Indian Money Market: An Overview

The Indian money market cannot be considered as an integrated unit. It can be broadly divided into two different parts, i.e., the unorganised and organised segments. There are lot of differences between unorganised and organised segment of Indian money market.

While the unorganised sector is constituted by money lenders and the indigenous bankers but the organised sector is again constituted by the nationalised and private sector commercial banks, the foreign banks, co-operative banks and the Reserve Bank of India (RBI). The unorganised segment of the Indian money market is not a homogenous and integrated sector but the organised sector of the Indian money market is a fairly integrated one.

Structure of Indian money market:


Unorganised Sector of Indian Money Market:

Unorganised segment of the Indian money market is composed of unregulated non-bank financial inter­mediaries, indigenous bankers and money lenders which exist even in the small towns and big cities. Their lending activities are mostly restricted to small towns and villages. The persons who normally borrow from this unorganised sector include farmers, artisans small traders and small scale producers who do not have any access to modern banks.

The following are some of the constituents of unorganised money market in India.

(i) Indigenous Bankers:

Indigenous bankers include those individuals and private firms which are engaged in receiving deposits and giving loans and thereby acting like a mini bank. Their activities are not at all regulated. During the ancient and medieval periods, these indigenous bankers were very active. But with the growth of modern banking, particularly after the advent of British, the business of the indigenous bankers received a setback.

Moreover, with the growth of commercial banks and co-operative banks the area of operations of indigenous bankers has again contracted further. Even today, a few thousands of indigenous bankers are still operating in the western and southern parts of the country and engaging themselves in the traditional banking business.

Indigenous bankers are classified into four main sub groups, i.e., Gujarati Shroffs, Multani-or Shikarpuri Shroffs, Chettiars and Marwari, Kayast. Gujarati Shroffs are mostly operating in Mumbai, Kolkata and in industrial and trading cities of Gujarat. The Multani or Shikarpuri Shroffs are operating mainly in Mumbai and Chennai. The Chettiars are mostly found in the South.

The Marwari Shroffs are mostly active in Mumbai, Kolkata, tea gardens of Assam and also in different other parts of North-East India. Among the four aforesaid groups, the Gujarati indigenous bankers are considered as the most powerful groups in respect of its volume of business.

The indigenous bankers are mostly engaged in both banking and non-banking business which they do not want to separate. Their lending operations remain mostly unregulated and unsupervised. They charge high rate of interest and they are not influenced by bank rate policy of the Reserve Bank of India.

(ii) Unregulated Non-Bank Financial Intermediaries:

There are different types of unregulated non-bank financial intermediaries in India. They are mostly constituted by loan or finance companies, chit funds and ‘nidhis’. A good number of finance companies in India are engaged in collecting substantial amount of funds in the form of deposits, borrowings and other receipts.

They normally give loans to wholesale traders, relailers, artisans, and different self-employed persons at a high rate of interest ranging between 36 to 48 per cent.

There are various types of chit funds in India. They are doing business in almost all the states but the major portion of their business is concentrated in Tamil Nadu and Kerala. Moreover, there are ‘nidhis’ operating in South India which are a kind of mutual benefit funds restricted to its members.

(iii) Moneylenders:

Moneylenders are advancing loans to small borrowers like marginal and small farmers, agricultural labourers, artisans, factory and mine workers, low paid staffs, small traders etc. at very high rates of interest and also adopt various malpractices for manipulating loan records of these poor borrowers.

There are broadly three types of moneylenders:

(i) Professional moneylenders dealing solely with money lending;

(ii) Itinerant moneylenders such as Kabulis and Pathans and

(iii) Non-professional moneylenders.

The area of operation of the moneylenders is very much localised and their methods of operation is also not uniform. The money lending operation of the moneylenders is totally unregulated and unsupervised which leads to worst exploitation of the small borrowers.

Moneylenders have become a necessary evil in the absence of sufficient institutional sources of credit to the poorer sections of society. Although various measures have been introduced to control the activities of moneylenders but due to lack of political will, these are not enforced, leading to a exploitation of small borrowers.

Organised Sector of Indian Money Market:

The organized segments of the Indian money market is composed of the Reserve Bank of India (RBI), the State Bank of India, Commercial banks, Co-operative banks, foreign banks, finance corporations and the Discount or Finance House of India Limited. The segment of Indian money market is quite integrated and well organised.

