Defects of the Indian Money Market
The Indian money market has been associated with several defects that hinder its efficient functioning. Some of the defects of the Indian money market are as follows:
1. Existence of Unorganised Money Market: The Indian money market consists of both organised and unorganised sectors. The unorganised sector, which includes indigenous bankers and moneylenders, lacks proper regulations and operates outside the purview of RBI. This leads to issues such as lack of transparency, high-interest rates, and exploitation of borrowers. Borrowers may face difficulties in accessing fair and transparent lending practices, affecting the overall efficiency of the market.
2. Absence of Cooperation amongst the Members of the Money Market: The lack of cooperation and coordination among the various participants in the money market, including banks, financial institutions, and the government, hampers the smooth functioning of the market. Without effective collaboration, the market may experience inefficiencies, liquidity problems, and a fragmented structure. Cooperative efforts are necessary to ensure the stability and optimal functioning of the money market.
3. Lack of Uniformity in Interest Rates in the Money Market: In the Indian money market, interest rates are not uniform across different segments and participants. This lack of uniformity creates disparities and uncertainties, making it difficult for market participants to make informed decisions. It also affects the transmission of monetary policy and the overall stability of the market. Transparent and consistent interest rate mechanisms are essential for an efficient money market.
4. Absence of Organised Bill Market: A well-developed bill market is crucial for the functioning of the money market. However, in India, the bill market is not adequately organised. This absence of an organised bill market limits the availability of short-term credit instruments, such as treasury bills and commercial bills, which are essential for liquidity management and financing trade transactions. A well-regulated bill market is necessary to facilitate efficient short-term financing.
5. Seasonal Financial Stringency: The Indian money market experiences seasonal fluctuations in liquidity and financial stringency. This is primarily due to factors like agricultural cycles, festive seasons, and government borrowing patterns. These fluctuations can lead to volatility in interest rates and create uncertainties for market participants. Strategies to manage these seasonal fluctuations are necessary for maintaining stability.
6. Shortage of Capital in the Money Market: The Indian money market faces a shortage of capital to meet trade and industry requirements. The limited availability of capital hampers the development of various sectors and restricts the growth potential of the overall economy. Adequate availability of capital is crucial for sustaining economic growth and meeting the funding needs of businesses and individuals.
7. Lack of Development of the Indian Money Market: The Indian money market is not as developed as other major global money markets. It lacks depth, breadth, and sophistication in terms of financial products and instruments. This hinders the efficient allocation of funds and impedes the overall growth and stability of the financial system. Developing a diverse range of financial products and instruments can enhance the market’s efficiency.
8. Excessive Number of Indigenous Bankers in the Money Market: The presence of a large number of indigenous bankers, such as moneylenders and unregulated non-banking financial entities, creates issues of unfair practices, lack of accountability, and high-interest rates. It also contributes to the unorganised nature of the money market. Proper regulation and oversight are necessary to mitigate these issues and ensure fair and transparent practices.
9. Absence of Specialised Institutions in the Money Market: The Indian money market lacks specialised institutions that can cater to specific financial needs and provide specialised financial services. This absence limits the options available to market participants and hampers the overall efficiency of the money market. The establishment and strengthening of specialised institutions can enhance the market’s ability to meet diverse financial requirements.
10. Non-availability of Credit Instruments: The Indian money market suffers from a lack of diverse and readily available credit instruments. The absence of a wide range of credit instruments restricts the flexibility and effectiveness of financing options for borrowers and lenders. Developing a comprehensive range of credit instruments can provide market participants with more options for managing their financing needs.
Addressing these defects requires various measures. Regulatory reforms are necessary to ensure proper oversight and regulation of all market participants. Improved coordination among market participants, including banks, financial institutions, and the government, is essential for efficient market functioning. Developing organised bill markets and specialised institutions can enhance the availability of credit instruments and cater to specific financial needs. Furthermore, promoting financial literacy among market participants can empower them to make informed decisions and contribute to a more efficient money market.