[PDF Notes] What are the importance steps taken by Reserve bank of India to Improve the Indian Money Market?

The Reserve Bank of Indian has taken various measures to improve the existing defects and to develop a sound money market in the country. Important among them are:

(i) Through the introduction of two schemes, one in 1952 and the other in 1970, the Reserve Bank has been making efforts to develop a sound bill market and to encourage the use of bills in the banking system. The variety of bills eligible for use has also been enlarged.

(ii) A number of measures have been taken to improve the functioning of the indigenous banks. These measures include: (a) their registration: (b) keeping and auditing of accounts; (e) providing financial accommodation through banks; etc.

(iii) The reserve bank is fully effective in the organised sector of the money market and has evolved procedures and conventions to integrate and coordinate the different components of money market.

Due to the efforts of the Reserve Bank, there is now much more coordination in the organised sector than that in the unorganised sector or that between organised and unorganised sectors.

(iv) The difference between various sections of the money market has been considerably reduced. With the enactment of the Banking Regulation Act, 1949, all banks in the country have been given equal treatment by the Reserve Bank as regards licensing, opening of branches, share capital, the type of loans to be given, etc.

(v) In order to develop a sound money market, the Reserve Bank of Indian has taken measures to amalgamate and merge banks into a few strong banks and given encouragement to the expansion of banking facilities in the country.

(vi) The Reserve Bank of India has been able to reduce considerably the differences in the interest rates between different sections as well as different centers of the money market. Now the interest rate structure of the country is much more sensitive to changes in the bank rate.

Thus, the Reserve Bank of India has succeeded to a great extent in improving the Indian money market and removing some of its serious defects. But, there are certain difficulties faced by the Reserve Bank in controlling the money market:

(i) The absence of bill market restricts the Reserve Bank’s ability to withdraw surplus funds from the money market by disposing of bills.

(ii) The existence of indigenous bankers is the major hurdle in the way of integrating the money market.

(iii) Inadequate development of call money market is another difficulty in controlling the money market. The banks do not maintain fixed ratios between their cash reserves and deposits and the Reserve Bank has to undertake large open market operations to influence the policy of the banks.

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