Features of Indian Money Market, Indian Economy Video Lecture | Business Economics for CA Foundation

Ans. The Indian Money Market has the following main features: 1. Fragmented Structure: The Indian Money Market consists of various segments such as the call money market, treasury bills market, commercial paper market, certificate of deposit market, etc. This fragmented structure allows for different instruments and participants to operate within the market. 2. Short-Term Nature: The Indian Money Market primarily deals with short-term funds, typically with a maturity period of less than one year. It provides a platform for borrowing and lending of short-term funds to meet immediate liquidity requirements. 3. Wide Range of Participants: The market caters to a wide range of participants, including commercial banks, non-banking financial companies (NBFCs), mutual funds, insurance companies, corporates, and individuals. These participants engage in various money market instruments based on their requirements and risk appetite. 4. High Liquidity: The Indian Money Market is known for its high liquidity, allowing participants to easily buy or sell their money market instruments. This liquidity is maintained through the presence of active players and regulatory mechanisms. 5. Regulated by RBI: The Reserve Bank of India (RBI) acts as the regulator and supervisor of the Indian Money Market. It formulates and implements policies to ensure the smooth functioning and stability of the market.

Ans. The Indian Money Market plays a crucial role in the Indian economy in the following ways: 1. Source of Short-Term Funds: The money market provides a platform for raising short-term funds for various economic activities. Businesses, individuals, and the government can borrow funds for working capital requirements, trade financing, and other short-term needs. 2. Liquidity Management: The money market helps in efficient liquidity management for financial institutions. Banks and other financial intermediaries can invest their surplus funds in money market instruments to earn interest and maintain liquidity simultaneously. 3. Price Discovery: The money market serves as a platform for price discovery of short-term funds. Interest rates in the money market reflect the demand and supply dynamics of short-term funds, providing crucial information for the overall interest rate structure in the economy. 4. Monetary Policy Implementation: The Reserve Bank of India (RBI) uses various money market operations to implement its monetary policy. By buying or selling government securities in the money market, the RBI influences the liquidity conditions and interest rates in the economy. 5. Risk Management: The money market allows participants to manage their short-term funding and investment requirements while minimizing risks. Various money market instruments provide options for diversification and risk mitigation.

Ans. The Indian Money Market consists of the following segments: 1. Call Money Market: The call money market deals with short-term funds borrowed and lent on a daily basis, usually overnight. It facilitates interbank borrowing and lending to manage daily liquidity requirements. 2. Treasury Bills Market: The treasury bills market enables the government to borrow funds for a short duration, typically up to one year. These are zero-coupon securities issued at a discount and redeemed at face value. 3. Commercial Paper Market: The commercial paper market allows highly rated corporates to raise short-term funds by issuing unsecured promissory notes. These promissory notes have a maturity period of up to one year and are traded among investors. 4. Certificate of Deposit Market: The certificate of deposit market enables banks to raise funds by issuing negotiable certificates of deposit to investors. These certificates represent time deposits with a fixed maturity period. 5. Commercial Bills Market: The commercial bills market facilitates short-term financing of trade transactions. It involves the issuance and trading of bills of exchange, which are used by businesses to finance their trade activities.

Ans. The Reserve Bank of India (RBI) regulates the Indian Money Market through various measures, including: 1. Monetary Policy: The RBI formulates and implements monetary policy to manage liquidity conditions and interest rates in the money market. It uses tools like the repo rate, reverse repo rate, and open market operations to influence the market. 2. Statutory Reserves: The RBI mandates commercial banks to maintain a certain portion of their deposits as statutory reserves. This reserve requirement ensures stability and liquidity in the banking system and indirectly affects the money market. 3. Market Surveillance: The RBI closely monitors the functioning of the money market to detect any irregularities or malpractices. It conducts regular inspections, audits, and supervisory activities to ensure transparency and fairness in the market. 4. Regulatory Framework: The RBI formulates and enforces regulations and guidelines for various money market instruments and participants. It sets prudential norms, disclosure requirements, and risk management guidelines to safeguard the interests of participants and maintain market integrity. 5. Development Initiatives: The RBI takes proactive measures to develop and strengthen the Indian Money Market. It introduces new money market instruments, promotes innovation, and encourages participation from various segments to enhance the market's efficiency and depth.

Ans. The Indian Money Market contributes to economic growth in the following ways: 1. Capital Formation: The money market provides a platform for raising short-term funds, which supports capital formation in the economy. Businesses can access funds for working capital requirements, while individuals can meet their short-term financial goals. 2. Investment Opportunities: The money market offers various investment opportunities for individuals and institutions. By investing in money market instruments, participants can earn returns on their surplus funds, leading to increased savings and investment in the economy. 3. Efficient Allocation of Funds: The money market helps in the efficient allocation of funds by channeling savings from surplus sectors to deficit sectors. It enables borrowers to access funds at competitive interest rates while providing lenders with avenues to earn interest on their idle funds. 4. Stability and Liquidity: The money market plays a crucial role in maintaining stability and liquidity in the financial system. It provides a platform for managing short-term liquidity requirements, reducing the risk of financial crises and disruptions in the economy. 5. Monetary Policy Transmission: The money market acts as a channel for the transmission of monetary policy decisions. By influencing interest rates and liquidity conditions, the Reserve Bank of India can stimulate or restrain economic activity, thereby contributing to overall economic growth.