Features and Objectives of Money Market

Money market is a market for short-term loan or financial assets. It is a market for the lending and
borrowing of short term funds. As the name implies, it does not actually deals with near substitutes
for money or near money like trade bills, promissory notes and government papers drawn for a short
period not exceeding one year. These short term instruments can be converted into cash readily
without any loss and at low transaction cost.

Money market is the centre for dealing mainly in short – term money assets. It meets the short-term
requirements of borrowers and provides liquidity or cash to lenders. It is the place where short-term
surplus funds at the disposal of financial institutions and individuals are borrowed by individuals,
institutions and also the Government.

Features of Money Market

The following are the general features of a money market:

1. It is market purely for short-term funds or financial assets called near money.
2. It deals with financial assets having a maturity period up to one year only.
3. It deals with only those assets which can be converted into cash readily without loss and with
minimum transaction cost.
4. Generally transactions take place through phone i.e., oral communication. Relevant documents
and written communications can be exchanged subsequently. There is no formal place like stock
exchange as in the case of a capital market.
5. Transactions have to be conducted without the help of brokers.
6. The components of a money market are the Central Bank, Commercial Banks, Non-banking
financial companies, discount houses and acceptance house. Commercial banks generally play a
dominant in this market.

Objectives of Money Market

The following are the important objectives of a money market:

 To provide a parking place to employ short-term surplus funds.

 To provide room for overcoming short-term deficits.
 To enable the Central Bank to influence and regulate liquidity in the economy through its
intervention in this market.
 To provide a reasonable access to users of Short-term funds to meet their requirements quickly,
adequately and at reasonable costs
 Role of RBI in Money Market - Financial and
Securities Markets, Financial Markets and
Institutions
 "Reserve Bank of India (RBI) is India’s Central bank. It plays multi-
facet role by executing multiple functions such as overseeing
 monetary policy, issuing currency, managing foreign exchange,
working as a bank of government"

