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.
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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.
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13 comments:
The money market in India is not only underdeveloped but it is also a heterogeneous entity. due to dichotomy of Indian money market into organized and unorganized sectors resulted in number of drawbacks. Some of which are given below.
1. Existence of Both Organized and Unorganized Markets : The first and foremost defect of Indian money market is existence of both organized and unorganized money markets. Indigenous bankers and money lenders plays an important role in unorganized money market. The main problem with indigenous bankers is that they don’t distinguish bbetween short-term and long term credit. the unorganized money market is not controlled by R.B.I. These features of unorganized money market, makes the whole Indian money market weak.
2. Absence of Integration between Various Sectors : There is no proper coordination between the various sectors of Indian money market. There is no mutual understanding between the banking institutions of organized sector and indigenous bankers of unorganized sector. with in the organized sector there is no proper coordination of activities of different banking institutiobs
3. Crunch of Loanable Funds : Indian money markets always experience a shortage of loanable funds, mainly due to less per capital income, low saving rate and higher consumption expenditure due to inflation and increase in standard of living. Specially with the invest of multichannel TVs with massive advertisements and the penetration of credit cards among the middle class had further increased consumption expenditure resulting in reduced savings.
4. Lack of Call Money Market : Call market means a market which provides money at call and short notice ranging a period 24 hours to one week. These loans are generally granted to stock brokers and discounting houses. In India very rarely such loans are granted.
5. Scarcity of Credit Instruments : Till late 1980’s, the Indian money market was suffering from scarcity of credit instruments. The only instruments available were the money at call and short notice and treasury bills. Moreover, there were no specialists dealers and brokers to handle the function in different segments of money market and to handle different kinds of credit instruments.
6. Improper Care of Rural Finance : An important weakness of the Indian Banking system is that till recently agricultural finance was divorced from the organized sector of the money market.
7. No Banker’s Acceptance : There is no development of bankers’ acceptance or acceptance of credit by the banks in India.
Blending of Lending and Trading Activities : In the unorganized sector, the financial agencies do not resort to money dealings only. They usually carry on retail trade agriculture and other business activities, along with lending operations.
8. Banking Gap : Banking facilities are either entirely nonexistent or inadequate in the villiages of India. All though there has been rapid expansion of bank branches in recent years specially after nationalization of banks, yet vast rural areas still exists without banking facilities. Scientifically-run institutions like commercial banks have a largely urban-orientation in our country.
9. Absence of All-India Money Market : Indian money market has not been organized into a single integrated all-indian market. It is divided into small segments mostly catering to the local financial needs.
Rajeev kumar tiwari
16bal099
The following are the defects of Indian money Market:
1. Narrow coverage- The organized banking system is still a very large component of the Indian money market. The Indian banking system widely covers metropolitan cities and the towns. But, the organized sector of the banking system is conspicuous by its absence in many rural areas. This means that lower income groups in many rural areas still do not enjoy banking facilities.
2. Imbalance between demand and supply- The Indian money market is characterized by inadequate supply of short-term assets. This creates a peculiar situation. On the one hand banks with surplus funds cannot invest them profitably short period. On the other hand, those who require short-term funds are unable to raise them from the market at competitive rates.
3. Lack of Co-ordination- There is hardly any co-ordination between the different segments of the money market. The reason in easy to find out. The different segments of the money market are very loosely interrelated at present. As a consequence there exist different interest rates in different sub-markets.
4. Only domestic coverage- Finally, the Indian money market mainly targets domestic market. So, it is very difficult to attract foreign funds. The main reason seems to be that rupee is not a major currency in the leading foreign exchange markets of the world.
Reserve Bank of India is the biggest regulator of the Indian markets. It controls the monetary policy of India. Its control is however limited to the organised part of economy and the unorganised sector which has a significant presence is largely unregulated. RBI frequently introduces many reforms to bolster the Indian economy which is in a state of constant flux and is continuously evolving. The major money market reforms came after the recommendations of S. Chakravarty Committee and Narsimham Committee. These were major changes which helped unfold the banking potential of India and shape our financial institutions to world class standards. It was soundness of these reforms which helped our economy to easily tide over the economic crisis which had gripped the world in 2008. It included deregulation of Interest Rates,
introduction of new money market instruments,
setting up Discount and Finance House of India,
introducing Liquidity Adjustment Facility,
regulation of Non-Banking Financial Companies and other such things.
