Page 257 - DECO502_INDIAN_ECONOMIC_POLICY_ENGLISH

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

(vi) Highly volatile call money market : As explained earlier, the call money market is the Notes
market for short term funds, known as “money at call and short notice”. The rate at which
funds are borrowed in this market is called the call money rate. Call money rates are
market-determined, i.e., by demand for and supply of short term funds. Despite all the
efforts made by RBI to moderate the fluctuations in the call money rates, the latter have
continued to be highly volatile. The highest and lowest quotations of the call money rate
during the past few years were as follows :
Table 1: Inter Bank Call Money Rates in India
(per cent per annum)
Year Highest Lowest

1990-91 70.00 4.00
1993-94 17.00 0.25
2000-01 14.00 4.00
2007-08 55.0 6.15
2008-09 23.0 1.0
2009-10 9.00 0.50

Source : RBI Handbook of Statistics on Indian Economy 2009-10.
The high rates reflect the huge demand for short term funds by the banking system specially
to meet the RBI requirement of minimum CRR. RBI attempts to moderate the fluctuations
through supporting the market with additional funds - by buying securities from the
market when there is short supply of funds and high call rates and absorbing the additional
funds when the call market has large surplus funds – through selling securities. In general,
however, RBI has only a limited success in its efforts to check the high volatility of the call
money market in India in the past.
(vii) Absence of a well-organised banking system : Another major defect of the Indian money
market was the absence of a well-organised banking system. Branch banking was extremely
slow before bank nationalisation in 1969. There are only a few big banks in the country
and they have concentrated themselves in large towns and mandi towns. The extreme
sluggishness in the movement of funds and the existence of different interest rates in
different regions are the result of slow branch banking in the country.
Since Independence and specially after the passing of the Banking Regulation Act, 1949,
the Reserve Bank has been exercising considerable influence and control over the banking
system. Through mergers and amalgamations the number of banks has been considerably
reduced. Besides, branch banking has been speeded up since 1969.
In spite of the various steps taken to strengthen the Indian banking system, RBI has failed
to really control and guide it. In this connection, we may refer to three instances.
(a) Harshad Mehta engineered securities scam in 1992 by using funds from well-known
banks, both foreign and Indians.
(b) Ketan Parekh used the funds of urban co-operative banks and those of Bank of
India and UTI to manipulate the prices of shares of a few companies in which he
was interested. This led to a virtual crash of the Indian stock market as a whole in
2001; and
(c) C.M. Agarwal of Home Trade used the funds of urban cooperative banks and of
pension funds to play in the gilt-edged market in March 2002.
The failure of RBI to prevent these abuses of the banking system proves clearly that the
Indian banking system is still far from being a well organised and efficiently supervised
system :

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