indian money market and role of rbi

INDIAN MONEY MARKET AND ROLE OF RBI

PRATEEKNIKHIL

PRAMOD VISHAKH

VIPUL

MONEY MARKETMoney market can be defined as a market for short-term funds with maturities ranging from overnight to one year and includes financial instruments that are considered to be close substitutes of money.

Money market plays a central role in the monetary policy transmission mechanism by providing a key link in the operations of monetary policy to financial markets and ultimately, to the real economy.

INDIAN MONEY MARKET

The Indian money market has dichotomic structure.It has a simultaneous existence of both organized money market as well as unorganized 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.

DISTRIBUTION OF NOTES AND COINS IN INDIA

AGENCIES INVOLVED

RBI

Banks(chests)

MOF

Govt Presses

Mints

Police Railways

RBI's Presses

FLOW OF NOTES & COINSNOTES COINS

RBI Offices

Chest branches

Public

Presses 4 Mints

4 mint-linked RBI Offices

Chest branches & RBI Offices

Public

INSTITUTIONS OPERATING IN MONEY MARKET

Reserve Bank Of India (RBI).

Schedule Commercial Banks (SCBs).

Co-operative Banks.

Non-Banking financial companies (NBFCs) and Financial Institutions like LIC,UTI,GIC development banks are also operating in the Indian money market.

INSTRUMENTS OF MONEY MARKET

Call money market.Promissory note.Repurchase AgreementTreasury Bill market.Bill of Exchange.Inter-Bank term moneyCommercial paper market.Certificate of Deposit.

CALL MONEY MARKETThe Call money market deals in short term finance repayable on demand, with a maturity period varying from 1 day to 14 days.

The Call money market has been transformed into a pure inter-bank market during 2006-07.

PROMISSORY NOTEWritten, signed, unconditional, and unsecured promise by one party (promisor) to another (promisee) that commits the maker to pay a specified sum on demand, or on a fixed or a determinable date.

REPURCHASE AGREEMENT MARKETRepurchase agreement involves a simultaneous “sale and purchase” agreement.The rate at which the RBI lends money to commercial banks is called repo rate, a short term for repurchase agreement.

TREASURY BILL MARKET (TB)Treasury bills are instrument of short-term borrowing by the Government of India, issued as promissory notes under discount.It is an IOU (I Owe You) of the Government. It is a promise by the Government to pay a stated sum after expiry of the stated period from the date of issue (14/91/182/364 days i.e. less than one year).

BILL OF EXCHANGE (BOE)A written, unconditional order by one party (the drawer) to another (the drawee) to pay a certain sum, either immediately or on a fixed date, for payment of goods or services received. The drawee accepts the bill by signing it, thus converting it into a post-dated check and a binding contract.

INTER-BANK TERM MONEYInter-bank market for deposits of maturity beyond 14 days (15 days–I year)is referred to as the term money market.

COMMERCIAL PAPER (CP)

Commercial paper is a money market security issued by large corporations to obtain funds to meet short-term debt obligations, and is backed only by an issuing bank or corporation’s promise to pay the face amount on the maturity date specified on the note.

CERTIFICATE OF DEPOSITS (CD)The CDs are negotiable term-deposits accepted by commercial bank from bulk depositors at market related rates.

Monetary policy is the process by which monetary authority of a country, generally a central bank controls the supply of money in the economy by its control over interest rates in order to maintain price stability and achieve high economic growth.

In India, the central monetary authority is the Reserve Bank of India (RBI).

MONETARY POLICY

RBI

Commercial Bank

Non-Commercial Bank

Non-Banking Financial Company

(NBFC) Public

PrivateForeign

(Sector bank)EXIM Bank,

SIDBI,NABARD LIC housing, HDFC, Bajaj

MONETARY OPERATIONS

Monetary operations involve monetary techniques which operate on monetary magnitudes such as money supply, interest rates and availability of credit aimed to maintain Price stability, stable Exchange rate , Healthy Balance of Payment, Financial stability, Economic growth.

RBI, the apex institute of India which monitors and regulates the monetary policy of the country stabilizes the price by controlling the Inflation.

OBJECTIVES OF MONETARY POLICY

Price Stability.Controlled Expansion of Bank Credit.Promotion of Fixed Investment.Restriction of Inventories.Promotion of Exports and Food.Procurement Operations.Desired Distribution of Credit.Equitable Distribution of Credit.To Promote Efficiency.Reducing the Rigidity.

INSTRUMENTS OF MONETARY POLICY

An open market operation involves buying or selling of government securities from or to the public and banks.

The RBI sells government securities to contract the flow of credit and buys government securities to increase credit flow.

QUANTITATIVE TECHNIQUES

A. OPEN MARKET OPERATIONS

Every financial institution has to maintain a certain quantity of liquid assets with themselves at any point of time of their total time and demand liabilities.

CRR is a certain percentage of bank deposits which banks are required to keep with RBI in the form of reserves or balances.

If CRR increase, then rate of interest in the economy will increase and vice versa.

B. CASH RESERVE RATIO (CRR)

C. STATUTORY LIQUIDITY RATIO (SLR)

D. REPO RATEThe rate at which the commercial bank take loan from the RBI. If repo rate is increased, then rate of interest will also be increased.

E. REVERSE REPO RATE

The rate at which the commercial bank deposits their surplus money with RBI. If reverse repo rate increased, then the rate of interest will also be increased..

The increase in Repo rate and Reverse repo rate is a symbol of tightening of the policy.

It is a method of persuading and convincing the commercial bank to advance credit in the advanced with the direction of the central bank in overall economic interest of the country.

QUALITATIVE CREDIT CONTROL

A. CHANGE IN LENDING MARGIN

The central bank is empowered to increase the lending margin with a view to decreasing the bank credit.

B. MORAL SUASION

ORIGIN OF RESERVE BANK OF INDIAThe Reserve Bank of India, the nation’s central bank, began operations on April 01, 1935.

It was established with the objective of ensuring monetary stability and operating the currency and credit system of the country to its advantage.

The origins of the Reserve Bank of India can be traced to 1926, when the Royal Commission on Indian Currency and Finance – also known as the Hilton-Young Commission – recommended the creation of a central bank for India to separate the control of currency and credit from the Government and to augment banking facilities throughout the country.

Reserve Bank of India was nationalized in the year 1949.RBI has one Governor and four Deputy Governor. The tenure of each is 3 years. The current Governor is Dr. Raghuram Rajan.

The Reserve Bank of India Act of 1934 established the Reserve Bank and set in motion a series of actions culminating in the start of operations in 1935.

1926 1934 1935 1937 1949RBI act passedHilton Young

Commission RBI commences operations in Kolkata as a shareholders bank

RBI central office moves to Mumbai

RBI nationalized

Issuer of Currency.

Banker and Debt Manager to Government.

Banker to banks.

FUNCTIONS OF THE RESERVE BANK

Financial Regulation and Supervision.

Foreign Exchange Reserves Management.

Foreign Exchange Management.

Market Operations.

Payment and Settlement Systems.

Developmental Role.

Policy Research and Data Dissemination

Monetary policy.

How Departments Work.

Currency management.

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