1. Division amongst Organized and Unorganized Sectors:
The most critical deformity of the Indian currency market is its division into two areas: (a) the organized sector and (b) the unorganized sector. There is little contact, coordination and collaboration between the two segments. In such conditions it is troublesome for the Reserve Bank to guarantee uniform and successful executions of financial approach in both the areas.
2. Prevalence of Unorganized Sector:
Another essential deformity of the Indian currency market is its power of chaotic area. The indigenous brokers possess a huge position in the cash lending business in the country regions. In this sloppy division, no obvious refinement is made between fleeting and long haul and between the reasons for credits. These indigenous brokers, which constitute a substantial segment of the currency advertise, stay outside the sorted out part. Hence, they truly confine the Reserve Bank's control over the currency showcase,
3. Absence of All-India Money Market:
Indian currency showcase has not been sorted out into a solitary coordinated all-Indian market. It is separated into little portions generally taking into account the neighborhood budgetary necessities. For instance, there is little contact between the currency advertises in the greater urban areas, similar to, Bombay, Madras, and Calcutta and those in littler towns.
4. Insufficient Banking Facilities:
Indian currency market is insufficient to meet the monetary need of the economy. In spite of the fact that there has been quick extension of bank offices as of late especially after the nationalization of banks, yet unlimited country zones still exist without saving money offices. When contrasted with the size and populace of the nation, the saving money organizations are insufficient.
5. Deficiency of Capital:
Indian currency showcase for the most part experiences the deficiency of capital assets. The accessibility of capital in the currency market is lacking to address the issues of industry and exchange the nation. The fundamental purposes behind the lack of capital are: (a) low sparing limit of the general population; (b) insufficient keeping money offices, especially in the provincial territories; and (c) undeveloped managing an account propensities among the general population.
6. Regular Shortage of Funds:
A Major disadvantage of the Indian currency market is the occasional stringency of credit and higher loan costs amid a part of the year. Such a deficiency perpetually shows up amid the bustling months from November to June when there is overabundance interest for credit for carrying on the reaping and showcasing operations in horticulture. Accordingly, the financing costs ascend in this period. In actuality, amid the slack season, from July to October, the interest for credit and the rate of intrigue decrease pointedly.
7. Differing Interest Rates:
Another deformity of Indian currency market is the variety and dissimilarity of financing costs. In 1931, the Central Banking Enquiry Committee composed: "The way that a call rate of 3/4 for each penny, a hundi rate of 3 for each penny, a bank rate of 4 for every penny, a bazar rate of little dealers of 6.25 for each penny and a Calcutta bazar rate for bills of little merchant of 10 for each penny can exist all the while shows a remarkable drowsiness of the development of credit between different markets." The loan fees additionally vary in different focuses like Bombay, Calcutta, and so on. Varieties in the loan fee structure is generally because of the credit fixed status as a result of insufficient, exorbitant and tedious method for exchanging cash.
-Richa Mukherjee
16bal043
1. Division amongst Organized and Unorganized Sectors:
The most critical deformity of the Indian currency market is its division into two areas: (a) the organized sector and (b) the unorganized sector. There is little contact, coordination and collaboration between the two segments. In such conditions it is troublesome for the Reserve Bank to guarantee uniform and successful executions of financial approach in both the areas.
2. Prevalence of Unorganized Sector:
Another essential deformity of the Indian currency market is its power of chaotic area. The indigenous brokers possess a huge position in the cash lending business in the country regions. In this sloppy division, no obvious refinement is made between fleeting and long haul and between the reasons for credits. These indigenous brokers, which constitute a substantial segment of the currency advertise, stay outside the sorted out part. Hence, they truly confine the Reserve Bank's control over the currency showcase,
3. Absence of All-India Money Market:
Indian currency showcase has not been sorted out into a solitary coordinated all-Indian market. It is separated into little portions generally taking into account the neighborhood budgetary necessities. For instance, there is little contact between the currency advertises in the greater urban areas, similar to, Bombay, Madras, and Calcutta and those in littler towns.
