[PDF Notes] Notes on the Structure of Indian Money Market

Financial markets are functionally classified into (a) money market and (b) capital market. This classifica­tion is on the basis of term of credit, i.e., whether the credit is supplied for a short period or long period.

Money market refers to institutional arrangements which deal with short-term funds. Capital market, on the other hand, deals in long-term funds.

Money market is a short-term credit market which deals with relatively liquid and quickly marketable assets, such as, short- term government securities, treasury bills, bills of exchange, etc.

According to Crowther, “The money market is a collective name given to the various firms and institutions that deal with various grades of near-money.”

The Reserve Bank of India defines money market “as the centre for dealing, mainly of a short-term character, in monetary assets; it meets the short-term requirements of borrowers and provides liquidity or cash to the lenders.”

Structure of Indian Money Market

(i)Broadly speaking, the money market in India comprises two sectors: (a) organised sector, and (b) unorganised sector.

(ii)The organised sector consists of the Reserve Bank of India, the State Bank of India with its seven associates, twenty nationalised commercial banks, other scheduled and non-scheduled commercial banks, foreign banks, and Regional Rural Banks. It is called organised because its part is systemati­cally coordinated by the RBI.

(iii) Non-bank financial institutions such as the LIC, the GIC and subsidiaries, the UTI also operate in this market, but only indirectly through banks, and not directly.

(iv) Quasi-government bodies and large companies also make their short-term surplus funds available to the organised market through banks.

(v)Cooperative credit institutions occupy the intermediary position between organised and unorganised parts of the Indian money market. These institutions have a three-tier structure. At the top, there are state cooperative banks.

At the local level, there are primary credit societies and urban cooperative banks. Considering the size, methods of operations, and dealings with the RBI and commercial banks, only state and central, cooperative banks should be included in the organised sector. The cooperative societies at the local level are loosely linked with it.

(vi)The unorganized sector consists of indigenous banks and money lenders. It is unorganised because activities of its parts are not systematically coordinated by the RBI.

(vii)The money lenders operate throughout the country, but without any link among themselves.

(viii)Indigenous banks are somewhat better organised because they enjoy rediscount facilities from the commercial banks which, in turn, have link with the RBI. But this type of organisation represents only a loose link with the RBI.

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