For developing the money market, it is felt necessary by the Reserve Bank to have a comprehensive review of the money market. As such, the Governor of the Reserve Bank of India appointed in September 1986, a Working Group on the Money Market, under the chairmanship of Shri M. Vaghul, with the following terms of reference:

(a) To examine money market instruments and recommends specific measures for their development.

(b) To recommend the pattern of money market interest rates and to indicate whether these should be administered or determined by the market.

(c) To study the feasibility of increasing the participants in the money market.

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(d) To assess the impact of changes in the cash credit system on the money market and examine the need for developing specialised institutions such as discount houses. In this context, the interaction between the inter-corporate market and the expanded money market could also be examined.

(e) Any other issue having a bearing on the development of the money market.

The Working Group submitted its Report in January 13, 1987.

The Report makes a number of observations and recommendations. Below we give the abstract of its major points.

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The Structure of the Indian Money Market:

1. The money market is a market for short-term financial assets that are close substitutes for money.

2. The money market instrument is liquid and can be transferred quickly at a low cost and it helps in equilibrating the short-term surplus funds of lenders with the requirements of borrowers.

3. Strictly speaking, there is no demarcated distinction between the short-term money market and the long-term capital market in India.

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4. The Indian money market is a restricted market. It is narrow-based with a limited number of participants. There is also paucity of instruments. There is also a tight control regulation by the Reserve Bank and the Indian Bankers’ Association over the rates of interest in the market.

5. The unorganised sector of the money market endeavours to meet the sectoral financing gaps. Its rates of interest are market-related and characteristically higher than those in the organised sector.

6. The volume of business in the call money market has increased over the period. Scheduled commercial banks’ borrowing in inter-bank call money market has increased from Rs. 573 crores during 1982-83 to Rs. 1,067 crores in 1985- 86.

7. Despite the various measures taken to develop bill finance, there has not been satisfactory progress in the growth of this instrument, as a result of which an active bill market has failed to develop.

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8. Treasury Bills are an integral part of the money market.

9. At present, the inter-corporate market providing short-term liquidity operates freely and outside the regulatory framework.

10. Money market should serve three broad objectives:

(i) It should provide an equilibrating mechanism for evening out short-term surpluses and deficits.

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(ii) It should provide a focal point for central bank intervention for influencing liquidity in the economy.

(iii) It should provide reasonable access to users of short-term money to meet their requirements at a realistic price. This is very important for an efficient banking system.

Major Recommendations:

1. The present interest rate ceiling on the call money fixed by the Indian Banks’ Association should be abolished. The call money rates should be freely determined by the market forces.

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2. The call money market should strictly be an inter-bank market.

3. The interest rate on inter-bank term deposits should be determined by the market forces.

4. A genuine bill culture is to be developed by taking a number of positive measures pertaining to interest rates and legislative amendments.

5. The government should make payments for all credit purchases in the form of bills.

6. The maximum discount rate on bills should not exceed an equivalent effective interest rate of 16%.

7. Further rediscounting by the institutions should be freely permitted.

8. The interest rate on short-term commercial papers should be freely determined by the market forces.

9. There should be no restrictions on the participants in the commercial paper market.

10. To develop an active secondary market in 182 days’ Treasury Bills, let there be a large number of participants who will bid regularly in the auctions; then, there can develop a portfolio of varying maturities.

11. By April 1987, a Treasury Bill Refinance Facility should be introduced. The refinance rate should be at least 1.5 percentage points higher than the prevailing Treasury bill rate.

12. The Finance House of India as an autonomous public limited company should be established to deal in short-term money market instruments. It should be jointly formed by the Reserve Bank, the public sector banks and the financial institutions.

13. Each new instrument introduced in the money market should have been approved by the Reserve Bank.

14. The stamp duty on bills must be abolished.