4. Insufficient Banking Facilities:
Indian currency market is insufficient to meet the monetary need of the economy. In spite of the fact that there has been quick extension of bank offices as of late especially after the nationalization of banks, yet unlimited country zones still exist without saving money offices. When contrasted with the size and populace of the nation, the saving money organizations are insufficient.
5. Deficiency of Capital:
Indian currency showcase for the most part experiences the deficiency of capital assets. The accessibility of capital in the currency market is lacking to address the issues of industry and exchange the nation. The fundamental purposes behind the lack of capital are: (a) low sparing limit of the general population; (b) insufficient keeping money offices, especially in the provincial territories; and (c) undeveloped managing an account propensities among the general population.
6. Regular Shortage of Funds:
A Major disadvantage of the Indian currency market is the occasional stringency of credit and higher loan costs amid a part of the year. Such a deficiency perpetually shows up amid the bustling months from November to June when there is overabundance interest for credit for carrying on the reaping and showcasing operations in horticulture. Accordingly, the financing costs ascend in this period. In actuality, amid the slack season, from July to October, the interest for credit and the rate of intrigue decrease pointedly.
7. Differing Interest Rates:
Another deformity of Indian currency market is the variety and dissimilarity of financing costs. In 1931, the Central Banking Enquiry Committee composed: "The way that a call rate of 3/4 for each penny, a hundi rate of 3 for each penny, a bank rate of 4 for every penny, a bazar rate of little dealers of 6.25 for each penny and a Calcutta bazar rate for bills of little merchant of 10 for each penny can exist all the while shows a remarkable drowsiness of the development of credit between different markets." The loan fees additionally vary in different focuses like Bombay, Calcutta, and so on. Varieties in the loan fee structure is generally because of the credit fixed status as a result of insufficient, exorbitant and tedious method for exchanging cash.
-Richa Mukherjee
16bal043
Another few defects of unorganized money market are parallel economy,bill market,crony capitalism and seasonality.
I want to elaborate how the factor of seasonality effects the economy especially in reference to the Indian economy.
Seasonality is the characteristic of the time series in which the data experiences regular and predictable changes that recur every calendar year. Weather,vacations and holidays are few such seasonal variations.
Seasonal fluctuations in a time series can be contrasted with cyclical patterns. These fluctuations are usually due to economic conditions and are often related to the business cycle.
These regular seasonal variations have a considerable effect on the underlying state of economy.
For an economy as large and as complex as India, these fluctuations bring in them the disruptiveness even in the remotest thought area. With the changes in the weather pattern(which leads to change in eating habits), no. Of school dropouts fluctuate. Along with it, urban flocking gets affected and thus both rural and urban areas get affected, even though at the macro level, the economy has different impact on both of them.
What is even more ironical is the unpredictability in the very concept of Seasonality. As the market is highly irregulated,so are the seasonal variations. All factors are so integrated with each other as shown in the example above where how onset of summer season finally leads to increase in urban flocking.
It is necessary for organisations to identify and measure seasonal variations within their market. Training,periodic maintaince ,temporary increase or decrease in the labor requirement fluctuates over certain periods.
Organizations need to know if variations they have been more or less than the expected amount, beyond what the usual seasonal variations account for.
By establishing seasonal pattern and using them for forecasting and prediction of the future trends, one can try to reduce the seasonal effect.
Thus, we see how seasonal adjustment in economy both in long and short run effects various levels of society at large.
Indian money market is relatively underdeveloped when compared with advanced markets like New York and London Money Markets. The money market in India is not only underdeveloped but it is also a heterogeneous entity. We need reforms in Money Market because:
1. Existence of both Organized and Unorganized Money Market : It is a significant aspect of the Indian money market. It has a simultaneous existence of both the organized money market as well as unorganized money markets. The organized money market consists of RBI, all scheduled commercial banks and other recognized financial institutions. However, the unorganized part of the money market comprises domestic money lenders, indigenous bankers, trader, etc. The organized money market is in full control of the RBI. However, unorganized money market remains outside the RBI control. Thus both the organized and unorganized money market exists simultaneously.
2. Seasonality : The demand for money in Indian money market is of a seasonal nature. India being an agriculture predominant economy, the demand for money is generated from the agricultural operations. During the busy season i.e. between October and April more agricultural activities takes place leading to a higher demand for money.
