Challenges of Money Market Mkt in India Essay

The India funds food food securities industry placeplace is a fiscal system that involves the modify and espouseing of short funds. India specie commercialize has seen exp wizardntial growth just after the globalization initiative in 1991. It has been observed that pecuniary creative activitys do employ nones trade instruments for financing short-run monetary requirements of various welkins very much(prenominal) as agriculture, pay and manufacturing. The per degreeance of the India bullion market has been outstanding in the past 20 course of studys. The central bank of the plain the coyness rely of India (run batted in) has always been playing the major role in regulating and controlling the India specie market.The interference of RBI is varied curbing crisis situations by reducing the cash prevail ratio (CRR) or infusing more money in the economy. Money market instruments take c be of the borrowers short-run needs and render the inevitable liq uid to the lenders. The varied types of India money market instruments atomic number 18 treasury bills, re barter for harmonys, moneymaking(prenominal) papers, certificate of deposit, and bankers credenza.The major players in the money market argon Reserve Bank of India (RBI), Discount and finance Ho utilise of India (DFHI), banks, financial institutions, mutual funds, establishment and the giant corpo regularize houses. Indian money market has a dichotomic structure. It has a simultaneous outliveence of both organise and un nonionic money markets. The organized structure consists of the RBI , all scheduled and moneymaking(prenominal) banks and a nonher(prenominal) know financial institutions as mentioned above. However, the unorganized piece of music of the market consists of local moneylenders, natal bankers, traders, etc. This part of the market is outside the purview of the RBI.Issues and challenges of the Indian money marketThe money market in India has undergone tremendous maturements since past xx years. However, it is still not free of certain rigidities that be hampering the growth of the market. They are 1. Dichotomy among Organized and Unorganized SectorsThe most important soil of the Indian money market is its division into two sectors (a) the organised sector and (b) the unorganized sector. There is little contact, coordination and cooperation mingled with the two sectors. In such conditions it is difficult for the Reserve Bank to ensure uniform and effective implementations of monetary policy in both the sectors.2. Predominance of Unorganized Sector other important defect of the Indian money market is its predominance of unorganized sector. The indigenous bankers occupy a signifi piece of tailt position in the money-lending telephone line in the rural areas. In this unorganized sector, no clear-cut peculiarity is made between short- call and long-term and between the purposes of loans. These indigenous bankers, which fabri cate a large portion of the money market, re main outside the organized sector. Therefore, they honestly restrict the Reserve Banks control everyplace the money market,3. Wasteful CompetitionWasteful competition exists not save between the organised and unorganised sectors, but also among the members of the two sectors. The proportion between various segments of the money market are not favorable they are loosely connected with each other and chiefly decipher separatist tendencies. For example, even to twenty-four hours, the State Bank of Indian and other commercial-grade banks look down upon each other as rivals. Similarly, competition exists between the Indian commercial banks and foreign banks.4. absence of All-India Money groceryIndian money market has not been organised into a single structured all-Indian market. It is divided into small segments mostly catering to the local financial needs. For example, thither is little contact between the money markets in the bigg er cities, uniform, Bombay, Madras, and Calcutta and those in smaller towns.5. Inadequate Banking FacilitiesIndian money market is inadequate to rival the financial need of the economy. Although there has been rapid expansion of bank branches in recent years particularly after the nationalization of banks, yet bulky rural areas still exist without banking facilities. As compared to the size and population of the country, the banking institutions are not enough.6. paucity of CapitalIndian money market primarily suffers from the shortage of capital funds. The availability of capital in the money market is insufficient to interpret the needs of industry and trade in the country. The main reasons for the shortage of capital are (a) low saving capacity of the lot (b) inadequate banking facilities, particularly in the rural areas and (c) undeveloped banking habits among the citizenry.7. Seasonal Shortage of FundsA Major drawback of the Indian money market is the seasonal stringen cy of quote and higher pastime order during a part of the year. Such a shortage invariably appears during the busy calendar months from November to June when there is unembellished demand for credit for carrying on the harvesting and marketing operations in agriculture. As a result, the fire rates rise in this period. On the contrary, during the slack season, from July to October, the demand for credit and the rate of relate decline sharply.8. alteration of stake RatesAnother defect of Indian money market is the multiplicity and disparity of absorb rates. In 1931, the Central Banking Enquiry charge wrote The fact that a call rate of 3/4 per cent, a hundi rate of 3 per cent, a bank rate of 4 per cent, a bazar rate of small traders of 6.25 per cent and a Calcutta bazar rate for bills of small trader of 10 per cent apprise exist at the resembling time indicates an extraordinary sluggishness of the movement of credit between various markets.The interest rates also differ in various centres like Bombay, Calcutta, etc. Variations in the interest rate structure is largely due to the credit immobility because of inadequate, costly and time-consuming means of transferring money. Disparities in the interest rates adversely affect the smooth and effective functioning of the money market.9. Absence of Bill MarketThe existence of a well-organized bill market is requirement for the proper and efficient working of money market. Unfortunately, in spite of the serious efforts made by the Reserve Bank of India, the bill market in India has not yet been effectivey developed. The short-term bills form a much smaller proportion of the bank finance in India as compared to that in the aged countries. M whatsoever factors are responsible for the underdeveloped bill market in India * Most of the commercial dealingss are made in terms of cash. * bullion credit is the main form of borrowing from the banks. Cash credit is given by the banks against the security of commo dities. No bills are abstruse in this type of credit. * The practice of advancing loans by the sellers also limits the use of bills.