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Chapter 24 Money and Capital Markets

Money Market
Money Market is the market for short-term funds, as distinct from the Capital Market which deals in long-term funds.

Money Market is a place where the lending and borrowing of short-term funds are arranged and it comprises the short-term credit instruments and the institutions and individuals who participate in the lending and borrowing business.
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Central bank organized and control the function of money market. A well organized money market is an essential condition for the successful operation of the Central Banking Policies. The money market is the locus of central banking policies for holding the conditions of liquidity within the bounds of what the monetary authorities consider desirable.

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Structure of Indian Money Market

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Call/Notice Money Market The most important feature of a money market instrument is that it is liquid and can be turned over quickly at low cost and provides an avenue for equilibrating the shortterm surplus funds of lenders and the requirements of borrowers. The call/notice money market forms an important segment of the Indian money market. Under call money market, funds are transacted on overnight basis and under notice money market, funds are transacted for the period between 2 days and 14 days. Term Money Market: Term Money- money lend for 15 days or more in Inter-bank market
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Chapter 24 Money and Capital Markets

Banks borrow in this money market for the following propose. To fill the gaps or temporary mismatches in funds
To meet the CRR & SLR Mandatory requirements as stipulated by the Central bank To meet sudden demand for funds arising out of large outflows Thus call money usually serves the role of equilibrating the short-term liquidity position of banks

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Participants

Participants in call/notice money market currently include banks, Primary Dealers (PDs), development finance institutions, insurance companies and select mutual funds. Of these, banks and PDs can operate both as borrowers and lenders in the market. But non-bank institutions (such as all-India FIs, select Insurance Companies or Mutual Funds), which have been given specific permission to operate in call/notice money market can, however, operate as lenders only. No new non-bank institutions are permitted to operate (i.e., lend) in the call/notice money market with effect from May 5, 2001.

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Commercial Paper
In the global money market, commercial paper is an unsecured promissory note with a fixed maturity of 1 to 270 days. Commercial Paper is a money-market security issued (sold) by large banks and corporations to get money to meet short term debt obligations (for example, payroll), and is only backed by an issuing bank or corporation's promise to pay the face amount on the maturity date specified on the note. Since it is not backed by collateral, only firms with excellent credit ratings from a recognized rating agency will be able to sell their commercial paper at a reasonable price. Commercial paper is usually sold at a discount from face value, and carries higher interest repayment rates than bonds. Typically, the longer the maturity on a note, the higher the interest rate the issuing institution must pay. Interest rates fluctuate with market conditions, but are typically lower than banks' rates

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Chapter 24 Money and Capital Markets

Certificates of Deposit: Certificates of Deposit (CD), introduced in June

1989, are essentially securitized short-term time deposits issued by banks during periods of tight liquidity, at relatively high interest rates (in comparison with term deposits).

Commercial Bills Market: Commercial Bills (Bills of Exchange) are

important instruments used to facilitate credit sales. Commercial bills can be discounted with banks and the banks, when they are in need of funds, may rediscount them in the money market.

Money Market Mutual Funds (MMMFs): A money market mutual

fund is an open-ended mutual fund that invests in short-term debt securities such as Treasury bills and commercial paper. Money market funds are widely regarded as being as safe as bank deposits yet providing a higher yield.

Treasury Bills: Treasury bills are promissory notes issued by the Central
Government to raise short term funds to bridge short term mismatches between receipts and expenditures.
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Chapter 24 Money and Capital Markets

Capital Market

A capital market is a market for securities (debt or equity), where business enterprises (companies) and governments can raise long-term funds. It is defined as a market in which money is provided for periods longer than a year, as the raising of short-term funds takes place on other markets (e.g., the money market). The capital market includes the stock market (equity securities) and the bond market (debt). Capital markets may be classified as primary markets and secondary markets. In primary markets, new stock or bond issues are sold to investors via a mechanism known as underwriting. In the secondary markets, existing securities are sold and bought among investors or traders, usually on a securities exchange, over-thecounter, or elsewhere.
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Importance of Capital Market

The capital market serves a very useful purpose by pooling the capital resources of the country and making them available to the enterprising investors. Well-developed capital markets augment resources by attracting and lending funds on a global scale.

