Meaning of Financial Markets

The financial market is a place or mechanism where funds or savings are transferred from
surplus units to deficit units. In the absence of financial markets, it is difficult to transfer
funds from a person who has no investment opportunities to one who has them.
The financial markets are thus essential to promote economic efficiency. All the countries,
irrespective of their state of development, need funds for their economic development and
growth. In an economy, funds are obtained from the savers or surplus units (the units which
have more income than their consumption) which may be household individuals, firms,
public sector units, government, etc.
There are certain investors or deficit units whose consumption or investment is more than
their current income. In any economy, flow of funds from surplus units to deficit ones is
essential for desired achievement of national goals and priorities. For this, appropriate
financial instruments and opportunities must be available.
The financial markets provide the platform for such flow where each saver can find and
exchange the appropriate financial assets as per his/her requirement. Therefore, the efficiency
of financial market depends upon how efficiently the flow of funds is managed in the country.
Further, the financial market must induce people to become producers/entrepreneurs and
motivate the individuals and institutions to save more.
Role of Financial Market
I. Primary Functions:
1. Mobilization of Savings: Financial markets channel savings into investments, enabling
individuals and institutions to invest in productive assets.
2. Allocation of Resources: Financial markets efficiently allocate resources to productive
sectors, promoting economic growth.
3. Risk Management: Financial markets enable risk sharing and management through various
financial instruments (e.g., derivatives).
4. Price Discovery: Financial markets determine prices of securities, reflecting market
expectations and supply-demand dynamics.
5. Liquidity Provision: Financial markets facilitate buying and selling of securities, providing
liquidity to investors.
II. Secondary Functions:
1. Information Dissemination: Financial markets provide market information, enhancing
transparency and investor knowledge.
2. Regulatory Compliance: Financial markets ensure adherence to regulations and standards,
maintaining market integrity.
3. Innovation: Financial markets encourage financial innovation, driving economic growth
and development
Functions of Financial Markets
The functions of financial market can be classified into three categories:
(a) Economic Functions,
(b) Financial Functions, and
(c) Other Functions.
a) Economic Functions: The financial markets play a very important role in the economic
growth of a country. The way it helps in the economic growth is as follows:
• It facilitates the transfer of real economic resources from sellers to ultimate users of
economic resources.
• Lenders/investors earn interest/dividend on their surplus investable funds, thereby
increasing their earnings, and as a result, enhancing national income finally.
• Borrowers generally use borrowed funds productively, if invested in new assets, thereby
increasing their income and gross national products finally.
• By facilitating transfer of real resources, it serves the economy and finally the welfare of the
public. • It provides a channel through which new savings flow into capital formation of a
country.
b) Financial Functions: As already discussed these markets facilitate in the flow of funds
from surplus units to deficit units. In this process there are several functions that it performs.
Some of those are as follows:
• It provides the borrowers with funds which they need to carry out their plans.
• It provides the lenders with earning assets so that their wealth may be held in a productive
form without the necessity of direct ownership of real assets.
• It provides liquidity in the market through which the claims against money can be resold at
any time, and thus, reconverting them into current funds.
c) Other Functions : In addition to the above, the financial markets perform three more
functions such as;
• Price Discovery: The interaction of buyers and sellers in a financial market determines
the price of the traded asset. The inducement for firms to acquire funds depends on the
required rate of return that investors demand, and it is this feature of financial markets
that signals how the funds in the economy should be allocated among financial assets.
This is called the price discovery process.
 Liquidity: Financial markets provide a mechanism for an investor to sell a financial asset.
In the absence of liquidity, the owner will be forced to hold a debt instrument till it
matures and an equity instrument till the company is, either voluntarily or otherwise,
liquidated.
 Reduces Costs: It reduces the search and information costs of transacting. Search costs
represent explicit cost, such as the Money spent to advertise the desire to sell or purchase
 a financial asset, the implicit costs such as the value of time spent in locating a
counterpart.

How Are Financial Markets Structured in India?

