- The ”Committee to Review the Working of Monetary System” chaired by Chakravarty made several recommendations in 1985 to develop Indian money market.
- As a follow-up, the RBI set up a Working Group on money market under the chairmanship of Vaghul, in 1987. Based on the recommendations of Vaghul Committee, RBI initiated a number of measures to widen and deepen the money market; the main ones of which are as follows:
Deregulation of Interest Rates
- From May 1989, the ceiling on interest rates on the call money, inter-bank short-term deposits, bills rediscounting and inter-bank participation was removed and the rates were permitted to be determined by the market forces. Thus, the system of administered interest rates is being gradually dismantled
Introduction of New Money Market Instruments
- In order to widen and diversify the Indian money market RBI has introduced many new money market instruments such as 182-days treasury bills, 364-day treasury bills, CDs & CPs.
- Through these instruments the government, commercial banks, financial institutions and corporate can raise funds through the money market. They also provide investors additional instruments for investments.
- In order to expand the investor base for CDs and CPs the minimum amount of investment and the minimum maturity periods are reduced by RBI
Repurchase Agreements (Repos)
- RBI introduced repos in government securities in December 1992 and reverse repos in November 1996.
- Repos and reverse repos help to even out short-term fluctuations in liquidity in the money market. They also provide a short-term avenue to banks to park their surplus funds.
- Through changes in repo and reverse repo rates RBI transmits policy objectives to entire money market
Liquidity Adjustment Facility (LAF)
- RBI has introduced LAF from June 2000 as an important tool for adjusting liquidity through repos and reverse repos.
- Thus, in the recent years RBI is using repos and reverse repos as a policy to adjust liquidity in the money market and therefore, to stabilize the short-term interest rates or call rates.
Discount and Finance House of India (DFHI)
- In order to impart liquidity to money market instruments and help the development of secondary market in such instruments, DFHI was set up in 1988 jointly by RBI, public sector banks and financial institutions
Regulation of NBFCs
- The RBI Act was amended in 1997 to provide for a comprehensive regulation of NBFC sector
- According to the amendment, no NFBC can carry on any business of a financial institution, including acceptance of public deposit, without obtaining a Certificate of Registration (CoR) from RBI.
The Clearing Corporation of India Limited (CCIL)
- The CCIL was registered on April 30, 2001 under the Companies Act, 1956, with the State Bank of India as the chief promoter
- The CCIL clears all transactions in government securities and repos reported on the Negotiated Dealing System (NDS) of RBI