Money Market is a Market for trading in short-term loans between banks and financial institutions. Participants in the money market borrow and lend for the short term.
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The RBI is highly impacted by the functioning of the Indian Money Market. Therefore, the efficiency of the Money Market is very important.
1. It is through the Money Market that surplus funds move to deficit areas. This helps in tackling temporary liquidity crisis in the country.
3. Government deficits are financed through the Money Market in a non-inflationary way.
That’s why you can say that Money Market is a ‘barometer’ of the Central Banking operations.
The Indian market is characterized by the presence of various types of financial institutions such as Non-Banking Financial Intermediaries, Cooperative Banks, Export-Import banks, indigenous lenders and so on. They cater to the financial needs of different sectors.
Money Market is all about indigenous components like indigenous lenders and so on. Many Non-Banking Financial Companies (NBFCs) have come up, which raise funds from the general public. NBFCs are outside the control and supervision of the RBI.
See also: What is Primary Market?
Indian Money Market is characterized by diversity in interest rates. Prime examples are the Government borrowing rates, deposit and lending rates of commercial banks, deposit and lending rates of co-operative banks and so on. This diversity is because of the immobility of funds from one section of the money market to another.
Indian Call Money Market rate is highly volatile. In peak season it may shoot up to 7-8%. However, in the slack season it falls to as low as 0.5%. RBI tries to moderate this volatility in the Call Money Market by supplying additional funds when supply is short and when call rates are high. Also, it absorbs the additional funds when Call Money Market has surplus funds. Unfortunately, in spite of all the efforts made by RBI, the fluctuations in the Call Money Market rates continue to be high.
5. Organized and Unorganized Sectors:
The Indian Money Market has two sectors, Organized Sector and Unorganized Sector. The cooperation and contact between the sectors is not too great. Also, the rate of interest in both the markets fluctuates widely.
Owing to fluctuating demand for funds, there are two seasons in Indian money Market, namely, the busy season and the slack season. November to April is the busy season as agricultural products come into the market during this time. Therefore, demand for funds during this period is high. May to October is the slack season. During this time, funds are repaid and demand for funds falls.
Indian Money Market is dominated by Government Securities and Semi-Government Securities.
Indian Money Market has an underdeveloped Bill Market. Due to this, it has almost no Acceptance and Discount Houses.
There is no movement of funds between the Indian Money Market and Foreign Money Markets.
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