To broadly classify the structure of financial markets in India, you must first understand
the two main financial markets: money markets and capital markets. While money markets
deal with short-term liquid securities, capital markets usually deal with medium-term and
long-term securities.
There are also other types of financial markets based on parameters like delivery timing,
maturity, type of claims, etc. In the following sections, you will see the structure of India’s
financial markets:
1. Money market
Money markets are marketplaces that deal with highly liquid and low-risk instruments. In
these markets, participants trade money market instruments such as Treasury Bills (T-Bills),
certificates of deposits, commercial papers, overnight securities, etc. These securities have
maturities of one year or less.
These assets are characterised by high liquidity, short-term maturity periods, low risks of loss
or volatility and low-interest rates. They are mostly used by companies and large institutional
investors like government bodies and financial institutions for wholesale trades.
Although the returns from these assets are limited, they offer a high degree of safety due to
their liquidity and short tenures. Moreover, money markets offer a large variety of
instruments to choose from. For market participants who require funds, this market is a
reliable source of cash.
2. Capital market
Capital markets are venues where entities that require capital can access it from suppliers
who have excess funds. It is a broad term that includes stock markets, bond markets, currency
markets and forex markets. The stock market and the bond market are the two most popular
capital markets.
Suppliers in the capital market include financial institutions and investors who have extra
capital to invest. Entities looking for capital include companies, government bodies and
individual borrowers. The capital market’s function is to provide a platform where buyers and
sellers can come to terms and exchange securities.
The capital market can be divided into two categories- The primary market and the secondary
market. These are discussed in more detail below.
1. Primary market
Also known as New Issue Market, this is where a company issue securities for the first time.
Companies use this marketplace to raise capital to help them fund their business endeavours.
They issue securities in the primary market in the form of shares, bonds and IPOs (Initial
Public Offerings).
 2. Secondary market
Shares that have already been issued in the primary markets are traded in the secondary
markets. Unlike primary markets, where securities move from companies to investors, in the
second market, securities are traded among investors. Also, the value of securities tends to
change as per their demand and supply. Stocks, Futures, Options, bonds, etc., are some of the
financial instruments traded in the secondary markets.
Other Types of Financial Markets
Other than money markets and capital markets, the following are some more types of
financial markets:
 Banking Market
The banking market is another important component under the structure of Indian financial
markets. It consists of both banks and non-banking financial institutions.
The banking market comprises scheduled commercial banks, small finance banks, payment
banks and cooperative banks. The Reserve Bank of India (RBI) is India’s central bank and
regulates our banking sector.
This system’s primary purpose is to collect funds from the general public and lenders with
surplus money and offer them credits. Banks offer credit in loans to individuals or businesses
that need capital.
 Pension market
Another pillar in the structure of financial markets in India is the pension market. This
marketplace assists people looking for financial security during their old age. It shelters and
allows senior citizens who do not fall under the umbrella of pension schemes to get
retirement benefits.
 Insurance market
Insurance markets are another growing part of the structure of Indian financial markets.
People tend to purchase insurance policies like motor or health insurance to safeguard
themselves financially in case of a mishap or financial obligations.
Insurance markets are experiencing positive growth due to growing financial literacy
amongst the masses. Therefore, policies such as health insurance, annuity plans, travel
insurance and motor insurance are high in demand today.
 Foreign exchange market
Foreign exchange, or Forex, carries the highest liquidity in the Indian financial
market. This is because people can easily deal with currencies in the forex markets.
Every country has their foreign exchange market that is connected online. Traders on foreign
exchanges use various trading strategies to benefit from the fluctuating exchange rates of
different currencies.
 Commodity market
The commodity market deals with trading raw materials like oil, pulses, rice, coffee and tea.
You can further classify commodity markets into hard and soft commodities.
Hard commodities comprise natural resources and minerals like coal, gold, oil and rubber.
Soft commodities include livestock and agricultural products like tea, wheat, sugar, meat,
soybean, etc.
In commodity exchanges, traders engage mainly in future contracts instead of trading. Future
contracts are an arrangement between traders wherein they decide upon selling or purchasing
commodities for a pre-decided period. Spots contracts and options contracts are also
sometimes used.

