Financial Markets and Services

UNIT - I
Indian Financial System – An Overview
The services that are provided to a person by the various Financial
Institutions including banks, insurance companies, pensions, funds, etc.
constitute the financial system.
Indian Financial System

The Indian financial system is a complex network of financial institutions,

markets, instruments, and services that facilitate the flow of funds between savers
and investors. It comprises various entities such as banks, non-banking financial
companies (NBFCs), insurance companies, stock exchanges, mutual funds,
pension funds, and other financial intermediaries.

The Indian Financial System plays a crucial role in mobilizing savings,

allocating capital, and facilitating economic growth and development in the
country.
Indian Financial System Structure

The Indian Financial System is made up of various components that

work together to facilitate the flow of funds between savers and investors. The
structure of the Indian financial system can be broadly divided into two parts:
the organized sector and the unorganized sector.
The organized sector includes formal financial institutions such as
banks, insurance companies, NBFCs, mutual funds, stock exchanges, and
pension funds. These institutions are regulated by the Reserve Bank of India
(RBI) and other regulatory bodies such as the Securities and Exchange Board
of India (SEBI), the Insurance Regulatory and Development Authority of
India (IRDAI), and the Pension Fund Regulatory and Development Authority
(PFRDA).
The unorganized sector, on the other hand, includes informal financial
intermediaries such as moneylenders, chit funds, and other unregulated entities
that cater to the financial needs of the
unbanked and underserved sections of society.

Features of Indian Financial System

The Indian financial system is a complex and interconnected network of
institutions, markets, and instruments that facilitate the flow of funds between
savers and borrowers. It plays a vital role in the economic development of the
country by mobilizing savings and allocating them to productive
investments. The Indian financial system is characterized by the following features:

• Dual structure system consisting of a formal sector and an informal sector.

• Intermediated, meaning that financial institutions play a key role in
mobilizing savings and allocating them to borrowers
• Increasingly market-based
• Regulated by the government through a number of regulatory bodies
• Promote financial inclusion, through the Pradhan Mantri Jan Dhan
Yojana and the Pradhan Mantri Mudra Yojana etc.
• Promoting economic growth

Indian Financial System Functions

The Indian financial system has several functions that help to meet the
financial needs of individuals and businesses. Here are some of the key
functions of the Indian financial system:
Mobilization of Savings: The Indian financial system helps to mobilize
savings from various sectors of the economy and channel them towards
productive investments. This is achieved through various financial
intermediaries such as banks, mutual funds, and insurance companies.
Allocation of Credit: The Indian financial system also plays a key role in
allocating credit to different sectors of the economy. Banks and other financial
institutions provide loans and credit facilities to
businesses and individuals to help them meet their financial needs.

Payment System: The financial system provides a safe and efficient payment
mechanism to facilitate transactions between different individuals and
businesses. This is achieved through various payment systems such as NEFT,
RTGS, and IMPS.
Risk Management: The financial system helps to manage risks associated with
financial transactions. Financial intermediaries such as insurance companies
provide risk management products such as life insurance, health insurance, and
property insurance.
Price Discovery: The Indian financial system also helps in the discovery of
prices of financial assets such as stocks, bonds, and commodities. This is
achieved through various financial intermediaries
such as stock exchanges and commodity exchanges.

Economic Development: The financial system plays a critical role in the

economic development of the country. It provides financial resources for
investment in infrastructure, industries, and other productive sectors of the
economy.
Financial Inclusion: The Indian financial system also strives to promote
financial inclusion by providing access to financial services to individuals
and businesses in remote and underdeveloped areas of the country.
Components of Indian Financial System
There are four main components of the Indian Financial System. This includes:
1. Financial Institutions

2. Financial Assets
3. Financial Services
4. Financial Markets

1. Financial Institutions
The Financial Institutions act as a mediator between the investor and the
borrower. The investor’s savings are mobilised either directly or indirectly via
the Financial Markets.

The main functions of the Financial Institutions are as follows:

• A short term liability can be converted into a long term investment

• It helps in conversion of a risky investment into a risk-free investment
• Also acts as a medium of convenience denomination, which means, it
can match a small deposit with large loans and a large deposit with small
loans
The best example of a Financial Institution is a Bank. People with surplus
amounts of money make savings in their accounts, and people in dire need of
money take loans. The bank acts as an intermediate between the two.

The financial institutions can further be divided into two types:

• Banking Institutions or Depository Institutions – This includes banks

and other credit unions which collect money from the public against
interest provided on the deposits made and lend that money to the ones in
need
• Non-Banking Institutions or Non-Depository Institutions –
Insurance, mutual funds and brokerage companies fall under this
category. They cannot ask for monetary deposits but sell financial
products to their customers.
Further, Financial Institutions can be classified into three categories:
• Regulatory – Institutes that regulate the financial markets like RBI, IRDA, SEBI, etc.
• Intermediates – Commercial banks which provide loans and other
financial assistance such as SBI, BOB, PNB, etc.
 • Non Intermediates – Institutions that provide financial aid to corporate
customers. It includes NABARD, SIBDI, etc.

2. Financial Assets
The products which are traded in the Financial Markets are called Financial
Assets. Based on the different requirements and needs of the credit seeker, the
securities in the market also differ from each other.

Some important Financial Assets have been discussed briefly below:

• Call Money – When a loan is granted for one day and is repaid on the
second day, it is called call money. No collateral securities are required
for this kind of transaction.
• Notice Money – When a loan is granted for more than a day and for less
than 14 days, it is called notice money. No collateral securities are
required for this kind of transaction.
• Term Money – When the maturity period of a deposit is beyond 14 days, it is called
term money.
• Treasury Bills – Also known as T-Bills, these are Government bonds
or debt securities with maturity of less than a year. Buying a T-Bill
means lending money to the Government.
• Certificate of Deposits – It is a dematerialised form
(Electronically generated) for funds deposited in the bank for a
specific period of time.
• Commercial Paper – It is an unsecured short-term debt instrument issued by
corporations.

3. Financial Services
Services provided by Asset Management and Liability Management
Companies. They help to get the required funds and also make sure that they are
efficiently invested.

The financial services in India include:

• Banking Services – Any small or big service provided by banks like
granting a loan, depositing money, issuing debit/credit cards, opening
accounts, etc.
• Insurance Services – Services like issuing of insurance, selling policies,
insurance undertaking and brokerages, etc. are all a part of the Insurance
 services
• Investment Services – It mostly includes asset management
• Foreign Exchange Services – Exchange of currency, foreign
exchange, etc. are a part of the Foreign exchange services
The main aim of the financial services is to assist a person with selling,
borrowing or purchasing securities, allowing payments and settlements and
lending and investing.

4. Financial Markets
The marketplace where buyers and sellers interact with each other and
participate in the trading of money, bonds, shares and other assets is called a
financial market.
The financial market can be further divided into four types:

• Capital Market – Designed to finance the long term investment, the

Capital market deals with transactions which are taking place in the market
for over a year. The capital market can further be divided into three types:
(a) Corporate Securities Market
(b) Government Securities Market
(c) Long Term Loan Market

• Money Market – Mostly dominated by Government, Banks and other

Large Institutions, the type of market is authorised for small-term
investments only. It is a wholesale debt market which works on low-risk
and highly liquid instruments. The money market can further be divided
into two types:
(a) Organised Money Market
(b) Unorganised Money Market

• Foreign exchange Market – One of the most developed markets across

the world, the Foreign exchange market, deals with the requirements
related to multi-currency. The transfer of funds in this market takes place
based on the foreign currency rate.
• Credit Market – A market where short-term and long-term loans are
granted to individuals or Organisations by various banks and Financial
and Non-Financial Institutions is called Credit Market
Banks - Bank’s are financial institutions that accept deposits from customers and
provide loans and other financial services. In India, banks can be classified into
public sector banks, private sector
banks, and foreign banks.

Non-Banking Financial Companies (NBFCs) - NBFCs are financial institutions that provide
banking services without holding a banking license. They offer a wide range
of financial services, such as loans, leasing, hire purchase, and investment
advisory services.
Insurance Companies - Insurance companies offer a range of life and non-life
insurance products, including health insurance, motor insurance, and property
insurance. They are regulated by the Insurance Regulatory and Development
Authority of India (IRDAI).
Capital Markets - The capital markets in India comprise the stock exchanges,
such as the Bombay Stock Exchange (BSE) and the National Stock Exchange
(NSE), and other capital markets
intermediaries such as brokers, depositories, and registrars. They provide a
platform for companies to raise capital through the issuance of equity and debt
instruments.
Mutual Funds - Mutual funds are investment vehicles that pool money from
various investors and invest in a diversified portfolio of stocks, bonds, and other
securities. They are regulated by the Securities and Exchange Board of India
(SEBI).
Pension Funds - Pension funds in India offer retirement solutions to individuals
and are regulated by the Pension Fund Regulatory and Development Authority of
India (PFRDA).
 Financial Market
Finance is considered to be one of the most important ingredients of the
contemporary business. Financial markets comprise of the entire institutional set-
up in place, which primarily deals with various financial instruments, including
credits extended in the form of cash, cheques, bank deposits, bills, etc.

A financial market offers a platform for individuals, various entities, and

institutions to enter into trading activities in respect of different financial
instruments (such as equities, debentures, bonds, etc.), commodities (such as
gold, silver, and other precious metals, or agricultural produces) and other
items/goods of fungible nature. Such offer is made available at a reasonable
transaction cost, which represents an efficient-market hypothesis.

Financial market is a meeting ground for the market players, viz. the buyers
and the sellers interested in trading in various financial instruments and
commodities are gathered together. Markets may be classified into two
categories,
• General market, where different kinds of instruments and
commodities are traded and
• Specialized market, which is meant for trading in specific
instrument/commodity.

Definition: Financial Market refers to a marketplace, where creation and

trading of financial assets, such as shares, debentures, bonds, derivatives,
currencies, etc. take place. It plays a crucial role in allocating limited resources, in
the country’s economy. It acts as an intermediary between the savers and
investors by mobilising funds between them.

