In this essay we will discuss about the Indian Money Market. After reading this essay you will learn about: 1. Structure of Indian Money Market 2. Characteristics and Defects of Indian Money Market 3. Under-Development 4. Measures to Reform.


  1. Essay on the Structure of Indian Money Market
  2. Essay on the Characteristics and Defects of Indian Money Market
  3. Essay on the Under-Development of Indian Money Market
  4. Essay on the Measures to Reform and Strengthen Indian Money Market

1. Essay on the Structure of Indian Money Market:

The Indian money market cannot be considered as an integrated unit. It can be broadly divided into two different parts, i.e., the unorganised and organised segments. There are lot of differences between unorganised and organised segment of Indian money market.

While the unorganised sector is constituted by money lenders and the indigenous bankers but the organised sector is again constituted by the nationalised and private sector commercial banks, the foreign banks, co-operative banks and the Reserve Bank of India (RBI). The unorganised segment of the Indian money market is not a homogenous and integrated sector but the organised sector of the Indian money market is a fairly integrated one.


Chart 14.3 below shows the structure of Indian money market :

Structure of Indian Money Market


Unorganised Sector of Indian Money Market:

Unorganised segment of the Indian money market is composed of unregulated non-bank financial inter­mediaries, indigenous bankers and money lenders which exist even in the small towns and big cities. Their lending activities are mostly restricted to small towns and villages. The persons who normally borrow from this unorganised sector include farmers, artisans small traders and small scale producers who do not have any access to modern banks.


The following are some of the constituents of unorganised money market in India.

(i) Indigenous Bankers:

Indigenous bankers include those individuals and private firms which are engaged in receiving deposits and giving loans and thereby acting like a mini bank. Their activities are not at all regulated. During the ancient and medieval periods, these indigenous bankers were very active. But with the growth of modern banking, particularly after the advent of British, the business of the indigenous bankers received a setback.

Moreover, with the growth of commercial banks and co-operative banks the area of operations of indigenous bankers has again contracted further. Even today, a few thousands of indigenous bankers are still operating in the western and southern parts of the country and engaging themselves in the traditional banking business.


Indigenous bankers are classified into four main sub groups, i.e., Gujarati Shroffs, Multani-or Shikarpuri Shroffs, Chettiars and Marwari, Kayast. Gujarati Shroffs are mostly operating in Mumbai, Kolkata and in industrial and trading cities of Gujarat. The Multani or Shikarpuri Shroffs are operating mainly in Mumbai and Chennai. The Chettiars are mostly found in the South.

The Marwari Shroffs are mostly active in Mumbai, Kolkata, tea gardens of Assam and also in different other parts of North-East India. Among the four aforesaid groups, the Gujarati indigenous bankers are considered as the most powerful groups in respect of its volume of business.

The indigenous bankers are mostly engaged in both banking and non-banking business which they do not want to separate. Their lending operations remain mostly unregulated and unsupervised. They charge high rate of interest and they are not influenced by bank rate policy of the Reserve Bank of India.

(ii) Unregulated Non-Bank Financial Intermediaries:

There are different types of unregulated non-bank financial intermediaries in India. They are mostly constituted by loan or finance companies, chit funds and ‘nidhis’. A good number of finance companies in India are engaged in collecting substantial amount of funds in the form of deposits, borrowings and other receipts.

They normally give loans to wholesale traders, relailers, artisans, and different self-employed persons at a high rate of interest ranging between 36 to 48 per cent.

There are various types of chit funds in India. They are doing business in almost all the states but the major portion of their business is concentrated in Tamil Nadu and Kerala. Moreover, there are ‘nidhis’ operating in South India which are a kind of mutual benefit funds restricted to its members.

(iii) Moneylenders:

Moneylenders are advancing loans to small borrowers like marginal and small farmers, agricultural labourers, artisans, factory and mine workers, low paid staffs, small traders etc. at very high rates of interest and also adopt various malpractices for manipulating loan records of these poor borrowers.