3. Multiplicity of Interest Rates : In Indian money market, we have many levels of interest rates. They differ from bank to bank, from period to period and even from borrower to borrower. Again in both organized and unorganized segment the interest rates differs. Thus, there is an existence of many rates of interest in the Indian money market.
4. Lack of Organized Bill Market : In the Indian money market, the organized bill market is not prevalent. Though the RBI tried to introduce the Bill Market Scheme (1952) and then New Bill Market Scheme in 1970, still there is no properly organized bill market in India.
5. Absence of Integration : The Indian money market is broadly divided into the Organized and Unorganized Sectors. The former comprises the legal financial institutions backed by the RBI. The unorganized statement of it includes various institutions such as indigenous bankers, village money lenders, traders, etc. There is lack of proper integration between these two segments.
6. Insufficient Funds or Resources : The Indian economy with its seasonal structure faces frequent shortage of financial recourse. Lower income, lower savings, and lack of banking habits among people are some of the reasons for it.
7. Shortage of Investment Instruments : In the Indian money market, various investment instruments such as Treasury Bills, Commercial Bills, Certificate of Deposits, Commercial Papers, etc. are used. But taking into account the size of the population and market these instruments are inadequate.
These are some of the reasons why do we need a reform in Money Market in India.
Nandita Surolia
16BAL088
Division- B
Though the Indian money market is considered as advanced money market among developing countries, it still suffers from many defects. These defects limit the efficiency of Indian money market.
Some defects are:-
1. Absence of integration:-the Indian money market has two components, the organized sector and unorganized sector. The former is regulated by RBI and the latter includes various institutions like indigenous bankers, money lenders, etc. there is lack of proper
2. Multiple rate of interest : In the Indian money market, especially the banks, there exists too many rates of interests. These rates vary for lending, borrowing, government activities, etc. Many rates of interests create confusion among the investors.
3. Insufficient Funds or Resources : The Indian economy with its seasonal structure faces frequent shortage of financial recourse. Lower income, lower savings, and lack of banking habits among people are some of the reasons for it.
4. Shortage of Investment Instruments : In the Indian money market, various investment instruments such as Treasury Bills, Commercial Bills, Certificate of Deposits, Commercial Papers, etc. are used. But taking into account the size of the population and market these instruments are inadequate.
5. Shortage of Commercial Bill : In India, as many banks keep large funds for liquidity purpose, the use of the commercial bills is very limited. Similarly since a large number of transactions are preferred in the cash form the scope for commercial bills are limited.
6. Lack of Organized Banking System : In India even through we have a big network of commercial banks, still the banking system suffers from major weaknesses such as the huge losses, poor efficiency. The absence of the organized banking system is major problem for Indian money market.
7. Less number of Dealers : There are poor number of dealers in the short-term assets who can act as mediators between the government and the banking system. The less number of dealers leads to the slow contact between the end lender and end borrowers.
Prashasti Patwa
16bal093
Despite the fact that the Indian currency market is considered as cutting edge currency showcase among creating nations, regardless it experiences many deformities. These imperfections confine the effectiveness of Indian currency advertise.
A few deformities are:-
1. Nonattendance of combination:- the Indian currency advertise has two segments, the composed segment and sloppy part. The previous is directed by RBI and the last incorporates different foundations like indigenous financiers, cash banks, and so on there is absence of legitimate
2. Various rate of premium : In the Indian currency showcase, particularly the banks, there exists an excessive number of rates of premiums. These rates shift for loaning, obtaining, government exercises, and so on. Many rates of premiums make disarray among the financial specialists.
3. Lacking Funds or Resources : The Indian economy with its occasional structure faces visit deficiency of money related response. Bring down salary, bring down investment funds, and absence of saving money propensities among individuals are a portion of the explanations behind it.
4. Deficiency of Investment Instruments : In the Indian currency advertise, different venture instruments, for example, Treasury Bills, Commercial Bills, Certificate of Deposits, Commercial Papers, and so forth are utilized. However, considering the span of the populace and market these instruments are deficient.
5. Deficiency of Commercial Bill : In India, the same number of banks keep huge assets for liquidity reason, the utilization of the business bills is extremely constrained. Additionally since a substantial number of exchanges are favored in the money frame the degree for business bills are constrained.
