Issues / Challenges related to Money Market in India

Existence of Unorganized Money Market

    • This is one of the major defects of Indian money market
    • It does not distinguish between short term and long term finance, and also between the purposes of finance
    • Since it is outside the control and supervision of RBI, it limits the RBI’s control over money market.

Lack of Integration

    • The organized market constitutes several institutions such as RBI, State Bank of India, commercial banks, cooperative banks and financial institutions. RBI as an apex body regulates their working.
    • The unregulated sector is not homogenous in itself. It constitutes indigenous bankers, loan companies, money lenders, etc.
    • In both the above, there is no uniformity in their practices and there is multiplicity of functionaries

Multiplicity in Interest Rates

    • There exists many rates of interest in the Indian money market such as the borrowing rate of government, deposits and lending rates of cooperative and commercial banks, lending rates of financial institutions, etc.
    • This is due to lack of mobility of funds from one section of the money market to another.
    • The rates differ for funds of same durations lent by different institutions

Inadequate Funds

    • Generally there is shortage of funds in Indian money market on account of various factors like inadequate banking facilities, low savings, lack of banking habits, existence of parallel economy, etc.

Seasonal Stringency of Money

    • The seasonal stringency of money and high rate of interest during the busy season (November to June) is a striking feature of Indian money market.
    • There occurs wide fluctuations in the interest rates from one season to another
    • RBI has been taking various measures to avoid such fluctuations in the money market by adding money into the money market during the busy season and withdrawing the funds during the slack season

Inadequate Credit Instruments

    • The Indian money market did not have adequate short term paper instruments till 1985-86. There were only call money and bill markets. Moreover there were no specialist dealers and brokers dealing in the money market.
    • After 1985-86, RBI introduced new credit instruments such as 182-day treasury bills, 364-day treasury bills, CDs and CPs. These instruments still are still in underdeveloped state in India.