The financial market provides a platform to the buyers and sellers, to meet,
for trading assets at a price determined by the demand and supply forces.
 Functions of Financial Market
The functions of the financial market are explained with the help of points below:

• It facilitates mobilisation of savings and puts it to the most productive

uses.
• It helps in determining the price of the securities. The frequent
interaction between investors helps in fixing the price of securities, on the
basis of their demand and supply in the market.
• It provides liquidity to tradable assets, by facilitating the exchange, as the
investors can readily sell their securities and convert assets into cash.
• It saves the time, money and efforts of the parties, as they don’t have to
waste resources to find probable buyers or sellers of securities. Further, it
reduces cost by providing valuable information, regarding the securities
traded in the financial market.
The financial market may or may not have a physical location, i.e. the
exchange of asset between the parties can also take place over the internet or
phone also.

Classification of Financial Market

By Nature of Claim
 o Debt Market: The market where fixed claims or debt instruments,
such as debentures or bonds are bought and sold between investors.
o Equity Market: Equity market is a market wherein the investors
deal in equity instruments. It is the market for residual claims.
2. By Maturity of Claim
o Money Market: The market where monetary assets such as
commercial paper, certificate of deposits, treasury bills, etc. which
mature within a year, are traded is called money market. It is the
market for short-term funds. No such market exist physically; the
transactions are performed over a virtual network, i.e. fax, internet
or phone.
o Capital Market: The market where medium and long term financial
assets are traded in the capital market. It is divided into two types:
▪ Primary Market: A financial market, wherein the company
listed on an exchange, for the first time, issues new security
or already listed company brings the fresh issue.
▪ Secondary Market: Alternately known as the Stock market,
a secondary market is an organised marketplace, wherein
already issued securities are traded between investors, such
asindividuals, merchant bankers, stockbrokers and mutual funds.
3. By Timing of Delivery
o Cash Market: The market where the transaction between buyers
and sellers are settled in real-time.
o Futures Market: Futures market is one where the delivery or
settlement of commodities takes place at a future specified date.
4. By Organizational Structure
o Exchange-Traded Market: A financial market, which has a
centralised organisation with the standardised procedure.
o Over-the-Counter Market: An OTC is characterised by a
decentralised organisation, having customised procedures.
Since last few years, the role of the financial market has taken a drastic
change, due to a number of factors such as low cost of transactions, high liquidity,
investor protection, transparency in pricing information, adequate legal
procedures for settling disputes, etc.
Structure of Financial Market in India
There are two main types of financial market where majority of trading is
happening. The first one is money market and second one is capital market.

2. Money Market

Money market is a type of market which trade in such securities which has a
short maturity periods (less than one year). Such securities are often risk free. As
their maturity periods are smaller (more liquid), and the risk of loss (volatility) is
also smaller, hence their yield is also less. Common men generally invest in
money market through money market mutual funds.

Securities which trade in money market are T-Bills, Certificate of Deposits

(CD’s), Commercial Papers (CP’s) , Repo etc. Read: Invest risk free & earn high
returns.
3. Capital Market

On one hand Indian household has small savings. On other other hand
corporates need funds to meet their capital requirements. If an Indian household
want to invest in business, it can be done through the security market. How? By
buying stocks, bonds from the capital market (stock market). Capital market has
further two branchings.

• (a) Primary Market: This market is also called the new issue market.
Company raise capital here to fund its business activity. In the primary
market, companies issue their securities for the first time to public (in
form of shares or bonds). It is here where the IPO’s are issued by
companies.
• (b) Secondary Market: Households who’ve bought the security in
primary market can sell (exit) it in secondary market. When we say “stock
exchange” we are actually referring to the secondary market. Here the
already issued securities are traded between buyers and sellers
independent of the issuers intervention. If the issuer (company) wants to
buyback its shares, they have to do it in secondary market.
4. Banking System

Banks and financial institution is a part of financial market. The banking

system consists of commercial banks, co-operative banks, payment banks, small
finance banks etc. All the banks are overall regulated by the Reserve Bank of
 India (RBI). All types of banks along with RBI makes a banking system.

The primary function of banks is to collect deposits from public (lenders

with surplus money), and give credits. The credits are offered in form of loans to
individuals, companies etc who need capital. In this role, the bank acts as an
intermediary.

While issuing the loans, banks also checks the borrowers credit worthiness.
If a borrower is credit worthy, loan will be disbursed.

5. Pension Market

This market caters to the need of elderly. It provides securities tailor made
to benefit the elderly population. As on today, still majority of Indian customers
do not avail retirement benefits. Pension market aims to include all such people
who has still not come under the ambit of retirement benefits.

People who work for government, or are employed by private companies

are covered under NPS, EPF or PPF. But a large majority of self-employed
people do not avail the retirement benefits. Pension market aims to include even
them here.
6. Insurance Market:

Like pension market, insurance market also has a small penetration in India.
People who buy insurance mainly do it to get tax benefits (like life insurance).
There are other who buy insurance as it is obligatory (like motor insurance). But
insurance market is growing. With rise of financial literacy, and rise in purchasing
power of the population, insurance products are selling more these days. Insurance
products like medical policies, motor policies, term plans etc are picking demand.

7. Foreign Exchange Market

Forex (Foreign Exchange) Market is an online place where people can trade
in currencies. As this market deals with currencies, it is the most liquid market of
all. Hence traders and speculators love Forex market.

As exchange rate of currencies vary, people trade between currencies to

take advantage of the rate fluctuations. The trade happens in Foreign Exchange
Market. Every country has their own Forex market. All such markets are
connected online – giving rise to a giant, decentralised global forex market.

Indian law permits forex trading only in currency derivatives. In India, RBI
and SEBI strictly controls trading in foreign currencies. Hence, Forex Trading in
India is not as popular as stock market or money market. But Forex trading still
happens in India. As per RBI rules, forex trading through currency derivatives is
allowed. Currency pairs available for derivative trading are USDINR,
EUROINR, GBPINR, JPRINR.

To start trading, one must open the accounts with those brokers who have
been permitted to trade in currency derivatives. Few such approved brokers are
listed below. A more comprehensive list is available in SEBI’s website.

• Angel Broking Limited.

• Axis Bank.
• Bajaj Financial Securities.
 • Bank of India.
• Bank of Baroda.
• ICICI Bank.
• HDFC Bank.
• Etc…

8. Commodity Market

Commodity trading takes place in the following exchanges in India:

S Name Traded Commodities

L
1 MCX : Multi Bullion, metals, fibre, energy, spices, plantations, pulses,
Commodity Exchange petrochemicals, cereals among others

2 ICEX : Indian Gold, silver, diamond, copper, lead, crude oil, natural gas,
Commodity Exchange mustard, soya bean, jute, iron ore.
3 NCDEX : National Cereals, pulses, fibres, oils & oil seeds, spices, gold, silver,
Commodity and steel,
Derivatives Exchange copper, crude oil, and brent crude oil among others.

4 NMCE : National Castor seeds, rapeseed, mustard, soya bean, sesame, copra,
Multi Commodity black pepper, gram, gold, aluminium, rubber, copper, lead,
Exchange zinc, jute, and coffee among others
Who are the Regulators of Financial Market?

The process of regulating the Indian financial market is a Top Down approach. It
starts from the Finance Ministry of India. The head of finance ministry is the Finance
Minister. Under the umbrella of Finance Ministry comes the following regulatory
bodies:

• RBI: Reserve Bank of India (RBI) makes and regulates the Monitory policies,
Forex policies, Credit policies, and also regulates all banks. The control of
RBI over these policies in turn influences the supply of money & credit in the
market. This control in turn influences the interest rates (of deposits, loans
etc). Read: About a flaw in banking system.
• SEBI: The Security and Exchange Board of India (SEBI) is the main
regulatory which regulates the primary and secondary market (stock
exchange etc).
• IRDAI: The Insurance Regulatory and Development Authority of India
(IRDAI) regulates the insurance sector of India. It also gives licence to
insurance companies. IRDAI also controls the “Tariff Advisory
Committee”. This committee in turn decides the price of general insurance
products. IRDAI also regulates how the insurance funds should be invested by
insurance companies.
• PFRDA: The Pension Fund Regulatory and Development Authority
(PFRDA) regulates the pension sector of India. It was PFRDA who has
designed the structure of pension products like NPS, EPF and PPF. It is
PFRDA which has decided the constituents of National Pension System
(NPS). PFRDA has the responsibility of registering participants of pension
fund like custodians, CRA, trustee bank, fund managers etc.
Participants of the financial market

• Regulators (regulatory and supervisory institutions). Establishments that

don’t take direct part in transactions (that is why they can’t be referred to
intermediaries), but the perform a controlling function. The supervisory
function is also carried out by the central bank and the state government, but it
can also be a separate institution, like a self-regulatory organization (SRO).

• Financial Services Companies (organizations providing financial market

services and financial intermediaries). These are institutions involved in
organizational work: currency, stock and commodity exchanges, brokers,
underwriters, auditors, depositories, registrars, clearing and consulting
companies.

• Banks (financial intermediaries). They are intermediaries involved in the

capital distribution, market regulation and supervision for the established rules
compliance.

• Legal entities (lenders, investors, borrowers). The most extensive group of

participants: companies engaged in the placement of clients' pension savings,
investment services, insurance companies, hedge funds, trust management
companies, brokers, dealers, individual lending organizations, companies
engaged in any type of financial activity, participating the in money turnover.

• Individuals (lenders, borrowers, investors): traders, speculators, individual

asset managers, long-term investors, and just ordinary people, as it was
mentioned at the beginning of the part.]
Functions of Financial Markets
Financial markets are expected to perform the following functions :

1) Mobilization of Savings and their Channelization into more

Productive Uses :
Financial markets encourage people to save more, as they act as a conduit for
channelizing household savings. Appropriate use of idle cash is ensured by deploying
them at places where they are required most. They also provide suitable returns to the
investors. This process is carried out through the help of a number of financial
instruments, which are designed to cater the needs of various categories of investors.

2) Facilitates Price Discovery :

The determinants of the price of any goods or services are the market forces, viz.
demand of a specific product or service and supply thereof in the market. The same
principle is applicable in the cases of financial instruments, i.e. their price is also
determined by their demand and their availability. An investor may, therefore, make
an attempt from time to time to ascertain the price of the financial instruments held by
him. The financial markets are facilitators of such price discovery in respect of goods,
services, and securities.
3) Provides Liquidity to Financial Assets :
Markets are the places where the market players (traders in various
commodities, including securities) are present for entering into appropriate actions,
i.e. buying or selling commodities/securities. In view of the above, securities continue
to be liquid; it means they can be bought or sold easily. This factor elevates the
confidence of the existing as well as potential investors.

