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

Notes
Chart 2 : Indian money market

Organised Banking Unorganised Banking Sub-markets
Sector Sector

Call money Bill market 364 days bill Certificates of Commercial paper
market market Deposits (CDs) (Cps)
Commercial Treasury
Billls Bills (90 days)
Bill Market in India
The bill market or the discount market is the most important part of the money market where
short term-bills—normally up to 90 days–are bought and sold. The bill market is further
subdivided into commercial bill market and treasury bill market.
The market for commercial bills has not become popular in India, unlike in London and other
international money markets where commercial bills are extensively bought and sold (i.e.,
discounted).
The 91-day treasury bills are the most common way the Government of India raises funds for
the short period. Some years ago, the government had introduced the 182-day treasury bills
which were later converted into 364-day treasury bills. In 1997, the Government introduced the
14-day intermediate treasury bills.
The Indian Money Market and RBI
Over all these institutions of the Indian money market, there is RBI which, as the ultimate
authority and controller of monetary and banking conditions in the country, is the accepted
leader of the money market. RBI has the responsibility to guide and control the institutions of
the money market and towards this end, it is armed with both qualitative and quantitative
weapons of credit control.
2. Features and Defects of the Indian Money Market
(i) Existence of Unorganised Money Market : The major defect of the Indian money market
has always been the existence of the indigenous bankers who do not distinguish between
short-term and long-term finance, nor even between the purposes of finance (as the Hundi
does not indicate whether it is a genuine trade bill or a financial paper). Many attempts
were made by RBI to bring the indigenous bankers under its direct influence and control.
During the last 50 years, there is a whole lot of non-banking financial companies (NBFCs)
who raise funds from the general public but who are generally outside the control and
supervision of RBI. To the extent these bankers/NBFCs are outside the organised money
market, RBI’s control over the money market is limited.
(ii) Absence of Integration : An important defect of the Indian money market at one time
was the division of the money market into several segments or sections, loosely connected
to each other. Each section of the money market—such as the State Bank of India and its
subsidiaries, the foreign exchange banks, the urban co-operative banks and indigenous
bankers—limited itself broadly to a particular class of business and remained independent
in its own sphere. Moreover, the relations between the various sections of the money
market were not cordial. This is so even now between Indian banks and foreign banks.
With the passage of the Banking Regulation, Act, 1949, all banks have been treated equally
by RBI as regards licensing, opening of branches, share capital, the type of loans and
advances to be given, etc. Accordingly, the Indian money market is getting closely
integrated.
RBI is now fully effective in the organised sectors of the money market, as it is in a position
to control the operations of the organised sector. Both commercial and; cooperative banks

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