SYLLABUS

The Economic Markets (4 sessions) The Product Market & How it Affects Indias Growth Potential The Money Market & How it Behaves The Capital Market & its Vendibility The Money Market & the Role of Central Banking How does Commercial Banking Effect industry & Business The Indian Labor Market & Levels of Unemployment & Inflation since 1990

Product Market
A market used to exchange a final good or service. Product markets exchange

consumer goods purchased by the household sector, capital investment goods purchased by the business sector, and goods purchased by government and foreign sectors.
A product market, however, does not include the exchange of raw materials,

scarce resources, factors of production, or any type of intermediate goods. The

total value of goods exchanged in product markets each year is measured by gross domestic product.
The demand side of product markets includes consumption expenditures,

investment expenditures, government purchases, and net exports.

The supply side of product markets is production of the business sector.

Nature of product market

Money acts as a facilitator buyer and seller of goods interact in market

exchange good for money.

Provides equilibrium in a competitive market varies an equilibrium price

which act as balance of demand and supply arrived automatically due to

market forces.

Provide a platform at a certain price for agricultural producers, and other products.

Component of product market

Gross production: the product market exchange final goods and services which

is specified as GDP. GDP is the total market value of all final goods and
services within a country.
Buyers and sellers: the demand side of the market makes the expenditure are

export consumptions and investment expenditure

1. 2. 3.

HOUSEHOLD CONSUMPTION BUSINESS INVESTMENT GOVERNMENT PURCHASES

4.
5. 6.

FOREIGN EXPORTS
DOMESTIC BUSINESS PRODUCTION FOREIGN IMPORTS

Money Market

Introduction
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, shortterm government securities, treasury bills, bills of exchange, etc.

Definition of Money Market

According to Crowther, "The money market is a collective name given to

the various firms and institutions that deal with various grades of nearmoney."
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.
The money market is a wholesale debt market for low-risk, highly-liquid,

short-term instrument. Funds are available in this market for periods ranging
from a single day up to a year. This market is dominated mostly by government, banks and financial institutions.

Importance Of Money Market

A developed money market plays an important role in the financial system of a country by supplying short-term funds adequately and quickly to

trade and industry. The money market is an integral part of a countrys

economy. Therefore, a developed money market is highly indispensable for the rapid development of the economy. A developed money market helps the smooth functioning of the financial system in any economy in the following ways: Development Of Trade And Industry: Money market is an important source of financing trade and industry. The money market, through discounting operations and commercial papers, finances the short-term working capital requirements of trade and industry and facilities the development of industry and trade both national and international.

Development Of Capital Market: The short-term rates of interest and the conditions that prevail in the money market influence the long-term interest as well as the resource mobilization in capital market. Hence, the development of capital market depends upon the existence of a developed money market. Smooth Functioning of Commercial Banks: The money market provides the commercial banks with facilities for temporarily employing their surplus funds in easily realisable assets. The banks can get back the funds quickly, in times of need, by resorting to the money market. The commercial banks gain immensely by economizing on their cash balances in hand and at the same time meeting the demand for large withdrawal of their depositors. It also enables commercial banks to meet their statutory requirements of cash reserve ratio (CRR) and Statutory Liquidity Ratio (SLR) by utilishing the money market mechanism.

Effective Central Bank Control: A developed money market helps the effective functioning of a central bank. It facilities effective implementation of the monetary policy of a central bank. The central bank, through the money market, pumps new money into the economy in slump and siphons it off in boom. The central bank, thus, regulates the flow of money so as to promote economic growth with stability. Formulation Of Suitable Monetary Policy: Conditions prevailing in a money market serve as a true indicator of the monetary state of an economy. Hence, it serves as a guide to the Government in formulating and revising the monetary policy then and there depending upon the monetary conditions prevailing in the market. Non-Inflationary Source Of Finance To Government: A developed money market helps the Government to raise short-term funds through the treasury bills floated in the market. In the absence of a developed money market, the Government would be forced to print and issue more money or borrow from the central bank. Both ways would lead to an increase in prices and the consequent inflationary trend in the economy.

Instruments in Money Market

Call money market Treasury bills market Markets for commercial paper Certificate of deposits Bills of Exchange

Money market mutual funds

Promissory Note

Structure of Indian Money Market

(i) 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.

Structure of Indian Money Market

(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.