4) Reduces Transactions Cost :

At the time of taking a trading decision (buying or selling), a host of
data/information is required by the trader. Gathering such data/information from
different independent sources is a challenging task, requiring a lot of time and money.
However, such data/information are readily available in the financial markets, which
can be obtained without much loss of time and money. As a result, the cost of
transaction is kept at the minimum possible level.

5) Assist in Maintaining Balanced Economic Growth :

Financial markets are important links between the investors on one hand, and
savers on the other. Therefore, they facilitate economic growth of a country in a
balanced manner. They are also an effective medium through which resources are
distributed among-st those who require them. In the process, technological up
gradation for the purpose of growth takes place on a regular and sustainable basis.
Features of Financial Market
Financial markets are characterized by the following Features :
1) Large Volume of Transactions :
One of the salient features of the financial markets pertains to the high level of
transaction volumes, and the pace at which various financial resources can move
between different markets.

2) Various Segments :
Financial markets are composed of a number of sub-divisions, e.g. equities
market, debts/bonds market, derivatives market, etc. Each of such sub- divisions may
be further divided into the primary market and secondary market. Investment
decisions are generally taken by the savers on the basis of risk perception and benefits
accrued there from.

3) Instant Arbitrage :
Due to the fact that there are a number of markets and a number of financial
instruments in existence, there is enough opportunity for quick arbitrage, if a proper
check is kept on the market movements.

4) Volatility :
Movements of financial markets are unpredictable, as they are quite sensitive to
any political/economic development, either domestic or global. Any negative/positive
development in the political/economic arena or even in respect of a specific
company/group of companies may impact the markets either way. Instances of
distress selling or panic buying are common place news in markets.

5) Dominated by Financial Intermediaries :

Most of the major/big players in markets are financial intermediaries; they take
investment decisions on behalf of their clients: At times, the risks involved in those
investment decisions are also borne by such intermediaries.
6) Negative Externalities :
Another hallmark of the financial markets is their association with negative
externalities. Any negative development in one of the market segments is likely to
have a contagious effect not only on other financial market segments, but also on non-
financial markets

7) Integration with Worldwide Financial Markets :

Of late, the domestic financial markets and the global financial markets are
under the process of assimilation with each other. Any positive or negative sentiment
of one market is bound to impact the other one. As a result, markets do not operate on
standalone basis anymore. Sub-prime crisis of USA (2008) is a burning example of
such integration.
Types of Financial Market
Financial markets may be classified into the following categories. Such
categorization has been made on the basis of the tenure of credit requirements and the
functions carried out by such markets :

1) Capital Market :
Capital market is an important segment of any financial market. Financial
assets/instruments having long-term maturity, generally more than one year, are dealt
with in this segment. Financial instruments having maturity of less than one year are
referred to as money market instruments, and are dealt with in another segment of
financial market, i.e. money market.
Capital market may be divided into two components, viz. primary market and
secondary market. While the new issues of equities or debt instruments are dealt with
in the primary market, the secondary market deals with the trading of existing or
earlier issued instruments.
Another way of classifying the capital market may be dividing it into stock
market (which deals with the equities) and bond market (which deals with the debt
instruments).

2) Money Market :
Money market is another segment of the financial market, in which the financial
instruments characterized by their high liquidity and short maturities, are traded. The
participants of this market use it for short-term borrowing and lending; the short-term
being in the range of 'overnight' to 'under one year'.

Advantages of Financial Market

A pivotal role is played by the financial markets in channelizing the peoples'
savings and diverting the same for the purpose of various economic activities, like
manufacturing of goods and provisions of services. 'Cost of credit' and 'return on
investments' are the two important indicators/factors impacting the player of the
financial markets (i.e. manufacturers and consumers). They facilitate channelization
of funds from those who have surplus, i.e. household/business savers to those who
needed them, e.g. individual consumers, business entities, governments, investors,
etc.
Similarly, comprehensive and vibrant financial markets coupled with the
presence of financial institutions creates an environment, wherein smooth flow of
funds takes place between different countries. The financial markets are
advantageous for investors as well as the corporate in the following manner:
1) Advantages to Investors :
• Buyers and sellers of various securities are brought together by providing
them with a common platform, which in turn ensures the marketability of
securities. In other words, buying and selling of securities can be done
conveniently, without any hassle.
• The prices of various securities are disclosed/quoted on a regular basis by the
stock exchanges in a transparent manner. This gives an opportunity to the
existing/potential investors to take their investment decisions in the most
profitable manner.
• The stock exchanges have an inbuilt system of taking care of the investors'
interest. In the cases of any fraud or default, the investors are compensated
appropriately.

2) Advantages to Corporate :
• Through the financial markets, the level of public awareness with regard to
the corporate and their activities, (products and services offered by them) is
increased manifolds.
• Corporate are given an opportunity to implement various share option
schemes for the benefits of their employees.
• Long-term financial support may be extended to needy corporate for the
acquisition of fixed assets like land, building, machinery, vehicles, etc.
• Financial markets act as a facilitator for the diversification activities
undertaken by a corporate, by permitting sharing of the associated risks in an
efficient manner.
• They also act as catalysts for the overall growth of the business sentiments by
inspiring and providing appropriate environment for the conduct of business.

Disadvantages of Financial Market

Financial markets suffer from the following deficiencies :
• They lack stability, and as such they are exposed to volatility.
• The investments made by the investors are subject to market risks.
• Financial markets are likely to face 'free-rider problem', a situation wherein no
market participant shows his willingness to contribute towards the cost of
something; instead everyone hopes that someone else will bear the cost.
Financial Investment
It is human nature to plan for rainy days. An individual must plan and keep
aside some amount of money for any unavoidable circumstance which might arise in
days to come. Future is uncertain and one must invest wisely to avoid financial crisis
in any point of time.

what is investment ?
Investment is nothing but goods or commodities purchased today to be used
in future or at the times of crisis. An individual must plan his future well to ensure
happiness for himself as well as his immediate family members. Consuming
everything today and saving nothing for the future is foolish. Not everyday is a bed of
roses, you never know what your future has in store for you.

Objectives of Investment
The need for investment will grow as you move ahead in life. Growing
responsibilities will demand an increase in investment. The primary objectives of
investment are listed below:
• Safeguard your Money
Investing keeps your money safe from immediate and unnecessary
expenditures. It also helps you keep your money safe from inflation
effects. Inflation erodes the value of your money unless it is invested in an
interest-earning asset. Thus, investing will help you automatically keep up
with inflation.
• Grow your Savings
Investment is the only way to start growing your invested money. It allows
your money to earn interest and if you keep the interest invested it will also
start to earn interest.
• Build Funds for Emergencies
Life is usually a series of ups and downs. Few times you are earning decent
and saving money while other times you need a large sum for an emergency.
Building investment pools help you on such rainy days.
• Secures your Retired Life
Retired life is where you don’t have a source of income to sustain your life.
Once you have built a retirement corpus, you can experience the freedom that
comes with it.
• Save Tax
Investment in tax-saving instruments like life insurance plans, ULIPs, PPF,
NPS, etc allows you to claim deductions on your taxable income. Thus,
investing in specific assets can help you reduce your tax liability. Many of
these investments also help you reduce your future tax with tax-free maturity
values.
• Fund Bigger Life Goals
 Your monthly income will not be enough to purchase your next car or build a
house for your family. However, if you invest a small sum in a few years both
could be possible.

What is Financial Investment ?

Financial investment refers to putting aside a fixed amount of money and expecting
some kind of gain out of it within a stipulated time frame.

What is Important in Financial Investment ?

Planning plays a pivotal role in Financial Investment. Don’t just invest just for the
sake of investing. Understand why you really need to invest money? Investing just
because your friend has said you to do so is foolish. Careful analysis and focused
approach are mandatory before investing.

Explore all the investment plans available in the market. Go through the pros and
cons of each plan in detail. Analyze the risk factors carefully before finalizing the
plan. Invest in something which will give you the maximum return.

Appoint a good financial planning manager who takes care of all your
investment needs. He must understand your requirement, family income, stability etc
to decide the best plan for you.

One needs to be a little careful and sensible while investing. An individual must read
the documents carefully before investing.

Types of Financial Investment

An individual can invest in any of the following:

▪ Mutual Funds
▪ Fixed Deposits
▪ Bonds
▪ Stock
▪ Equities
▪ Real Estate (Residential/Commercial Property)
▪ Gold /Silver
▪ Precious stones
Need for Financial Investment
• Financial Investment ensures all your dreams turn real and you enjoy life to
the fullest without actually worrying about the future.

• Financial investment ensures you save for rainy days. Careful investment
makes your future secure.

• Financial investment controls an individual’s spending pattern. It decides how

and what amount one should spend so that he has sufficient money for future.

Financial Investment Options

Short-term investing
Savings bank account
Use only for short-term (less than 30 days) surpluses

Money market funds

Offer better returns than savings account without compromising liquidity

Bank fixed deposits

For investors with low risk appetite, best for 6-12 months investment period
Bonds and debentures
Option for large investments or to avail of some capital gains tax rebates

Mutual Funds
Unless you rate high on our Investment IQ Test, use mutual funds as a vehicle to
invest

Life Insurance Policies

Don't buy life insurance solely as an investment

Equity shares
Maximum returns over the long-term, invest funds you do not need for at least five
years

1. Savings Bank Account

Use only for short-term (less than 30 days) surpluses
Often the first banking product people use, savings accounts offer low interest
(4%-5% p.a.), making them only marginally better than safe deposit lockers

2. Money Market Funds (also known as liquid funds)

Offer better returns than savings account without compromising liquidity
Money market funds are a specialized form of mutual funds that invest in extremely
short-term fixed income instruments. Unlike most mutual funds, money market
funds are primarily oriented towards protecting your capital and then, aim to
maximise returns.
Money market funds usually yield better returns than savings accounts, but lower
than bank fixed deposits. With the flexibility to issue cheques from a money
market fund account now available, explore this option before putting your
money in a savings account.

