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Unit 20: Indian Financial System: Money Market and Monetary Policy
Pavitar Parkash Singh, Lovely Professional University

Unit 20: Indian Financial System: Notes
Money Market and Monetary Policy

CONTENTS
Objective
Introduction
20.1 Indian Financial System: Money Market
20.2 Monetary Policy
20.3 Summary
20.4 Key-Words
20.5 Review Questions
20.6 Further Readings

Objectives

After reading this Unit students will be able to:
• Explain the Indian Financial System.
• Describe about the Monetary Policy.

Introduction

At present, the institutional structure of the financial system is characterised by (a) banks, either
owned by the Government, RBI or private sector (domestic or foreign) and regulated by the RBI; (b)
development financial institutions and refinancing institutions, set up either by a separate statute or
under Companies Act, either owned by Government, RBI, private or other development financial
institutions and regulated by the RBI and (c) non-bank financial companies (NBFCs), owned privately
and regulated by the RBI.
Reforms of 1990s have altered the organisational forms, ownership pattern and domain of operations
of Financial Institutions (FIs) on both the asset and liability fronts. Drying up of low cost funds has
led to an intensification of the competition for resources for both banks and FIs. At the same time,
with banks entering the domain of term lending and FIs making a foray into disbursing short-term
loans, the competition for supply of funds has also increased. Besides, FIs have also entered into
various fee-based services like stock-broking, merchant banking, advisory services and the like.
20.1 Indian Financial System : Money Market

In a broad sense, finance refers to funds or monetary resources needed by individuals, business
houses and the Government. Individuals and households require funds essentially for meeting their
current requirements or day-to-day expenses or for buying capital goods (commonly known as
investment).
A business unit — a factory or a workshop — needs funds for paying wages and salaries, for buying
raw materials, for purchasing new machinery or replacing an old one, etc. Traders require finance
for buying and stocking goods in their shops and godowns.
Farmers require finance for short periods of 12 to 15 months for cultivation purposes, such as for
buying seeds, manure, fodder for cattle, etc. Such short-period loans are normally paid off after the
harvest has been collected. The farmers may need finance for medium term and long-term—say, for
periods up to 5 to 10 years —for the purchase of livestock, agricultural machinery and implements,
digging wells, making permanent improvements on land, etc.

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