Essay on the Characteristics of Developed and Underdeveloped Money Market

Developed money market is a relative term which refers to a better organised, more efficient and more sensitive money market. In other words, the developed money market has greater responsiveness to changes in demand and supply of short-term funds in any of its segments.

Generally, the extent of development of a money market is closely related to the degree of economic development of a country.

The money markets of economically advanced countries, like, England and America are developed, while those of underdeveloped or developing countries, like India, are relatively underdeveloped. The following are the main characteristics of developed and underdeveloped money markets:

1. Presence of Central Bank:

An essential prerequisite for a developed money market is the presence of a central bank which functions as monetary and banking authority in the country. A powerful central bank guides, controls and regulates the money market. It formulates a suitable monetary policy to meet the money market.

It formulates a suitable monetary policy to meet the needs of the money market. It can influence the supply of cash to cater the changing requirements of the people. The central bank is the lender of the last resort.

It keeps the cash reserves of the commercial banks and comes to the rescue of the banks in times of emergency by granting them funds through rediscounting the eligible securities.

In underdeveloped money markets like India, the central bank is not able to adopt an effective monetary policy and influence the money market properly because of the existence of indigenous bankers.

2. Developed Banking System:

A developed money market requires the existence of a well-organised commercial banking system. Moreover, the public should also have banking habits. The commercial banks are the ‘nucleus of the whole money market’. They are the main suppliers of short-term funds.

Therefore, the policy of the commercial banks regarding loans and advances will have its effect on the money market. Because of their close relation with the central bank, the commercial banks serve as a connecting link between the central bank and the various sectors of the money market.

In under-developed money markets, like India, the number of developed commercial banks is very small and their activities are confined mainly to the urban areas, the money market is unorganised because of the presence of indigenous bankers. People also have not fully developed the banking habits.

3. Availability of Financial Assets:

Efficient working of the developed money market requires a regular and adequate supply of a variety of financial assets, such as, bills of exchange, treasury bills, short-term government bonds, etc.

Moreover, there should also be an adequate number of dealers and brokers in the money market who buy and sell these assets. An underdeveloped market, on the other hand, is marked by the insufficient supply of financial assets and inadequate number of dealers and brokers.

4. Existence of Sub-Markets.

Developed money market has well-organised sub-markets, each specialising in a particular type of financial asset. According to S.N. Sen, “The larger the number of sub-markets, the broader and more developed will be the structure of the money market”.

For example, the New York money market has commercial paper market, banker’s acceptance market, certificates of deposit market, Treasury bill market, Federal funds market, repurchase agreements market, etc.

An undeveloped money market is mainly limited to call loans which the commercial banks grant to each other. There is either non-existence of or a limited development of commercial bill and Treasury bill markets.

5. Integrated Structure of Market:

Developed money market has an integrated structure. In other words, its various sub-markets are so closely connected that information and funds move easily and quickly from one market to another. There is free movement of borrowers and lenders between different sub-markets.

As a result, all the sub-markets become highly sensitive to each other, i.e., the activities of one market have immediate influence on those of others. In the undeveloped money markets, there is little inter-relation and coordination between different sub-markets.

6. Integrated Structure of Interest Rates:

Another feature of a developed money market is that interest rates prevailing in, different sub- market is integrated. A change in the bank rate by the central bank causes an change in interest rates existing in different sub-markets. In an undeveloped money market, wide difference exists in the interest rates because of lack of coordination between different sub-markets.

7. Availability of Adequate Resources:

Another characteristic of a developed money market is the availability of adequate resources to finance the transactions in various sub-markets. These resources come from within as well as outside the country.

The London money market and the New York money market have access to domestic and foreign resources. Undeveloped money markets depend mainly on domestic financial resources and do not attract foreign funds largely because of political instability and unstable exchange rates.

8. Existence of Specialised Institutions:

The developed money market is characterised by the existence of institutions specialising in particular types of assets. These institutions help increasing the efficiency of money market and making it more competitive.

The London money market has acceptance houses and discount houses which specialise in accepting the bills and discounting the bills respectively. In undeveloped money markets, such specialised institutions do not exist.

9. Other Factors:

There are many other factors contributing to the development of a money market. They are: expansion of international trade, industrial development, stable political conditions, absence of dis­crimination against foreign firms, etc.

The underdeveloped countries, with slow industrialisation and small volume of internal and international trade and marked by political instability have undeveloped money markets.