3. Bank Fixed Deposit (Bank FDs)

For investors with low risk appetite, best for 6-12 months investment period

Also referred to as term deposits, this product would be offered by all banks.
Minimum investment period for bank FDs is 30 days.

The ideal investment time for bank FDs is 6 to 12 months as normally interest on
bank less than 6 months bank FDs is likely to be lower than money market fund
returns.

It is important to plan your investment time frame while investing in this instrument
because early withdrawals typically carry a penalty.
Long-term investing

1. Post Office Savings Schemes (POSS)

Low risk and no TDS

POSS are popular because they typically yield a higher return than bank FDs. The
monthly income plan could suit you if you are a retired individual or have regular
income needs.

Besides the low (Government) risk, the fact that there is no tax deducted at source
(TDS) in a POSS is amongst the key attractive features.

The Post Office offers various schemes that include National Savings Certificates
(NSC), National Savings Scheme(NSS), Kisan Vikas Patra, Monthly Income Scheme
and Recurring Deposit Scheme.

2. Public Provident Fund (PPF):

Best fixed-income investment for high tax payers

PPF is a very attractive fixed income investment option for small investors primarily
because of –
- An 11% post-tax return - effective pre-tax rate of 15.7% assuming a 30% tax rate
- A tax-rebate - deduction of 20% of the amount invested from your tax liability
for the year, subject to a maximum Rs60,000 for a tax rebate
- Low risk - risk attached is Government risk

Lack of liquidity is a big negative. You can withdraw your investment made in Year 1
only in Year 7 (although there are some loan options that begin earlier).

If you are willing to live with poor liquidity, you should invest as much as you can in
this scheme before looking for other fixed income investment options.

3. Company Fixed Deposits (FDs):

Option to maximise returns within a fixed-income portfolio

FDs are instruments used by companies to borrow from small investors. Typically
FDs are open throughout the year. Invest in FDs only if you have surplus funds for
more than 12 months. Select your investment period carefully as most FDs are not
encashable prior to their maturity.

Just as in any other instrument, risk is an embedded feature of FDs, more so because it
is not mandatory for non-finance companies to get a credit rating for this instrument.
Investors should consciously (either though a credit rating or through an expert) select
the companies they invest in. Quite a few small investors have lost their life's savings
by investing in FDs issued by companies that have run into financial problems.

4. Bonds and Debentures

Option for large investments or to avail of some capital gains tax rebates

Besides company FDs, bonds and debentures are the other fixed-income
instruments issued by companies. As a result of an illiquid secondary market and a
lack-lustre primary market, investment in these instruments is largely skewed
towards issues from financial institutions.

While you might find some high-yielding options in the secondary market, if you do
not want the problems associated with bad deliveries and the transfer process or you
want to invest a large sum of money, the primary market is the better option.

5. Mutual Funds:
Unless you rate high on our Investment IQ Test, use mutual funds as a vehicle to
invest

Have you ever made an investment in partnership with someone else? Well, mutual
funds work on more or less the same principles. Investors pool together their money
to buy stocks, bonds, or any other investments.

Investing through mutual funds allows an investor to -

- Avail the services of a professional money manager (who manages the

mutual fund)
- Access a diversified portfolio despite making a limited investment
- Our primer Investing in Mutual Funds should educate you a lot more on the
benefits of investing in mutual funds and strategies you could employ.

6. Life Insurance Policies

Don't buy life insurance solely as an investment

Life insurance premiums, depending upon the policy selected, include the costs of -

1) death-benefit coverage
2) built-in investment returns (average 8.0% to 9.5% post-tax)
3) significant overheads, including commissions.

This implies that if you buy insurance solely as an investment, you are incurring costs
that you would not incur in alternate investment options.
It is, however, important to insure your life if your financial needs and profile so
require. Use our Are You Adequately Insured planning tool to find out if you need life
insurance, and if yes, how much.

7.Equity Shares:
Maximum returns over the long-term, invest funds you do not need for at least five
years
There are two ways in which you can invest in equities-

- through the secondary market (by buying shares that are listed on the stock
exchanges)
- through the primary market (by applying for shares that are offered to the
public)
- Over the long term, equity shares have offered the maximum
return to investors. As an investment option, investing in equity
shares is also perceived to carry a high level of risk.
Factors to Consider Before Investing

Now that you understand investment basics, you must also learn to choose the best
investment option as per your financial goals. Listed below are a few steps to help
you find the best investment option as per your life goals:

• Define your Investment Goals

Every financial journey is different, and hence everyone's investment goals
are different. The first thing you can do is define your investment goals.
This will help you with the following:
o How much money do you need in the future?

o How much you can invest now?

o How long do you need to invest?

• Choose Investment Options as per Goals

Once your goals are defined, select the investment option. Your choice will
depend mostly on the time available for a particular milestone or event in
life. For example:
o If your goal is to buy a car after 3 years, you can invest your savings
in a debt mutual fund and achieve your goal.
o Buying a house after 10 years means you can invest in equity
funds and stocks.

• Ensure Higher Tax Savings

Long-term investment options can also help you save on tax:

o Investments like PPF and ULIPs help you reduce your taxable
income when you invest in them.
o Equity mutual funds, gold ETFs, and debt mutual funds enjoy
indexation benefits on capital gains if you hold them long
enough.

• Insure Important Family Goals

Certain family goals like a child’s higher education and marriage cannot be
left to chance. So, you should choose investment options that offer good
growth as well as protection for the goal.
o Investment options like ULIPs have a life insurance cover
with diversified investment options.
o Guaranteed Return Plans are safe long-term investments that
offer guaranteed returns on the investment that you make.
 Investment is essential to grow your money and create wealth. It will help
you achieve your life goals. There are many investment options available in India,
and you must understand the purpose, the risk, and the reward associated with
them. You should pick an option according to your investment goals and needs.
What Is Investing?
Investing, broadly, is putting money to work for a period of time in some
sort of project or undertaking in order to generate positive returns (i.e., profits that
exceed the amount of the initial investment). It is the act of allocating resources,
usually capital (i.e., money), with the expectation of generating an income, profit,
or gains.

One can invest in many types of endeavors (either directly or indirectly)

such as using money to start a business, or in assets such as purchasing real
estate in hopes of generating rental income and/or reselling it later at a higher
price.

Investing differs from saving in that the money used is put to work,
meaning that there is some implicit risk that the related project(s) may fail,
resulting in a loss of money. Investing also differs from speculation in that
with the latter, the money is not put to work per-se, but is betting on the short-
term price fluctuations.

• Investing involves deploying capital (money) toward projects or activities

that are expected to generate a positive return over time.
• The type of returns generated depends on the type of project or asset; real
estate can produce both rents and capital gains; many stocks pay
quarterly dividends; bonds tend to pay regular interest.
• In investing, risk and return are two sides of the same coin; low risk
generally means low expected returns, while higher returns are usually
accompanied by higher risk.
• Investors can take the do-it-yourself approach or employ the services of
a professional money manager.
• Whether buying a security qualifies as investing or speculation depends on
three factors—the amount of risk taken, the holding period, and the source
of returns.

Types of Investments
Today, investment is mostly associated with financial instruments that allow
individuals or businesses to raise and deploy capital to firms. These firms then
rake that capital and use it for growth or profit-generating activities.

While the universe of investments is a vast one, here are the most common
types of investments:
Stocks
A buyer of a company's stock becomes a fractional owner of that company.
Owners of a company's stock are known as its shareholders and can participate in
its growth and success through appreciation in the stock price and regular
dividends paid out of the company's profits.
Bonds
Bonds are debt obligations of entities, such as governments, municipalities,
and corporations. Buying a bond implies that you hold a share of an entity's debt
and are entitled to receive periodic interest payments and the return of the bond's
face value when it matures.
Funds
Funds are pooled instruments managed by investment managers that enable
investors to invest in stocks, bonds, preferred shares, commodities, etc. Two of
the most common types of funds are mutual funds and exchange-traded funds or
ETFs. Mutual funds do not trade on an exchange and are valued at the end of the
trading day; ETFs trade on stock exchanges and, like stocks, are valued constantly
throughout the trading day. Mutual funds and ETFs can either passively track
indices, such as the S&P 500 or the Dow Jones Industrial Average, or can be
actively managed by fund managers.
Investment Trusts
Trusts are another type of pooled investment. Real Estate Investment Trusts
(REITs) are one of the most popular in this category. REITs invest in commercial
or residential properties and pay regular distributions to their investors from the
rental income received from these properties. REITs trade on stock exchanges
and thus offer their investors the advantage of instant liquidity.
Alternative Investments
Alternative investments is a catch-all category that includes hedge funds and
private equity. Hedge funds are so-called because they can hedge their investment
bets by going long and short on stocks and other investments. Private equity
enables companies to raise capital without going public. Hedge funds and private
equity were typically only available to affluent investors deemed "accredited
investors" who met certain income and net worth requirements. However, in
recent years, alternative investments have been introduced in fund formats that
are accessible to retail investors.
Options and Other Derivatives
Derivatives are financial instruments that derive their value from another
instrument, such as a stock or index. Options contracts are a popular derivative
that gives the buyer the right but not the obligation to buy or sell a security at a
fixed price within a specific time period. Derivatives usually employ leverage,
making them a high-risk, high-reward proposition.

Commodities
Commodities include metals, oil, grain, and animal products, as well as
financial instruments and currencies. They can either be traded through
commodity futures— which are agreements to buy or sell a specific quantity of a
commodity at a specified price on a particular future date—or ETFs. Commodities
can be used for hedging risk or for speculative purposes.

Comparing Investing Styles

• Active versus passive investing: The goal of active investing is to "beat the
index" by actively managing the investment portfolio. Passive investing, on
the other hand, advocates a passive approach, such as buying an index fund,
in tacit recognition of the fact that it is difficult to beat the market
consistently. While there are pros and cons to both approaches, in reality, few
fund managers beat their benchmarks consistently enough to justify the
higher costs of active management.
• Growth versus value: Growth investors prefer to invest in high-growth
companies, which typically have higher valuation ratios such as Price-
Earnings (P/E) than value companies. Value investors look for companies
that have significantly lower PE's and higher dividend yields than growth
companies because they may be out of favor with investors, either
temporarily or for a prolonged period of time.