There are broadly three types of moneylenders:

(i) Professional moneylenders dealing solely with money lending;

(ii) Itinerant moneylenders such as Kabulis and Pathans and

(iii) Non-professional moneylenders.


The area of operation of the moneylenders is very much localised and their methods of operation is also not uniform. The money lending operation of the moneylenders is totally unregulated and unsupervised which leads to worst exploitation of the small borrowers.

Moneylenders have become a necessary evil in the absence of sufficient institutional sources of credit to the poorer sections of society. Although various measures have been introduced to control the activities of moneylenders but due to lack of political will, these are not enforced, leading to a exploitation of small borrowers.

Organised Sector of Indian Money Market:

The organised segments of the Indian money market is composed of the Reserve Bank of India (RBI), the State Bank of India, Commercial banks, Co-operative banks, foreign banks, finance corporations and the Discount or Finance House of India Limited. The segment of Indian money market is quite integrated and well organised.

Mumbai, Kolkata, Chennai, Delhi, Bangalore and Ahmedabad are the leading centres of the organised sectors of the Indian money market. The Mumbai money market is a well organised, having head offices of the RBI and different commercial banks, two leading well developed stock exchanges, the bullion exchange and fairly organised market for Government securities. All these have placed the Mumbai money market at par with New York money market of USA and London money market of England.


The main constituents of the organised sector of Indian money market include:

(i) The Call Money Market,

(ii) The Treasury Bill Market,

(iii) The Commercial Bill Market,

(iv) The Certificates of Deposits Market,

(v) Money Market for Mutual Funds and


(vi) The Commercial Paper Market.

(i) Call Money Market:

The call money market is a most common form of developed money market. It is a most sensitive segment of the financial system which reflects clearly any change in it. The call money market in India is very much centred at Mumbai, Chennai and Kolkata and out of which the Mumbai is the most important one. In such market, lending and borrowing operations are carried out for one day.

The call money market in also termed as inter-bank call money market. Normally, scheduled commercial banks, Co­operative banks and the Discount and Finance House of India (DFHI) operate in this market and in a special situation; the LIC, UTI, the GIC, the IDBI and the NABARD are permitted to operate as lenders in this call money market. In this market, brokers usually play an important role.

(ii) Treasury Bill Market:

Treasury bill markets are markets for treasury bills. In India such treasury bills are short term liability of the Central Government which are of 91 day and 364 day duration. Normally, the treasury bills should be issued so as to meet temporary revenue deficit over expenditure of a Government at some point of time. But, in India, the treasury bills are, nowadays, considered as a permanent source of funds for the Central Government.


In India, the RBI is the major holder of the treasury bills, which is around 90 per cent of the total. In India, ad-hoc treasury bills have now been replaced by ways and means Advances since April 1, 1997, so as to finance temporary deficits of the Central Government.

(iii) Commercial Bill Market:

The Commercial bill market is a kind of sub-market which normally deals with trade bills or the commercial bills. It is a kind of bill which is normally drawn by one merchant firm on the other and they arise out of commercial transactions.

The purpose for issuing a commercial bill is simply to reimburse the seller as and when the buyer delays payment. But, in India, the commercial bill market is not so developed. This is mainly due to popularity of the cash credit system in bank lending and the unwillingness on the part of large buyer to bind himself to payment schedule related to the commercial bill and also the lack of uniform approach in drawing bills.

Commercial bills are an instrument of credit which is very much useful to business firms and banks. In India, the outstanding amount of commercial bills rediscounted by the banks with different financial institutions at the end of March, 1996 was to the extent of only Rs 374 crore.

(iv) Certificate of Deposit (CD) Market:


The certificate of Deposit (CD) was introduced in India by the RBI in March 1989 with the sole objective of widening the range of money market instruments and also to attain higher flexibility in the development of short term surplus funds for the investors. Initially the CDs are issued by scheduled commercial banks in multiples of Rs 25 lakh and also to the extent of a minimum of Rs 1 crore.

