Money markets in India
Introduction to Money market
A money market is a market for borrowing and lending of short-term funds. It deals in funds and financial instruments having a maturity period of one day to one year. It is a mechanism through which short-term funds are loaned or borrowed and through which a large part of financial transactions of a particular country or of the world are cleared.
The Indian money market is "a market for short-term and Long term funds with maturity ranging from overnight to one year and includes financial instruments that are deemed to be close substitutes of money." It is diversified and has evolved through many stages, from the conventional platform of treasury bills and call money to commercial paper, certificates of deposit, repos, FRAs and IRS .The Indian money market consists of diverse sub-markets, each dealing in a particular type of short-term credit. The money market fulfils the borrowing and investment requirements of providers and users of short-term funds, and balances the demand for and supply of short-term funds by providing an equilibrium mechanism. It also serves as a focal point for the Central Bank's intervention in the market. The players of money market and its functions:
In money market transactions of large amount and high volume take place. It is dominated by small number of large players. In money market the players are :-Government, RBI, DFHI (Discount and finance House of India) Banks, Mutual Funds, Corporate Investors, Provident Funds, PSUs (Public Sector Undertakings), NBFCs (Non-Banking Finance Companies) etc. The role andlevel of participation by each type of player differs from that of others
It helps the RBI in effective implementation of monetary policy. It provides mechanism to achieve equilibrium between demand and supply of short-term funds.
It helps in allocation of short term funds through inter-bank transactions and money market Instruments.
It also provides funds in non-inflationary way to the government to meet its deficits It facilitates economic development.
Structure of Indian money market
The Indian money market consists of the un organised sector: moneylenders, indigenous bankers, chit funds; organised sector:Reserve Bank of India,private banks, public sector banks, development banks and other Non Banking Financial Companies(NBFCs)such as Life Insurance Corporation of India(LIC), the International Finance Corporation, IDBI, and the co-operative sector.
Reserve Bank of India
The influence of the Reserve Bank of India's power over the Indian money market is confined almost exclusively to the organised banking structure. It is also considered to be the biggest regulator in the markets. There are certain rates and data which are released at regular intervals which have a huge impact on all the financial markets in INDIA. The unorganised sector, which consists mostly of indigenous bankers and non-banking financial companies, although occupying an important position in the money market have not been properly integrated with the rest of the money market.
Treasury bill market
Treasury bills are instrument of short-term borrowing by the Government of India, issued as promissory notes under discount. The interest received on them is the discount which is the difference between the price at which they are issued and their redemption value. They have assured yield and negligible risk of default. Under one classification, treasury bills are categorised as ad hoc, tap and auction bills and under another classification it is classified on the maturity period like 91-days TBs, 182-days TBs, 364-days TBs and two types of 14-days TBs
Ready forward contract (Repos)
Repo is an abbreviation for Repurchase agreement, which involves a...
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