 Reserve Bank of India: How different from other banks

Reserve Bank of India (RBI) is the Central Bank of the country. Role of
RBI differs from other banks since it does not get engaged in day to day
retail banking; does not do micro or macro regular financing. On the
contrary, it is the Bankers’ Bank and formulates monetary guidelines and
policies which are to be followed by all the banks operating in the country.
 The Reserve Bank of India was established in 1935 with the provision of
Reserve Bank of India Act, 1934. Till 1949 RBI was privately owned and
was nationalized in 1949. Since then RBI is fully owned by the
Government of India.
 Role of RBI
Reserve Bank of India (RBI) is India's Central bank. It plays multi-facet
role by executing multiple functions such as overseeing monetary policy,
issuing currency, managing foreign exchange, working as a bank of
government and as banker of scheduled commercial banks, among
others. It also works for overall economic growth of the country.
 Key functions of RBI
The preamble of the Reserve Bank of India describes its main functions
as ‘to regulate the issue of Bank Notes and keeping of reserves with a
view to securing monetary stability in India and generally to operate the
currency and credit system of the country to its advantage’.
 Currency Issue
Reserve bank of India is the only authority who is authorized to issue
currency in India. While coins are minted by Government of India (GoI),
the RBI works as an agent of GoI for distributing and handling of coins.
Up to Re.1 coins are minted by GoI although RBI ensures their
distribution in the country.
 RBI also works to prevent counterfeiting of currency by regularly
upgrading security features of currency. RBI prints currency at its 4
currency printing facilities at Dewas, Nasik, Mysore and Hyderabad. The
RBI is authorized to issue notes up to the value of Rupees 10,000 (Ten
thousand).
 Banker to Government
Like individuals, firms and companies who need a bank to carry out their
financial transactions effectively & efficiently, Governments also need a
bank to carry out their financial transactions. RBI serves this purpose for
the Government of India (GoI). As a banker to the GoI, RBI maintains its
accounts, receive in and make payments out of these accounts. RBI also
helps GoI to raise money from public via issuing bonds and government
approved securities.
 Supervisor of Banks: Bankers’ bank
RBI also works as banker to all the scheduled commercial banks. All the
banks in India maintain accounts with RBI which help them in clearing &
settling inter-bank transactions and customer transactions smoothly &
swiftly. Maintaining accounts with RBI help banks to maintain statutory
reserve requirements. RBI also acts as lender of last resort for all the
banks.
 RBI has the responsibility of regulating the nation's financial system. As a
regulator and supervisor of the Indian banking system it ensures financial
stability & public confidence in the banking system. RBI uses methods
like On-site inspections, off-site surveillance, scrutiny & periodic meetings
to supervise new bank licenses, setting capital requirements and
regulating interest rates in specific areas. RBI is currently focused on
implementing Basel-III norms to regulate the hidden Non Performing
Assets (NPAs) in Banking system.
 Manages Country’s Foreign Exchange
RBI has an important role to play in regulating & managing Foreign
Exchange of the country. It manages forex and gold reserves of the
nation.
 On a given day, the foreign exchange rate reflects the demand for and
supply of foreign exchange arising from trade and capital transactions.
The RBI’s Financial Markets Department (FMD) participates in the foreign
exchange market by undertaking sales / purchases of foreign currency to
ease volatility in periods of excess demand for/supply of foreign currency.
 Controller of Credit to regulate Money supply
RBI formulates and implements the Monetary Policy of India to keep the
economy on growth path. Monetary Policy refers to the process employed
by RBI to control availability & cost of currency and thus keeping
Inflationary & deflationary trends low and stable. RBI adopts various
measures to regulate the flow of credit in the country. The measures
adopted by RBI can broadly be categorized as Quantitative & Qualitative
tools.
 Quantitative Tools
Quantitative measures of credit control are applicable to entire money
and banking system without discriminations. They broadly refer to reserve
ratios, bank rate policy etc. Reserve ratios are the share of net demand &
time liabilities (NDTL) which banks have to keep aside to ensure that they
have sufficient cash to cover customer withdrawals.
 Cash Reserve Ratio (CRR)
CRR is one of the most commonly used by RBI as quantitative tool of
credit control. The ratio specifies minimum fraction of the total deposits of
customers, which commercial banks have to hold as reserves either in
 cash or as deposits with the central bank. CRR is set according to the
guidelines of the central bank of a country.
 RBI is empowered to vary CRR between 15 percent and 3 percent.
 Present situation
Current CRR is 4% in India. Cash Reserve Ratio was quoted at 4
percent on Monday July 25. Cash Reserve Ratio in India averaged 5.67
percent from 1999 until 2016, reaching an all time high of 10.50 percent
in March of 1999 and a record low of 4 percent in February of 2013.
 CRR: Impact of Increase & decrease
CRR is the share of net demand and time liabilities that banks must
maintain as cash with RBI. The RBI has set CRR at 4%. So if a bank has
200 Crore of NDTL then it has to keep Rs. 8 Crore in cash with RBI. RBI
pays no interest on CRR.
 For example – if we assume that economy is showing inflationary trends
& RBI wants to control this situation by adjusting SLR & CRR. If RBI
increases SLR to 50% and CRR to 20% then bank will be left only with
Rs. 60 crore for operations. Now it will be very difficult for bank to
maintain profitability with such small capital. Bank will be left with no
choice but to raise interest rate which will make borrowing costly. This will
in turn reduce the overall demand & hence price will come down
eventually.
 Statutory Liquidity Ratio (SLR)
The share of net demand and time liabilities that banks must maintain in
safe and liquid assets, such as government securities, cash and gold is
SLR. The current SLR announced by RBI is 21.25%.
 Open Market Operation (OMO)
Open market operation is the activity of buying and selling of government
securities in open market to control the supply of money in banking
system. When there is excess supply of money, RBI sells government
securities thereby taking away excess liquidity. Similarly, when economy
needs more liquidity, RBI buys government securities and infuses more
money supply into the economy.
 Bank Rate
When banks want to borrow long term funds from RBI, it is the interest
rate which RBI charges from them. Current Bank rate is 7% w e f from
June 2016. The bank rate is not used to control money supply these days
although it provides the basis of arriving at lending and deposit rates.
However, if a bank fails to keep SLR or CRR then RBI will impose penalty
& it will be 300 basis points above bank rate.
 Repo Rate
If banks want to borrow money (for short term, usually overnight) from
RBI then banks have to pay this interest rate. Present Repo rate is 6.5%
with effect from June 2016.
 Banks have to pledge government securities as collateral. This kind of
deal happens through a repurchase agreement. If a bank wants to borrow
Rs. 100 crores, it has to provide government securities at least worth Rs.
100 crore (could be more because of margin requirement which is 5%-
10% of loan amount) and agree to repurchase them at Rs. 106.50 crore
at the end of borrowing period. So the bank has paid Rs. 6.50 crore as
interest. This is the reason it is called repo rate. The government
securities which are provided by banks as collateral cannot come from
SLR quota (otherwise the SLR will go below 21.5% of NDTL and attract
penalty). Banks have to provide these securities additionally.
 To curb inflation, RBI increases Repo rate which will make borrowing
costly for banks. Banks will pass this increased cost to their customers
which make borrowing costly in whole economy. Fewer people will apply
for loan and aggregate demand will get reduced. This will result in
inflation coming down. RBI does the opposite to fight deflation. Although
when RBI reduce Repo rate, banks are not legally required to reduce
their base rate.
 Reverse Repo Rate
Reverse repo rate is just the opposite of repo rate. If a bank has surplus
money, they can park this excess liquidity with RBI and central bank will
pay interest on this. This interest rate is called reverse repo rate. At
present,reverse repo rate is 6% with effect from June 2016.
 Marginal Standing Facility (MSF)
This scheme was introduced in May, 2011 and all the scheduled
commercial banks can participate in this scheme. Banks can borrow up to
2.5% of their respective Net Demand and Time Liabilities. RBI receives
application under this facility for a minimum amount of Rs. 1 crore and in
multiples of Rs. 1 crore thereafter. The important difference with repo rate
is that bank can pledge government securities from SLR quota (up to
1%). Current MSF rate is 7% with effect from June 2016.
 Qualitative Measures
Qualitative measures of credit control are discriminatory in nature and are
applied for specific purpose or to specific financial organization, bank or
others which RBI thinks are violating the monetary policy norms.
 Loan to Value LTV or Margin Requirements
Loan to Value is the ratio of loan amount to the actual value of asset
purchased. RBI regulates this ratio so as to control the amount bank can
lend to its customers. For example, if an individual wants to buy a car
from borrowed money and the car value is Rs. 10 Lac, he can only avail a
loan amount of Rs. 7 Lac if the LTV is set to 70%. RBI can decrease or
increase to curb inflation or deflation respectively.
 Selective credit control
RBI can specifically instruct banks not to give loans to traders of certain
 commodities. This prevents speculations/ hoarding of commodities using
money borrowed from banks.
 Moral Suasion
RBI persuades bank through meetings, conferences, media statements to
do specific things under certain economic trends. An example of this
measure is to ask banks to reduce their Non-performing assets (NPAs).
 Regulates and Supervises the Payment and Settlement Systems
The Payment and Settlement Systems Act of 2007 (PSS Act) gives the
Reserve Bank oversight authority, including regulation and supervision,
for the payment and settlement systems in the country. In this role, the
RBI focuses on the development and functioning of safe, secure and
efficient payment and settlement mechanisms. Two payment systems
National Electronic Fund Transfer (NEFT) and Real Time Gross
Settlement (RTGS) allow individuals, companies and firms to transfer
funds from one bank to another. These facilities can only be used for
transferring money within the country.