Structure of Indian Money Market

(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

THE DETAILED STRUCTURE OF INDIAN MONEY MARKET

I.Organised Structure 1.Reserve bank of India 2.DFHI(discount and finance house of India) 3.Commercial banks i-Public sector banks --SBI with 7 subsidiaries --Cooperative banks --20 nationalised banks ii-Private banks --Indian Banks --Foreign banks 4.Development bankIDBI,IFCI,ICICI,NABARD,EXIM ,L IC,GIC,UTI,ect.,
II.Unorganised sector

1.Indigenous banks 2.Money lenders 3.Chits 4.Nidhis III.Co-operative sectors 1.State cooperative ->central cooperative banks --Primary Agri credit societies --Primary urban banks 2.State Land development banks* -->central land development banks -->Primary land development banks * -> Now known as Agriculture and Rural Development Banks

Organized sector of the Indian Money Market

Submarket
Call Money market Treasury bill market The repo market Commercial & Trade

Participating Institutions Instruments

RBI
DFHI Banks Development
Treasury bills Repos Inter Bank Call Money Commercial & Trade

Bill Market
Certificate of Deposits

Bills
Commercial Paper Certificates of Deposits Participation Certificates

Financial Institutions
Investment Finance

Market
Commercial Paper

Companies
Mutual Funds

Market
Money market Mutual

Funds

Characteristics of Indian Money Market

Indian Money Market has the following major features or characteristics. Dichotomic Structure : It is a significant aspect of the Indian money market. It has a simultaneous existence of both the organized money market as well as unorganised money markets. The organized money market consists of RBI, all scheduled commercial banks and other recognized financial institutions. However, the unorganized part of the money market comprises domestic money lenders, indigenous bankers, trader, etc. The organized money market is in full control of the RBI. However, unorganized money market remains outside the RBI control. Thus both the organized and unorganized money market exists simultaneously. Seasonality : The demand for money in Indian money market is of a seasonal nature. India being an agriculture predominant economy, the demand for money is generated from the agricultural operations. During the busy season i.e. between October and April more agricultural activities takes place leading to a higher demand for money.

Characteristics of Indian Money Market

Multiplicity of Interest Rates : In Indian money market, we have many levels

of interest rates. They differ from bank to bank from period to period and even from borrower to borrower. Again in both organized and unorganized segment the interest rates differs. Thus there is an existence of many rates of interest in the Indian money market. Lack of Organized Bill Market : In the Indian money market, the organized bill market is not prevalent. Though the RBI tried to introduce the Bill Market Scheme (1952) and then New Bill Market Scheme in 1970, still there is no properly organized bill market in India. Absence of Integration : This is a very important feature of the Indian money market. At the same time it is divided among several segments or sections which are loosely connected with each other. There is a lack of coordination among these different components of the money market. RBI has full control over the components in the organized segment but it cannot control the components in the unorganized segment.

Characteristics of Indian Money Market

High Volatility in Call Money Market : The call money market is a

market for very short term money. Here money is demanded at the call rate. Basically the demand for call money comes from the commercial banks. Institutions such as the GIC, LIC, etc suffer huge fluctuations and thus it has remained highly volatile.
Limited Instruments : It is in fact a defect of the Indian money

market. In our money market the supply of various instruments such

as the Treasury Bills, Commercial Bills, Certificate of Deposits,

Commercial Papers, etc. is very limited. In order to meet the varied requirements of borrowers and lenders, It is necessary to develop

numerous instruments

Drawbacks of Indian Money Market

Though the Indian money market is considered as the advanced money market among developing countries, it still suffers from many drawbacks or defects. These defects limit the efficiency of our market. Some of the important defects or drawbacks of Indian money market are : Absence of Integration : The Indian money market is broadly divided into the Organized and Unorganized Sectors. The former comprises the legal financial institutions backed by the RBI. The unorganized statement of it includes various institutions such as indigenous bankers, village money lenders, traders, etc. There is lack of proper integration between these two segments. Multiple rate of interest : In the Indian money market, especially the banks, there exists too many rates of interests. These rates vary for lending, borrowing, government activities, etc. Many rates of interests create confusion among the investors.

Drawbacks of Indian Money Market

Insufficient Funds or Resources : The Indian economy with its seasonal

structure faces frequent shortage of financial recourse. Lower income, lower

savings, and lack of banking habits among people are some of the reasons for it.
Shortage of Investment Instruments : In the Indian money market, various

investment instruments such as Treasury Bills, Commercial Bills, Certificate of Deposits, Commercial Papers, etc. are used. But taking into account the size of the population and market these instruments are inadequate.
Shortage of Commercial Bill : In India, as many banks keep large funds for

liquidity purpose, the use of the commercial bills is very limited. Similarly since a large number of transactions are preferred in the cash form the scope for commercial bills are limited.

Drawbacks of Indian Money Market

Lack of Organized Banking System : In India even through we have a big

network of commercial banks, still the banking system suffers from major
weaknesses such as the NPA, huge losses, poor efficiency. The absence of the organized banking system is major problem for Indian money market.
Less number of Dealers : There are poor number of dealers in the short-

term assets who can act as mediators between the government and the banking system. The less number of dealers leads tc the slow contact between the end lender and end borrowers.
These are some of the major drawbacks of the Indian money market; many

of these are also the features of our money market.

