Rigidities in the Indian Money Market:
Notwithstanding the deregulation process initiated by the Reserve Bank of India and several innovations, the money market is not free from certain rigidities which are hampering the growth of the market. The most important rigidities in the Indian money market are:
(i) Markets not integrated
Money market in India is not well integrated. There is a well-developed secondary market in India, which does not exist in money market.
(ii) Players restricted
Only Government, banks, FII and big companies are involved in the money market. Retail investors are rarely interested in the money market making it restricted to only corporates, the Government and the foreign Institutional Investors (Fll’s).
(iii) Supply based-sources influence uses
Banks are generally the main sources of fund in the money market. Commercial Banks are main supplier of funds in Money Market Instruments especially RBI which issues Treasury Bills on behalf of the Government of India.
(iv) Not many instruments
Unlike European Market, only few money market instruments are available in India i.e. Treasury bill, commercial papers, commercial bill, certificate of deposit and call/notice money in India.
(v) Reserve requirements
There are fixed reserve requirements in case of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) which banks have to maintain at all times. CRR is the reserve which banks have to keep with RBI. Whereas, SLR is the reserve which banks have to keep with themselves, thus, restricting the flow of money market instruments.
(vi) Lack of transparency
There is lack of transparency in money market because the secondary market is not very well developed. Since, the transactions are done Over the Counter (OTC), there is lack of transparency and public information.
(vii) Commercial transactions are mainly in cash
Since most of the transactions are done through cash, the circulation of funds in money market instrument is restricted.
(viii) Heavy Stamp duty limiting use of exchange bills
In case of issuance of commercial bills, stamp duty is paid in case of bill of exchange, thus, limiting their use. Further, in case of Commercial Paper (CP), the stamp duty rates applicable to non-bank entities are five times higher than those applicable to banks. Moreover, a CP attracts a stamp duty for 90 days irrespective of the tenure. Hence, CP issued for a shorter period attracts higher stamp duty, making it an expensive financial instrument.
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