Defects of Indian money market

 The Indian money market is not well developed. Compared to the growth in the economy, the growth of the money market has been slow and the influence of the money market in the economy has been quite limited.

This can be traced to the following deficiencies in the Indian money market:-

(1) DOUBLE CHARACTER:- The Indian economy has dichotomic money markets with an organised sector and unorganised sector. The organised sector consists of specialised banking and financial institutions which operate in the money market in accordance with rules. On the other hand, the unorganised sector do not follow any set rules in loan operations. The two sectors do not have any contact with each other and lack co-ordination for cooperation. In fact the  unorganised sector reduces the effectiveness of monetary policy measures because it does not fall under the jurisdiction of the RBI.

(2) CAPTIVE MARKET:- The Indian money market is captive. It is governed by a few institutions which participate in it. The participants in the organised money market are limited to banks and a few all India financial institutions while in the unorganised market the principal participants are money lenders and indigenousthe bankers.

(3) NARROW BASED:- The Indian money market is narrow based and is functioning with limited number of instruments. The main instruments are interbank call money, treasury bills, commercial bank bills, certificates of deposit and commercial paper. The last two have just been started and others have made little impact on the working of the money market. In fact, only few instruments are being used in practice and others remain only in paper. Moreover these instruments do not serve those institutions which can be in the money market whenever they have excess funds.

(4) SMALL GEOGRAPHICAL AREA:- The Indian money market is confined to a small geographical area comprising four capital cities of India namely Delhi ,Mumbai ,Kolkata and Chennai. This inhibits the growth of the money market. A large segment of rural or semi urban and urban India is out of the preview of the organised money market.

(5) SLOW RATE OF MONETISATION:- The slow rate of monetisation is another factor which has kept the Indian money market underdeveloped. There are still large backward areas in rural India in which monetisation is taking place at a very slow pace. They fall in the unorganised sector of the money market and get loans from the merchant money lenders.

(6) SHORTAGE OF CAPITAL:- There is shortage of capital in the Indian money market which fails to meet the requirements of the trade and industry. The main reasons for the insufficiency of funds are :- Low saving capacity of people due to low level of income, Inadequate banking facilities in the rural areas , Preferences of savers to invest in physical assets like land ,real estate, gold than in financial savings.

(7) LARGE  UNORGANISED SECTOR:- A major defect of the Indian money market is the existence of a large unorganised sector. This sector is dominated by indigenous bankers and money lenders. They are neither under the control of the RBI nor are they influenced by market rate of interest. There is also no clear demarcating line for short term and long term finance in this sector.

(8) NO RELATION BETWEEN ORGANISED AND UNORGANISED SECTORS:- In India the organised and the unorganised sector of the money market do not have any relation with each other. The money lenders and indigenous bankers work independently and they fail to get funds from commercial banks except like other customers. Rather, they prefer to borrow from each other because the commercial banks insist observance of formal rules and procedures.