Understanding Organised vs Unorganised Money Market

Understanding Organised vs Unorganised Money Market

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The money market plays an important role in the financial system of a nation. It is a market where short-term financial instruments such as Treasury bills, commercial papers, and certificates of deposits are traded. The money market in India can be broadly classified into two categories - the organised and unorganised market. The organised money market in India comprises of financial institutions such as the Reserve Bank of India (RBI), commercial banks, and financial corporations. These institutions are regulated by the RBI, which acts as the central bank of India. Transactions in this market are conducted through a well-defined system of rules and regulations, which are enforced by the RBI. On the other hand, the unorganised money market is characterised by informal transactions between individuals and businesses. The unorganised money market includes various informal credit channels such as moneylenders, chit funds, and informal savings and credit associations.

One of the major differences between the organised and unorganised money market is the level of risk involved. Transactions in the organised money market are relatively low risk, as they are conducted through well-established financial institutions and are subject to regulatory oversight. However, transactions in the unorganised money market are high risk, as they are largely unregulated and informal.

Another difference between the organised and unorganised sector of Indian money market is the cost of credit. The organised money market offers credit at relatively lower rates of interest compared to the unorganised money market. This is because financial institutions in the organised money market have access to low-cost funds from the RBI and other sources. In contrast, the unorganised money market is characterised by high interest rates, as lenders in this market need to cover their high cost of funds. The organised and unorganised money markets also have different impacts on the overall economy. The organised money market plays a crucial role in the transmission of monetary policy, as it is directly linked to the RBI.

Thus, organised and unorganised financial markets are two distinct components of the financial system in India. The organised money market is characterised by transparency, standardisation, and regulatory oversight, while the unorganised money market is largely informal and unregulated. While the organised money market offers relatively low-risk credit at lower rates of interest, the unorganised money market is characterised by high interest rates and higher risk.