Maturity period of CDs varied between three months and one year. In India, six financial institutions, viz., IDBI, ICICI, IFCI, IRBI, SIDBI and Export and Import Bank of India were permitted in 1993 to issue CDs for period varying between 1 to 3 years.

Banks normally pay high rates of interest on CDs. In 1995-96, the stringent conditions in the money market induced the bankers to mobilise a good amount of resources through CDs. Accordingly in recent years, the outstanding amount of CDs issued by the commercial banks has almost been doubled from Rs 8,017 crore in March, 1995 to Rs 16,316 crore as on 29th March, 1996.

(v) Commercial Paper Market:

In India, the Commercial Paper (CP) was introduced in the money market in January 1990. A listed company having working capital not less than Rs 5 crore can issue CP. Again the CP can be issued in multiples of Rs 25 lakhs subject to a minimum of Rs 1 crore for a maturity period varying between three to six months. CPs would be again freely transferable by endorsement and delivery.

(vi) Money Market Mutual Funds:


In India, the RBI has introduced a scheme of Money Market Mutual Funds (MMMFs) in April 1992. The main objective of this scheme was to arrange an additional short term avenue for the individual investors. This scheme has failed to receive much response as the initial guidelines were not attractive. Thus, in November, 1995, the RBI introduced some relaxations in order to make the scheme more attractive and flexible.

As per the existing guidelines, the banks, public financial institutions and the private financial institutions are allowed to set up MMMFs. In the mean time, the limits of investment in individual instruments by MMMF have already been deregulated. Since April 1996, the RBI has allowed MMMFs to issue units to corporate enterprises and others at par with the mutual funds introduced earlier.

As per the latest data available from Association of Mutual Funds, overall, the combined Assets Under Management (AUM) of all the mutual fund houses in country stood at Rs 5,06,692.6 crore. The top five mutual funds of the country include—Reliance MF, ICICI Prudential MF, UTI-MF, HDFC MF and Franklin Templeton MF. Reliance MF continued to be the most valued fund house in the country with assets under management (AUM) of Rs 90,937.94 crore at the end of March 31, 2008.

The industry body Assocham Chamber recently conducted a survey on “MF Growth Patterns” and accordingly observed that the Mutual Fund industry has growth 25 per cent between 1999 and 2007 to stand at Rs 4,67,000 crore and the trend would improve as MFs are becoming a preferred choice for both rural and urban retail investors.

The mutual fund sector would grow at compound annual rate of 30 per cent in next three years to become Rs 9,50,000 crore industry as predicted by the survey. The share of privately managed MF players in the total MF industry is expected to fall to 70 per cent from the current estimation of 82 per cent. The reduction would result from the alliance of the private players with overseas partners.

2. Essay on the Characteristics and Defects of Indian Money Market:

The Indian money market has many distinctive characteristics but it also suffers from various defects.

Following are some and defects:

(i) Lack of Adequate Integration:

There is lack of adequate integration in the Indian money market. The organised and the unorganised sector of Indian money market are totally separate from each other and they have independent financial operations of their own. Therefore, activities of one sector have no impact on the activities of the other sector. It is very difficult to establish a national money market under such a background.

However, the Mumbai money market has been emerging as a strong money market in recent times. Moreover, various constituents of the Indian money market viz., commercial banks, Co-operative banks and foreign banks are competing among themselves and particularly, the competition is much in the countryside. Even the commercial banks are competing among themselves. Again, the monetary policy of the RBI is also not effective to maintain adequate integration among various constituents of Indian money market.

(ii) Shortage of Funds:

Another important feature of Indian money market is the shortage of funds. Therefore, the demand for loanable funds in the money market is much higher than that of its supply.