Money market
Money market is a set of institutions, conventions, and practices, the aim of
which is to facilitate the lending and borrowing of money on a short-term basis.
The money market is, therefore, different from the capital market, which is
concerned with medium- and long-term credit. The definition of money for
money market purposes is not confined to bank notes but includes a range of
assets that can be turned into cash at short notice, such as short-term
government securities, bills of exchange, and bankers’ acceptances.
Every country with a monetary system of its own has to have some kind
of market in which dealers in short-term credit can buy and sell. The need for
such facilities arises in much the same way that a similar need does in
connection with the distribution of any of the products of a diversified economy
to their final users at the retail level. If the retailer is to provide reasonably
adequate service to his customers, he must have active contacts with others
who specialize in making or handling bulk quantities of whatever is his stock-
in-trade. The money market is made up of specialized facilities of exactly this
kind. It exists for the purpose of improving the ability of the retailers of
financial services—commercial banks, savings institutions, investment houses,
lending agencies, and even governments—to do their job. It has little if any
contact with the individuals or firms who maintain accounts with these various
retailers or purchase their securities or borrow from them.
The elemental functions of a money market must be performed in any kind of
modern economy, even one that is largely planned or socialist, but the
arrangements in socialist countries do not ordinarily take the form of a market.
Money markets exist in countries that use market processes rather than
planned allocations to distribute most of their primary resources
among alternative uses. The general distinguishing feature of a money market
is that it relies upon open competition among those who are bulk suppliers of
funds at any particular time and among those seeking bulk funds, to work out
the best practicable distribution of the existing total volume of such funds.
In their market transactions, those with bulk supplies of funds or demands for
them, rely on groups of intermediaries who act as brokers or dealers. The
characteristics of these middlemen, the services they perform, and their
relationship to other parts of the financial mechanism vary widely from country
to country. In many countries there is no single meeting place where the
middlemen get together, yet in most countries the contacts among all
participants are sufficiently open and free to assure each supplier or user of
funds that he will get or pay a price that fairly reflects all of the influences
(including his own) that are currently affecting the whole supply and the whole
demand. In nearly all cases, moreover, the unifying force of competition is
reflected at any given moment in a common price (that is, rate of interest) for
similar transactions. Continuous fluctuations in the money market rates of
interest result from changes in the pressure of available supplies of funds
upon the market and in the pull of current demands upon the market.
Banks And The Money Market
Commercial banks
Commercial banks are at the centre of most money markets, as both suppliers
and users of funds, and in many markets a few large commercial banks serve
also as middlemen. These banks have a unique place because it is their role
to furnish an important part of the money supply. In some countries they do this
by issuing their own notes, which circulate as part of the hand-to-hand currency.
More often, however, it is checking accounts at commercial banks
that constitute the major part of the country’s money supply. In either case, the
outstanding supply of bank money is in continual circulation, and any given
bank may at any time have more funds coming in than going out, while at
another time the outflow may be the larger. It is through the facilities of the
money market that these net excesses and shortages are redistributed, so
that the banking system as a whole can at all times provide the means
of payment required for carrying on each country’s business.
In the course of issuing money the commercial banks also actually create it by
expanding their deposits, but they are not at liberty to create all that they may
wish whenever they wish, for the total is limited by the volume of bank
reserves and by the prevailing ratio between these reserves and bank
deposits—a ratio that is set by law, regulation, or custom. The volume of
reserves is controlled and varied by the central bank (such as the Bank of
England, the European Central Bank, or the Federal Reserve System in the U.S.),
which is usually a governmental institution, is always charged with
governmental duties, and almost invariably carries out a major part of its
operations in the money market.
Central banks
The reserves of the commercial banks, which are continually being
redistributed through the facilities of the money market, are in fact
mainly deposit balances that these commercial banks have on the books of the
central bank or notes issued by the central bank, which the commercial banks
keep in their own vaults. As the central bank acquires additional assets, it
pays for them by crediting depositors’ accounts or by issuing its own notes;
thus the potential volume of commercial bankreserves is enlarged. With more
reserves, the commercial banks can make additional loans or investments,
paying for them by entering credits to depositors’ accounts on their books.
And in that way the money supply is increased. It may be reduced by
reversing the sequence. The central bank can sell some of its marketable
assets in the money market or in markets closely interrelated with the money
market; payment will be made by drawing down some of the commercial bank
reserve balances on its books; and with smaller reserves remaining, the
commercial banks will have to sell or reduce some of their investments or their
loans. That, in turn, results in a shrinkage of the outstanding money supply.
Central bank operations of this kind are called open-market operations.
The central bank may also increase bank reserves by making loans to the
banks or to such intermediaries as bill dealers or dealers in government
securities. Reduction of these loans correspondingly reduces bank reserves.
Although the mechanics of these lending procedures vary widely among
countries, all have one feature in common: the central bank establishes an
interest rate for such borrowing—the bank rate or discount rate—pivotally
significant in the structure of money market rates.
Money market assets may range from those with the highest form of
liquidity—deposits at the central bank—through bank deposits to various
forms of short-term paper such as treasury bills, dealers’ loans, bankers’
acceptances, and commercial paper, and including government securities of
longer maturity and other kinds of credit instruments eligible for advances or
rediscount at the central bank. Although details vary among countries, the
touchstone of any money market asset other than money itself is its
closeness—i.e., the degree of its substitutability for money. So long as the
institutions making use of a money market regard a particular type of credit
instrument as a reasonably close substitute—that is, treat it as “liquid”—and
so long as the central bank acquiesces in or approves of this approach, the
instrument is in practice a money market asset. Thus no single definition or list
can apply to the money markets of all countries nor will the list remain the
same through the years in the money market of any given country.
The International Money Market

