Page 39 - DCOM304_INDIAN_FINANCIAL_SYSTEM

Indian Financial System

Notes predominant and hence have a major impact on the interest rate structure and the money
position. Like banks, financial institutions also undertake lending and borrowing of short-term
funds. Due to the large volumes these FIs transact in, they have a significant impact on the
money market.
Corporates also transact in the money market mostly to raise short-term funds for meeting their
working capital requirements. This segment partly utilizes both the organized and the
unorganized sector of the money market.

Player Role
Central Bank Intermediary
Government Borrower/Issuer
Banks Borrowers/Issuers
Discount Houses Market Makers
Acceptance Houses Borrowers/Issuers
FIs Lenders/Inventors
MFs Investors
FIIs Intermediaries
Dealers Intermediaries
Corporates Issuers

Money market operators also include other institutional players viz. Mutual Funds (MFs), Foreign
Institutional Investors (FIIs), etc. The level of participation of these players varies largely
depending on the regulations. For instance, the level of participation of the FIIs in the Indian
money market is restricted to invest in government securities only. In addition to the various
borrowers and lenders, few players act as intermediaries in the money market. Discount and
acceptance houses and market makers/primary dealers/satellite dealers come under this category
and have certain specific roles to play in the money market.
Discount houses perform the function of discounting/rediscounting the commercial bills and
T-Bills. On the other hand, acceptance houses are specialized agencies which accept the bills of
exchange on behalf of their clients for a commission. This service enhances the liquidity of the
bill. However, an active bill market becomes a prerequisite for the services of the discount and
acceptance houses. In addition, some of these intermediaries act as underwriters to the government
securities and also have the option to be their market makers. The above mentioned various
money market players, can be segregated into different categories based on their activity in the
market, i.e., they can be only lenders, lenders and borrowers/issuers, investors or intermediaries.
Certain players may have more than one role to play. Table above defines the role of the various
players in the money market.

3.5 Types/Composition of Indian Money Market

Organised money market in India is composed of call/notice money market, term money
market, treasury bill market, discount market and bill market.

3.5.1 Call/Notice Money Market

Call/Notice money market, as noted earlier, is a market where the day-to-day surplus funds,
mostly of banks are traded. In India, there does not exist short-term money market along the
pattern of the U.K. and the US. Call loans in India are provided; (i) to the bill market, (ii) for the
purpose of dealing in the bullion markets and stock exchanges, (iii) between banks, and (iv)
frequently to individuals of high financial status in Mumbai for ordinary trade purposes in

34 LOVELY PROFESSIONAL UNIVERSITY