Markets exist to facilitate the purchase and sale of goods and services. The financial market exists to facilitate sale and purchase of financial instruments and comprises two major markets, namely the capital market and the money market. The distinction between the capital market and the money market is that the capital market mainly deals in medium- and long-term investments (maturity more than a year) while the money market deals in short-term investments (maturity up to a year).UPSC aspirants need to know the basics of economics. Syllabus of UPSC GS paper 3 has economics in it. And students should be clear with the concepts of economics. It is also very essential for the students to keep a track of current affairs related to economics. To  read more articles on Economics click here.

TOPICS

  • Money Market
  • Capital Market

MONEY MARKET

RBI is the apex banking institution in the money market.

Indian money market is divided into organised sector and unorganised sector.

Unorganised sector includes unregulated non-bank financial intermediaries, indigenous bankers, money lenders etc.

Organised sector mainly comprises

  • Call Money Market
  • Treasury Bill Market
  • Repo Market
  • Commercial Bill Market
  • Certificate of Deposit Market
  • Commercial Paper Market
  • Money Market Mutual Funds

Call Money Market

 Call Money Market is a place where borrowing and lending transactions are carried out for one day only.

The call money market is also known as Inter-Bank Call Money Market.

Treasury Bills

  • In India treasury bills are the short-term liability of the central government.
  • It can be issued for a maturity period of 91 days, 182 days or 364 days.
  • It can have a minimum amount of face value of 1 lakh and thereafter in multiples of it.
  • The rate of interest is market-determined.

Commercial Paper (CP)

Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note.

  • It was introduced in India in 1990 with a view to enabling highly-rated corporate borrowers to diversify their sources of short-term borrowings and to provide an additional instrument to investors. Subsequently, primary dealers and all-India financial institutions were also permitted to issue CP to enable them to meet their short- term funding requirements for their operations.
  • Corporates, Primary Dealers (PDs) and the All-India Financial Institutions (FIs) are eligible to issue CP.
  • A corporate would be eligible to issue CP provided
    • The tangible net worth of the company, as per the latest audited balance sheet, is not less than ` 4 crore;
    • The company has been sanctioned working capital limit by bank(s) or all-India financial institution(s
    • The borrowal account of the company is classified as a Standard Asset by the financing banks/
  • CP can be issued for maturities between a minimum of  7 days and a maximum of up to one year from the date of issue. However, the maturity date of the CP should not go beyond the date upto which the credit rating of the issuer is valid.
  • All eligible participants shall obtain the credit rating for issuance of Commercial Paper either from Credit Rating Information Services of India Ltd. (CRISIL) or the Investment Information and Credit Rating Agency of India Ltd. (ICRA) or the Credit Analysis and Research Ltd. (CARE) or the FITCH Ratings India Pvt. Ltd. or other such Credit Rating Agencies (CRAs) as may be specified by the Reserve Bank of India from time to time, for the purpose.

Certificate of Deposit (CD)

  • Certificate of Deposit (CD) is a negotiable money-market instrument and is issued in dematerialised form or as a Usance Promissory Note against funds deposited at a bank or other eligible financial institutions for a specified time period.
  • Guidelines for issue of CDs are presently governed by various directives issued by the Reserve Bank of India (RBI), as amended from time to time.
  • CDs can be issued by (i) Scheduled Commercial Banks (excluding Regional Rural Banks and Local Area Banks); and (ii) All-India Financial Institutions (FIs) that have been permitted by the RBI to raise short-term resources within the umbrella limit fixed by the RBI.
  • Banks have the freedom to issue CDs depending on  their funding requirements.
  • Minimum amount of a CD should be ` 1 lakh, i.e., the minimum deposit that could be accepted from a single subscriber should not be less than ` 1 lakh, and in multiples of ` 1 lakh thereafter.
  • CDs can be issued to individuals, corporations, companies (including banks and PDs), trusts, funds, associations, etc. Non-Resident Indians (NRIs) may also subscribe to CDs, but only on non-repatriable basis, which should be clearly stated on the Certificate. Such CDs cannot be endorsed to another NRI in the secondary market.
  • The maturity period of CDs issued by banks should not be less than 7 days and not more than one year, from the date of issue.
  • The FIs can issue CDs for a period not less than 1 year and not exceeding 3 years from the date of issue.

