Ramesh Singh Summary: Indian Money Market | Indian Economy for UPSC CSE PDF Download

INDIAN MONEY MARKET

• 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 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. The ‘repo rate' of the time (announced by the RBI) works as the guiding rate for the current 'discount rate'.
• 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.

Need for Money Market
Income generation (i.e., growth) is the most essential requirement of any economic system. In the modern industrial economies creation of productive assets is not an easy task, as it requires investible capital of long-term nature. Long-term capital can be raised either through bank loans, corporate bonds, debentures or shares (i.e., from the capital market).

Capital market
The short-term period is defined as upto 364 days. The crucial role money market plays in an economy is proved by the fact that if only a few lakhs or crores of rupees of working capital is not met in time, it can push a firm or business enterprise to go for lock-out, which has been set-up with thousands of crores of capital.

Money Market in India
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 blue print for its development.

Unorganised Money

• Market Before the government started the organised development of the money market in India, its unorganised form had its presence since the ancient times— its remna country.
• Their activities are not regulated like the organised money market, but they are recognised by the government. In recent years, some of them have been included under the regulated organised market (for example, the NBFCs were put under the regulatory control of the RBI in 1997).

Organised Money Market
Since the government started developing the organised money market in India (mid-1980s), we have seen the arrival of a total of eight instruments designed to be used by different categories of business and industrial firms.

• Money Market Mutual Fund (MF)
• Repos and Reverse Repos
• Commercial Bill (CB)
• Call Money Market (CMM)
• Certificate of Deposit (CDJ),
• Commercial Paper (CP)
• Treasury Bills (TBs)

MUTUAL FUNDS

• Mutual funds, first of all came in the money market (regulated by the RBI), but they have the freedom to operate in the capital market, too. This is why they have provision of dual regulator— the RBI and SEBI. Mutual funds are compulsorily registered with the Securities and Exchange Board of India (SEBI), which also acts as the first wall of defence for all investors in these funds.
• For those who do not understand how mutual funds operate but are willing to invest, the move by SEBI is seen as a big relief.
• Each mutual fund is run by a group of qualified people who form a company, called an asset management company (AMC) and the operations of the AMC are under the guidance of another group of people, called trustees.
• Both, the people in the AMC as well as the trustees, have a fiduciary responsibility, because these are the people who are entrusted with the task of managing the hard-earned money of people who do not understand much about managing money.
• There are three types of schemes offered by MFs :
  (i) Open-ended Schemes : An open-ended fund is one which is usually available from an MF on an on goin g basis, that is, an investor can buy or sell as and when they intend to at a NAV-based price.
  (ii) Closed-ended Schemes : A close-ended fund usually issue units to investors only once, when they launch an offer, called new fund offer (NFO) in India. Thereafter, these units are listed on the stock exchanges where they are traded on a daily basis. As these units a relisted, any investor can buy and sell these units through the exchange.
  (iii) Exchange-Traded Funds (ETFs) : ETFs are a mix of open-ended and close-ended schemes. ETFs, like close-ended schemes, a relisted and traded on a stock exchange on a daily basis, but the price is usually very close to its NAV, or the underlying assets, like gold ETFs.

DFHI

• The Discount and Finance House of India Limited (DFHI) was set up in April 1988 by the RBI jointly with the public sector banks and financial investment institutions (i.e ., LIC , GIC and UTI).
• Its establishment was an outcome of the long-drawn need of the following two types:
  (i) To bring an equilibrium of liquidity in the Indian banking system, and 13
  (ii) To impart liquidity to the instruments of the money market prevalent in the economy.

INDIAN CAPITAL MARKET
Project Financing
After Independence, India went for intensive industrialisation to achieve rapid growth and development. To this end, the main responsibility was given to the Public Sector Undertakings (PSUs). For industrialisation were quire capital, technology and labour, all being typically difficult to manage in the case of India. For capital requirement, the government decided to depend upon internal and external sources and the government decided to set up financial institutions (FIs).
(i) Financial Institutions