Function of Financial market

I. Price Determination - The financial market performs the function of price
discovery of the different financial instruments traded between the buyers and the
sellers on the financial market. The prices at which the financial instruments trade in
the financial market are determined by the market forces, i.e., demand and supply.
So the financial market provides the vehicle by which the prices are set for both
financial assists which are issued newly and for the existing stock of the financial
assets.
II. Funds Mobilization - Along with determining the prices at which the financial
instruments trade in the financial market, the required return out of the funds invested
by the investor is also determined by participants in the financial market. The
motivation for persons seeking the funds is dependent on the required rate of return,
which the investors demand.
III. Liquidity - The liquidity function of the financial market provides an opportunity for
the investors to sell their financial instruments at their fair value prevailing in the
market at any time during the working hours of the market.
IV. Risk sharing - The financial market performs the function of risk-sharing as the
person who is undertaking the investments is different from the persons who are
investing their fund in those investments. With the help of the financial market, the
risk is transferred from the person who undertakes the investments to those who
provide the funds for making those investments.
V. Easy Access - The industries require the investors to raise funds, and the investors
require the industries to invest their money and earn the returns from them. So the
financial market platform provides the potential buyer and seller easily, which helps
them save their time and money in finding the potential buyer and seller
VI. Reduction in Transaction Costs and Provision of the Information - The trader
requires various types of information while doing the transaction of buying and
selling the securities. For obtaining the same time and money is required. But the
financial market helps provide every type of information to the traders without the
requirement of spending any money by them. In this way, the financial market
reduces the cost of the transactions.
VII. Capital Formation Financial markets provide the channel through which the new
investors’ savings flow in the country, which aids in the country’s capital formation.
Participants in financial markets
 Individuals are, by far, the most important participant as they generally deploy their
savings into banks or invest in securities.
 Business enterprises access the market for funds to run their operations and for
expansion. They also invest their surpluses in financial securities.
 Banks deposit and lend to people in need of capital. They also deploy a part of their
deposits or surpluses in various securities like shares, bonds and mutual funds.
 Financial institutions raise money by issuing long-term bonds and other international
sources and lend to key sectors like agriculture, small industries, housing
development, etc.
 Insurance companies account for a huge chunk of the national savings. The
premiums received by insurance companies are for a long duration, which they deploy
in long-term bonds and securities. As the subject matter of insurance is risk, insurance
companies deploy their funds in long-term securities.
 Mutual funds are used either as savings or growth instruments. They deploy funds
mobilised from unit holders across the financial market like shares, bonds, exchange-
traded funds etc. Mutual funds are considered to be reasonably safe by investors as
they deploy their funds across a wide range of securities and sectors and thereby
mitigate risk to some extent.
 Government is the largest borrower in the system. It not only collects taxes but also
borrows by issuing bonds to fund development and infrastructure projects. It is the
largest issuer of bonds to which other market participants subscribe.
 Regulatory bodies such as the Reserve Bank of India (RBI), the Securities and
Exchange Board of India (SEBI) and the Insurance Regulatory and Development
Authority of India (IRDAI) regulate and monitor the above-mentioned participants.
 Intermediaries such as stock exchanges, clearing agents, brokers, custodians,
depositories, credit rating agencies, etc., also are some important participants in the
financial markets that facilitate their smooth functioning.
  Money Market
The money market is a crucial financial market segment where short-term borrowing and
lending of funds occur. It facilitates the smooth functioning of the economy by providing a
platform for participants to meet their immediate cash needs and manage liquidity. The
participants in the money market include governments, corporations, financial institutions,
and individual investors. Transactions in the money market typically involve highly liquid
and low-risk instruments with maturities of one year or less.

How does the money market work?

