Discuss the Recent Trends in the Indian Money Market
The recommendations of the 1987 Narasimha Committee II
significantly improved the money market in India. The Reserve Bank introduced
several measures during this period to improve the money market. Notable among
them are-
1. Marketization of interest rates:
The Indian money market has been greatly improved by the marketization of interest rates. Earlier the ceiling of interest rate in the
demand money market was 10%. Similarly, the ceiling for inter-bank term money
and commercial bill refinancing and inter-bank participation without risk was
10.5% to 11.5% and 12.5% respectively. The withdrawal of the interest rate caps and commercial bill refinancing rate are valuable steps toward the modernization
of the Indian money market.
2. Waiver of Stamp Duty:
The main disadvantage of using hundis or bills in the money
market was the stamp duty imposed on the hundreds. In August 1989, the government
withdrew stamp duty to improve the bill market. As a result, the use of hundi
or bill will increase and the bill market will also expand. As the bill market
expands, the money market will also improve.
3. Introduction of New Financial Instruments:
Currently, new financial instruments have been introduced in
cash flows and regulatory environments to meet the financial needs of various
types of investors or lenders, and borrowers. For example – the introduction of
treasury bills, risk-free or risk-bearing inter-bank participation
certificates, certificates of deposit, and instruments has increased the scope
of financial markets manifold.
4. Establishment of Batta and Financial Centres:
The Discount and Finance House of India was established based
on the recommendations of the Bhagal Committee. This institution started
functioning on 25th April 1988. The main function of Batta and Financial
Center is to simply resolve the short-term liquidity imbalance in the money
market. Apart from this, working as a specialized intermediary in the business
of financial documents in the money market. These institutions not only deal in
commercial bills, but they also deal in short-term treasury bills, and government or
government-sanctioned debt securities. Since 1992, this institution has started
buying and selling government bonds. Since February 1996, this company has been
recognized as the main representative or dealer (Primary Dealer). Since then,
the participation of both primary and secondary markets and financial centers
in buying and selling government bonds has increased. As a result, the Indian
money market has gained momentum.
5. Introduction of Repo System:
The word 'repo' comes from repurchase. Banks and other
financial institutions participating in the money market issue securities to
raise their financial funds on the condition that they will repurchase the
securities at a specified price after a specified period. This system
is known as the repo system. In the repo system, purchase and sale contracts are
executed simultaneously. When a bank or financial institution needs short-term
funds, it sells its securities and when its short-term funds are more than its requirements, it participates in repo or resale arrangements. The repo
system balances the supply and demand of short-term funds. Repo has been fixed
at 14 days from August 1993. However, the timing of repo arrangements varies
across financial institutions. This system has become quite popular in banks.
6. Reverse Repo:
A reverse repo is a reverse repo. When a bank or financial institution buys investment securities on the condition that it will sell or return the investment securities to that institution after a specified period and at a specified contract price, it is called a reverse repurchase agreement or reverse repos. That is, when one company's transaction is a repo, the other company's is reverse repo. Reverse Repos provide additional income from short-term surplus funds. Repos and reverse repos have been established as effective means of eliminating liquidity fluctuations and stabilizing interest rates in the money market.
7. Modernization of Technology:
Improvement of technology is essential for the development of
financial markets. The introduction of the VSAT network and the improvement of the electronic
dealing system have helped considerably in expanding the money market. Apart
from this, the electronic system has also brought transparency to the money
market.
Since the mid-nineties, India's money market has developed
rapidly as a result of adopting a modified monetary policy as recommended by
the Narasimha Committee II. In short, the current money market has been
modernized by relaxing the strictness of the transaction system, deregulation of interest rates, and expanding the number of eligible participants.