Question

Explain the problems faced by the money market in India.

Answer 1

A money market is a financial market wherein lending and borrowing of short-term funds take place. The Indian money market is less developed in terms of volume and liquidity as compared to the advanced countries.

The problems of the Indian Money Market can be explained as follows:

1. Dual Structure of the Money Market: The presence of both, the organized and unorganized sectors in the money market leads to disintegration, lack of transparency, and increased volatility. The unorganized sector of the money market lacks coordination and does not come under the direct control and supervision of the RBI.
2. Lack of uniformity in the rates of interest: The money market comprises various entities such as commercial banks, cooperative banks, non-bank finance companies (NBFCs), development finance institutions, investment companies, etc. The money market also comprises different categories of borrowers.
3. Shortage of funds: The money market faces a shortage of funds due to inadequate savings. The low per capita income (PCI), poor banking habits among the people, indulgence in wasteful consumption, inadequate banking facilities in rural areas, etc. have also been responsible for the paucity of funds in the money market.
4. Seasonal fluctuations: Demand for funds varies as per the seasons. During the peak season, from October to June, finance is required on a large scale for various purposes such as trading in agricultural produce, investment in business activities, etc. This results in wide fluctuations in the money market.
5. Lack of financial inclusion: Banking facilities in the country are still inadequate and inaccessible to vulnerable groups such as the weaker sections and the low-income groups. This shows a lack of financial inclusion.
6. Delays in technological up-gradation: The use of advanced technology is a prerequisite for the development and smooth functioning of financial markets. Delays in the up-gradation of technology hamper the working of the money market.