The money market operates through the interaction of various participants, including
governments, corporations, financial institutions, and individual investors. These participants
engage in short-term borrowing and lending to meet their immediate cash needs and manage
liquidity. Here’s a breakdown of how the money market works:
 Borrowers: Entities needing short-term funds, such as governments or corporations,
approach the money market to meet their immediate financial obligations. They issue
money market instruments to raise funds quickly. These instruments act as a form of
borrowing from investors.
 Money Market Instruments: Borrowers issue various instruments with varying
maturities, interest rates, and credit ratings. These instruments include Treasury bills,
commercial paper, certificates of deposit, and repurchase agreements. These
instruments are highly liquid and considered low risk.
 Investors: Investors with surplus funds seeking short-term investment opportunities
turn to the money market. They purchase money market instruments issued by
borrowers. In return, investors receive interest payments or discounts on the tools,
which serve as their returns on investment.
 Trading and Secondary Market: Money market instruments can be traded on the
secondary market, allowing investors to buy and sell them before maturity. This
secondary market enhances liquidity, as investors can access their funds before the
instrument matures.
 Money Market Funds: Money market funds pool investments from institutional and
individual investors and invest in a diversified portfolio of money market instruments.
These funds allow investors to indirectly participate in the money market while
benefiting from professional management.
 Regulatory Oversight: The money market operates within a regulated environment.
Regulatory bodies monitor and enforce rules and regulations to ensure transparency,
stability, and fair practices. This oversight helps maintain the integrity and reliability
of the money market.
Participants in Money Market:
A large number of borrowers and lenders make up the money market.

Some of the important players are listed below:

1. Central Government:

Central Government is a borrower in the money market through the issue of Treasury
Bills (T-Bills). The T-Bills are issued through the RBI. The T-Bills represent zero risk
instruments. They are issued with tenure of 91 days (3 months), 182 days (6 months) and
364 days (1 year). Due to its risk free nature, banks, corporates and many such
institutions buy the T-Bills and lend to the government as a part of it short- term
borrowing programme.

2. Public Sector Undertakings:

Many government companies have their shares listed on stock exchanges. As listed
companies, they can issue commercial paper in order to obtain its working capital
finance. The PSUs are only borrowers in the money market. They seldom lend their
surplus due to the bureaucratic mindset. The treasury operations of the PSUs are very
inefficient with huge cash surplus remaining idle for a long period of time.

3. Insurance Companies:

Both general and life insurance companies are usual lenders in the money market. Being
cash surplus entities, they do not borrow in the money market. With the introduction of
CBLO (Collateralized Borrowing and Lending Obligations), they have become big
investors. In between capital market instruments and money market instruments,
insurance companies invest more in capital market instruments. As their lending
programmes are for very long periods, their role in the money market is a little less.

4. Mutual Funds:

Mutual funds offer varieties of schemes for the different investment objectives of the
public. There are many schemes known as Money Market Mutual Fund Schemes or
Liquid Schemes. These schemes have the investment objective of investing in money
market instruments.

They ensure highest liquidity to the investors by offering withdrawal by way of a day’s
notice or encashment of units through Bank ATMs. Naturally, mutual funds invest the
corpus of such schemes only in money market. They do not borrow, but only lend or
invest in the money market.

5. Banks:

Scheduled commercial banks are very big borrowers and lenders in the money market.
They borrow and lend in call money market, short-notice market, repo and reverse repo
market. They borrow in rediscounting market from the RBI and IDBI. They lend in
commercial paper market by way of buying the commercial papers issued by corporates
and listed public sector units. They also borrow through issue of Certificate of Deposits
to the corporates.

6. Corporates:

Corporates borrow by issuing commercial papers which are nothing but short-term
promissory notes. They are issued by listed companies after obtaining the necessary
credit rating for the CP. They also lend in the CBLO market their temporary surplus,
when the interest rate rules very high in the market. They are the lender to the banks
when they buy the Certificate of Deposit issued by the banks. In addition, they are the
lenders through purchase of Treasury bills.