Mumbai, Kolkata, Chennai, Delhi, Bangalore and Ahmedabad are the leading centres of the organised sectors of the Indian money market. The Mumbai money market is a well organised, having head offices of the RBI and different commercial banks, two leading well developed stock exchanges, the bullion exchange and fairly organised market for Government securities. All these have placed the Mumbai money market at par with New York money market of USA and London money market of England.

The main constituents of the organised sector of Indian money market include:

(i) The Call Money Market,

(ii) The Treasury Bill Market,

(iii) The Commercial Bill Market,

(iv) The Certificates of Deposits Market,

(v) Money Market for Mutual Funds and

(vi) The Commercial Paper Market.

(i) Call Money Market:

The call money market is a most common form of developed money market. It is a most sensitive segment of the financial system which reflects clearly any change in it. The call money market in India is very much centred at Mumbai, Chennai and Kolkata and out of which the Mumbai is the most important one. In such market, lending and borrowing operations are carried out for one day.

The call money market in also termed as inter-bank call money market. Normally, scheduled commercial banks, Co­operative banks and the Discount and Finance House of India (DFHI) operate in this market and in a special situation; the LIC, UTI, the GIC, the IDBI and the NABARD are permitted to operate as lenders in this call money market. In this market, brokers usually play an important role.

(ii) Treasury Bill Market:

Treasury bill markets are markets for treasury bills. In India such treasury bills are short term liability of the Central Government which are of 91 day and 364-day duration. Normally, the treasury bills should be issued so as to meet temporary revenue deficit over expenditure of a government at some point of time. But, in India, the treasury bills are, nowadays, considered as a permanent source of funds for the Central Government.

In India, the RBI is the major holder of the treasury bills, which is around 90 per cent of the total. In India, ad-hoc treasury bills have now been replaced by ways and means Advances since April 1, 1997, so as to finance temporary deficits of the Central Government.

(iii) Commercial Bill Market:

The Commercial bill market is a kind of sub-market which normally deals with trade bills or the commercial bills. It is a kind of bill which is normally drawn by one merchant firm on the other and they arise out of commercial transactions.

The purpose for issuing a commercial bill is simply to reimburse the seller as and when the buyer delays payment. But, in India, the commercial bill market is not so developed. This is mainly due to popularity of the cash credit system in bank lending and the unwillingness on the part of large buyer to bind himself to payment schedule related to the commercial bill and also the lack of uniform approach in drawing bills.

Commercial bills are an instrument of credit which is very much useful to business firms and banks. In India, the outstanding amount of commercial bills rediscounted by the banks with different financial institutions at the end of March, 1996 was to the extent of only Rs 374 crore.

(iv) Certificate of Deposit (CD) Market:

The certificate of Deposit (CD) was introduced in India by the RBI in March 1989 with the sole objective of widening the range of money market instruments and also to attain higher flexibility in the development of short term surplus funds for the investors. Initially the CDs are issued by scheduled commercial banks in multiples of Rs 25 lakh and also to the extent of a minimum of Rs 1 crore.

Maturity period of CDs varied between three months and one year. In India, six financial institutions, viz., IDBI, ICICI, IFCI, IRBI, SIDBI and Export and Import Bank of India were permitted in 1993 to issue CDs for period varying between 1 to 3 years.

Banks normally pay high rates of interest on CDs. In 1995-96, the stringent conditions in the money market induced the bankers to mobilise a good amount of resources through CDs. Accordingly in recent years, the outstanding amount of CDs issued by the commercial banks has almost been doubled from Rs 8,017 crore in March, 1995 to Rs 16,316 crore as on 29th March, 1996.

(v) Commercial Paper Market:

In India, the Commercial Paper (CP) was introduced in the money market in January 1990. A listed company having working capital not less than Rs 5 crore can issue CP. Again, the CP can be issued in multiples of Rs 25 lakhs subject to a minimum of Rs 1 crore for a maturity period varying between three to six months. CPs would be again freely transferable by endorsement and delivery.