* Heavy stamp duty dissuades the use of exchange bills. * Absence of learnance houses is another factor responsible for the underdevelopment of bill market in India. * In their desire to ensure greater liquidity and public confidence, the Indian banks like to invest their funds in first class government securities than in exchange bills. * The RBI also prefers to extend re deductioning facility to the commercial banks against sanctioned securities. Comparison of Indian money market with Developed & Developing economies funds MARKET IN A DEVELOPED ECONOMY (with the US in reference)The domestic money market in the United States carries out the largest volume of transactions of any such market in the world its participants include the most heterogeneous group of financial and nonfinancial concerns to be found in any money market it permits trading in an remarkably wide variety of money substitutes and it is less centralized geographically than the money market of any other country. Although there has always been a thump of money market activities in New York City and much of the countrys participation in the international money market centers there, a process of continuous change during the 20th century has produced a authentically national money market.The unit banking system This system has led needs to striking differences between money market arrangements in the United States and those of other countries. At times, some smaller banks almost inevitably find that the wholesale facilities of the money market cannot provide promptly the funds needed to meet unexpected reserve drains, as deposits move about the country from one bank to another.MONEY MARKET IN DEVELOPING COUNTRIESWell-developed money markets exist in nevertheless a few high-income countries. In other countries money markets are narrow, poorly integrated, a nd in many another(prenominal) oddballs virtually nonexistent. Despite the many differences among countries, one can say in general that the degree of development of a countrys financial system, including its money markets, is directly tie in to the level of its economy. Most developing countries, except those having socialist systems, have the boost of money markets as a policy objective, if scarcely to provide outlets for short-term government securities. At the same time many of these governments pursue low-interest-rate policies in order to reduce the cost of government debt and to encourage investment.Such policies discourage saving and make money market instruments unattractive. Nevertheless, a demand for short-term funds and a supply of them exist in all market-oriented economies. In many developing countries these pressures have led to unorganized money markets, which are often highly developed in urban areas Such markets are unorganized because they are outside normal f inancial institutions they manage to range government controls over interest rates but at the same time they do not function very effectively because interest rates are high and contacts between localities and among borrowers and lenders are limited.Money Market Instruments in India1. COMMERCIAL PAPERS ( cps) Commercial Paper (CP) is a movable short-term unsecured promissory note with fixed maturity date, issued by well-rated companies generally change on discount basis. It does not originate from any special self-liquidating trade transaction like commercial bill which generally build up out of specific trade or commercial transaction. CP was introduced in India in 1990 with a view to enabling highly rated corporate borrowers to diversify their sources of short-term borrowings and to provide an additional instrument to investors. The CP rates usually lie between prime lending rate of commercial banks and some benchmark interest rate like 91- mean solar day treasury bill rate , bank rate, 3 month MIBOR, Average Call Money Rate, etc. Except for the bank rate, which is a policy- induced rate, other rates are market determined.Risks associated with Cps assign Risk Moderate to high. The ratings of the company issuing the commercial paper should be monitored i.e., A-1/P-1. Liquidity Risk Moderate. If a company has credit problems it may attain a negative credit watch, which will lead to a rating being downgraded. Commercial paper also may be somewhat difficult to sell. Market Risk Moderate, due to the short-term nature of this security.CHALLENEGES ASSOCIATED WITH CPs* Higher financial costs force organizational decisions and changes* Substantial sign collateral requirements* More lucky as debt holders can force halt of MFI* More tricky cash flow management as principal sum is repaid* Early negotiations require a new set of skills and contacts* Local banks may not be willing to be cooperative* Loans may be dollarized in an inflationary situation* Too ma ny subsidized loans can retard move to market rate2. CERTIFICATE OF DEPOSITS (CDs) This scheme was introduced in July 1989, to enable the banking system to mobilize bulk deposits from the market, which they can have at competitive rates of interest. The major features are Who can issue- Scheduled commercial banks (except RRBs) and All India Financial Institutions within their Umbrella limit. Investors- Individuals (other than minors), corporations, companies, trusts, funds, associations etc Maturity -Min 7 age Max 12 Months (in case of FIs minimum 1 year and maximum 3 years). Amount- Min Rs.1 lac, beyond which in multiple of Rs.1 lac Interest Rate- Market related. Fixed or floatingLoan- Against collateral of CD not permittedPre-mature cancellation- Not allowedTransfer, Endorsement & delivery- Any timeOther conditions If payment day is holiday, to be paid on next preceding