Each central bank usually holds some form of reserve that is acceptable in
settling international transactions. International monetary reserves are mainly
gold, or “money market assets” in some country whose currency is widely
used, such as the United States dollar. The monetary laws of all countries
provide for the establishment of some kind of parity between their currencies
and those of other countries. This parity may be defined either in terms
of gold or in relation to a key currency such as the British pound sterling or the
United States dollar, which in turn has a fixed parity with gold. A country
maintains the “convertibility” of its currency by standing ready to buy and sell
gold or other currencies in exchange for its own at prices within a fixed and
rather narrow “spread” above or below the “exchange rate” for its own
currency that is implied by the declared parity.
Because world trade continually gives rise to various needs for payment in
various currencies, an international money market must exist so that traders
with an excess of one currency can use it to buy another currency for which
they have a need. Within the scope of convertibility arrangements, this trading
in currencies is carried out by skilled intermediaries, usually banks or
specialized foreign exchange brokers and dealers. Trading in currencies is
extensive both for immediate use (“spot”) and for future (“forward”) delivery.
Quotations vary according to changes in supply and demand, over the range
between the upper and lower buying and selling prices set by official parity. If
no parity has been set quotations may fluctuate widely. If a currency is subject
to exchange controls, there may be two or more quotations for different uses
of the same nominal currency.
Changes in a country’s balance of payments may affect the usefulness
or prestige of its currency. A sustained and substantial balance of payments
deficit (outpayments larger than inpayments), for example, will result in
continuous large increases in the world supply of its currency, possibly leading
to some decline in its acceptability abroad and to a loss of international
monetary reserves. At the same time, an outward drain may reduce the
reserves of the commercial banks (the base for the domestic money supply),
unless the central bank takes offsetting action.
Since 1944 most of the countries that have domestic money markets or that
play a role in the international money market have been joined together in
the International Monetary Fund, which represents a pooling of part of the foreign
exchange reserves (including gold) of more than 100 member countries.
Drawings on the pool may be made by member countries to meet some of the
reserve drains arising from balance of payments deficits and in amounts
related to the quota that each has subscribed.
The internal money markets of a surprisingly high proportion of the countries
of the world are quite rudimentary. The work of the money market in these
countries is done largely by transfers of deposit balances, government
securities, or foreign exchange among a few banks and between them and
the central bank. But in nearly all such cases there is genuine discontent with
the rigidity of these limited facilities and a desire to develop a structure, as
well as instruments and procedures, which would provide the open-market
attributes of the arrangements that have evolved in the leading countries.
Several of the more fully developed money markets are described below.
The U.S. Money Market

The domestic money market in the United States carries out the largest volume
of transactions of any such market in the world; its participants include the
most heterogeneous group of financial and nonfinancial concerns to be found in
any money market; it permits trading in an unusually wide variety of money
substitutes; and it is less centralized geographically than the money market of
any other country. Although there has always been a clustering of money
market activities in New York City and much of the country’s participation in the
international money market centres there, a process of continuous change
during the 20th century has produced a genuinely national money market.
By 1935 the financial crises of the Great Depression had resulted in a basic
revision of the banking laws. All gold had been withdrawn from internal
circulation in 1933 and was henceforth held by the U.S. Treasury for use only
in settling net flows of international payments among governments or central
banks; its price was raised to $35 per ounce, and the U.S. dollar became the
key currency in an international gold bullion standard. Domestically, the
changes included legislative recognition of the primary importance of unified
open-market operations by the Federal Reserve System and delegation to the
board of governors of the Federal Reserve System of authority to raise or
lower the ratios required between reserves and commercial bank deposits.
Although about half of the 30,000 separate banks existing in the early 1920s
had disappeared by the mid-1930s, the essential character of commercial
banking in the U.S. remained that of a “unit” (or single-outlet) banking system
in contrast to those of most other countries, which had a small number of
large branch-banking organizations.
The unit banking system
This system has led inevitably to striking differences between money market
arrangements in the United States and those of other countries. At times,
some smaller banks almost inevitably find that the wholesale facilities of the
money market cannot provide promptly the funds needed to meet unexpected
reserve drains, as deposits move about the country from one bank to another.
To provide temporary relief, pending a return flow of funds or more gradual
disposal of other liquid assets in the money market, such banks have the
privilege, if they are members of the Federal Reserve System, of borrowing
for reasonable periods at their own Federal Reserve bank. At times some
large banks, which serve as depositories for part of the liquid balances of
many of the smaller ones (including those that are not members of the
Federal Reserve System) also find that demands converging on them are
much greater than expected. These large banks, too, can borrow temporarily
at a Federal Reserve bank if other money market facilities are not adequate to
their needs. Because these borrowing needs are unavoidably frequent in a
vast unit banking system and, as a rule, do not indicate poor management,
the discount rate charged by the Federal Reserve banks on such borrowing is
not ordinarily put at punitive or severe penalty levels—thus, contrary to
practice in many other countries, the central bank does not always maintain its
interest rate well above those prevailing on marketable money market
instruments. To avoid abuse, there is continuous surveillance of the borrowing
banks by the Federal Reserve banks.