This shortage of fund is mostly resulted from:

(i) Small capacity to save arising out of low per capita income;

(ii) Inadequate banking network and poor banking habit of the people, in general;

(iii) Absence of adequate and diversified investment opportunities and finally, the emergence of strong parallel economy having a huge magnitude of black money.

In recent years, the development of rural banking structure, with the opening rural branches of commercial banks and with the expansion of Co-operative banks, has improved the fund position of the Indian money market, to some extent.

(iii) Lack of Adequate Banking Facilities:

Indian money market is also characterised by lack of adequate banking facilities. Rural banking network in the country is still inadequate. Population per bank office in India was 12,000 persons in 1993 as compared to that of only 1,400 persons in USA. In the rural areas, a substantial number of population, having small saving potential, have no access to facilities.

Under such a system, a huge amount of small savings are not mobilised which needs to be mobilised for its productive uses through the expansion of banking network.

(iv) Lack of Rational Interest Rate Structure:

There is lack of rational interest structure which is mostly resulted from lack of co-ordination among different banking institutions. Recently, there is some improvement in this regard, particularly after the introduction of standardisation of interest rates by the RBI for its rationalisation.

However, the present system of administered interest rates is suffering from the defects like:

(i) Too many concessional rates of interest;

(ii) Comparatively low yield on government securities, and

(iii) Improper lending and deposit rates fixed by the commercial banks.

(v) Absence of Organised Bill Market:

There is absence of organised bill market in India although the commercial banks purchase and discount both inland and foreign bills to a limited extent. Although, the RBI has introduced its limited bill market under its scheme of 1952 and 1970, but the same scheme has failed to popularize the bill finance in India.

The popularity of the cash credit system and lack of uniformity in commercial bills are mostly responsible for the poor development of bill market in the country. Even after the introduction of Bill Market Scheme, 1970, the bill finance has declined and its extent been declined from 20.3 per cent in 1971 to a mere 11.0 per cent in 1995-96.

(vi) Existence of Unorganised Money Market:

Another important feature of Indian money market is the existence of its unorganised character, where one of its segments is constituted by the indigenous bankers and moneylenders. This unorganised segment in completely separated from the organised segment of the money market.

Although the RBI has tried to bring the indigenous bankers under its direct control yet all the attempts have failed. Thus, as the indigenous bankers remained outside the organised money market, therefore, RBI’s control over the money market is quite limited.

(vii) Seasonal Stringency of Money and Fluctuations in Interest Rates:

Another important feature of Indian money market is seasonal stringency of money and the volatile fluctuation of interest rates. India, being an agricultural country has to face huge demand for funds during the period of October to June every year so as to meet its requirement for farm operations and also for trading in agricultural produce.

But the money market is not having sufficient elasticity thus it creates seasonal stringency of funds leading to a rise in the rate of interest. But in the rainy and slack season the demand for fund slumps down leading to a automatic fall in the rate of interest. Such regular fluctuations in interest rates are not at all conducive to developmental activities of the country.

3. Essay on the Under-Development of Indian Money Market:

Considering various defects of Indian money market it can be observed that the money market in India is relatively underdeveloped. Moreover, in respect of resources, organisation stability and elasticity, the said market cannot be compared with the developed money markets of London and New York. But among the third world countries India has been maintaining the most developed banking system. Even then the organisation of the money market is still underdeveloped.

The underdevelopment nature of Indian money market is mostly determined by the following shortcomings:

Firstly, Indian money market fails to possess an adequate and continuous supply of short term assets such as treasury bills, bills of exchange, short term Government bonds etc.

Secondly, this market is lacking the highly organised banking system, so important for the successful working of a money market.

Thirdly, the sub-markets like acceptance market and the commercial bill market are non-existent in Indian money market.

Fourthly, Indian money market has totally failed to develop market for short term assets and accordingly there are no dealers of short term assets who act as intermediaries between the Government and the entire banking system.

Fifthly, Indian money market in suffering from lack of co-ordination between its different constituents.

Sixthly, Indian money market again fails to attract any foreign funds.

