The money market is a mechanism that deals with the lending and borrowing of short term funds. The India Money Market has come of age in the past two decades. In order to study the money market of India in detail, we at first need to understand the parameters around which the money market in India revolves.
The performance of the Indian Money Market is heavily dependent on real interest rate that is the interest rate that is inflation adjusted. Though the money market is free from interest rate ceilings,structural barriers and other institutional factors can be held responsible for creating distortions in India Money Market. Apart from the call market rates, the other interest rates in the Indian Money Market usually do not change in the short run.
It is due to this disparity between the opposite forces that is prevalent in the money market in India that a well defined income path cannot be traced.
The Indian Money Market involves a wide range of instruments. Here, maturities range from one day to a year, issued by banks and corporates of various sizes. The money market is also closely linked with the Foreign Exchange Market through the process of covered interest arbitrage in which the forward premium acts as a bridge between domestic and foreign interest rates.
To analyze the interest rates that characterize the Indian Money Market, the following elements need to be covered:
* The term structure of interest rate.
* The difference between domestic and international interest rates
* The market structure differences between the auction markets that clear continuously and the. customer markets.
* The credit speed between instruments involving similar maturity but diverse risk factor.
Such is the distortion in the Indian Money Market.