How to Invest
Do-It-Yourself Investing

The question of "how to invest" boils down to whether you are a Do-It-Yourself
(DIY) kind of investor or would prefer to have your money managed by a
professional.
Many investors who prefer to manage their money themselves have accounts
at discount or online brokerages because of their low commissions and the
ease of executing trades on their platforms.

DIY investing is sometimes called self-directed investing, and requires a fair

amount of education, skill, time commitment, and the ability to control one's
emotions. If these attributes do not describe you well, it may be smarter to let a
professional help manage your investments.

Professionally-Managed Investing
Investors who prefer professional money management generally have wealth
managers looking after their investments. Wealth managers usually charge their
clients a percentage of assets under management (AUM) as their fees. While
professional money management is more expensive than managing money by
oneself, such investors don't mind paying for the convenience of delegating the
research, investment decision-making, and trading to an expert.
Robo advisor Investing
Some investors opt to invest based on suggestions from automated financial
advisors. Powered by algorithms and artificial intelligence, roboadvisors gather
critical information about the investor and their risk profile to make suitable
recommendations. With little to no human interference, roboadvisors offer a cost-
effective way of investing with services similar to what a human investment
advisor offers. With advancements in technology, robo advisors are capable of
more than selecting investments. They can also help people develop retirement
plans and manage trusts and other retirement accounts, such as 401(k)s.

A Brief History of Investing

While the concept of investing has been around for millennia, investing in its
present form can find its roots in the period between the 17th and 18th centuries,
when the development of the first public markets connected investors with
investment opportunities. The Amsterdam Stock Exchange was established in
1602, and
the New York Stock Exchange (NYSE) in 1792.

Industrial Revolution Investing

The Industrial Revolutions of 1760-1840 and 1860-1914 resulted in greater
prosperity as a result of which people amassed savings that could be invested,
fostering the development of an advanced banking system. Most of the
established banks that dominate the investing world began in the 1800s, including
Goldman Sachs and J.P. Morgan.

20th Century Investing

The 20th century saw new ground being broken in investment theory, with the
development of new concepts in asset pricing, portfolio theory, and risk
management. In the second half of the 20th century, many new investment
vehicles were introduced, including hedge funds, private equity, venture capital,
REITs, and ETFs.
In the 1990s, the rapid spread of the Internet made online trading and
research capabilities accessible to the general public, completing the
democratization of investing that had commenced more than a century ago.

21st Century Investing

The bursting of the dot.com bubble—a bubble that created a new generation of
millionaires from investments in technology-driven and online business stocks—
ushered in the 21st century and perhaps set the scene for what was to come. In
2001, the collapse of Enron took center stage, with its full display of fraud that
bankrupted the company and its accounting firm, Arthur Andersen, as well as
many of its investors.

One of the most notable events in the 21st century, or history for that matter, is
the Great Recession (2007-2009) when an overwhelming number of failed
investments in mortgage-backed securities crippled economies around the
world.
Well-known banks and investment firms went under, foreclosures surmounted,
and the wealth gap widened.

The 21st century also opened up the world of investing to newcomers and
unconventional investors by saturating the market with discount online
investment companies and free-trading apps, such as Robinhood.
 Money Market in India

Meaning of Money Market:

Money market is a market for short-term funds. We define the short-term as a period of 364
days or less. In other words, the borrowing and repayment take place in 364 days or less.
The manufacturers need two types of finance: finance to meet daily expenses like purchase
of raw material, payment of wages, excise duty, electricity charges etc., and finance to meet
capital expenditure like purchase of machinery, installation of pollution control equipment
etc.
The first category of finance is invested in the production process for a short- period of
time. The market where such short-time finance is borrowed and lent is called ‘money
market’. Almost every concern in the financial system, be it a financial institution, business
firm, a corporation or a government body, has a recurring problem of liquidity
management, mainly because the timing of the expenditures rarely synchronize with that of
the receipts.
The most important function of the money market is to bridge this liquidity gap. Thus,
business and finance firms can tide over the mismatches of cash receipts and cash
expenditures by purchasing (or selling) the shortfall (or surplus) of funds in the money
market.
In simple words, the money market is an avenue for borrowing and lending for the short-
term. While on one hand the money market helps in shifting vast sums of money between
banks, on the other hand, it provides a means by which the surplus of funds of the cash rich
corporations and other institutions can be used (at a cost) by banks, corporations and other
institutions which need short-term money.
A supplier of funds to the money market can be virtually anyone with a temporary excess of
funds. The government bonds, corporate bonds and bonds issued by banks are examples of
money market instruments, where the instrument has a ready market like the equity shares
of a listed company. The money markets refer to the market for short-term securities (one
year or less in original maturity) such as treasury bills, certificates of deposits, commercial
paper etc. Money market instruments are more liquid in nature.
The money market is a market where money and highly liquid marketable securities are
bought and sold. It is not a place like the stock market but an activity and all the trading is
done through telephones. One of the important features of the money market is honor of
commitment and creditworthiness.
The money market form an important part of the financial system by providing an avenue
for bringing equilibrium of the surplus funds of lenders and the requirements of borrowers
for short periods ranging from overnight up to a year.
Money market provides a non-inflationary way to finance government deficits and
allow governments to implement monetary policy through open market operations and
provide a market based reference point for setting interest rate.

Features of Money Market:

Following are the features of money market:

1. Money market has no geographical constraints as that of a stock exchange.

The financial institutions dealing in monetary assets may be spread over a
wide geographical area.
2. Even though there are various centers of money market such as Mumbai,
Calcutta, Chennai, etc., they are not separate independent markets but are inter-
linked and interrelated.
3. It relates to all dealings in money or monetary assets.
4. It is a market purely for short-term funds.
5. It is not a single homogeneous market. There are various sub-markets such
as Call money market, Bill market, etc.
6. Money market establishes a link between RBI and banks and provides
information of monetary policy and management.
7. Transactions can be conducted without the help of brokers.
8. Variety of instruments are traded in money market.

Objectives of Money Market:

Following are the objectives of money market:

1. To cater to the requirements of borrowers for short term funds, and

provide liquidity to the lenders of these funds.
2. To provide parking place for temporary employment of surplus fund.
3. To provide facility to overcome short term deficits.
4. To enable the central bank to influence and regulate liquidity in the
economy.
5. To help the government to implement its monetary policy through open
market operation.
Characteristics of the Indian Money Market
Some of the key characteristics or features of the Indian Money Market are as follows:

1. Segmented Structure: The Indian money market can be categorised into organised
and unorganised sectors. The organised sector includes institutions like the Reserve
Bank of India (RBI), commercial banks, cooperative banks, and other financial
institutions. However, the unorganised sector comprises indigenous bankers and
money lenders.
2. Regulatory Oversight by the RBI: The Reserve Bank of India plays a pivotal role
in regulating and supervising the Indian money market. It controls the money supply in
the economy, manages liquidity, and ensures the stability of the financial system.
3. Focus on Short-Term Financing: The Indian money market predominantly deals
with short-term financial instruments having maturities of up to one year. It enables
participants to fulfil their short-term funding requirements and efficiently manage
liquidity.
4. Diverse Array of Instruments: The Indian money market offers a wide range
of instruments, including treasury bills, certificates of deposit, commercial papers, call
money, etc. These instruments serve as avenues for short-term borrowing, lending, and
investment activities.
5. High Liquidity: The Indian money market is known for its high liquidity due to the
presence of diverse participants and instruments. Market participants can readily buy or
sell their holdings without significant price fluctuations.
6. Low-risk Instruments: Instruments in the Indian money market are generally
considered low-risk because of their short maturities and backing by credible issuers such
as the government, banks, and financial institutions. Consequently, they are attractive to
risk-averse investors.
7. Significance in Monetary Policy Transmission: The money market plays a critical
role in transmitting monetary policy decisions. The RBI employs various tools, such as
open market operations, repo rate, and reverse repo rate, to regulate liquidity in the
money market and influence overall interest rates in the economy.
8. Dominance of Institutional Investors: Institutional investors, including banks,
financial institutions, and mutual funds, primarily dominate the Indian money market.
Individual retail investors have limited direct participation, although they can indirectly
access the money market through mutual funds and other investment vehicles.
9. Interconnectedness with Other Financial Markets: The Indian money market
exhibits interconnections with other segments of the financial market, such as the capital
market and foreign exchange market. Funds from the money market can flow into long-
term investments or be utilised for currency trading.
10. Ongoing Infrastructure Development: The Indian money market has experienced
significant growth and development in recent years. Efforts have been made to enhance
market infrastructure, improve transparency, and introduce new instruments to cater to
the evolving needs of participants.
Importance of the Money Market

The money market is a market for short term transactions. Hence it is responsible
for the liquidity in the market. Following are the reasons why the money market is
essential:
• It maintains a balance between the supply of and demand for the monetary
transactions done in the market within a period of 6 months to one year..
• It enables funds for businesses to grow and hence is responsible for the
growth and development of the economy.
• It aids in the implementation of monetary policies.
• It helps develop trade and industry in the country. Through various money
market instruments, it finances working capital requirements. It helps develop
the trade in and out of the country.
• The short term interest rates influence long term interest rates. The money
market mobilises the resources to the capital markets by way of interest rate
control.
• It helps in the functioning of the banks. It sets the cash reserve ratio and
statutory ratio for the banks. It also engages their surplus funds towards
short term assets to maintain money supply in the market.
• The current money market conditions are the result of previous monetary
policies. Hence it acts as a guide for devising new policies regarding short
term money supply.
• Instruments like T-bills, help the government raise short term funds. Otherwise,
to fund projects, the government will have to print more currency or take loans
leading to inflation in the economy. Hence the it is also responsible for
controlling inflation.
•

What are Money Market Instruments?

Money market instruments are financial instruments that help companies, corporations,
and government bodies to raise short-term debt for their needs. The borrowers meet
their short-term needs at a low cost and the lenders benefit from interest rates and
liquidity. Money market instruments include bonds, treasury bills, certificates of
deposit, commercial paper, etc.
 Characteristics of Money Market Instruments
• It is a financial market and has no fixed geographical location.
• It is a market for short term financial needs, for example, working capital
needs.
• It’s primary players are the Reserve Bank of India (RBI), commercial banks
and financial institutions like LIC, etc.,
• The main money market instruments are Treasury bills, commercial papers,
certificate of deposits, and call money.
• It is highly liquid as it has instruments that have a maturity below one year.
• Most of the money market instruments provide fixed returns.

