The money market facilitates the short-term meeting of lenders with excess funds and borrowers with obligations for maturities ranging from a single day to an entire year. The money market provides a price-based standard against which inflation-neutral interest rates can set. It also permits governments to conduct monetary policy using open market mechanisms. Monetary policy in the money market can also implement through open market activity. Read on to discover everything there is to know about structure of indian money market and to become a subject matter expert on it.
The money market is a trading venue for the exchange of cash and other highly liquid assets. It’s not like the stock market, where you can physically go. Instead, it’s a phone conversation. In contrast, a stock exchange is a centralized market for trading shares of stock. Dedication and dependability are crucial qualities for success in the financial markets. Expanding your knowledge on advantages of money market accounts can be achieved by reading more.
Structure of Indian Money Market
The money market is where investors buy and sell money market instruments, as defined by the Reserve Bank of India. It helps people out financially in the short term and provides lenders with cash. Agents bid on short-term investable excess funds made available by financial institutions and other individuals and institutions for debtors, including individuals, institutions, or even the government. Broaden your horizons by checking out the structure of the Indian money market.
In 1990, investors could buy these CBs for the first time. Mutual funds, NBFCs, Scheduled Commercial Banks, Merchant Banks, Co-operative Banks, and Co-operative Banks all offer these to their customers. It replaced the previous Bill Market in the country, which had been operating since 1952. The seller writes a promissory note on the buyer, covering the cost of goods previously shipped, thus creating a commercial bill. The bill automatically pay, ensuring the cost cover.
A discussion is possible. After being approved by banks, these bills go by a variety of names, including bills of exchange, trade bills, and business bills. Typically, a payment schedule of 90 days or less require. At this point, the vendor may try to reduce the bill’s interest rate by negotiating with the issuing banks. The EXIM bank, SIDBI, and IDBI are just a few of the FIs that will accept these bills for re-discounting. Therefore, commercial invoices are a vital source of quick funding for the retail and wholesale sectors.
Mutual Funds for the Money Market
In 1992, mutual funds (MFs) were established as a money market instrument that would allow investors to make short-term investments. Since March of 2000, SEBI has been in charge of monitoring mutual funds. In addition to monitoring the RBI, this is essential. Currently, a diverse collection of financial institutions, including commercial banks, public and private financial institutions, and private sector firms, can establish MFs. This is good structure of indian money market
Repos and Backwards Repos
Banks and other financial institutions can get access to short-term loans from the RBI through the Repurchase Operation (Repo). The government will sell assets to the RBI to accomplish this. The Reserve Bank of India (RBI) buys assets from banks and other financial institutions during a reverse repurchase arrangement (reverse repo). This necessitates the RBI to take out loans from financial entities. These methods have grown increasingly important in recent years for handling monetary and fiscal policy.
These middlemen function similarly to banks by accepting deposits, making loans, and transacting in hundis (short-term local bills of exchange). Interest rates fluctuate with each market and each financial institution. However, they may spend more than merely the funds they receive from deposits. They go by a wide variety of surnames, including “Kathakali,” “Saraf,” “Shroff,” and “Chetty.” They provide financing to enterprises in the retail, manufacturing, and agricultural sectors. There are several advantages to working with an indigenous bank, but the most salient ones are straightforward and adaptable procedures, a laid-back approach, individual attention, efficiency, and speed.
However, issues such as a high interest rate (between 18 and 36 percent), confusion between banking and commerce, and an interest in non-banking industries such as general stores, brokers, and so on are obstacles they must overcome. In order to allow smaller investors access to the money market, the Reserve Bank of India (RBI) established money market mutual funds. Money market mutual funds pool investors’ deposits and invest it in liquid, short-term securities.
They interact with participants in the same way as mutual benefit funds do. The co-op relies heavily on dues paid by its members. The co-op offers low-interest loans to its members, who can use the funds for things like house improvements. You can only get them in South India, and they have a distinctively southern flavor. Chit money and Nidhis are both unregulated. This is the structure of indian money market.
Brokers of Finances
You can find them in any of the major towns; however, the cloth, grain, and commodity markets are the finest places to do so. They facilitate transactions between those seeking loans and those willing to lend.
They relate to monetary matters. The group’s members contribute to the fund on a consistent basis. Once the regulations have been established, the money distribute to the other members (through bids or drawings, as appropriate). The Chit Fund well know in the southern Indian states of Kerala and Tamil Nadu.
Bill for Cash Management (cmb)
Since August 2009, this has been in place so that the government may address its short cash flow issues. Cash Management Bills are a one-of-a-kind type of discounted financial instrument with a short payment term (less than 91 days). Discounted from their face value, CMBs are essentially the same as Treasury Bills. They are eligible for the ready forward facility and can trade. Legally, banks that put money into CMBs can meet their SLR (statutory liquidity requirements).
In contrast, the Reserve Bank of India monitors and keeps order in an organized market. This market is now a well-established, scientifically managed market that has eliminated all the issues that occur with an unregulated money market.
