Money Markets

The interest rates get determined in the money markets. There are two kinds of markets where borrowing and lending of money takes place. These are short term markets and long term markets.

• Short term markets are called "Money Markets".
• The long term markets are called Fixed Income markets.

So, Money markets are those markets where there is a borrowing and lending of Short Term Money Takes place.

By short term, we refer to a period of less than 1 year.

• The Money market instruments have a maturity of less than one year.

Due to short maturity, the instruments of money market are liquid and can be converted to cash easily and thus are able to address the need of the short term surplus fund of the lenders and short term borrowing requirements of the borrowers.

Money market instruments in India are regulated by the RBI and SEBI.

• The most active segment of the money market is "Overnight Call market" or repo.

The Money market in India has a wide range of instruments whose maturity ranges from 1 day to 1 year. The Instruments of the money market in India are as follows:

• Call Money / Notice Money Market
• Repo / Reverse Repo
• Inter-corporate Deposits (ICD)
• Commercial Paper (CP)
• Certificate of Deposit (CD)
• T-Bills.

Some Features of the Indian Money Market

• In India , so far the control of the RBI over the money market has been limited. This is because of an indigenous banking system and unorganized money market. In recent year a lot of NBFC have spread their roots in the system and still the market lacks complete integration. The money market at one time was divided into several segments which were loosely connected with each other, and partly independent of each another. However, now the RBI is fully effective in the organized sector and Indian Money Market is getting closely integrated.
• In Indian Money market there are too many interest rates existed since long. One reason attributed to this is immobility of funds from one segment to another.
• In Indian Money market, the rates are seasonal and during the busy season i.e. November to May-June, funds are required to move the crops and this busy season causes lack of liquidity and hike in the interest rates. In the slack season, there are surplus funds. For this RBI has been pumping in money in the busy season and pumping out in the slack seasons.
• The short term bill market is not much popular in India. This market needs to be developed. One reasons attributed to this was that industry preferred to borrow rather than depending upon the short term bills. The RBI's New Bill Market Scheme of the early 1970s got failed.
• In call / notice money market in India has been highly volatile and the difference between highest and lowest quotations is very high. For example in 1990, the highest rate was 70% per annum and lowest rate was 4% per annum. Similarly, in 2008-09, the highest quotation was 23 percent per annum and lowest was 1% per annum. One reasons attributed to this is also the short term money required by the Banks to maintain the RBI requirements of CRR / SLR.