RBI and Money Market

RBI and Money Market

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The Reserve Bank of India has made a number of steps to address current flaws and build a robust money market in the nation. Among the most important are:

(i) The Reserve Bank has worked to build a strong bill market while promoting the utilisation of bills in the banking system by introducing two programmes, one in 1952 and another in 1970. The number of banknotes that can be used has also increased.

(ii) Several steps have been made to strengthen the operation of indigenous banks. These steps include: (a) registration; (b) accounting and auditing; (e) giving financial assistance through banks; and so forth.

(iii) The Reserve Bank is fully operational in the organised sector of the Money Market, having developed processes and standards that combine and organise the various components of the Money Market. Because of the Reserve Bank's efforts, there is currently far greater coordination in the organised sector than in the unorganised sector or between the organised and unorganized sectors.

(iv) The disparity between distinct segments of the Money Market has shrunk significantly. Since the passage of the Banking Regulation Act in 1949, the Reserve Bank has treated all banks in the nation equally in terms of licencing, branch openings, share capital, loan types, and so on.

(v) In order to foster a healthy money market, the RBI has implemented steps to consolidate and combine banks into a handful of strong banks, as well as encouraged the growth of banking options in the country.

(vi) The RBI has been capable to significantly minimise interest rate differentials across different parts and centres of the Money Market. The country's interest rate structure is now considerably more susceptible to fluctuations in the Bank rate. Thus, the Reserve Bank of India has been mostly successful in upgrading the Indian money market and resolving some of its major flaws.

However, the RBI has many challenges in governing the money market as mentioned herein:

(i) The lack of a bill market limits the Reserve Bank's capacity to remove excess cash via the Money Market by selling bills.

(ii) The presence of indigenous bankers is a key impediment to integrating the Money Market.

(iii) Another challenge in governing the Money Market is insufficient growth of the call Money Market. Banks fail to set ratios between cash reserves and deposits, and the Reserve Bank must conduct major transactions in the open market to influence bank policy.