Types of Money Market Instruments in India

1. Treasury Bills
Treasury Bills are one of the most popular money market instruments. They have varying
short-term maturities. The Government of India issues it at a discount for 14 days to 364
days.
These instruments are issued at a discount and repaid at par at the time of maturity.
Also, a company, firm, or person can purchase TB’s. And are issued in lots of Rs.
25,000 for 14 days & 91 days and Rs. 1,00,000 for 364 days.
2. Commercial Bills
Commercial bills, also a money market instrument, works more like the bill of exchange.
Businesses issue them to meet their short-term money requirements.
These instruments provide much better liquidity. As the same can be transferred from
one person to another in case of immediate cash requirements.
3. Certificate of Deposit:
Certificate of Deposit (CD’s) is a negotiable term deposit accepted by commercial
banks. It is usually issued through a promissory note. CD’s can be issued to individuals,
corporations, trusts, etc. Also, the CD’s can be issued by scheduled commercial banks
at a discount. And the duration of these varies between 3 months to 1 year. The same,
when issued by a financial institution, is issued for a minimum of 1 year and a
maximum of 3 years.
4. Commercial Paper
Corporates issue CP’s to meet their short-term working capital requirements. Hence
serves as an alternative to borrowing from a bank. Also, the period of commercial
paper ranges from 15 days to 1 year.
The Reserve Bank of India lays down the policies related to the issue of CP’s. As a
result, a company requires RBI’s prior approval to issue a CP in the market. Also, CP
has to be issued at a discount to face value. And the market decides the discount rate.
Denomination and the size of CP:
Minimum size – Rs. 25 lakhs
Maximum size – 100% of the issuer’s working capital
5. Call Money
It is a segment of the market where scheduled commercial banks lend or borrow on short
notice (say a period of 14 days). In order to manage day-to- day cash flows.
The interest rates in the market are market-driven and hence highly sensitive to demand
and supply. Also, historically, interest rates tend to fluctuate by a large % at certain
times

Structure of Indian Money Market

(i) Broadly speaking, the money market in India comprises two sectors-
• Organised sector, and
• Unorganised sector.
(ii) The organised sector consists of the Reserve Bank of India, the State Bank
of India with its seven associates, twenty nationalised commercial banks, other
scheduled and non-scheduled commercial banks, foreign banks, and Regional
Rural Banks. It is called organised because its part is systematically
coordinated by the RBI.
(iii) Non-bank financial institutions such as the LIC, the GIC and subsidiaries,
the UTI also operate in this market, but only indirectly through banks, and not
directly.
(iv) Quasi-government bodies and large companies also make their short-
term surplus funds available to the organised market through banks.
(v) Cooperative credit institutions occupy the intermediary position between
organised and unorganised parts of the Indian money market. These institutions
have a three-tier structure. At the top, there are state cooperative banks. At the
local level, there are primary credit societies and urban cooperative banks.
Considering the size, methods of operations, and dealings with the RBI and
commercial banks, only state and central, cooperative banks should be included
in the organised sector. The cooperative societies at the local level are loosely
linked with it.
(vi) The unorganised sector consists of indigenous banks and money lenders. It
is unorganised because activities of its parts are not systematically coordinated
by the RBI.
(vii) The money lenders operate throughout the country, but without any link
among themselves.
(viii) Indigenous banks are somewhat better organised because they enjoy
rediscount facilities from the commercial banks which, in turn, have link with
the RBI. But this type of organisation represents only a loose link with the RBI.
 Constituents of Indian Money Market:

Money market is a centre where short-term funds are supplied and demanded.
Thus, the main constituents of money market are the lenders who supply and the
borrowers who demand short- term credit.
1. Supply of Funds:
There are two main sources of supply of short-term funds in the Indian money market:

(a) Unorganised indigenous sector, and

(b) Organised modern sector.
(i) Unorganized Sector:
The unorganised sector comprises numerous indigenous bankers and village
money lenders. It is unorganized because its activities are not controlled and
coordinated by the Reserve Bank of India.
(ii) Organized Sector:
The organized modern sector of Indian money market comprises:
(a) The Reserve Bank of India;
(b) The State Bank of India and its associate banks;
(c) The Indian joint stock commercial banks (scheduled and non- scheduled) of
which 20 scheduled banks have been nationalised;
(d) The exchange banks which mainly finance Indian foreign trade;
(e) Cooperative banks;
(f) Other special institutions, such as, Industrial Development Bank of India,
State Finance Corporations, National Bank for Agriculture and Rural
Development, Export-Import Bank, etc., which operate in the money market
indirectly through banks; and
(g) Quasi-government bodies and large companies also make their funds
available to the money market through banks.

In the Indian money market, the main borrowers of short-term funds are:
(a) Central Government, (b) State Governments, (c) Local bodies, such as,
municipalities, village panchayats, etc., (d) traders, industrialists, farmers,
exporters and importers, and (e) general public.

Sub-Markets of Organised Money Market:

The organised sector of Indian money market can be further classified into the
following sub- markets:
A. Call Money Market:
The most important component of organised money market is the call money
market. It deals in call loans or call money granted for one day. Since the
participants in the call money market are mostly banks, it is also called
interbank call money market.
The banks with temporary deficit of funds form the demand side and the banks
with temporary excess of funds form the supply side of the call money market.

The main features of Indian call money market are as follows:

(i) Call money market provides the institutional arrangement for making the
temporary surplus of some banks available to other banks which are temporary
in short of funds.
(ii) Mainly the banks participate in the call money market. The State Bank of
India is always on the lenders’ side of the market.
(iii) The call money market operates through brokers who always keep in touch
with banks and establish a link between the borrowing and lending banks.

(iv) The call money market is highly sensitive and competitive market. As such,
it acts as the best indicator of the liquidity position of the organised money
market.

(v) The rate of interest in the call money market is highly unstable. It quickly
rises under the pressures of excess demand for funds and quickly falls under the
pressures of excess supply of funds.

(vi) The call money market plays a vital role in removing the day-to-day
fluctuations in the reserve position of the individual banks and improving the
functioning of the banking system in the country.

B. Treasury Bill Market:

The treasury bill market deals in treasury bills which are the short-term (i.e., 91,
182 and 364 days) liability of the Government of India. Theoretically these bills
are issued to meet the short- term financial requirements of the government.
But, in reality, they have become a permanent source of funds to the
government. Every year, a portion of treasury bills are converted into long- term
bonds. Treasury bills are of two types: ad hoc and regular.

Ad hoc treasury bills are issued to the state governments, semi- government
departments and foreign central banks. They are not sold to the banks and the
general public, and are not marketable.
The regular treasury bills are sold to the banks and public and are freely
marketable. Both types of ad hoc and regular treasury bills are sold by Reserve
Bank of India on behalf of the Central Government.
The treasury bill market in India is underdeveloped as compared to the treasury
bill markets in the U.S.A. and the U.K.
In the U.S.A. and the U.K., the treasury bills are the most important money
market instrument:
(a) Treasury bills provide a risk-free, profitable and highly liquid investment
outlet for short- term, surpluses of various financial institutions;
(b) Treasury bills from an important source of raising fund for the
government; and
(c) For the central bank the treasury bills are the main instrument of open
market operations.

On the contrary, the Indian Treasury bill market has no dealers expect the
Reserve Bank of India. Besides the Reserve Bank, some treasury bills are held
by commercial banks, state government and semi-government bodies. But, these
treasury bills are not popular with the non- bank financial institutions,
corporations, and individuals mainly because of absence of a developed
treasury bill market.

C. Commercial Bill Market:

Commercial bill market deals in commercial bills issued by the firms engaged
in business. These bills are generally of three months maturity. A commercial
bill is a promise to pay a specified amount in a specified period by the buyer of
goods to the seller of the goods. The seller, who has sold his goods on credit
draws the bill and sends it to the buyer for acceptance. After the buyer or his
bank writes the word ‘accepted’ on the bill, it becomes a marketable instrument
and is sent to the seller.
The seller can now sell the bill (i.e., get it discounted) to his bank for cash. In
times of financial crisis, the bank can sell the bills to other banks or get them
rediscounted from the Reserved Bank. In India, the bill market is undeveloped
as compared to the same in advanced countries like the U.K. There is absence
of specialised institutions like acceptance houses and discount houses,
particularly dealing in acceptance and discounting business.

D. Collateral Loan Market:

Collateral loan market deals with collateral loans i.e., loans backed by security.
In the Indian collateral loan market, the commercial banks provide short- term
loans against government securities, shares and debentures of the government,
etc.

E. Certificate of Deposit and Commercial Paper Markets:

Certificate of Deposit (CD) and Commercial Paper (CP) markets deal with
certificates of deposit and commercial papers. These two instruments (CD and
CP) were introduced by Reserve Bank of India in March 1989 in order to widen
the range of money market instruments and give investors greater flexibility in
the deployment of their short-term surplus funds.
Participants in Money Market:
A large number of borrowers and lenders make up the money market. Some of the
important players are listed below:
1. Central Government:
Central Government is a borrower in the money market through the issue of
Treasury Bills (T- Bills). The T-Bills are issued through the RBI. The T- Bills
represent zero risk instruments. They are issued with tenure of 91 days (3
months), 182 days (6 months) and 364 days (1 year). Due to its risk free nature,
banks, corporates and many such institutions buy the T-Bills and lend to the
government as a part of it short- term borrowing programme.