6. Absence of Organized Banking System : In India even through we have a major system of business banks, still the keeping money framework experiences real shortcomings, for example, the colossal misfortunes, poor effectiveness. The nonattendance of the sorted out managing an account framework is significant issue for Indian currency advertise.
Indian Economy is a closed economy. Our debt market has not developed. Our OTC market has to develop fully.There are still large number of regions, which have inadequate banks. Rural areas still witness banks with old technology.Most banks are not able to train their staff in latest technology,especially those working in rural areas. Banks are unable to introduce innovative products and services.
Money Market need reform, as we need a system, which can promote excellence and social accountability both.We have commercial paper and other such instruments,but we don't have other such instruments for small entrepreneurs, small farmers and artisans.Micro-finance has not yet become popular with the banks in India.Most micro-finance players are NGOs,who lack expertise in banking and lack resources.Banks should enter in this field- as one-third of India is still very poor. We need banking in India to come up with innovative products,services and solutions for the small entrepreneurs, artisans and farmers, because they are the backbone of India. That will bring the marketing to the bottom of the pyramid.
Another few deformities of sloppy currency market are parallel economy,bill market,crony free enterprise and regularity. I need to expand how the component of regularity impacts the economy particularly in reference to the Indian economy.
Regularity is the normal for the time arrangement in which the information encounters customary and unsurprising changes that repeat each logbook year. Weather,vacations and occasions are couple of such regular varieties.
Regular changes in a period arrangement can be diverged from recurrent examples. These changes are as a rule because of financial conditions and are regularly identified with the business cycle. These consistent regular varieties considerably affect the fundamental condition of economy.
For an economy as extensive and as mind boggling as India, these changes acquire them the troublesome behavior even in the remotest thought territory. With the adjustments in the climate pattern(which prompts to change in dietary patterns), no. Of school dropouts vary. Alongside it, urban rushing gets influenced and consequently both provincial and urban zones get influenced, despite the fact that at the large scale level, the economy has distinctive effect on them two.
What is much more unexpected is the unusualness in the very idea of Seasonality. As the market is very irregulated,so are the occasional varieties. All elements are so incorporated with each different as appeared in the case above where how onset of summer season at long last prompts to increment in urban running.
It is important for associations to recognize and measure occasional varieties inside their market. Training,periodic maintaince ,impermanent increment or abatement in the work prerequisite varies over specific periods.
Associations need to know whether varieties they have been pretty much than the normal sum, past what the typical occasional varieties represent.
Primary Market Reforms:
Keeping in view the need to develop the
primary market as an efficient vehicle for
mobilisation of resources, SEBI took a number of
measures designed to boost investor confidence.
New measures were introduced by SEBI after a
series of formal and informal consultations with
the market participants, Associations of Merchant
Bankers of India and the Advisory Committee on
Primary Market. These seek to further simplify
the issue procedure to facilitate both resource
mobilisation and investor protection.
Issuers proposing to make the first offer of
equity to the public, including any security
convertible into equity, have been allowed to do
so if they have a track record of dividend payment
in the immediately preceding three years. Listed
companies are not bound by entry norms if their
post-issue net worth does not exceed five times
their pre-issue net worth. Unlisted companies have
been allowed to freely price their securities
provided they have shown net profit in the
immediately preceding three years. These
measures are expected to boost industrial
investment in the economy.
Frenny Patel
16BAL021
Reforms in the Indian Money Market:
Since its inception, particularly after independence, the Reserve Bank of India has been making efforts to remove the defects of the Indian money market. The organised sector of the market is relatively well knit and differences between various sectors of the market have been reduced.
The bill market scheme was one very important step. But the Indian money market is still centred on the call money market although efforts have been made to develop secondary market in post 1991 period.
Vaghul Committee on Money Market, Sukhmoy Chakravarty Committee on the Review of the working of the Monetary System and Narasimham Committee on the working of Financial System has made important recommendations on the Indian money market. The Reserve Bank of India has started the process of implementation of these recommendations.
1. Development of Money Market Instruments
2. Reintroduction of 182 days treasury bills
3. Deregulation of Interest Rates
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