Discuss the Recent Trends in the Indian Money Market
The recommendations of the 1987 Narasimha Committee IIsignificantly 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.