CAPITAL MARKET

Capital market is important for raising funds for capital formation and investments and forms a very vital link for economic development of any country. It provides a means for issuers to raise capital from investors (who have surplus money available from saving for investment). Thus, the savings normally flow from household sector to business or government sector, which normally invest more than they save. A vibrant and efficient capital market is the most important parameter for evaluating health of any economy.

The Indian capital market has two groups – organised capital market and unorganised capital market. Unorganised capital market comprises long-term borrowing and lending of funds from moneylenders and others. Organised capital market is broadly divided into the stock exchange operations and long-term lending of funds from the financial intermediaries, banks and non-banks financial intermediaries.

Functions of capital market

The major objectives of the capital market are:

  • To mobilise resources for investments.
  • To facilitate buying and selling of securities.
  • To facilitate the process of efficient price discovery.
  • To facilitate settlement of transactions in accordance with the schedules.

Security Market

The security market has two interdependent and inseparable segments, namely, the new issues (primary) market and the stock (secondary) market. The primary market provides the channel for the creation and sale of new securities, while the secondary market deals in the securities that were issued previously. The securities issued in the primary market are issued by public limited companies or by government agencies. The resources in this kind of market are mobilised either through a public issue or through a private-placement route. If anybody can subscribe to the issue, it is a public issue; if the issue is made available only to a select group of people, it is known as private placement. There are two major types of issuers of securities — corporate entities, who issue mainly debt and equity instruments, and the government (central as well as state), which issues debt securities (dated securities and treasury bills).

The secondary market enables participants who hold securities to adjust their holdings in response to changes in their assessment of risks and returns. Once new securities are issued in the primary market, they are traded in the stock (secondary) market. The secondary market operates through two mediums, namely, the over-the-counter (OTC) market and the exchange-traded market. The OTC markets are informal markets where trades are negotiated. Most of the trades in government securities take place in the OTC market. All the spot trades where securities are traded for immediate delivery and payment occur in the OTC market. The other option is to trade, using the infrastructure provided by the stock exchanges. The exchanges in India follow a systematic settlement period. All the trades taking place over a trading cycle (day = T) are settled together after a certain time (T + 2 days). The trades executed on exchanges are cleared and settled by a clearing corporation. The clearing corporation acts as a counter party and guarantees settlement. A variant of the secondary market is the forward market, where securities are traded for future delivery and payment. Avariant of the forward market is the Futures and Options market. Presently, only two exchanges in India — the National Stock Exchange of India Ltd. (NSE) and the Bombay Stock Exchange (BSE) —provide trading in Futures and Options.

Bombay Stock Exchange

  • BSE Ltd, the first-ever stock exchange in Asia established in 1875 and the first in the country to be granted permanent recognition under the Securities Contract Regulation Act, 1956, has had an interesting rise to prominence over the past 138 years.
  • BSE is a corporatised and demutualised entity with a broad shareholder base which includes two leading global exchanges, Deutsche Bourse and Singapore Exchange as strategic partners.
  • BSE provides an efficient and transparent market for trading in equity, debt instruments, derivatives, mutual funds. It also has a platform for trading in equities of Small-and- Medium Enterprises (SMEs).
  • Around 5000 companies are listed on BSE, making it world's No. 1 exchange in terms of listed members.
  • BSE Ltd is world's fifth most active exchange in terms of number of transactions handled through its electronic trading system. It is also one of the world’s leading exchanges (5th largest) for index options trading.
  • BSE also provides a host of other services to capital- market participants, including risk management, clearing, settlement, market data services and education. It has a global reach with customers around the world and a nationwide presence. BSE systems and processes are designed to safeguard market integrity, drive the growth of the Indian capital market and stimulate innovation and competition across all market segments.
  • BSE is the first exchange in India and second in the world to obtain an ISO 9001:2000 certification. It is also the first exchange in the country and second in the world to receive Information Security Management System Standard BS 7799-2-2002 certification for its on-line trading system (BOLT).
  • It operates one of the most respected capital market educational institutes in the country (the BSE Institute Ltd.). BSE also provides depository services through its Central Depository Services Ltd. (CDSL) arm.
  • Bombay Stock Exchange has now adopted only its initials BSE as its new name, positioning itself as a national multi- asset financial-infrastructure institution. BSE’s strategic shift in approach, attitude and business focus is reflected in its new tagline “Experience the New”.
  • BSE’s popular equity index — the SENSEX — is India's most widely-tracked stock market benchmark index. It is traded internationally on the EUREX as well as leading exchanges of the BRCS nations (Brazil, Russia, China and South Africa).