2. Public Sector Undertakings:

Many government companies have their shares listed on stock exchanges. As
listed companies, they can issue commercial paper in order to obtain its working
capital finance. The PSUs are only borrowers in the money market. They
seldom lend their surplus due to the bureaucratic mindset.
The treasury operations of the PSUs are very inefficient with huge cash surplus
remaining idle for a long period of time.
a. Insurance Companies:
Both general and life insurance companies are usual lenders in the money
market. Being cash surplus entities, they do not borrow in the money market.
With the introduction of CBLO (Collateralized Borrowing and Lending
Obligations), they have become big investors. In between capital market
instruments and money market instruments, insurance companies invest more in
capital market instruments. As their lending programmes are for very long
periods, their role in the money market is a little less.
b. Mutual Funds:
Mutual funds offer varieties of schemes for the different investment objectives
of the public. There are many schemes known as Money Market Mutual Fund
Schemes or Liquid Schemes. These schemes have the investment objective of
investing in money market instruments.
They ensure highest liquidity to the investors by offering withdrawal by way of
a day’s notice or encashment of units through Bank ATMs. Naturally, mutual
funds invest the corpus of such schemes only in money market. They do not
borrow, but only lend or invest in the money market.
c. Banks:
Scheduled commercial banks are very big borrowers and lenders in the money
market. They borrow and lend in call money market, short-notice market, repo
and reverse repo market. They borrow in rediscounting market from the RBI and
IDBI. They lend in commercial paper market by way of buying the commercial
papers issued by corporates and listed public sector units. They also borrow
through issue of Certificate of Deposits to the corporates.
d. Corporates:
Corporates borrow by issuing commercial papers which are nothing but short-
 term promissory notes. They are issued by listed companies after obtaining the
necessary credit rating for the CP. They also lend in the CBLO market their
temporary surplus, when the interest rate rules very high in the market. They
are the lender to the banks when they buy the Certificate of Deposit issued by
the banks. In addition, they are the lenders through purchase of Treasury bills.
There are many other small players like non-banking finance companies,
primary dealers, provident funds and pension funds. They mainly invest and
borrow in the CBLO market in a small way.

Defects of the Indian Money Market

The Indian money market has been associated with several defects that hinder its
efficient functioning. Some of the defects of the Indian money market are as follows:
1. Existence of Unorganised Money Market: The Indian money market consists of
both organised and unorganised sectors. The unorganised sector, which includes
indigenous bankers and moneylenders, lacks proper regulations and operates outside
the purview of RBI. This leads to issues such as lack of transparency, high-interest
rates, and exploitation of borrowers. Borrowers may face difficulties in accessing fair
and transparent lending practices, affecting the overall efficiency of the market.
2. Absence of Cooperation amongst the Members of the Money Market: The lack
of cooperation and coordination among the various participants in the money market,
including banks, financial institutions, and the government, hampers the smooth
functioning of the market. Without effective collaboration, the market may experience
inefficiencies, liquidity problems, and a fragmented structure. Cooperative efforts are
necessary to ensure the stability and optimal functioning of the money market.
3. Lack of Uniformity in Interest Rates in the Money Market: In the Indian money
market, interest rates are not uniform across different segments and participants. This
lack of uniformity creates disparities and uncertainties, making it difficult for market
participants to make informed decisions. It also affects the transmission of monetary
policy and the overall stability of the market. Transparent and consistent interest rate
mechanisms are essential for an efficient money market.
4. Absence of Organised Bill Market: A well-developed bill market is crucial for the
functioning of the money market. However, in India, the bill market is not adequately
organised. This absence of an organised bill market limits the availability of short-term
credit instruments, such as treasury bills and commercial bills, which are essential for
liquidity management and financing trade transactions. A well-regulated bill market is
necessary to facilitate efficient short-term financing.
5. Seasonal Financial Stringency: The Indian money market experiences seasonal
fluctuations in liquidity and financial stringency. This is primarily due to factors like
agricultural cycles, festive seasons, and government borrowing patterns. These
fluctuations can lead to volatility in interest rates and create uncertainties for market
participants. Strategies to manage these seasonal fluctuations are necessary for
maintaining stability.
6. Shortage of Capital in the Money Market: The Indian money market faces a
shortage of capital to meet trade and industry requirements. The limited availability of
capital hampers the development of various sectors and restricts the growth potential
of the overall economy. Adequate availability of capital is crucial for sustaining
economic growth and meeting the funding needs of businesses and individuals.
7. Lack of Development of the Indian Money Market: The Indian money market is
not as developed as other major global money markets. It lacks depth, breadth, and
sophistication in terms of financial products and instruments. This hinders the efficient
allocation of funds and impedes the overall growth and stability of the financial
system. Developing a diverse range of financial products and instruments can enhance
the market’s efficiency.
8. Excessive Number of Indigenous Bankers in the Money Market: The presence
of a large number of indigenous bankers, such as moneylenders and unregulated non-
banking financial entities, creates issues of unfair practices, lack of accountability, and
high-interest rates. It also contributes to the unorganised nature of the money market.
Proper regulation and oversight are necessary to mitigate these issues and ensure fair
and transparent practices.
9. Absence of Specialised Institutions in the Money Market: The Indian money
market lacks specialised institutions that can cater to specific financial needs and
provide specialised financial services. This absence limits the options available to
market participants and hampers the overall efficiency of the money market. The
establishment and strengthening of specialised institutions can enhance the market’s
ability to meet diverse financial requirements.
10. Non-availability of Credit Instruments: The Indian money market suffers from a
lack of diverse and readily available credit instruments. The absence of a wide range
of credit instruments restricts the flexibility and effectiveness of financing options for
borrowers and lenders. Developing a comprehensive range of credit instruments can
provide market participants with more options for managing their financing needs.

Undeveloped Nature of Indian Money Market:

An insight into the various defects and inadequacies of the Indian money market
reveals that as compared to the advanced international money markets like the London
Money Market, the New York Money Market, etc., Indian money market is still an
undeveloped money market. It is “a money market of a sort where banks and other
financial institutions lend or borrow funds for short periods.”

The following characteristics of Indian money market highlight its undeveloped

nature:
(i) The Indian money market does not possess highly developed and
adequately developed banking system.
(ii) It lacks sufficient and regular supply of short-term assets such as bills of
exchange, treasury bills, short-term government bonds, etc.
(iii) There is no uniformity in the interest rates which vary considerably
among different financial institutions as well as centres,
(iv) In the Indian money market, there are no dealers in short-term assets who
 can function as intermediaries between the government and the banking
system,
(v) No doubt, a well-developed call money market exists in India, there is
absence of other necessary sub-markets such as the acceptance market,
commercial bill market, etc.
(vi) There is no proper coordination between the different sectors of the
money market,

Measures to Improve Indian Money Market:

In a view of the various defects in the Indian money market, the following
suggestions have been made for its proper development:

(i) The activities of the indigenous banks should be brought under the effective
control of the Reserve Bank of India.
(ii) Hundies used in the money market should be standardised and written in the
uniform manner in order to develop an all-India money market,
(iii) Banking facilities should be expanded especially in the unbanked and
neglected areas,
(iv) Discounting and rediscounting facilities should be expanded in a big way to
develop the bill market in the country.
(v) For raising the efficiency of the money market, the number of the clearing
houses in the country should be increased and their working improved.
(vi) Adequate and less costly remittance facilities should be provided to the
businessmen to increase the mobility of capital.
(vii) Variations in the interest rates should be reduced.

Reserve Bank and Indian Money Market:

The Reserve Bank of Indian has taken various measures to improve the existing
defects and to develop a sound money market in the country.
Important among them are:
(i) Through the introduction of two schemes, one in 1952 and the other in 1970,
the Reserve Bank has been making efforts to develop a sound bill market and to
encourage the use of bills in the banking system. The variety of bills eligible for
use has also been enlarged.
(ii) A number of measures have been taken to improve the functioning of the
indigenous banks. These measures include- (a) their registration; (b) keeping
and auditing of accounts; (e) providing financial accommodation through
banks; etc.

(iii) The reserve bank is fully effective in the organised sector of the money
market and has evolved procedures and conventions to integrate and coordinate
the different components of money market.
Due to the efforts of the Reserve Bank, there is now much more coordination in
the organised sector than that in the unorganised sector or that between organised
and unorganised sectors.
(iv) The difference between various sections of the money market has been
considerably reduced. With the enactment of the Banking Regulation Act,
1949, all banks in the country have been given equal treatment by the Reserve
Bank as regards licensing, opening of branches, share capital, the type of loans
to be given, etc.
(v) In order to develop a sound money market, the Reserve Bank of Indian has
taken measures to amalgamate and merge banks into a few strong banks and
given encouragement to the expansion of banking facilities in the country,
(vi) The Reserve Bank of India has been able to reduce considerably the
differences in the interest rates between different sections as well as different
centres of the money market.
Now the interest rate structure of the country is much more sensitive to changes
in the bank rate. Thus, the Reserve Bank of India has succeeded to a great
extent in improving the Indian money market and removing some of its serious
defects.
But, there are certain difficulties faced by the Reserve Bank in controlling the
money market:

(i) The absence of bill market restricts the Reserve Bank’s ability to withdraw
surplus funds from the money market by disposing of bills.
(ii) The existence of indigenous bankers is the major hurdle in the way of
integrating the money market.
(iii) Inadequate development of call money market is another difficulty in
controlling the money market. The banks do not maintain fixed ratios between
their cash reserves and deposits and the Reserve Bank has to undertake large
open market operations to influence the policy of the
banks.
 Capital Markets
A kind of financial market where the company or government securities are generated
and patronised with the intention of establishing long-term finance to coincide the
capital necessary is called Capital Market.
In this market, the buyers use funds for longer-term investment. The nature of the
capital market is risky markets. Therefore, it is not used for short-term funds
investment. Most of the investors obtain the capital markets to preserve for education
or retirement.

Types of Capital Market:

The capital market is mainly categorized into:

Primary Market
The primary market mainly deals with new securities that are issued in the stock
market for the first time. Thus it is also known as the new issue market. The main
function of the primary market is to facilitate the transfer of the newly issued shared
from the companies to the public. The main investors in this type of market are
financial institutions, banks, HNIs, etc.

Secondary Market
It is the market where the trading of the securities actually takes place, thus it is also
referred to as the stock market. Here the buying and selling of securities take place,
The existing investors sell the securities and new investors by the securities.