Features of the Money Market

The money market is a segment of the financial market that deals in short-term debt
instruments, typically with maturities of less than a year. Here are some of its key features:
1. Short-Term Maturity:
 Instruments have a relatively short maturity, usually less than a year. This provides
liquidity and minimizes risk.
2. High Liquidity:
 Money market instruments are highly liquid, meaning they can be easily bought and
sold. This makes them attractive to investors who need quick access to their funds.
3. Low Risk:
 Due to their short maturity and the generally low credit risk of the issuers (often
governments or large corporations), money market instruments are considered to be
relatively low-risk investments.
4. Low Return:
 In general, money market instruments offer lower returns compared to long-term
investments like stocks and bonds. This is because of their lower risk profile.
5. Safety and Stability:
 Money market instruments are often seen as a safe and stable investment option,
especially during periods of market volatility.
6. Sensitivity to Interest Rate Changes:
 The value of money market instruments can be sensitive to changes in interest rates. If
interest rates rise, the value of existing money market instruments may decline.
7. Diverse Instruments:
 The money market includes a variety of instruments, such as:
o Treasury Bills: Short-term debt securities issued by the government.
 o Commercial Paper: Short-term debt issued by corporations.
o Certificates of Deposit (CDs): Time deposits offered by banks.
o Repurchase Agreements (Repos): Short-term loans secured by government
securities.
o Bankers' Acceptances: Time drafts accepted by a bank.

Role of Money Market in India

The role of the money market in India can be discussed under the following categories:
 Access to money for short-term borrowers
Money markets provide easy access to money for short-term borrowers, making it easier to
borrow from markets at reasonable rates of interest.
 Liquidity for economic growth
The instruments of the money market are highly liquid. They facilitate better management of
liquidity by the authorities leading to better borrowing and lending which turns into better
economic growth.
 Portfolio management
Money markets have numerous instruments to suit the diverse need of investors and
borrowers. Investors can build a portfolio in money markets according to their risk and return
requirements.
 Economization of use of cash
Money markets contain various close substitutes of money but not actual money. Therefore, it
economizes the uses and utilities of cash.
 Demand and supply equilibrium
Money markets depend on the rational allocation of money and other resources while
mobilizing savings into various investment channels. This helps in maintaining supply and
demand equilibrium.
 Monetary policy implementation
Central banks implement monetary policies and money markets help in the successful
implementation of these policies. The money market aims at equidistributional of money to
various sectors to increase the speed of economic growth.
 Fulfilling financial requirements of the government:
Governments can fulfil their short-term monetary requirements through the use of treasury
bills in the money markets.
Problems of Money Market in India
 Shortages of Funds
Usually, there is a shortage of funds in the Indian Money Market due to various factors, such
as low savings, inadequate banking facilities, lack of banking habits, the existence of a
parallel economy, etc.
In the last free years, there has been a palpable increase in the funds of money markets due to
various schemes introduced by the government. This has made money markets richer and
more accessible too.
 Existence of Unorganised Money Market
The unorganized sector is a major drawback of the Indian money market. The unorganized
sector is out of the purview of the Reserve Bank of India. It is an exploitative sector that
creates a debt trap for borrowers. Unorganized money markets are often available in rural
areas where the organized sector is absent. The government of India is trying hard to contain
this issue.
 Delays in technological up-gradation
Upgradation of technology is a major requirement for the smooth functioning of money
markets. However, this is absent in many places, especially rural areas in India. The absence
of quick upgradation of money markets creates a backlog which is a major problem. India’s
technological impetus is changing fast which can add immense value to the money markets.
 Absence of Well-Organized Banking Sector
There is an absence of a well-structured banking sector in India. The banking operations are
concentrated in major cities and towns but rural areas are completely devoid of it. Such
anomalies in demographic disparities create a bottleneck in the efficiency of money market
operations.
 No Uniformity in the rates of interest
There are too many types of interest rates in the Indian Money Market. The borrowing rates
of the government, interest rates of co-operatives, and commercial banks, lending rates of
financial institutions, etc., are all different from one another. A lack of mobility of funds from
one section of the money market to another. Creates such disparities which is a reason for the
inefficiency of the money market in India.
 Seasonal fluctuations
The seasonal fluctuation of money supply and high rate of interest from November to June is
a particular feature of the Indian Money market. There is a wide fluctuation in the Indian
money market in interest rates from one season to another. The money markets add money
into the market during the busy season and withdraw funds during the seasons when there is a
lack of investments.
 Lack of Standardization:
Diverse Instruments: The market is characterized by a wide range of instruments with
varying terms, features, and regulations. This lack of standardization can create
complexities for investors and borrowers.
 Lack of Market Infrastructure:
Technology: The Indian money market has lagged behind in adopting modern
technology and infrastructure, which can hinder efficiency and transparency.
 Lack of Investor Education:

