Reason for underdevelopment of Indian money market

When we compare Indian money market with the developed money market, we can undoubtedly say that the Indian money market is underdeveloped. A few of the reason for the slow development or underdevelopment of Indian money market is discussed here.

Indian money market
Causes for the underdevelopment of Indian Money market:

  • Dichotomy in the structure or presence of unorganized sector
  • Inadequate banking system with lack of control by Central bank
  • Disparity in interest rates
  • Lack of coordination among various money markets
  • Limited nature of bill market
  • Lack of facility for inter-movement of funds
  • Seasonal fluctuations leading to shortage of funds
  • Inadequate credit instruments and resources
  • Lack of adequate foreign funds
  • Lack of sub markets.

1. Dichotomy in the structure or presence of unorganized sector is one of the reason for underdevelopment of Indian money market

One of the biggest drawback of Indian money market for its underdevelopment is the presence of unorganized money market, consisting of money lenders and indigenous bankers. Due to their presence, an abnormal interest rate prevails which leads to high increase in the price level. The arrival of deposits into the organized sector is also prevented by the presence of these money lenders and indigenous bankers. They offer high rate of interest while accepting deposits and they lend the money for a higher rate of interest.

Money lenders and indigenous bankers hinder the development of Indian money market in some way:

The rural population depends on the money lenders for all their short-term requirements. The trader in the semi-urban area depends on the indigenous banker for his short-term requirements. Thus, the organized sector is completely neglected. The commercial banks, co-operative banks, RRBs, etc., are not able to enter into the strong fort built by the money lenders and indigenous bankers over the years. As long as this condition prevails, the money market in India will never be developed.

2. Inadequate banking system with lack of control by Central Bank in India

Inadequate banking system with lack of control by the Central Bank is one of the reason for the underdevelopment of Indian money market.

Prior to 1955, the commercial banks had contributed hardly 3% of the rural credit, while 70% of it was met by the money lenders. The co-operative sector had contributed only 3.5%. There were not many branches of commercial banks being opened in rural areas prior to 1970. Hence, the mobilization of deposit by the organized sector was limited.

The traders and businessmen were given their credit requirements by indigenous bankers. All the efforts taken by RBI to curtail the operations of money lenders and indigenous bankers proved futile. Hence, more funds were given for speculative and non productive purposes and the price level could not be controlled effectively by RBI.

3. Disparity of interest rates a reason for slow growth of Indian money market

The interest rate prevailing in different centres in the country varies. This shows that there is lack of mobility of funds and there is more activity in certain centres and less in other centres.

For example, Bombay will have a higher rate of interest for short-term funds while Chennai will have lesser rate of interest. This reveals that there is more activity in Bombay and less activity in Chennai.

Such disparity of interest rates has always been a problem for the development of Indian money market.

4. Lack of co-ordination among various money markets in India

Lack of co-ordination among the counterparts is a great concern for the growth of Indian money market.

The interest rate prevailing on various credit instruments clearly indicates that there is lack of co-ordination in the money market. In a true money market, all the credit instruments with the same period should have the same rate of interest. But in India there are different interest rates in the call loan market, commercial bill market, treasury bill market and foreign bill markets.

If there are adequate funds provided by commercial banks in all the market, the interest rate should be uniform. But it is not so, which indicates that the activities are not uniform among the counterparts. While the interest rate for domestic activity is more, the interest rate for foreign activity is less. This indicates that there is lack of balanced activity in the money market.

5. Limited nature of bill market

Lack of activities in the bill market is another reason for the underdevelopment of Indian money market.

Though the bill market was started in 1970 by RBI under the new bill market scheme, it could not pick-up due to increasing costs. The stamp charges and the discount rate were much higher and hence the traders were not attracted by the bill market.

There will be more bill transactions only when the traders and businessmen resort to bills transactions. But in practice, we find traders are not keen to use the bills in their trading activity.

6. Lack of facility for infer-movement of funds

The transfer of funds between centres has not developed over the period. There has been a lot of delay in the collection of bills and also in the realization of out station cheques. Due to this, the inter movement of funds between various centres gets affected. With capital getting concentrated in a limited area, there will be regional disparities. Only certain areas will be developed while others will remain backward.

This could be a major concern for the slow growth of Indian money market.

7. Seasonal fluctuations leading to shortage of funds in Indian money market

In India, the money market witnesses, seasonal fluctuations as agriculture forms major activity. There are two seasons in the Indian money market. One from June to February, it is called busy season. While the rest of the period is called off season.

During the busy season, the demand for short-term funds will be very high and the organized money market will not be able to cater to the needs. At the same time, during the off season, banks will be left with huge amount of money without much demand. This situation can be overcome if there is uniform activity throughout the year, which is not so as Indian agriculture is depending on the monsoon.

This liquidity issue between the busy season and off season is one of the reason that slows down the growth of Indian money market.

8. Inadequate credit instruments and resources

The funds available with the organized sector is inadequate to meet the requirements of agriculture, small scale, cottage and other industrial activities. The supply of bills, bonds and other Central and State Government securities are also insufficient. There is lack of correlation between the funds and the credit instruments. Both are inadequate. This also slows down the growth of Indian money market.

9. Lack of adequate foreign funds

The Foreign Exchange Regulation Act and exchange control restricted the inflow of foreign funds in to the country. As a result, the exchange rate of Indian Rupee with foreign currencies were not stable. This naturally affected the foreign trade of India.

This fluctuation in currency value not only affects the growth of Indian money market, but also the import and export related activities.

10. Lack of sub markets

Inadequate sum markets in India is also one of the reason for the underdevelopment of money market. For the promotion of sub markets, we require the presence of acceptance house, issue house and discount house. For a long time these were not there. Only in 1988 the discount and finance house was set up.

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