GROWTH OF MONEY MARKET :
Post reforms period in India has witnessed tremendous growth of the Indian money markets. Banks and other financial institutions have been able to meet the high expectations of short term funding of important sectors like the industry, services and agriculture. Functioning under the regulation and control of the Reserve Bank of India (RBI), the Indian money markets have also exhibited the required maturity and resilience over the years.
The organization and structure of the money market has undergone a sea change in the last decade in India. This was accompanied by a growth in quantitative terms also.
Up to 1987, the money market consisted of 6 facts :
1. Call Money Market;
2. Inter Bank Term Deposit/Loan Market;
3. Participation Certificate Market;
4. Commercial Bills Market;
5. Treasury Bills Market; and
6. Inter-corporate Market.
The market had 3 main deficiencies:
1. It had a very narrow base with RBI, Banks, LIC and UTI as the only participants lending funds while the borrowers were large in number;
2. There were only few money market instruments.
3. The interest rates were not market determined but were controlled either by RBI or by a voluntary agreement between the participants through the Indian Banks Association (IBA).
To set right these deficiencies, the recommendations of Chakravarthy Committee (1985) and the Vaghul Committee (1987) laid foundation for systematic development of the Indian Money Market. The implementation of the suggestions of the respective committees has widened and deepened the market considerably by increasing the number of participants and instruments and introducing market determined rates as against the existing administered or volunteered interest rates.
Further, an active secondary market for dealings of money market instrument was created which positively impacted the liquidity of these instruments. For this purpose, the Discount and Finance House of India Limited (DFHI) was formed as an autonomous financial intermediary in April, 1988 to embellish the short-term liquidity imbalances and to develop an active secondary market for the trading of instruments of the money market. The DFHI plays the role of a market maker in money market instruments. With the relaxation of the regulatory framework and the arrival of new instruments and participants, DFHI occupies a key role in ushering a more active and de-regulated money market.