The money market in India does not satisfy the criteria of developed money market. RBI the apex institutions of Indian money market, along with government had taken various measures to strengthen Indian money market over the years. Some of the reform measures are as follows:
1) Remitting the stamp duty
In Aug 1989, the government the stamp duty on bills which was considered a major administrative constraint in the use of bill system. However this measures fails to induce use of commercial bills.
2) Deregulation of money market interest rates
With effect from may 1,1989, the RBI deregulated money market interest rates which proved to be significant step. This was done to make interest rate flexible and lend transparency to transactions in the money market.
3) Introducing new money market instruments
- In treasury bill market, in 1992-93 it was decided to introduce 364 days treasury bills.
- Certificate of deposits were introduced in Indian Money Market in 1988-99. However RBI has modified norms and guidelines for them in 1996-97.
- In march 1989, RBI announced new scheme of commercial paper and its guidelines were came into effect from January 1990.
4) Introduction of Repo and Reverse Repo
Repo and reverse repo can be used by RBI to tackle inflationary problem. Repo is the method in which borrower undertake a commitment to purchase back the security after the specified period at a pre-determined price.
Reverse Repo is opposite practice wherein the lender lends against the securities with the commitment to take back the securities from the borrower against the payment at a specified price.
From 2011-2012 RBI announces the repo rate only. RBI also instituted a new marginal standing facility from which scheduled commercial banks can borrow overnight funds.
5) Setting the discount and Finance house of India
The DFHI was setup by RBI jointly with public sector banks and all India Finance Institutions. It was incorporated on March 8, 1988 under the companies act, 1956 and commenced its business operations from April 25, 1988. The main objective of establishing DFHI was to facilitate the smoothening of short term liquidity imbalances by developing an active money market and integrating the various systems of money market.
6) Introducing money market mutual funds
There are three phases of evolution of mutual funds in Indian money market. The first phase was started with the establishment Unit trust of India. It was a monopoly in it. In the second phase public sector banks and financial institutions setup their mutual funds. In the third phase after 1992 the entry of private sector was allowed in mutual fund market.
7) Developing call money market
The call money market is mainly an interbank market. Until 1990 only UTI and LIC were allowed to operate as lenders since 1971. During 1990’s RBI allowed other financial institutions also to participate in call money market. Moreover till 1984 the call rates were administered by Indian bank’s association but now it is decided by market forces.