Indian money market is regarded as underdeveloped money market. The main shortcomings of Indian money market are as follows:
1. Absence of Coordination:
There is no coordination between organised and unorganized sectors of the money market. At times there is even wasteful competition between them.
Such a situation is extremely harmful for the economic progress of the country.
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2. Absence of Developed Bill Market:
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An important shortcoming of Indian Money Market is the absence of a well developed money market. Though both inland and foreign bills are traded in Indian Money Market yet its scope is very limited. In spite of the efforts of Reserve Bank in 1952 and in 1970, only a limited bill market exists in India. Thus, an organised bill market in the real sense of the term has not yet been fully developed in India. The main obstacles in the development of bill market appear to be the following:
(i) The lack of uniformity in drawing bills in different parts of the country,
(ii) The large use of cash credit as the main form of borrowing from commercial banks, (iii) Presence of Inter-call money market and
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(iv) The pressure of cash transactions. Thus, Bill Market is relatively underdeveloped.
3. Shortage of Funds in Money Market:
The Indian money market is characterised by shortage of funds. The funds available in the market are inadequate to meet the requirements of trade and industry. The main reasons responsible for shortage of funds are poverty, low level of income and low savings. Inadequate banking facilities are also one of the main causes of shortage of funds.
4. Seasonal Stringency of Funds:
Another defect of Indian Money Market is the stringency of credit in particular seasons of the year. During the harvest time (April to November) there is substantial rise in demand for credit. The supply of credit at such a time does not increase in the same proportion in which demand increases.
Consequently, rate of interest shoots up during the busy season. On the other hand, during the slack season, due to fall in demand for credit, the interest rate declines. These wide variations in the supply and demand for money are due to inelastic supply of money.
5. Lack of Uniformity in Interest Rates:
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In Indian Money Market, there is no uniformity in rates of interest. The lending rates of commercial banks differ from those of the Rural Regional Banks and cooperative banks. There is also wide variation in the rates of interest charged by the banks of organised sector and of indigenous banks. The bill finance rate also differs from hundi rate.
6. Underdeveloped Banking Habits:
Inspite of rapid branches expansion of banks and spread of banking to unbanked and rural centres, the banking habits in India are still underdeveloped, (i) There are several reasons for it.
Whereas in U.S.A. for every 1400 persons there is a branch of a commercial bank, in India there is a branch for every 13,000 people, (ii) The use of cheques is restricted, (iii) The majority of transactions are settled in cash, (iv) The hoarding habit is widespread.
7. Dominance of Indigenous Bankers:
The indigenous banker still dominates the banking scene in India. Even after banking expansion in the rural areas, the money lenders still continue to be the only source to the agriculturists. They exploit their customers by adopting malpractices and charging exorbitant rate of interest The Reserve Bank exercises no control over them.