(vi) Money Market Mutual Funds:

In India, the RBI has introduced a scheme of Money Market Mutual Funds (MMMFs) in April 1992. The main objective of this scheme was to arrange an additional short term avenue for the individual investors. This scheme has failed to receive much response as the initial guidelines were not attractive. Thus, in November, 1995, the RBI introduced some relaxations in order to make the scheme more attractive and flexible.

As per the existing guidelines, the banks, public financial institutions and the private financial institutions are allowed to set up MMMFs. In the mean time, the limits of investment in individual instruments by MMMF have already been deregulated. Since April 1996, the RBI has allowed MMMFs to issue units to corporate enterprises and others at par with the mutual funds introduced earlier.

As per the latest data available from Association of Mutual Funds, overall, the combined Assets Under Management (AUM) of all the mutual fund houses in country stood at Rs 5,06,692.6 crore. The top five mutual funds of the country include Quant MF, ICICI Prudential MF, KOTAK MF, HDFC MF and Franklin Templeton MF. Reliance MF continued to be the most valued fund house in the country with assets under management (AUM) of Rs 90,937.94 crore at the end of March 31, 2008.

The industry body Assocham Chamber recently conducted a survey on “MF Growth Patterns” and accordingly observed that the Mutual Fund industry has growth 25 per cent between 1999 and 2007 to stand at Rs 4,67,000 crore and the trend would improve as MFs are becoming a preferred choice for both rural and urban retail investors.

The mutual fund sector would grow at compound annual rate of 30 per cent in next three years to become Rs 9,50,000 crore industry as predicted by the survey. The share of privately managed MF players in the total MF industry is expected to fall to 70 per cent from the current estimation of 82 per cent. The reduction would result from the alliance of the private players with overseas partners.


Liquidity Management: Money market is a dynamic market. It facilitates better management of liquidity and money in the economy by the monetary authorities. This, in turn, leads to economic stability and development of the country.

Short-term requirements of borrowers: Money market provides access to sources of funds to borrowers in order to meet their short-term requirements at reasonable interest rates.

Portfolio Management: Money market deals with different types of financial instruments that are designed to suit the risk and return preferences of the investors. This enables the investors to hold a portfolio of different financial assets which in turn, helps in minimizing risk and maximizing returns.

Economizes the use of cash: Money market deals with various financial instruments that are close substitutes of money and not actual money. Thus, it economizes the use of cash.

Implementation of monetary policy: Monetary policy is implemented by the central bank. It aims at managing the quantity of money to meet the requirements of different sectors and to increase the pace of economic growth. A well-developed money market ensures the successful implementation of the monetary policy. It also guides the central bank in developing an appropriate interest policy.

Equilibrating mechanism: Through the rational allocation of resources and mobilization of savings into investment channels, the money market helps to establish equilibrium between the demand for and supply of short-term funds.

Financial requirements of the government: Money market helps the government to fulfill its short-term financial requirements on the basis of Treasury Bills (T-bills).


Development of Trade and Industry

  • It is an important source of financing trade and industry, as it provides for short-term funds adequately and quickly
  • The money market, through discounting operations and commercial papers, finances the short-term working capital requirements of trade and industry and facilities the development of industry and trade both national and international

Development of Capital Market

  • The short-term rates of interest and the conditions that prevail in the money market influence the long-term interest, as well as the resource mobilization in capital market

Smooth Functioning of Commercial Banks

  • The money market provides the commercial banks with facilities for temporarily employing their surplus funds in easily realizable assets. The banks can get back the funds quickly, in times of need, by resorting to the money market.
  • It also enables commercial banks to meet their statutory requirements of cash reserve ratio (CRR) and Statutory Liquidity Ratio (SLR) by utilizing the money market mechanism.

Effective Central Bank Control

  • A developed money market helps the effective functioning of a central bank.
  • Its facilities effective implementation of the monetary policy of a central bank

Formulation of Suitable Monetary Policy

  • Conditions prevailing in a money market serve as a true indicator of the monetary state of an economy.
  • Hence, it serves as a guide to the Government in formulating and revising the monetary policy, depending upon the monetary conditions prevailing in the market.

Non-Inflationary Source of Finance to Government

  • A developed money market helps the Government to raise short-term funds through the treasury bills floated in the market.
  • In the absence of a developed money market, the Government would be forced to print and issue more money or borrow from the central bank; Both of which would lead to an increase in prices and the consequent inflationary trend in the economy.

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