Along with this practice of borrowing at a Federal Reserve bank has

developed the market for “federal funds.” This specialized part of the money
market provides for the direct transfer to a member bank of balances on the
books of a Federal Reserve bank in return for payment of a variable rate of
interest called the “federal funds rate.” These funds are immediately available.
There are transactions, too, in funds that are on deposit at commercial
banks—by means of loans between banks, or through loans by one large
depositor to another. Because these must be collected through a clearing
process, they are usually called “clearinghouse funds.”
Money market instruments
Transactions in federal funds and clearinghouse funds are further
supplemented by transactions in which either kind of money is exchanged for
some other liquid, money market instrument, most frequently government
securities. The magnitude of the market for government securities became so
great after World War II that it overshadowed all other elements of the money
market. Trading in outstanding “governments” is virtually all done through
dealers who buy and sell for their own account at prices which they quote on
request (standing ready to “bid” for or to “offer” any outstanding issue). Most
of these dealers have head offices located in New York City, but all are
engaged in nationwide operations. Their transactions and the lending
arrangements through which they finance their own inventories of government
securities have evolved into a particularly sensitive indicator of the pressures
of supply and demand on the money market from day to day. The most
common form of dealer financing is the repurchase agreement, through which
dealers sell parts of their inventory temporarily, subject to repurchase.
Closely interrelated, often through trading operations conducted by the same
dealers, are the much smaller markets for bank drafts, bills of exchange, and
commercial paper. Alongside these other markets and actually somewhat
larger in outstanding volume are the markets for securities issued by various
“agencies” created by federal statute, such as the Federal Home Loan banks
and Federal Land banks. Another money market instrument is the negotiable
time certificate of deposit (CD), issued in large volume by commercial banks,
which first became significant in 1962. While the owner of a time CD cannot
withdraw his deposit before the maturity date initially agreed upon, he can sell
it at any time in a secondary market that is conducted by government
securities dealers.
The Federal Reserve System conducts day-to-day operations in the money
market on its own initiative in order to assist the smooth working of the nation’s
financial machinery and to exert a general influence aimed at
fostering economic growth and limiting economic instability. Its transactions
include substantial outright purchases or sales of government securities,
relatively small purchases and run-offs of bankers’ acceptances, and a
considerable volume of loans made for a few days at a time to dealers in
government securities or acceptances in the form of repurchase agreements.
While it is still the commercial banks as a group that have the greatest
continuing need for the combined facilities of the nationwide money market,
there is frequent and continuous participation by a great variety of institutional
investors who channel the public’s savings into various uses and who must
always also make some provision for their own liquidity.
Perhaps the most unusual feature in the composition of the U.S. money market
is the great importance attained by nonfinancial business concerns and local
units of government since World War II. Corporate treasurers and the
treasurers of many states and local political subdivisions and authorities have
become so keenly sensitive to the profitable possibilities of managing their
own liquid holdings instead of relying on the commercial banks as most had
done formerly that this group at times provides nearly as large a part of the
volatile financing needs of government securities dealers, for example, as
comes from the banks. Moreover, banks outside New York City sometimes
supply more of the financing needed by these dealers than do the traditional
“money market banks” in New York City. The nationwide character of the
money market is also shown by the participation of nearly 200 banks in the
federal-funds market—banks that are widely scattered among all Federal
Reserve districts, although the bulk of all transactions is executed through
facilities located in New York.
While the U.S. money market has become truly national, it still needs a final
clearing centre upon which the net impact of changes in overall supply or
demand can ultimately converge and where the final balancing adjustments of
the market as a whole can be accomplished. In filling that need, New York
City continues to be the centre of the national money market.