National Stock Exchange (NSE)

The National Stock Exchange (NSE) is India's leading stock exchange covering various cities and towns across the country. NSE was set up by leading institutions to provide a modern, fully automated screen-based trading system with national reach. The Exchange has brought about unparalleled transparency, speed and efficiency, safety and market integrity. It has set up facilities that serve as a model for the securities industry in terms of systems, practices and procedures.

On its recognition as a stock exchange under the Securities Contracts (Regulations) Act, 1956 in April 1993, NSE commenced operations in the Wholesale Debt Market (WDM) segment in June 1994. NSE started trading in the equities segment (Capital Market Segment) on November 3, 1994 and within a short span of one year became the largest exchange in India in terms of volumes transacted. NSE commenced operations in derivatives segment in June 2000 with the launch of index future. The figure contracts are based on the popular benchmark S&P CNX, Nifty Index. The Exchange introduced trading in Index Options (also based on Nifty) on June 4, 2001. NSE also became the first exchange to launch trading in options on individual securities from July 2, 2001.

Securities and Exchange Board of India (SEBI)

The Securities and Exchange Board of India was established on April 12, 1992 in accordance with the provisions of the Securities and Exchange Board of India Act, 1992 for dealing with all matters relating to development and regulation of security market and investor protection.

Mutual Fund

A mutual fund is an investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money- market instruments and similar assets. One of the main advantages of mutual funds is that they give small investors access to professionally managed, diversified portfolios of equities, bonds and other securities, which would be quite difficult (if not impossible) to create with a small amount of capital.

All mutual fund schemes are governed by SEBI regulations.

Stock Market Indices                                       Country

BSE Sensex......................................................... India

Hang Seng Index............................................ Hong Kong

Nikkei 225........................................................... Japan

Kospi Index.................................................... South Korea

Kuala Lumpur Composite Index....................... Malaysia

TSEC Weighted Index....................................... Taiwan

SSE Composite Index........................................ China

Dow Jones.......................................................... USA

NASDAQ Composite Index................................ USA

FTSE Index......................................................... UK

Jakarta Composite Index............................... Indonesia

Gilt-Edged market

It refers to the market for government and semi-government securities, backed by the RBI. The securities traded in this market are stable in value and are much sought after by banks and other institutions.

Establishment Year of Important Financial Institutions of India

  Industrial Finance Corporation of India.................................................... 1948

 UTI (Unit Trust of India)............................................................................. 1964

 IDBI (Industrial Development Bank of India)............................................. 1964

 NABARD (National Bank for Agriculture and Rural Development   .........  1982

 SIDBI (Small Industries Development Bank  (India).................................. 1990

EXIM Bank (Export-Import Bank of India).................................................. 1982

NHB (National Housing Bank)................................................................... 1988

LIC (Life Insurance Corporation)............................................................... 1956

GIC (General Insurance Corporation)   ..................................................   1972

RRBs (Regional Rural Banks).................................................................. 1975

HDFC (Housing & Development Finance Corporation Ltd.)   .............      1977

Important Committees

Committees                                        Appointedfor

Ghosh Committee ..............................Bank Frauds

Goiporia Committee .......................... Bank Customer Services

Goswami Committee  ........................Industrial  Sickness and Corporate Re-structuring

Jilani Committee   ............................ Loan System

Janakiraman Committee.................. Securities Transactions of the Banks and Financial Institutions

 Malhotra Committee   ......................Insurance Sector Reforms

Dr. Mehta Committee  ....................  Integrated Rural Development Programmes

 Nadkarni Committee  ......................To evolve an improved procedure for conducting transactions in public sector bonds and mutual

Ist Narasimham Committee  ............Banking  Sector Reforms

IInd Narasimham Committee ...... Banking Sector Reforms

Devaluation of Indian Currency: Lowering of the value of domestic currency in terms of foreign currencies is called devaluation. A country resorts to devaluation when its exports fall short of imports. As a result of devaluation, imports become dearer and exports cheaper. India devalued its rupee in the years 1949, 1966 and twice in the year 1991. But now this measure is not used, as the exchange rate of rupee with other currencies of the world is determined by market forces of demand and supply and not by the government

Economics is one of the most important part of UPSC syllabus. To read more articles on Economics click here