Page 256 - DECO502_INDIAN_ECONOMIC_POLICY_ENGLISH

Indian Economic Policy

Notes have come to rely increasingly on the rediscounting and borrowing facilities provided by
RBI, especially during the busy season. Besides, RBI guides and directs them in their
lending policies and regularly; inspects the books of scheduled commercial banks.
However, RBI’s control and monitoring of the commercial banking sector are not always
fully effective. This is clear from Harshad Mehta scam in 1992 and Ketan Parekh scam in
2001.
(iii) Diversity in Money Rates of Interest : Another defect of the Indian money market related
to the existence of too many rates of interest—the borrowing rate of the government, the
deposit and lending rates of commercial banks, deposit and lending rates of cooperative
banks, the lending rates of DFI’s, etc. The basic reason for the existence of so many rates of
interest simultaneously is the immobility of funds from one section of the money market
to another. In recent years the different money rates of interest have been promptly
adjusting to changes in the bank rate.
(iv) Seasonal Stringency of Money : A very striking characteristic of the Indian money market
was the seasonal monetary stringency and high rates of interest during a part of the year—
during the busy season from November to June when funds were required to move the
crops from the villages and up country districts to the cities and ports. During the off-
season (July to October) or slack season, banks have large surplus funds and the rates of
interest reach low levels. There are even now wide fluctuations in the money rates of
interest from one period of the year to another. RBI attempts to lessen the seasonal
fluctuations in the money market by pumping money into the money market during busy
seasons and withdrawing the same during off seasons. This feature of the money market—
seasonal stringency or glut—is present even now.
(v) Absence of the Bill Market : Another defect of the Indian money market was the absence
of a commercial bill market or a discount market for short term commercial bills. A well
organised bill market is necessary for linking up the various credit agencies ultimately
and effectively to RBI. No bill market was developed in India due to certain historical
accidents—such as the practice of banks keeping a large amount of cash for liquidity
purposes, preference of industry and trade for borrowing rather than rediscounting bills,
the improper drafting of the bazar hundi, the system of cash credit as the main form of
borrowing from banks, the preference of cash transactions in certain lines of activity, the
absence of warehousing facilities for storing agricultural produce and the high stamp
duty on usance bills.
The commercial bill market has not been fully developed, even though there is general
appreciation of the need for such a market :
(a) Commercial bills, along with bank credit, are an important source of finance for
business and industrial houses;
(b) Banks with surplus funds like to buy (that is, discount) commercial or trade bills, as
they yield a good rate of return; they are for a short period (90 days) and they are
self-liquidating, that is, the drawee of the bills would pay off at the time of maturity.
(c) Commercial bills are useful to RBI for its open market operations. In times of
monetary shortage, RBI can buy bills from the market and pump in additional funds
and help create more bank credit. In times of glut of funds in the money market, RBI
can sell bills in the market and absorb the surplus funds with banks.
RBI introduced a bill market scheme known as the New Bill Market Scheme in 1970 under
which RBI rediscounted genuine trade bills. The Scheme was not developed fully as was
anticipated. Basically, the development of a bill market would depend on whether industry
and trade are prepared to recover their receivables through the medium of bills and whether
the buyers of goods are prepared to bind themselves to the discipline of the bills, that is,
pay the amount due on the specified date mentioned on the bills.
Development of a bill market is extremely useful to the country from the point of expanding
credit as well as from the point of monetary policy.

250 LOVELY PROFESSIONAL UNIVERSITY