Limited Awareness: Many investors and borrowers in India lack adequate knowledge
about money market instruments and their risks and benefits. This can hinder market
development and participation.

 Limited Risk Management Tools:

Derivatives: The use of derivatives for risk management in the Indian money market
is still relatively limited, which can expose market participants to significant risks.

Reforms for Money Market in India

In 1985, the Chakravarty presided "Committee for the Review of the Working of
Monetary System," made a number of suggestions for developing the money market in
India. In 1987, the RBI established a Working Group on Money Market under Vaghul's
leadership as a follow-up. The Reserve Bank of India (RBI) took a number of steps to
expand and deepen the Money Market in response to the recommendations of the Vaghul
Committee. The most important ones are as follows:
1. Interest Rates deregulation - The ceiling over the rate of interest upon call money,
inter-bank deposits that are short-term, bills re-discounting, and participation inter-bank
was lifted in May 1989, allowing the rates to be determined by market forces.As a result,
the administration of interest rates is being gradually eliminated
2. Introducing novel money-market instruments - In order to broaden and diversify the
Indian money market, the Reserve Bank of India (RBI) has introduced a number of new
instruments, including CDs and CPs, 182-day treasury bills, and 364-day treasury bills.
Through these instruments the public authority, Business Banks, monetary foundations
and corporate can collect supports through the Currency Market. Additionally, they offer
investors additional investment tools. RBI reduces the minimum investment amount and
maturity period for CDs and CPs in an effort to increase the number of investors.
3. Repos or, the Repurchase Agreements - In December 1992, the RBI introduced
Repos for government securities, and in November 1996, it introduced Reverse Repos.
The Money Market's short-term fluctuations in liquidity can be balanced with the
assistance of repos and reverse repos. Banks can also use them to temporarily store their
excess cash. The RBI communicates its policy goals to the entire Money Market by
adjusting repo and reverse repo rates.
4. LAF or, the Liquidity Adjustment Facility - The Liquidity Adjustment Facility
(LAF) was introduced by the RBI in June 2000 and serves as an important tool for
adjusting liquidity through Repos and Reverse Repos. As a result, the Reserve Bank of
India (RBI) has recently adopted a policy of using Repos and Reverse Repos to adjust
liquidity in the Money Market and, as a result, stabilize short-term interest rates or call
rates.
5. DFHI or, the Discount and Finance House of India - was established in 1988 by
RBI, public sector banks, and financial institutions to provide liquidity to Money Market
instruments and support the growth of secondary markets for these instruments.
6. NBFCs regulation - The RBI Act was changed in 1997 to accommodate a thorough
guideline of NBFC area. Without a Certificate of Registration (CoR) from the RBI, no
NFBC can conduct any financial institution-related business, including accepting public
deposits.
7. CCIL or, the Clearing Corporation of India Limited - The CCIL was established on
April 30, 2001, and the State Bank of India served as its primary promoter. It was
established in accordance with the Companies Act of 1956. All transactions in
government securities and Repos that are reported on the Negotiated Dealing System
(NDS) of the RBI are cleared by the CCIL.
2. Unorganized Money Market The economy on one hand performs through organised sector
and on other hand in rural areas there is continuance of unorganised, informal and indigenous
sector. The unorganised money market mostly finances short-term financial needs of farmers
and small businessmen. The main constituents of unorganised money market are:-
1) Indigenous Bankers (IBs) Indigenous bankers are individuals or private firms who give
loans and thereby operate as banks. IBs accept deposits as well as lend money. They mostly
operate in urban areas, especially in western and southern regions of the country. The volume
of their credit operations is however not known. Further, their lending operations are
completely unsupervised and unregulated. Over the years, the significance of IBs has
declined due to growing organised banking sector.
2) Money Lenders (MLs) They are those whose primary business is money lending. Money
lending in India is very popular both in urban and rural areas. Interest rates are generally
high. Large amount of loans are given for unproductive purposes. The operations of money
lenders are prompt, informal and flexible. The borrowers are mostly poor farmers, artisans,
petty traders and manual workers. Over the years the role of money lenders has declined due
to the growing importance of organised banking sector.
3) Non - Banking Financial Companies (NBFCs) They consist of :-
1. Chit Funds Chit funds are savings institutions. It has regular members who make periodic
subscriptions to the fund. The beneficiary may be selected by drawing of lots. Chit fund is
more popular in Kerala and Tamilnadu. RBI has no control over the lending activities of chit
funds.
2. Nidhis Nidhis operate as a kind of mutual benefit for their members only. The loans are
given to members at a reasonable rate of interest. Nidhis operate particularly in South India.
3. Loan or Finance Companies Loan companies are found in all parts of the country. Their
total capital consists of borrowings, deposits and owned funds. They give loans to retailers,
wholesalers, artisans and self -employed persons. They offer a high rate of interest along with
other incentives to attract deposits. They charge high rate of interest varying from 36% to
48% p.a.
4. Finance Brokers They are found in all major urban markets especially in cloth, grain and
commodity markets. They act as middlemen between lenders and borrowers. They charge
commission for their services.