• All India Financial Institutions (AIFIs) - The all India FIs are IFCI (1948 ); ICICI (1955); IDBI (1964); SIDBI (1990) & IIBI (1997). All of them were public sector FIs except ICICI, which was a joint sector venture with initial capital coming from the RBI, some foreign banks and FIs. The public sector FIs we refunded by the Government of India.
• Specialised Financial Institutions (SFIs) - Two new FIs were set up by the Central Government in the late 1980s to finance risk and innovation in the area of industrial expansion ; this was India's trial in the area of venture capital funding.
  (i) IFCI Venture Capital Funds Ltd (IFCI Venture), 2000
  (ii) Tourism Finance Corporation of India Ltd (TFCI), 1989
• Investment Institutions (IIs) - Three investment institutions also came up in the public sector, which are yet an other kind of FIs, i.e., the LIC (1956 ), the UTI (1964) and the GIC (1971).
• State Level Finance Institutions (SLFIs ) - In the wake of states involvement in the industrial development, the central government allowed the states to set up their own financial institutions.
  (i) State Finance Corporations (SFCs)
  (ii) State Industrial Development Corporations (SIDCs)

(ii) Banking Industry
By April 2020, there were a total of 163 scheduled commercial banks operating in India—18 public sector banks (PSBs), 53 RRBs (with over 13 under consideration for amalgamation with their parent PSBs), 41 Indian private sector banks (including 10 Small Banks, 7 Payment Banks and 3 Local Area Banks), 46 foreign banks except the scheduled and non-scheduled state co-operative banks—with 74 per cent foreign direct investment (FDI) allowed in the private sector banks.
(iii) Insurance Industry

• The purpose of expanding the industry, one after another the life and non-life insurance businesses were nationalised by the government (in 1956 and 1970, respectively), and the public sector insurance companies did serve the better purpose in the areas of providing safety net and nationbuilding. 
• An independent regulator was set up—the IRDA (domestic and foreign—with an FDI cap of 49 per cent).
• By April 2020, a total of 57 insurance companies were operating in India of which 24 are in life segment while 33 in non-life segment—1 public sector life insurer (LIC), 4 public sector general insurer, 2 specialised insurers (AICIL and ECGC), 1 public sector re-insurer (GIC Re) and 4 foreign reinsurers.

(iv) Security Market

• After the government's attempts to formally organise the security and stock market of India, the segment has seen accelerated expansion.
• The security market of India is regulated by SEBI. India has developed a regulated 'forward market' also where hundreds of commodities and derivatives are traded on spot and non-spot basis— regulated by FMC which merged into SEBI by late 2015.

FINANCIAL REGULATION

• Regulatory Agencies India has product-wise regulators—Reserve Bank of India (RBI) regulates credit products, savings and remittances; the Securities and Exchange Board of India (SEBI) regulates investment products; the Insurance Regulatory and Development Authority (IRDA) regulates insurance products; and the Pension Fund Regulatory and Development Authority (PFRDA) regulates pension products. The Forward Markets Commission (FMC) regulates commodity based exchange-traded futures (which was merged with the SEBI by late 2015).
• Quasi-regulatorv Agencies Several other government bodies perform quasi-regulatory functions—National Bank for Agriculture and Rural Development (NABARD), Small Industries Development Bank of India (SIDBI), and National Housing Bank (NHB). NABARD supervises regional rural banks as well as state and district cooperative banks. NHB regulates housing finance companies, and SIDBI regulates the state finance corporations (SFCs).
• Central Ministries Certain ministries of the Gol are also involved in policy making in the financial system. Ministry of Finance (MoF) is most prominently involved, through its representatives on the Boards of SEBI, IRDA and RBI. MoF and Ministry of Small Scale Industries have representatives on SIDBI Board, and Ministry of Urban Development is represented on the NHB Board. MoF representatives are also on Boards of public sector banks (PSBs) and Development Financial Institutions (DFIs).
• State Governments - Through the Registrar of Cooperatives, who are under the departments of agriculture and cooperation, the state governments regulate the cooperative banking institutions in their respective states. The state government have also sometimes claimed a regulatory role in certain other cases. Though it never became an open battle, the Andhra Pradesh government's Ordinance directing operations of Micro Finance Institutions (MFIs)— many o f them NBFCs registered with and regulated by RBI— falls into this space. 
• Special Statutes for Certain Financial Intermediaries - Some key financial services intermediaries like SBI (and its Associate Banks before their consolidation with SBI in 2017-18), Public Sector Banks, LIC and GIC are governed by their own statutes. These statutes give a special status to these institutions vis-a-vis the other institutions performing the same functions. Earlier, IFCI, UTI and IDBI also operated under special statutes, but now there special statutes have been repealed.
• Establishment of FSDC - Few years back, an important addition was made to the regulatory architecture— the Financial Sector Development Council (FSDC) was set up which replaced the High Level Committee on Capital Markets. The council is convened by Ministry of Finance and does not have statutory authority— it is structured as a council of regulators— Finance Minister as chairman. It has a permanent secretarial