The British Money Market

The discount houses
In Great Britain the money market consists of a number of linked markets, all of them
concentrated in London. The 12 specialist banks known as discount houses have the
longest history as money market institutions; they have their origin in the London bill
broker who in the early 19th century made the market in inland commercial bills. By
selling bills through this market, the growing industrial and urban areas were able to
draw upon the surplus savings of the agricultural areas. Quite early many bill brokers
began to borrow money from banks in order to buy and hold these bills, instead of
simply acting as brokers, and thus became the first discount houses. Since then the
major assets held by the discount houses have at different times been commercial bills
(first inland bills as described above and later bills financing international trade),
treasury bills, and short-dated government bonds. During the 1960s there was a
resurgence of the commercial bill, which finally became the discount houses’ largest
single class of asset, only to be overtaken later by the certificate of deposit.
Important changes were introduced into the British monetary system in 1971, but
money at call with the discount houses retained its role as a reserve asset. Such is the
safety and liquidity of call money that, despite the fractionally lower rate on it
compared with other reserve assets, the banks hold about half of their required
reserves in this form. This in turn provides the discount houses with a large pool of
funds, which they invest in relatively short-dated assets, of which the most important
is sterling certificates of deposit, followed by commercial bills, local authority
securities, and treasury bills. This pattern of assets is greatly influenced by the fact
that all call loans to the discount houses are secured loans, parcels of assets being
deposited pro rata with the lending banks as security, and the assets held by the
discount houses must therefore be suitable for use as such security.
They also need to hold a substantial proportion of assets that are rediscountable at
the Bank of England in case of need, and the Bank of England limits their holding of
assets other than public sector debt to a maximum of 20 times their capital resources.
On the liabilities side of the discount house’s balance sheet, operating in call money is
part of its day-to-day work. A bank that expects to make net payments to other banks
during the day (for example, in settlement of checks paid by its customers to their
customers) will probably call in some of its call loans, and by convention this is done
before noon. Since the banks that have called in money then pay it to other banks,
these other banks will have an equal amount to re-lend to the discount houses in the
afternoon. Thus the discount houses can “balance their books”—borrow enough
money in the afternoon to replace the loans called from them in the morning.
It is not uncommon for perhaps £100,000,000 to be called from, and re-lent to, the
discount houses on an active day.

There is one main reason why the money position may not balance in this way. The
British government accounts are kept with the Bank of England, which does not lend
at call as other banks do. Thus net payments into or out of these government accounts
will cause a net shortage or surplus of money for the discount houses in the afternoon
and will tend to cause money rates to rise or fall. The Bank of England can allow such
shortages or surpluses to affect interest rates, or it can offset them by buying or selling
bills or by lending overnight to the discount houses at market rates. Even if the Bank
of England does not act in this way to meet a shortage of funds, the discount houses
are always finally able to secure the funds they need by their right to borrow from the
Bank of England (the lender of last resort) against approved security at the “minimum
lending rate” (the penalty rate).

On the assets side of their balance sheets, the discount houses are active dealers in a
number of the assets they hold. They make the market in sterling certificates of
deposit and in commercial bills, quoting buying and selling rates for different
maturities. They also quote selling rates for treasury bills that they acquire at the
weekly tender in competition with each other and with any other banks that may
tender, including the Bank of England. Most of these other banks tender for treasury
bills in order to hold them to maturity, but the discount houses sell theirs on the
average when only a few weeks of the bills’ 91-day life has passed. A large proportion
of these bills is sold to the clearing banks, which do not tender on their own account.
The Bank of England minimum lending rate is normally determined for each week
0.5–0.75 percent above the average treasury bill rate at the previous Friday’s tender.
The bank, however, has the power to fix it at a different level if it so wishes, and this
has been done.
Other markets
Important changes have also occurred outside the discount market described above;
after the mid-1950s there was steady growth in public borrowing by local authorities.
This led to an active local authority loan market conducted through a number of
brokers, where money can be lent on deposit for a range of maturities from two days
up to a year (and indeed for longer periods). Much more rapid was the growth after
the mid-1960s of the interbank market, in which banks borrow and lend unsecured for
a range of maturities from overnight upward. This market also is conducted through
brokers, often firms that also operate in the local authority and other markets; a
number of these firms of brokers are subsidiaries of discount houses.

In addition to the markets mentioned, there is the gilt-edged (government bond)

market on the stock exchange; short-dated bonds are held by the discount houses and
by banks and other money market participants, as are short-dated local authority
stocks and local authority “yearling” (very short-dated) bonds. With flexibility of
bank deposit rates (at least for deposits of large denomination), both banks and
nonbank transactors are faced with a wide and competitive range of sterling money
market facilities in London.
Finally, mention should be made of the Eurodollar market, because London is its
centre; this is an entrepôt market with a very large volume of business in U.S. dollar
balances, conducted through brokers (often the same firms that operate in the sterling
markets), and U.K. banks are active participants. However, owing to exchange
control there has been little significant interaction between the Eurodollar market and
the U.K. domestic money market.
R.F.G. Alford

The Money Markets Of Other Countries

The Canadian money market

The Canadian money market was substantially broadened in 1954 with the
introduction of day-to-day bank loans against Government of Canada treasury bills
and other short-term government and government-guaranteed securities. Treasury
bills of 91 days’ and 182 days’ maturity are issued weekly with the occasional
offering of a longer maturity of up to one year. Government of Canada bonds and
Government of Canada guaranteed bonds are issued at less regular intervals.