“The stock market is the story of cycles and of the human behavior that is responsible
for overreactions in both directions.”- Seth Klarman

Capital Market Instruments

There are mainly two types of instruments that are traded in the capital market, which
are:

1. Stocks: Stocks are sold and bought over a stock exchange, They represent
ownership in the company and the buyer of the share is referred as the
shareholder.
2. Bonds: The debt securities which are traded in the capital market are known
as the bonds. Companies issue bonds for in order to raise capital for the
expansion of the business and growth.
Features of Indian Capital Market:
Here are the features of the Capital Market:
1. Serves as a link between Savers and Investment Opportunities:
The capital market serves as a crucial link between the saving and investment process
as it transfers money from savers to entrepreneurial borrowers.
2. Long-term Investment:
It helps investors to invest their hard-earned money in long-term investments.
3. Helps in Capital formation:
The capital market offers opportunities for those investors who have a surplus amount
of money and want to park their money in some type of investment and also take the
benefit of the power of compounding.
4. Helps Intermediaries:
While transferring shares and money from one investor to another, it takes help from
intermediaries like brokers, banks, etc. thus helping them in conducting their business.
5. Rules and Regulations:
The capital markets operate under the regulation and rules of the Government thus
making it a safe place to trade.

Structure of Capital Market

The following is the structure of Indian Capital Market:
Constituents of Capital Market
The constituents of Indian capital market are as follows:

Capital Market Intermediaries

Financial Intermediaries are the organizations that help in the transfer or channeling of
funds from those who have surplus funds to those who are in need of it. They act as a
middleman in connecting the surplus parties to the deficit ones. A classic example can
be a bank that accumulates bank deposits and uses them to provide bank loans.

The main Financial Intermediaries of India include:

▪ Stock Exchanges: These include the NSE (National Stock Exchange), BSE
(Bombay Stock Exchange), MCX (Multi Commodity Exchange), etc
▪ Banks
▪ Insurance Companies
▪ Pension Funds
▪ Mutual Funds
Functions of a Capital Market
A capital market is for long-term financial assets. It plays a crucial role in mobilising
resources and allocating them to useful channels. Therefore, the capital market helps a
country’s economic progress.
The following are the functions:

• It transfers savings from parties in cash and other forms to the financial
markets. It fills the gap between those who provide capital and those who
require it.
• Investors can profit more from greater risks.
• Capital Markets also assist in stabilising stock prices in addition to
facilitating the mobilisation of capital. For instance, exchange
instruments like stocks are liquid for participants.
• Therefore, the availability of funds is a continuous process. Platforms like
the National Stock Exchange and Bombay Stock Exchange help accomplish
this. It lowers the price of information and transactions.
• Intermediaries like brokers and traders enable the transfer of capital and
shares between two investors. This aids them in running their business.

Features of a Capital Market

The following are the features of capital markets:

• Safety: Government regulates the capital markets. They operate

under a defined set of rules. Therefore, investors consider it a safe
place for trading.
• Channelizes savings: Capital markets act as a link between savers
and investors. They mobilise the savings from savers to industry
players and promote economic growth.
• Long term investment: Capital markets provide a platform for long
term investments. Any investors looking for investing in long term
investments can do so through capital markets.
• Wealth Creation: The capital market provides an opportunity to
investors with surplus funds to invest in capital market instruments
like shares and bonds and create wealth for themselves through the
power of compounding.
• Helps intermediaries: The capital market mobilises savings from
savers to borrowers with the help of intermediaries like stock
exchanges, brokers, banks, etc. By doing so, the capital market is
helping intermediaries conduct business and earn income
•
•
Advantages of Capital market
The following are the advantages of the capital market:

• Transaction happens between those who need capital and those who
have the capital.
• Capital market transactions are more effective.
• Shares earn dividend income for investors.
• In the long term, the growth in the value of capital market
investments is high.
• The interest rates from bonds are higher than the interest rates
offered by banks.
• Long-term capital gain benefits are available for stock market
investments.
• Capital market investments can be used as collateral for getting
loans from banks.

Example of Capital Market

Following are examples of Indian capital market:

• Stock Market: The stock market, also known as the equity or share
market, brings together buyers and sellers of stocks, representing
ownership claims on businesses.
• Bond Market: The bond market is a financial space where
participants can issue new debt (primary market) or trade debt
securities.
• Currency and Foreign Exchange Markets: The foreign exchange
market is a global decentralized platform for trading currencies,
• determining exchange rates for every currency
Capital Markets In India
The capital market provides the support to the system of capitalism of the country. The
Securities and Exchange Board of India (SEBI), along with the Reserve Bank of India
are the two regulatory authority for Indian securities market, to protect investors and
improve the microstructure of capital markets in India. With the increased application of
information technology, the trading platforms of stock exchanges are accessible from
anywhere in the country through their trading terminals.

Capital Markets In India

India has a fair share of the world economy and hence the capital markets or the share
markets of India form a considerable portion of the world economy. The capital market
is vital to the financial system.

The capital Markets are of two main types. The Primary markets and the secondary
markets. In a primary market,
companies, governments or public sector institutions can raise funds through bond
issues. Alos, Corporations can sell new stock through an initial public offering (IPO)
and raise money through that. Thus in the primary market, the party directly buys shares
of a company. The process of selling new shares to investors is called underwriting.

In the Secondary Markets, the stocks, shares, and bonds etc. are bought and sold by the
customers. Examples of the secondary capital markets include the stock exchanges
like NSE, BSE etc. In these markets, using the technology of the current time, the
shares, and bonds etc. are sold and purchased by parties or people.

Broad Constituents in the Indian Capital Markets

Fund Raisers
Fund Raisers are companies that raise funds from domestic and foreign sources, both
public and private. The following sources help companies raise funds.
Fund Providers
Fund Providers are the entities that invest in the capital markets. These can be
categorized as domestic and foreign investors, institutional and retail investors. The list
includes subscribers to primary market issues, investors who buy in the secondary
market, traders, speculators, FIIs/ sub-accounts, mutual funds, venture capital funds,
NRIs, ADR/GDR investors, etc.
Intermediaries
Intermediaries are service providers in the market, including stock brokers, sub-brokers,
financiers, merchant bankers, underwriters, depository participants, registrar and
transfer agents, FIIs/ sub- accounts, mutual Funds, venture capital funds, portfolio
managers, custodians, etc.
Organizations
Organizations include various entities such as MCX-SX, BSE, NSE, other regional stock
exchanges, and the two depositories National Securities Depository Limited (NSDL)
and Central Securities Depository Limited (CSDL).
Market Regulators
Market Regulators include the Securities and Exchange Board of India (SEBI), the
Reserve Bank of India (RBI), and the Department of Company Affairs (DCA).

Role And Importance of Capital Market In India

The capital market has a crucial significance to capital formation. For a speedy
economic development, the adequate capital formation is necessary. The significance
of capital market in economic development is explained below:
Mobilization Of Savings And Acceleration Of Capital Formation:
In developing countries like India, the importance of capital market is self-evident. In
this market, various types of securities help to mobilize savings from various sectors of
the population. The twin features of reasonable return and liquidity in stock exchange
are definite incentives to the people to invest in securities. This accelerates the capital
formation in the country.
Raising Long-Term Capital
The existence of a stock exchange enables companies to raise permanent capital.
The investors cannot commit their funds for a permanent period but companies
require funds permanently. The stock exchange resolves this dash of interests by
offering an opportunity to investors to buy or sell their securities, while
permanent capital with the company remains unaffected.
Promotion Of Industrial Growth
The stock exchange is a central market through which resources are transferred to the
industrial sector of the economy. The existence of such an institution encourages
people to invest in productive channels. Thus it stimulates industrial growth and
economic development of the country by mobilizing funds for investment in the
corporate securities.
Ready And Continuous Market
The stock exchange provides a central convenient place where buyers and sellers can
easily purchase and sell securities. Easy marketability makes an investment in securities
more liquid as compared to other assets.
Technical Assistance
An important shortage faced by entrepreneurs in developing countries is technical
assistance. By offering advisory services relating to the preparation of feasibility
reports, identifying growth potential and training entrepreneurs in project
management, the financial intermediaries in capital market play an important role.
Reliable Guide To Performance
The capital market serves as a reliable guide to the performance and financial position of
corporate, and thereby promotes efficiency.
Proper Channelization Of Funds
The prevailing market price of a security and relative yield are the guiding factors for
the people to channelize their funds in a particular company. This ensures effective
utilization of funds in the public interest.
Provision Of Variety Of Services:
The financial institutions functioning in the capital market provide a variety of services
such as a grant of long-term and medium-term loans to entrepreneurs, provision of
underwriting facilities, assistance in the promotion of companies, participation in equity
capital, giving expert advice etc.
Development Of Backward Areas
Capital Markets provide funds for projects in backward areas. This facilitates economic
development of backward areas. Long-term
funds are also provided for development projects in backward and rural areas.
Foreign Capital
Capital markets make possible to generate foreign capital. Indian firms are able to
generate capital funds from overseas markets by way of bonds and other securities.
The government has liberalized Foreign Direct Investment (FDI) in the country. This
not only brings in the foreign capital but also foreign technology which is important for
economic development of the country.
Easy Liquidity
With the help of secondary market, investors can sell off their holdings and convert them
into liquid cash. Commercial banks also allow investors to withdraw their deposits, as and
when they are in need of funds.
Differences between Money Market and Capital Market

Money Market Capital Market

Definition

A random course of financial A kind of financial market where the

institutions, bill brokers, money dealers, company or government securities are
banks, etc., wherein dealing on short- generated and patronised with the intention
term financial tools are being settled is of establishing long-term finance to coincide
referred to as Money Market. with the capital necessary is called Capital
Market.

Market Nature

Money markets are informal in nature. Capital markets are formal in nature.

Instruments involved

Commercial Papers, Treasury Bonds, Debentures, Shares, Asset

Certificate of Deposit, Bills, Trade Secularisation, Retained Earnings, Euro
Credit, etc. Issues, etc.

Investor Types

Commercial banks, non-financial Stockbrokers, insurance companies,

institutions, central bank, chit funds, etc. Commercial banks, underwriters, etc.

Market Liquidity

Money markets are highly liquid. Capital markets are comparatively less
liquid.
Risk Involved

Money markets have low risk. Capital markets are riskier in comparison to
money markets.

Maturity of Instruments

Instruments mature within a year. Instruments take longer time to attain

maturity

Purpose served

To achieve short term credit To achieve long term credit requirements of

requirements of the trade. the trade.

Functions served

Increasing liquidity of funds in the Stabilising economy by increase in

economy savings

Return on investment achieved

ROI is usually low in money market ROI is comparatively high in capital

market