Ramesh Singh Test : Indian Financial Market - UPSC

• The money market is the short-term financial market of an economy. In this market, money is traded between individuals or groups (i.e., financial institutions, banks, government, companies, etc.), who are either cash-surplus or cash-scarce.

• Trading is done on a rate known as the discount rate which is determined by the market and guided by the availability of and demand for the cash in the day-to-day trading.

• Borrowing in this market may or may not be supported by collaterals.

• In the capital market, money is traded on the interest rate as well as on dividends. Long-term loans are raised on well-defined interest rates, while long-term capital is raised on dividends through the sale of shares.

The market operates in both ‘organised and ‘unorganised channels in India. Starting from the 'person-to-person’ mode and converting into ‘telephonic transaction', it has now gone online in the age of internet and information technology. The transactions might take place through the intermediaries (known as brokers) or directly between the trading sides.

• The organised form of money market in India is just close to three decades old. However, its presence has been there but restricted to the government only.

• It was the Chakravarthy Committee (1985) which, for the first time, underlined the need of an organised money market in the country and the Vaghul Committee (1987) laid the blueprint for its development.

• Today, the money market in India is not an integrated unit and has two segments- unorganised Money Market and Organised Money Market.

• Indigenous Bankers: Indigenous bankers receive deposits and lend money in the capacity of an individual or private firms. There are four such bankers in the country functioning as non-homogenous groups: (a) Gujarati Shroffs: They operate in Mumbai, Kolkata as well as in industrial, trading and port cities in the region. (b) Multani or Shikarpuri Shroffs: They operate in Mumbai, Kolkata, Assam tea gardens and North-Eastern India. (c) Marwari Kayas. They operate mainly in Gujarat with a little bit of presence in Mumbai and Kolkata. (d) Chettiars: They are active in Chennai and at the ports of southern India.

• Certificate of Deposit (CD): Organised in 1989, the CD is used by banks and issued to the depositors for a specified period ranging less than one year—they are negotiable and tradable in the money market.

• Since 1993 the RBI allowed the financial institutions to operate in it- IFCI, IDBI, IRBI (IIBI since 1997) and the Exim Bank—they can issue CDs for the maturity periods above one year and up to three years.

In a reverse repo, the banks and financial institutions purchase government securities from the RBI (basically here the RBI is borrowing from the banks and the financial institutions). All government securities are dated and the interest for the repo or reverse repo transactions are announced by the RBI from time to time.