Indian Money Market Reform

05/02/2021 0 By indiafreenotes

Reserve Bank of India is the biggest regulator of the Indian markets. It controls the monetary policy of India. Its control is however limited to the organised part of economy and the unorganised sector which has a significant presence is largely unregulated. RBI frequently introduces many reforms to bolster the Indian economy which is in a state of constant flux and is continuously evolving.

The bill market scheme was one very important step. But the Indian money market is still centred on the call money market although efforts have been made to develop secondary market in post 1991 period.

The major money market reforms came after the recommendations of S. Chakravarty Committee and Narsimham Committee. These were major changes which helped unfold the banking potential of India and shape our financial institutions to world class standards. It was soundness of these reforms which helped our economy to easily tide over the economic crisis which had gripped the world in 2008.

Discount and Finance House of India Ltd:

Has been set up as a part of the package of reforms of the money market. It buys bills and other short term papers from banks and financial institutions. It provides short term investment opportunity to banks.

To develop a secondary market in Government securities, it started buying and selling securities to a limited extent in 1992. To enable Discount and Finance House of India Ltd. (DFHI), to deal in Government securities, the Reserve Bank of India provides necessary refinance.

The institutional infrastructure in government securities has been strengthened with the system of Primary Dealers (PDs) announced in March 1995 and that of Satellite Dealers (SDs) in December 1996.

Similarly, Securities Trading Corporation of India was established in 1994, to provide better market and liquidity for dated securities, and to hold short term money market assets like treasury bills. The National Stock Exchange (NSE), has an exclusive trading floor for transparent and screen based trading in all types of debt instruments

Regulation of Non-Banking Financial Companies

RBI Act was amended in 1997 to bring the NBFCs under its regulatory framework. A NBFC is a company registered under Companies Act, 1956 and is involved in making loans and advances, acquisition of shares, stocks, bonds, securities issued by government etc.  They are similar to banks but are different from the latter as they cannot accept demand deposits and cannot issue cheques. They have to be registered with RBI to operate within India. There are a host of regulations which NBFCs have to follow to smoothly operate within India like accept deposit for a minimum period, cannot accept interest rate beyond the prescribed rate given by RBI.

Money Market Mutual Funds:

In 1992 setting up of Money Market Mutual Funds was announced to bring it within in the reach of individuals. These funds have been introduced by financial institutions and banks.

With these reforms the money market is becoming vibrant. There is further scope of introducing new market players and extending refinance from Reserve Bank of India.

Narasimham Committee has also proposed that well managed non-banking financial intermediates and merchant bank should also be allowed to operate in the money market. As and when implemented this will widen the scope of money market.

Permission to Foreign Institutional Investors (FII):

FII’s are allowed to operate in all dated government securities. The policy for 1998-99 had allowed them to buy treasury Bills’ within approved debt ceiling.

Institutional Development:

The post reforms period saw significant institutional development and procedural reforms aimed at developing a strong secondary market in government securities.

Setting up Discount and Finance House of India

Discount and Finance House of India was set up in 1988 to impart more liquidity and also further develop the secondary market instruments. However, maturities of existing instruments like CDs and CPs were gradually shortened to encourage wider participation. Likewise ad hoc treasury bills were abolished in 1997 to stop automatic monetisation of fiscal deficit.

Reintroduction of 182 days treasury bills:

The 182 days bills, which were discontinued in 1992, have been reintroduced from 1998-99. Now Indian money market has 14 days, 91 days, 182 days and 364 days treasury bills.

Demand for Treasury bill is no longer exclusively linked with statutory liquidity rates considerations. The secondary market transactions aiming at effective management of short term liquidity are on the increase.