Economy / Money Market and Capital Market in India - Intruments and Dynamics / Money Market Reforms.
Money Market Reforms.
The Indian money market has undergone significant reforms over the years, driven by recommendations from expert committees and the need for efficiency in achieving monetary objectives.
Here are some key reforms implemented in the Indian Money Market:
- Deregulation of Interest Rates:
- The deregulation of interest rates was a significant step to allow market forces to determine interest rates. This move aimed to enhance efficiency and competitiveness in the money market.
- Introduction of Money Market Mutual Funds (MMMFs):
- Money Market Mutual Funds were permitted to sell units to both corporates and individuals. This allowed investors to participate in the money market through mutual funds, providing them with a new avenue for short-term investments.
- Establishment of Discount and Finance House of India (DFHI):
- In 1988, the Discount and Finance House of India (DFHI) was established to inject liquidity into the money market. DFHI was a joint initiative by the Reserve Bank of India, public sector banks, and financial institutions.
- Liquidity Adjustment Facility (LAF):
- The introduction of the Liquidity Adjustment Facility (LAF) provided a mechanism for adjusting liquidity in the market. LAF allows the RBI to absorb or inject financial resources based on market conditions.
- Electronic Dealing System:
- To enhance transparency and efficiency, an electronic dealing system was introduced for money market transactions. This move aimed to modernize the market and facilitate smoother transactions.
- Development of New Market Instruments:
- The development of new market instruments, such as Cash Management Bills (CMBs) and the Market Stabilization Scheme (MSS) since 2004, added flexibility to the money market. These instruments became particularly relevant post-demonetization in 2016.
- Standing Deposit Facility (SDF):
- The introduction of the Standing Deposit Facility (SDF) provided banks with an additional tool for managing liquidity. SDF allows banks to place excess funds with the RBI at an interest rate determined by the central bank.
These reforms collectively aimed to create a more efficient, transparent, and responsive money market in India. The changes were aligned with global best practices and aimed to enhance the effectiveness of monetary policy tools.
