multiplier and the money Supply The central bank may also control the money supply through the financial base. It may choose to either buy or sell securities in the marketplace which will either inject or remove money Tespectively Thus the monetary base will be affected causing the money supply to modify. This money market is dominated by the Central bank. It facilitates the exchange of financial assets for money. In India, RBI acts as watchdog of the monetary system. It occupies strategic position and influences availability and cost of credit. The pivotal role of RBI is that of promotional and development banker in the money market, RBI intervenes to regulate the liquidity and interest rates through its monetary policies like Repo or Reverse Repo rates to achieve the broad objectives like stability of interest rate and foreign exchange market. The funds are being sold and purchased at a certain price by banking, institutions and individuals. Shortcomings of Indian the Money Market Indian money market is one of the leading money market among various developing countries butit still suffers from many drawbacks. The important shortcomings are as follows: 1. Absence of Integration: Indian money market has been classified into organized and unorganized sector. Both of them further have of number of divisions and subdivisions, The organized sector consists of financial institutions headed by RBI The unorganized sector con- sist of institutions like indigenous bankers, village moneylenders etc, The financial operations of these two segments are independent of each other. There is a lack of coordination and integration amongst various sub-markets. 2, Inadequate banking facility: The major problems of the banking sys- tem in India are huge NPA, under-developed rural banking network iit __MONEY MARKETS 45 and poor efficiency. Thus these drawbacks lead to the problem of mobilization of huge amount of small savings in the rural areas very difficult. This inadequate banking facility is major problem formoney market in India. 3, Multiple interest rates; Most of the legal financial institutions work in their own way and they charge different interest rates. There is a huge variation in rates for lending, borrowing, government activities, etc. Thus the investors get confused in this system. 4, Shortage of funds or resources: Indian money market faces seasonal shortage of financial resources. The demand for funds is much more than the supply of funds. The major reasons for shortage of funds in Indian economy are poverty, lower savings, inadequate banking facility and lower income. 5. Shortage of investments instruments: Various instruments like commercial papers, Certificate of Deposits, Treasury bills and com- mercial bills are used in Indian money market. However, there is an inadequacy among the size of the population and the market for these instruments. Although RBI has taken several steps for the development of efficient instruments but there is still much to be desired. CE