Relevance of Development of Money Market

The development of the money market is important for the debt market especially through the process of liquidity. The money market provides the required finances and enhances the liquidity in the market and leads to the short end of the yield curve. Various components of the money market foster the development in various ways. The repo market contributes to the development of an active Government Securities market and vice versa because the lending and borrowing processes are conducted safely through repos. There must be a necessary coordination between the Government Securities and money markets where the interest rates are market determined and the central bank manages the debt and monetary policy functions.

Many measures have been taken in recent years to develop a short-term yield curve with deep liquidity in the money market in India. The four important measures in this regard are as follows:

• First, a Liquidity Adjustment Facility (LAF) has been introduced, comprising repo and reverse repo operations through auctions conducted. This was done to equilibrate the liquidity and to control the short-term interest rates.
• Second, the non-bank participants in the call market who are currently lenders are withdrawn gradually so as to make the call money market a pure interbank market.
• Third, refinance support facility is being streamlined and a market-based approach is being brought in. Removal of system of liquidity support on fixed terms and shifting it to a full-fledged Liquidity Adjustment Facility (LAF), is being considered seriously.
• Fourth, the other parts of the money market, particularly the repo market is being broadened by allowing the players other than banks into lending as well as borrowing in these markets. For further assistance in this direction, a Clearing Corporation of India Ltd., (CCIL) was established.