business dayIssued at a discount to face valueDuplicate can be issued after giving a public notice & obtaining aidCHALLENGES ASSOCIATED WITH CDs* No additions are permitted to be made to any CD. Unless otherwise required by law CDs may not be withdrawn former to maturity. When one purchases a CD, he has to agree with the issuing depository institution to keep your funds on deposit for the term of the CD. * CDs are not automatically renewed* CDs are relatively illiquid and taxable instruments. Hence, generally people do not find an incentive to hold CDs. * sensation mightiness not get a fixed interest rate if you deal the wrong type of CD. Its important to understand the distinction between variable-rate CDs (which can be less predictable) and those that offer fixed rates.3. TREASURY BILLS (T-BILLS) Treasury bills, popularly known as T-bills, are short-term finance bills issued by the government. They are not backed by any trade transaction, like the commercial bills. These bills are highly liquid and risk-free as they are backed by a guarantee from the government. They were earlier iss ued for 91 old age but now there are also 182 days and 364 days treasury bills. These treasury bills are floated through auctions conducted by RBI. The Reserve Bank of India as the leader and controller of money market, buys and sells these treasury bills. The buying and selling operations are conducted by DFHI on behalf of RBI for stabilizing the money market.Who can buy Treasury bills can be purchased by any one (including individuals) except State govt. These are issued by RBI and sold through fortnightly or monthly auctions at varying discount rate depending upon the bids. Denomination Minimum amount of face value Rs.1L and in multiples thereof. There is no specific amount/limit on the effect to which these can be issued or purchased. Maturity 91-days TBs, 182-days TBs, 364-days TBs and two types of 14-days TBills. Rate of interest -Market determined, based on demand for and supply of funds in the money market.CHALLENGES ASSOCIATED WITH T-BILLS* T-Bills do not fetch very at tractive yields.* Though T-bills are sold through auction in order to ensure market rates for the investor, in actuality, competitive bids are almost absent. The RBI is compelled to accept these non-competitive bids , hence, adequate returns are not available. It makes T-bills unpopular.* Generally , the investors hold T-Bills till maturity and they do not come for circulation. Hence, active trading and mobility in T-bill market is adversely affected.4. REPURCHASE AGREEMENT (REPO AND REVERSE REPO) Repo is a money market instrument, which enables collateralized short term borrowing and lending through sale/purchase operations in debt instruments. Under a repo transaction, a holder of securities sells them to an investor with an agreement to repurchase at a predetermined date and rate. In the case of a repo, the forward clean value of the bonds is set in advance at a level which is different from the spot clean price by adjusting the difference between repo interest and coupon earned on the security. A reverse repo is the mirror image of a repo. For, in a reverse repo, securities are acquired with a simultaneous commitment to resell.Hence whether a transaction is a repo or a reverse repo is determined only in terms of who initiated the first leg of the transaction. When the reverse repurchase transaction matures, the counterparty returns the security to the entity concern and causes its cash along with a profit spread. One factor which encourages an organization to enter into reverse repo is that it earns some extra income on its otherwise idle cash. Broadly, there are four types of repos available in the international market when classified with regard to maturity of underlying securities, pricing, term of repo etc. They comprise buy-sell back repo, classic repo bond borrowing and lending and tripartite repos.CHALLENGES ASSOCIATED WITH REPURCHASE AGREEMENTS* As far as risks are concerned although repos are collateralized transactions they are still exposed t o counterparty risk and the issuer risk associated with the collateral. As far as the counterparty risk is concerned, the investor should be able to toss off the securities acquire as collateral, thus largely offsetting any loss. Against this the seller /lender of bonds will hold cash or other securities as testimonial against non-return of the lent securities. In both the cases it is to be ensured that the realizable value equals or exceeds the exposure.* There is also the concentration risk resulting from illiquid issues which are used as collateral in the transaction.* Again, even where global agreements are signed full transfer of ownership as per contractual protections could be enforced only where a clean ratified opinion is available in pry of jurisdiction concerned. In other words, repos are also prone to legal risks if care is not taken.5. MONEY MARKET MUTUAL FUNDS (MMMF)6. COLLATERALIZED borrow AND LENDING OBLIGATION (CBLO)It is a money market instrument as approved by RBI, is a product developed by CCIL (Clearing Council of India Ltd) . CBLO is a discounted instrument available in electronic book entry form for the maturity period ranging from one day to 90 Days (can be made available up to one year as per RBI guidelines). CBLO is explained as under An obligation by the borrower to return the money borrowed, at a specified future date An authority to the lender to receive money lent, at a specified future date with an cream/privilege to transfer the authority to another person for value received An underlying charge on securities held in custody (with CCIL) for the amount borrowed/lent.Banks, financial institutions, primary dealers, mutual funds and co-operative banks, who are members of NDS, are allowed to participate in CBLO transactions. Non-NDS members like corporate, co-operative banks, NBFCs, Pension/Provident Funds, Trusts etc. are allowed to participate by obtaining Associate Membership to CBLO Segment. In order to enable the market participants to borrow and lend funds, CCIL provides the Dealing System through Indian Financial engagement (INFINET), a closed user group to the Members of the Negotiated Dealing System (NDS) who exert Current account with RBI. Internet gateway for other entities who do not maintain Current account with RBI.