Defects of Indian Money Market :

A well-developed money market is a necessary pre-condition for the effective implementation
of monetary policy. The central bank controls and regulates the money supply in the country
through the money market. However, unfortunately, the Indian money market is inadequately
developed, loosely organised and suffers from many weaknesses. Major defects are discussed
below:
1. Dichotomy between Organised and Unorganised Sectors: The most important defect of
the Indian money market is its division into two sectors: (a) the organised sector and (b)
the unorganised sector. There is little contact, coordination and cooperation between 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 Unorganised Sector: Another important defect of the Indian money
market is its predominance of unorganised sector. The indigenous bankers occupy a
significant position in the money-lending business in the rural areas. In this unorganised
sector, no clearcut distinction is made between short-term and long-term and between the
purposes of loans. These indigenous bankers, which constitute a large portion of the
money market, remain outside the organised sector. Therefore, they seriously restrict the
Reserve Bank’s control over the money market,
3. Wasteful Competition: Wasteful competition exists not only between the organised and
unorganised sectors, but also among the members of the two sectors. The relation
between various segments of the money market is not cordial; they are loosely connected
with each other and generally follow separatist tendencies. For example, even today, the
State Bank of Indian and other commercial 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 Market: Indian money market has not been organised into a
single integrated all-Indian market. It is divided into small segments mostly catering to
the local financial needs. For example, there is little contact between the money markets
in the bigger cities, like, Bombay, Madras, and Calcutta and those in smaller towns.
5. Inadequate Banking Facilities: Indian money market is inadequate to meet the financial
need of the economy. Although there has been rapid expansion of bank branches in recent
years particularly after the nationalisation of banks, yet vast rural areas still exist without
banking facilities. As compared to the size and population of the country, the banking
institutions are not enough.
6. Shortage of Capital: Indian money market generally suffers from the shortage of capital
funds. The availability of capital in the money market is insufficient to meet the needs of
 industry and trade in the country. The main reasons for the shortage of capital are: (a) low
saving capacity of the people; (b) inadequate banking facilities, particularly in the rural
areas; and (c) undeveloped banking habits among the people.
7. Seasonal Shortage of Funds: A Major drawback of the Indian money market is the
seasonal stringency of credit and higher interest rates during a part of the year. Such a
shortage invariably appears during the busy months from November to June when there is
excess demand for credit for carrying on the harvesting and marketing operations in
agriculture. As a result, the interest rates rise in this period. On the contrary, during the
slack season, from July to October, the demand for credit and the rate of interest declines
sharply.