The Money market in India is a correlation for short-term funds with maturity ranging from overnight to one year in India including financial instruments that are deemed to be close substitutes of money] Similar to developed economies the Indian money market is diversified and has evolved through many stages, from the conventional platform of treasury bills and call money to commercial paper, certificates of deposit, repos, forward rate agreements and most recently interest rate swaps
The Indian money market consists of diverse sub-markets, each dealing in a particular type of short-term credit. The money market fulfills the borrowing and investment requirements of providers and users of short-term funds, and balances the demand for and supply of short-term funds by providing an equilibrium mechanism. It also serves as a focal point for the central bank’s intervention in the market.
Reserve Bank of India
The influence of the Reserve Bank of India’s power over the Indian money market is confined almost exclusively to the organised banking structure. It is also considered to be the biggest regulator in the markets. There are certain rates and data which are released at regular intervals which have a huge impact on all the financial markets in INDIA. The unorganised sector, which consists mostly of indigenous bankers and non-banking financial companies, although occupying an important position in the money market have not been properly integrated with the rest of the money market.
Deregulation of Interest Rates
From May 1989, the ceiling on interest rates on the call money, inter-bank short-term deposits, bills rediscounting and inter-bank participation was removed and the rates were permitted to be determined by the market forces. Thus, the system of administered interest rates is being gradually dismantled
Introduction of New Money Market Instruments
In order to widen and diversify the Indian money market RBI has introduced many new money market instruments such as 182-days treasury bills, 364-day treasury bills, CDs & CPs.
Through these instruments the government, commercial banks, financial institutions and corporate can raise funds through the money market. They also provide investors additional instruments for investments.
In order to expand the investor base for CDs and CPs the minimum amount of investment and the minimum maturity periods are reduced by RBI.
Liquidity Adjustment Facility (LAF)
RBI has introduced LAF from June 2000 as an important tool for adjusting liquidity through repos and reverse repos.
Thus, in the recent years RBI is using repos and reverse repos as a policy to adjust liquidity in the money market and therefore, to stabilize the short-term interest rates or call rates.
Repurchase Agreements (Repos)
RBI introduced repos in government securities in December 1992 and reverse repos in November 1996.
Repos and reverse repos help to even out short-term fluctuations in liquidity in the money market. They also provide a short-term avenue to banks to park their surplus funds.
Through changes in repo and reverse repo rates RBI transmits policy objectives to entire money market
Discount and Finance House of India (DFHI)
In order to impart liquidity to money market instruments and help the development of secondary market in such instruments, DFHI was set up in 1988 jointly by RBI, public sector banks and financial institutions
The Clearing Corporation of India Limited (CCIL)
The CCIL was registered on April 30, 2001 under the Companies Act, 1956, with the State Bank of India as the chief promoter.
The CCIL clears all transactions in government securities and repos reported on the Negotiated Dealing System (NDS) of RBI.
Regulation of NBFCs
The RBI Act was amended in 1997 to provide for a comprehensive regulation of NBFC sector.
According to the amendment, no NFBC can carry on any business of a financial institution, including acceptance of public deposit, without obtaining a Certificate of Registration (CoR) from RBI.