Groups involved in the money market are the following: the government, as the issuer
of the securities; the Bank of Canada, acting as issuing agent for the government and as
a large holder of market material; the chartered banks, as large holders and as
distributors and potential buyers and sellers of bills and bonds at all times; the security
dealers, as carriers of inventories and traders in such securities; and the public (mainly
provincial and municipal governments and larger corporations), as short-term
investors.
Treasury bills are sold by competitive tender in which the Bank of Canada, the
chartered banks, and a small number of investment dealers participate. Bonds are
normally issued at a price at which the yield is in line with outstanding comparable
issues.
The central bank, through its tender at the weekly treasury-bill sale, active
manipulation of its own bill and bond portfolio, and regulation of the money supply, has
workable instruments for active monetary control. For both banks and qualified
dealers, the Bank of Canada acts as lender of last resort. The rate is set slightly above
the average rate of the last treasury bill auction to discourage regular borrowing.
The German money market
In what was formerly West Germany, where the money market developed strongly
after World War II, transactions have been to a large extent confined to interbank loans.
In addition, insurance companies and other nonbank investors are also important
lenders of short-term funds. Treasury bills and other short-term bills and notes from
government agencies (railways and post) were gaining in importance by the 1960s,
whereas in 1955 certain nonmarketable securities (the so-called equalization claims,
created during the 1948 currency reform) held by the Bundesbank were transformed
into short-term marketable securities in order to obtain suitable market material for the
open-market operations of the Bundesbank. Banks are not used to dealing in short-
term government securities between each other. They generally either hold these
securities to maturity or resell them to the central bank at its buying rates, so that a
true money market has not developed.
The market for commercial paper is of some significance, and dealing in it takes place
from time to time between banks, especially in times of tight market
conditions. Comprehensive regulations have been given through the Bundesbank about
the rediscountability of the several kinds of commercial paper.
The influence of the Bundesbank on the monetary situation through open-market
operations by the 1960s was greatly hampered by the vast liquidity of the banking
system as a consequence of the persistence of Germany’s favourable balance of
payments situation.
The French money market
The French money market is fairly well established, but its size is restricted by the
fact that in France currency still plays an important role in the money supply, whereas
by regulations the nonfinancial private sector of the economy is excluded from
dealing in the market. Banks as well as a few public or semipublic agencies working
in the financial sphere and intermediaries—brokers and discount houses—constitute
the market. Transactions take place in commercial paper and in treasury bills. The
monetary authorities maintain a special bookkeeping system for all the treasury bills
held by banks and other financial institutions, under which such bills are not
represented by actual certificates but by entries in special accounts administered by
the Banque de France for the treasury.
The central bank’s open-market operations, which were normally limited to smoothing
out disturbances in the local money market, have gained importance in recent years.
Open-market transactions are effected to keep domestic money market rates in line
with international rates, in an effort to prevent unwanted capital flows. The
possibilities of the central bank’s influencing the monetary situation through the
money market are limited to the large government needs for short-term funds, no
market for long-term government borrowing being established.
Christiaan Glasz

The Japanese money market

In Japan’s rapidly growing economy the demand for funds, both short-term and long-
term, has been persistently strong. Commercial banks and other financial
institutions have therefore had an important role. The monetary authorities (the
Ministry of Finance and the Bank of Japan) have been unwilling to allow market
forces to equilibrate demand and supply in many financial markets for fear that interest
rates would become excessively high. Most interest rates have been set
administratively at levels high by international comparison (until the late 1960s) but
lower than market forces would have dictated. Monetary policy is implemented by
controls on both the availability of credit and its cost.
Under these circumstances, Japan has had a very restricted money market. The market
for short-term government securities is negligible; the low, pegged interest rate means
that the Bank of Japan is the main buyer and that open-market operations are
impossible. Transactions in commercial paper are minimal, being discouraged
because they would tend to undermine the structure of interest rates and financial
institutions.

Only the call money market is well developed. It is restricted to transactions among
financial institutions. The interest rate on call money has been relatively free, and
persistently above most other short-term and long-term rates. Although small amounts
are lent overnight, most are “unconditional loans” (repayment after one day’s notice,
with a minimum of two days) or “over-month-end-loans” (repayment on a fixed day
the following month). The pattern of flows is rather stable, despite seasonal and
cyclical fluctuations. City banks are the major borrowers; they have a strong demand
for loans by large enterprises and use call funds as a major source of liquidity. Major
lenders are local banks, trust banks, credit associations, and agricultural cooperatives,
which collect individual urban and rural savings and are attracted by the high yields,
liquidity, and low risk of call loans relative to other uses. Call brokers help make a
market, though most funds flow directly from one financial institution to another.
About three-quarters of the funds flow through the Tokyo market, and there are also
call markets in Ōsaka and Nagoya.
Money markets in developing countries
Well-developed money markets exist in only a few high-income countries. In other
countries money markets are narrow, poorly integrated, and in many cases virtually
nonexistent. Despite the many differences among countries, one can say in general
that the degree of development of a country’s financial system, including its money
markets, is directly related to the level of its economy. Most very-low-income
countries have limited financial systems in which money markets play no role. In
many former colonies, notably in Africa, expatriate commercial banks had substituted
for a local money market; the banks met fluctuations in loan demand by changing
their balances at head offices in London or elsewhere. More recently, government
policies have encouraged these banks to develop domestic channels for temporary
surpluses and deficits. Persistent inflation has been another factor inhibiting the growth
of money markets in developing countries, notably in Latin America.
Most developing countries, except those having socialist systems, have the
encouragement of money markets as a policy objective, if only to provide outlets for
short-term government securities. At the same time many of these governments
pursue low-interest-rate policies in order to reduce the cost of government debt and to
encourage investment. Such policies discourage saving and make money market
instruments unattractive. Nevertheless, a demand for short-term funds and a supply of
them exist in all market-oriented economies. In many developing countries these
pressures have led to “unorganized money markets,” which are often highly
developed in urban areas. Such markets are unorganized because they are outside
“normal” financial institutions; they manage to escape government controls over
interest rates; but at the same time they do not function very effectively because
interest rates are high and contacts between localities and among borrowers and
lenders are limited. In all developing countries traditional forms of moneylending
continue, particularly for agriculture and small enterprise.
Reserve Bank of India (RBI) is the central bank of the country. The Reserve Bank was established in
1935 by the Banking Regulation Act, 1934 with a capital of Rs. 5 cr. Initially the ownership of almost
all the shares capital was in the hands of non-government share holders. So in order to prevent the
centralisation of the shares in few hands, the RBI was nationalised on January 1, 1949.

