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Reforms in Indian Money Market

The reforms in the Indian money market, as outlined based on the recommendations of various committees and initiatives taken by the Reserve Bank of India (RBI), have played a significant role in the development and modernization of the Indian financial system. Here's a summary of these reforms:

  1. Deregulation of Interest Rates:

    • Starting from May 1989, the RBI removed the ceiling on interest rates for various money market instruments, allowing market forces to determine these rates.
    • This marked a shift away from the system of administered interest rates, promoting market-driven pricing.

  2. Introduction of New Money Market Instruments:

    • The RBI introduced several new money market instruments, including 182-day and 364-day treasury bills, Certificates of Deposit (CDs), and Commercial Papers (CPs).
    • These instruments provided additional avenues for the government, banks, financial institutions, and corporations to raise funds in the money market.
    • To expand the investor base for CDs and CPs, the RBI reduced the minimum investment amounts and minimum maturity periods.

  3. Repurchase Agreements (Repos):

    • Repos in government securities were introduced by the RBI in December 1992, followed by reverse repos in November 1996.
    • Repos and reverse repos serve to stabilize short-term liquidity fluctuations in the money market and offer banks a short-term mechanism to manage their surplus funds.
    • The RBI uses changes in repo and reverse repo rates to transmit its policy objectives to the entire money market.

  4. Liquidity Adjustment Facility (LAF):

    • Introduced by the RBI in June 2000, LAF has become a critical tool for managing liquidity through repos and reverse repos.
    • LAF helps the RBI adjust liquidity in the money market to stabilize short-term interest rates, such as call rates.

  5. Discount and Finance House of India (DFHI):

    • Established in 1988, DFHI was jointly formed by the RBI, public sector banks, and financial institutions.
    • DFHI's role is to enhance liquidity in money market instruments and promote the development of a secondary market for these instruments.

  6. Regulation of Non-Banking Financial Companies (NBFCs):

    • The RBI Act was amended in 1997 to comprehensively regulate the NBFC sector.
    • NBFCs are required to obtain a Certificate of Registration (CoR) from the RBI to conduct financial institution-related businesses, including accepting public deposits.

  7. The Clearing Corporation of India Limited (CCIL):

    • Established on April 30, 2001, under the Companies Act, 1956, with the State Bank of India as the primary promoter.
    • CCIL plays a crucial role in clearing transactions in government securities and repos reported on the Negotiated Dealing System (NDS) of the RBI.

These reforms have contributed to the growth, efficiency, and transparency of the Indian money market. They have also aligned the market more closely with global best practices and have provided diverse financing options for various participants, including the government, financial institutions, and corporations.

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