A vibrant capital market is a prerequisite for the development of industry and commerce.
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Nature of the Indian Capital Market

Structure of Indian Capital Market

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Stock Exchange

Stock Exchanges are structured marketplace where affiliates of the union gather to sell firm's shares and other securities

The buying and selling on an exchange is only open to its affiliates and brokers.
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Objective and Role Of Stock Exchange

To safeguard the interest of investing public having dealings on the exchange and the members. To establish and promote honorable and just practice in securities transactions. To promote, develop and maintain a well regulated market for dealing in securities. To promote industrial developments in the country through efficient resources mobilization by way of investment in corporate securities.
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Different Stock Exchanges in India

National Stock Exchange (NSE) of India Bombay Stock Exchange (BSE) of India Regional Stock Exchanges (RSE) of India

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Regional Stock Exchanges (RSE) of India

Ahmedabad Stock Exchange Bhubaneshwar Stock Exchange Cochin Stock Exchange Delhi Stock Exchange Hyderabad Stock Exchange Ludhiana Stock Exchange Madras Stock Exchange Mangalore Stock Exchange OTC Exchange Of India Saurashtra Kutch Stock Exchange Vadodara Stock Exchange

Bangalore Stock Exchange Calcutta Stock Exchange Coimbatore Stock Exchange Guwahati Stock Exchange Jaipur Stock Exchange Madhya Pradesh Stock Exchange Magadh Stock Exchange Meerut Stock Exchange Pune Stock Exchange Uttar Pradesh Stock Exchange

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SEBI

The establishment of the Securities and Exchange Board of India (SEBI) was a land mark government measure to monitor and regulate capital market activities and to promote healthy development of the market.
The SEBI was constituted in 1988 by a resolution of Government of India and it was made a statutory body by the Securities and Exchange Board of India Act, 1992.

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Objectives

According to the Act, the objectives of SEBI are to protect the interests of investors in securities and to promote the development of, and to regulate, the securities market for matters connected therewith or incidental therewith. SEBI is a statutory body with a triple mandate: protection of interests of investors, proper regulation of the stock exchanges and healthy development of securities market.

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Capital Market Reforms And Developments

The number of Stock Exchanges has increased and the capital market has expanded substantially. However, the functioning of the stock exchanges were characterized by many shortcomings with long delays, lack of transparency in procedures and vulnerability to price rigging and insider trading. A number of measures have been taken to overcome these problems. The objectives of these measures, broadly, have been to:

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Provide for effective control of the stock exchange operations. Increase the information flow and disclosures so as to enhance the transparency. Protect the interests of investors. Check insider trading. Improve the operational efficiency of the stock exchanges. Promote healthy development of the capital market.

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Chapter 24 Money and Capital Markets

Provide for effective control of the stock exchange operations. Increase the information flow and disclosures so as to enhance the transparency. Protect the interests of investors. Check insider trading. Improve the operational efficiency of the stock exchanges. Promote healthy development of the capital market.

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Chapter 24 Money and Capital Markets

Financial Institutions

Financial Institutions Financial sector plays an indispensable role in the overall development of a country. The most important constituent of this sector is the financial institutions, which act as a conduit for the transfer of resources from net savers to net borrowers, that is, from those who spend less than their earnings to those who spend more than their earnings The Government of India, in order to provide adequate supply of credit to various sectors of the economy, has evolved a well developed structure of financial institutions in the country

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Finance, which has been aptly described as the life-blood of industry Short-term Finance Short-term finance usually refers to the funds required for a period of less than one year. Medium-term Finance The period of one year to five years may be regarded as a mediumterm. Long-term Finance Periods exceeding 5 years are usually regarded as long-terms.
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Chapter 24 Money and Capital Markets

Financing Institution

All-India Development Banks (AIDBs):Industrial Development Bank of India (IDBI) Industrial Finance Corporation of India Ltd (IFCI Ltd) Small Industries Development Bank of India (SIDBI) Industrial Investment Bank of India Ltd (IIBI)

Specialized Financial Institutions (SFIs):IFCI Venture Capital Funds Ltd (IVCF) ICICI Venture Funds Ltd Tourism Finance Corporation of India Ltd. (TFCI)
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Investment Institutions
Life Insurance Corporation of India (LIC) Unit Trust of India (UTI) General Insurance Corporation of India (GIC)

State Financial Corporations (SFCs)

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