Why Do We Need Reforms in Money Market?

The following are the major defects of the Indian Money market:

1. Major portion of money market held by unorganized players and incoherence between organized and unorganized money market

2. RBI's monetary policy becomes ineffective because of lack of integration between various sub-markets as well as various institutions and agencies.

3.    Diversity In Interest Rates. In the rural and urben segments, there are different rates of interest which create differences in costs of operation.

4.    Seasonality Of Money Market. Agriculture turnover happens twice in a year and hence there are seasonal fluctuations in rate of interest, liquidity and investment cycles. 

5.    Shortage Of Funds. Inadequate banking facilities, low savings, lack of banking habits, existence of parallel economy are a few reasons for shortage of funds and mobilization of funds.

6.    Absence Of Organised Bill Market. The bill market in India is not popular due to overdependence of cash transactions, high discounting rates, problem of dishonour of bills etc.

7.    Inadequate Banking Facilities. The reach of banking system is low and uneven across the country.

8.    Inefficient And Corrupt Management. Lack of professionalization and deficient service are the most important factors in inefficiency.


Comment further by researching more on this topic...

Festivities and Federal Reserve

"For only the second time in a decade, the U.S. Federal Reserve (Fed) raised U.S. interest rates by 0.25%. The move had been widely expected following firm evidence the U.S. economy is on the road to recovery.

This was the Fed’s final meeting before President-elect Donald Trump’s inauguration. Following his numerous campaign-trail promises of tax cuts and infrastructure spending, members of the Fed’s interest-rate setting committee may have been wary of the potential for such policies to further fan the flames of inflation.

Bond investors clearly expect interest rates to continue on an upward trajectory next year. The yield on two-year Treasuries, which are particularly sensitive to changes in interest rates, jumped to its highest level since 2009 as investors sold bonds." - Blog - Thinking Aloud Aberdeen Asset Management

Questions:

Q:1 Why would the Federal Reserve's action of raising interest rate coincide with recovery in US?

Q:2 How is a rising interest rate related to inflation?

Q:3 What is the benefit to Bond investors in this new scenario?

Q:4 If you had purchased bonds this Christmas, what would be your expectation in future?

Semester II students, show me what you know about these issues by posting answers a your reactions and view...

How Do Banks Operate?

Excerpt Taken from: 
Blog: Pragmatic Capitalism, Authored by Cullen Roche
 

The following is a general overview of the purpose of modern banks and how they operate in a simplistic sense.  This passage is an excerpt from Cullen Roche’s book “Pragmatic Capitalism: What Every Investor Needs to Know About Money and Finance”

The monetary system is designed to cater to the creation of the public’s money supply, primarily by private banks by establishing a money supply that is elastic. That is, it can expand and contract as the demand for money expands and contracts. Most modern money takes the form of bank deposits, and most market exchanges involving private agents are transacted in private bank money. As I have discussed, inside money governs the day-to-day functioning of modern fiat monetary systems. The role of outside money, which is created by the public sector, is comparatively minor and plays a mostly facilitating role.

Like the government, banks are also money issuers but not issuers of private sector net financial assets. That is, banking transactions always involve the creation of a private sector asset and a liability. Banks create loans independent of government constraint (aside from the regulatory framework). As I will explain, banks make loans independent of their reserve position with the government, rendering the traditional money multiplier deeply flawed.

The monetary system in the developed world is designed specifically around a competitive private banking system. The banking system is not a public-private partnership serving public purpose, as the central bank essentially is. The banking system is a privately owned component of the system run for private profit. The thinking behind this design was to disperse the power of money creation away from a centralized government and put it into the hands of non-government entities. The government’s relationship with the private banking system is more a support mechanism than anything else. In this regard I like to think of the government as being a facilitator in helping to sustain a viable credit-based money system.

It’s important to understand that banks are not constrained by the government (outside the regulatory framework) in terms of how they create money. Business schools teach that banks obtain deposits and then leverage those deposits ten times or so. This is why we call the modern banking system a fractional reserve banking system. Banks supposedly lend a portion of their reserves. There’s just one problem here: banks are never reserve constrained. Banks are always capital constrained. This can best be seen in countries such as Canada, which has no reserve requirements. Reserves are used for two purposes—to settle payments in the inter-bank market and to meet the Fed’s reserve requirements. Aside from this, reserves have little impact on the day-to-day lending operations of banks in the United States. This was recently confirmed in a paper from the Federal Reserve:

Changes in reserves are unrelated to changes in lending, and open market operations do not have a direct impact on lending. We conclude that the textbook treatment of money in the transmission mechanism can be rejected.