It first went live in 1990, and since then, business organizations all over India have adopted it. Companies issuing participation certificates require to maintain a certain credit rating from a rating agency approved by the RBI. CRISIL, ICRA, and a number of others fall within this category. Business paper can purchase in the form of a promissory note or as an abstract concept from any of the depositories authorized by SEBI to do so. High liquidity is a hallmark of commercial paper, an uninsured asset that trades on the money market. The buyer knows they will receive a certain sum of money at a certain time in the future because to the fixed expiration date. Public and private corporations with widespread recognition in the nation’s industrial and banking sectors produce commercial papers.
They’re being sold for less than they’re actually worth.
The Treasury Bills
This sector of the economy has existed since independence, although it wasn’t formally recognized until 1986. The Federal Government issues them whenever it needs a quick infusion of funds for up to 364 days. Treasury bills having maturities of 91 days, 182 days, and 364 days are now available for issuance. Banks and other financial institutions can use TBs to make short-term investments, and the government can use them as a short-term cushion. They also aid financial institutions in satisfying the CRR and SLR criteria. Treasury Bills are tradable on the secondary market. Many different types of businesses participate in the Treasury Bills Market, including commercial banks, primary dealers, mutual funds, corporations, financial institutions, pension funds, and insurance organizations.
Villages are home to professional donors. They rely heavily on this for financial support. Their interest rates are totally irrational. Agricultural workers, small and marginal farmers, craftsmen, factory workers, and others can all apply for and receive loans for personal, non-business purposes. They provide services that are prompt, flexible, and easy to work with. This is the best structure of indian money market.
Call Cmm (money Market)
People only borrow and lend money for a day on this market, therefore it’s also known as the “overnight borrowing market” or the “money at call” market. Money can borrow or earned on this market for a maximum of 14 days. We term this “short notice.” The majority of the transactions in this market involve banks exchanging money with one another. Individuals can borrow money on this market with or without pledging collateral. This market’s interest rate “glides” in tandem with the repo rate. The only service providers allowed in this market are LIC, GIC, Mutual Funds, IDBI, and NABARD. However, cooperative banks and scheduled commercial banks can both lend and borrow money in this market.
Cds (certificates of Deposit)
Introduced in 1989, they have now found widespread use among financial institutions, who typically make them available to customers for terms of less than a year. On the money market, you can buy, sell, and trade them. Financial institutions such as IFCI, IDBI, IRBI (now IIBI since 1997), and Exim Bank have been permitted by the RBI to participate in this market since 1993. These financial institutions have been granted authorization by the Reserve Bank of India to issue certificates of deposit with maturities ranging from one year to three years.
Commercial banks and other developing financial institutions may issue certificates of deposit, which are a form of unsecured promissory note. Certificates of deposit (CDs) are promissory notes redeemable in a bank for money deposited for a specified period of time at a specified interest rate. These financial instruments are extremely liquid and carry no inherent risk. Commercial banks in India were the first to employ CDs to facilitate access to capital markets.
Sector not Organized
The term “unorganized money market” is used to describe financial markets that are not regulated by a central authority, such as the Federal Reserve or the Securities and Exchange Commission. It is capable of functioning independently. Moneylenders, Indigenous bankers, dealers, landlords, Meghans, chukars, nidhis, and chit funds are only few of the major actors in the informal financial sector. The unregulated money market in India is run by bankers, moneylenders, and other non-banking financial intermediaries. Cities may be home, but the countryside is where their deeds are typically done. Indeed, they are a vital source of income for 36% of rural households.
How Many Different Kinds of Money Markets does India Have?
Money market securities include both short-term and long-term deposits, as well as commercial paper, certificates of deposit, money market mutual funds, commercial bills, and Treasury bills. Cash that must withdraw in less than 14 days from the date it issue call “short-notice money.”
Who is in Charge of the Money Market in India?
Several pieces of legislation, including the Reserve Bank of India Act of 1934, the Government Securities Act of 2006, the Foreign Exchange Management Act of 1999, the Bilateral Netting of Qualified Financial Contracts Act of 2020, and the Payment and Settlement Systems Act of 2007, give the Reserve Bank of India authority over the Indian financial markets. All of these regulations enact after the Reserve Bank of India Act was passed.
Who can Buy and Sell on the Money Market?
Banks, Primary Dealers (PDs), organisations financing development, insurers, and some mutual funds are some of the current participants in the call-and-notice money market (Annex I). Financial institutions, including as banks and PDs, can play dual roles in the market by serving as both borrowers and lenders.
The Reserve Bank is now in a better position to regulate the availability of cash as a result of the shifts in the money markets. Only financial securities with a maturity of one year or less trade on the money market. Security trading on the money market is often smooth and risk-free. As a result, their returns tend to be lower than those of other types of investments. The best way for an individual to enter the money market is through a money market mutual fund. Continue reading to become an expert in structure of indian money market and learn everything you can about it.