–– ADVERTISEMENT ––

Functions of Reserve Bank

1. Issue of Notes —The Reserve Bank has the monopoly for printing the currency notes in the
country. It has the sole right to issue currency notes of various denominations except one rupee note
(which is issued by the Ministry of Finance). The Reserve Bank has adopted the Minimum Reserve
System for issuing/printing the currency notes. Since 1957, it maintains gold and foreign exchange
reserves of Rs. 200 Cr. of which at least Rs. 115 cr. should be in gold and remaining in the foreign
currencies.

2. Banker to the Government–The second important function of the Reserve Bank is to act as the
Banker, Agent and Adviser to the Government of India and states. It performs all the banking
functions of the State and Central Government and it also tenders useful advice to the government
on matters related to economic and monetary policy. It also manages the public debt of the
government.
3. Banker’s Bank:- The Reserve Bank performs the same functions for the other commercial
banks as the other banks ordinarily perform for their customers. RBI lends money to all the
commercial banks of the country.
Structure of Banking Sector in India
4. Controller of the Credit:- The RBI undertakes the responsibility of controlling credit created by
the commercial banks. RBI uses two methods to control the extra flow of money in the economy.
These methods are quantitative and qualitative techniques to control and regulate the credit flow in
the country. When RBI observes that the economy has sufficient money supply and it may
cause inflationary situation in the country then it squeezes the money supply through its
tightmonetary policy and vice versa.
Where do Printing of Security Papers, Notes and Minting take Place in India?

5. Custodian of Foreign Reserves:-For the purpose of keeping the foreign exchange rates stable,
the Reserve Bank buys and sells the foreign currencies and also protects the country's foreign
exchange funds. RBI sells the foreign currency in the foreign exchange market when its supply
decreases in the economy and vice-versa. Currently India has Foreign Exchange Reserve of around
US$ 360bn.

6. Other Functions:-The Reserve Bank performs a number of other developmental works. These
works include the function of clearing house arranging credit for agriculture (which has been
transferred to NABARD) collecting and publishing the economic data, buying and selling of
Government securities (gilt edge, treasury bills etc)and trade bills, giving loans to the Government
buying and selling of valuable commodities etc. It also acts as the representative of Government
in International Monetary Fund (I.M.F.) and represents the membership of India.
New department constituted in RBI:- On July 6, 2005 a new department, named financial market
department in reserve bank of India was constituted for surveillance on financial markets.

This newly constituted dept. will separate the activities of debt management and monetary
operations in future. This department will also perform the duties of developing and monitoring the
instruments of the money market and also monitoring the government securities and foreign money
markets.

So it can be concluded that as soon as the our country is growing the role of RBI is going to be very
crucial in the upcoming years

The Securities and Exchange Board of India is the regulatory body for dealing with all matters
related to the development and regulation of securities market in India. It was established on 12th of
April in 1988. It is headquartered in Mumbai. SEBI was declared a constitutional body in 1992. At
present, Ajay Tyagi is the Chairperson of SEBI.
Organizational Structure of SEBI
SEBI is managed by the six members-one chairman (nominated by the chairman), two members
from office of central ministries, one from RBI, and remaining to members are nominated by the
central government.

List of Approved Stock Exchanges in India

The main functions of SEBI are summarized below
1. To protect the interests of investors and to make regulations to drive the capital market.
2. To regulate the share markets and other security exchanges.
3. To control the working of share brokers, sub brokers, share transfer agents, merchant bankers,
underwriters, portfolio managers etc. and also to make their registration.
4. To guide the employees and individuals related with the security exchanges and to encourage
healthy competition in the security markets.
5. To eliminate corruption in the security markets.
6. To register the mutual fund securities and keep an eye on their activities in the market.
7. To arrange training programs for new investors. (alo printing of training booklets)
8. To eliminate the insider trading activities.
9. To supervise the working of various organizations trading n the security market and also to ensure
systematic dealings.
10. To increase research and investigation in order to achieve above objectives.
Microfinance Institutions in India
Powers of SEBI
1. For the discharge of its functions efficiently, SEBI has been vested with the following powers:
2. To approve by−laws of stock exchanges.
3. To require the stock exchange to amend their by−laws.
4. To inspect the books of accounts and call for periodical returns from recognized stock exchanges.
5. To inspect the books of accounts of financial intermediaries.
6. To compel certain companies to list their shares in one or more stock exchanges.
7. Registration of brokers.

Image Source: Daily Mail

So it can be conclude that all statutory powers for regulating Indian capital market are vested with
SEBI itself. SEBI releases its annual guidelines for the all participants of the security market so that
fair and smooth functioning of the security market can be ensured