Finally, Indian money market cannot be termed as a developed one considering its supply of fund and the liquidity position.

4. Essay on the Measures to Reform and Strengthen Indian Money Market:

In recent years, serious efforts have been made by the Government and the RBI to remove the shortcomings of Indian money market. RBI, in the mean time has reduced considerably the differences between the various constituents of money market. Differences in the interest rates have also been reduced by the RBI and the monetary stringency has also been reduced by the RBI through open market operations and bill market scheme.

Even then, Indian money market is still very much dependent on the call money market which is again characterised by high volatility. In the mean time, the RBI has introduced various measures to reform the money market as per recommendations of the Sukhamoy Chakraborty Committee on the “Review of the working of the Monetary system” and the Narasimham Committee report on the working of the Financial System in India.

Following are some of the important reform measures introduced to strengthen the Indian money market:

(i) Remission of Stamp Duty:

In order to remove the major administrative constraint in the use of bill system, the Government has remitted the stamp duty in August 1989. However, the experts feel that unless the cash credit system is discouraged this government decision to remit the stump duty is not going to favour the prevailing bill system.

(ii) Deregulation of Interest Rates:

Another important step to strengthen the money market was to deregulate the money market interest rates since May, 1989. This will bring interest rate flexibility and transparency in money market transactions.

Again in November, per the recommendations of the Narasimham Committee, the interest rates have been further deregulated and the banks and other financial institutions have been advised to determine and adopt market related rates of interest as far as practicable.

(iii) Introduction of New Instruments:

The RBI has introduced certain money market instruments for strengthening the market conditions. These instruments are—182 days treasury bills, longer maturity treasury bills, Certificates of Deposits (CDs), Commercial Paper (CP) and dated Government securities.

Discount and Finance House of India (DFHI) promoted the 182-day treasury bills systematically and these bills were the first security sold by auction for financing the fiscal deficit of the Central Government. Again, the DFHI has also developed a secondary market in these bills and they become popular with the commercial banks.

Again in 1992-93, the Government decided to introduce 364 day treasury bills and discontinued the 164-day treasury bills. The 364 day treasury bills can be held by commercial banks for meeting its statutory liquidity ratio. CDs received a considerable market during 1995-96.

The volume of outstanding CDs gradually rose from Rs 6,385 crore in January 1995 to Rs 20,815 crore on July 5, 1996. CPs are another instrument which made considerable progress in 1992-93 and 1993-94. Outstanding amount of CPs increased from Rs 64.70 crore in June 1991 to Rs 3,264 crore in March 1994. Again the activity of CP market declined sharply in 1995-96 and thereby the outstanding CPs as on April 30. 1996 was only Rs 71.3 crore.

(iv) DFHI:

The Discount and Finance House of India (DFHI) was set up on April 25, 1988 as a part of the reform package for strengthening money market. The main function of DFHI is to bring the entire financial system consisting of the scheduled commercial banks, co-operative banks, foreign banks and all- India financial institutions, both in the public and private sector, within the fold of the Indian money market.

This House will normally buy bills and short term papers from different banks and financial institutions in order to invest all of their idle funds for short periods. DFHI has also started to buy and sell government securities from April 1992 in limited quantity with the necessary refinance support from the RBI.

(v) Money Market Mutual Funds (MMMFs):

The Government announced the establishment of Money Market Mutual Funds (MMMFs) in April 1992 with the sole objective to bring money market instruments within the reach of individuals. The MMMFs have been set up by different scheduled commercial banks and public financial institutions.

The shares or units of MMMFs have been issued only to individuals. Thus the aforesaid measures to reform Indian money market have helped it to become more advanced, solvent and vibrant. With the introduction of new instruments, the secondary market has also developed considerably.

Moreover, with the setting up of DFHI and MMMFs, the lot of Indian money market has achieved considerable progress in recent rimes and is also expected to achieve further progress in the years to come.