Money market & Role of RBI

Reserve Bank Of India

As the Central Bank of the county, the Reserve Bank of India plays a very significant role in the Indian Money Market. It manages the liquidity in the money market by granting refinance facilities to the banks and by stipulating the reserve requirements. Cash Reserve Ratio (CRR) and Statutory Liquidity Requirements (SLR) are the principal tools to affect the liquidity with the banks. when the banking system has excess liquidity, Reserve Bank of India raises the Cash Reserve Ratio (CRR) and thus, impounds the surplus liquidity and vice-versa. Statutory Liquidity requirement is raised to divert bank funds mainly to Government and other approved securities and thereby reducing liquidity with banks.

Role of RBI in Money Market

Firstly the central bank could do this by setting a necessary reserve ratio, which would restrict the ability of the commercial banks to increase the money supply by loaning out money. If this condition were above the ratio the commercial banks would have wished to have then the banks will have to create fewer deposits and make fewer loans then they could otherwise have profitably done. If the central bank imposed this requirement in order to reduce the money supply, the commercial banks will probably be unable to borrow from the central bank in order to increase their cash reserves if they wished to make further loans. They might try to attract further deposits from customers by raising their interest rates but the central bank may retaliate by increasing the necessary reserve ratio.

Role of RBI in Money Market

The central bank can influence the supply of money through special
deposits. These are deposits at the central bank which the banking sector is required to lodge. These are then frozen, thus preventing the

sector from accessing them even though interest is paid at the

average Treasury bill rate. Making these special deposits reduces the level of the commercial banks operational deposits which forces

them to cut back on lending.

Role of RBI in Money Market

The supply of money can also be prohibited by the central bank by adjusting its

interest rate which it charges when the commercial banks wish to borrow money

(the discount rate). Banks generally have a ratio of cash to deposits which they
consider to be the minimum safe level. If command for cash is such that their reserves fall below this level they will able to borrow money from the central bank at its discount rate. If market rates were 8% and the discount rate were also

8%, then the banks might decrease their cash reserves to their minimum ratio
knowing that if demand exceeds supply they will be able to borrow at 8%. The central bank, even if, may raise its discount rate to a value above the market level, in order to encourage banks not to reduce their cash reserves to the minimum during excess loans. By raising the discount value to such a level, the commercial banks are given an incentive to hold more reserves thus reducing the money multiplier and the money supply.

Role of RBI in Money Market

Another way the money supply can be affected by the central bank is

through its operation of the interest rate. By raising or lowering interest rates the demand for money is respectively reduced or

increased. If it sets them at a certain level it can clear the market at

level by supplying sufficient money to match the demand. Alternatively it could fix the money supply at a convinced rate and

let the market clear the interest rates at the balance. Trying to fix the
money supply is not easy so central banks regularly set the interest rate and provide the amount of money the market demands.

Role of RBI in Money Market

The central bank may also involve the money supply through

operating on the open market. This allows it to influence the money supply through the financial base. It may choose to either buy or sell

securities in the marketplace which will either inject or remove

money respectively. Thus the monetary base will be affected causing the money supply to modify.

 RBI buys bonds worth Rs 8,819.52 cr under open market operations MUMBAI: The Reserve Bank on Friday bought bonds worth Rs 8,819.52 crore

through open market operations (OMO), against a target of Rs 10,000 crore, as part of its strategy to infuse liquidity into the system. Four securities were on offer for OMO and the RBI subscribed to all of them, the central bank said in a statement. While government securities (G-Sec) maturing in 2018 with a coupon rate of 8.24 per cent garnered over Rs 475 crore, 8.20 per cent G-Secs maturing in 2022 garnered Rs 262 crore. Furthermore, 9.15 per cent G-Secs maturing in 2024 mopped up Rs 5,901.10 crore and 8.28 per cent G-Secs maturing in 2032 garnered 2,181.41 crore. With this, the central bank has infused nearly Rs 82,000 crore into the financial system in nine tranches in the last two months. OMOs are the "first preference" of the RBI for injecting liquidity and there is an opportunity to raise up to Rs 2.74 lakh crore through the window. RBI Deputy Governor Subir Gokarn had earlier said that liquidity is likely to be under pressure for some more time on account of factors such as advance tax payments. Overnight drawings by banks from the RBI's liquidity adjustment facility have exceeded Rs 1,20,000 crore and it has said in the past that the deficit has exceeded its target of 1 per cent of net demand and time liabilities (NDTL).