Money Market Notes : Recent trends and developments in Money Market, Instruments of money market.
QUESTION: Discuss the recent developments that have taken place in Indian economy?
Evaluate the implications of recent trends in Indian money market?
Answer: MONEY MARKET: Money market is a market for short term loans i.e. loss than one year. It is a region where short term funds are brought and sold through telephone or email. Funds are borrowed in the market for a short period ranging from a day to six months or less than a year. The assets which are used as credit instruments are known as ‘Near Money Assets.’
ACCORDING TO GEOFFFREY GROWTHER
“Money market is a collective name given to the various forms and institutions that deals with various grades of near money”
RECENT TRENDS: RBI is the biggest regulator of the Indian markets. RBI introduces the major reforms to bolster the Indian economy. The major money market reforms came after the recommendations of Chakravarty committee and Narsimham committee. These were major changes which help unfold the banking potential of the India and shape our financial institutions to the world class standards.
The following are the recent developments:
- DEREGULATION OF INTEREST RATES: Interest rates are now subject to market conditions as the ceiling limit on the interest have been removed by RBI after 1989. The important rates in India are bank rate, medium term lending rate, prime lending rate, bank deposit rate, call rate, certificate of deposit rate, commercial paper rate etc. Chakravarty committee has a strong proponent of free and flexible interest rates to promote savings, investment, government financial system and stability. RBI removed the fixed upper ceiling of 16.5% and instead fixed a minimum of 16% p.a. The rates were further relaxed after the Narsimham committee report.
- REFORMS IN CALL AND TERM MONEY MARKET: The reforms in call and term money market were done to infuse more liquidity into the system and enable price discovery. RBI undertook several important steps to check the constraints and remove them systematically. RBI announced that non-financial institutions should not participate in call/term money market operations and it should purely be an inter banking operating segment and encouraged other participants to migrate to collateralized segments to improve stability. Also, reporting of all call/notice money market transactions through negotiated dealing system within 15 minutes of conclusion of transaction was made mandatory.
- INTRODUCTION OF NEW MONEY MARKET INSTRUMENTS: RBI introduced many new money market instruments to diversify the market. These were certificate of deposits, commercial papers, inter-bank participation certificates.
- SETTING UP DISCOUNT AND FINANCE HOUSE OF INDIA: Discount and finance house of India was setup to import more liquidity and also further develop the secondary market instruments. However, maturities of existing instruments like CD’s and CP’S were gradually shortened to encourage wider participation. Likewise, adhoc treasury bills were abolished in 1997 to stop automatic monetization of fiscal deficit.
- INTRODUCING LIQUID ADJUSTMENT FACILITY: RBI introduced a liquidity adjustment facility which was operated through fixed repo rate and reverse repo rates. This helped establishment of interest rate as an important monetary instrument and granted greater flexibility to RBI to respond to market needs and suitably adjust liquidity in the market.
- REFINANCE BY RBI: This is a tool by RBI to meet the any liquid shortages and for credit control to select sectors. The export credit refinance facility to banks is provided under RBI act 1934. It is available to all scheduled commercial banks who are authorized to deal in foreign exchange and have extended export credit. The scheduled commercial banks are provided export credit to the time of 50% of the outstanding export credit.
The concept of directed credit was also changed as the narsimham committee recommended the reduction of directed credit from 40% to 10%. Is also suggested narrowing focus to small farmers and low-income target groups. The refinance rate is limited to bank rate.
7. REGULATION OF NFBC’S: RBI act was amended in 1997 to bring the non-banking financial companies under its regulatory framework. NBFC is a company registered under companies act 2013 and is involved in making loans and advances acquisitions of shares, stocks, bonds, securities issued by government etc. They are similar to banks but are different in the respect that they cannot accept demand deposits and cannot issue cheques. They have to be registered with RBI to operate within India. There are most of regulations which NBFC’S have to follow to smoothly operate within India like accept deposit for a minimum period, cannot accept interest rate beyond the prescribed rate given by RBI.
8. DEBT RECOVERY: Last but not the least, the recent development made in the Indian money market is the set up of special recovery tribunals which provide legal assistance to banks for recovery of dues.
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