C.9] Financial Market and its Instruments

1. Money Market

1.1 Definition

• Money Market is a segment of the financial market where short-term financial instruments are traded.
• It deals with short-term funds (usually less than one year) and is used for liquidity management.

1.2 Key Characteristics

• Short-term instruments (maturity < 1 year)
• High liquidity
• Low risk
• High credit quality

1.3 Instruments

1.4 Key Players

• Central Bank (RBI in India)
• Commercial Banks
• Non-Banking Financial Companies (NBFCs)
• Treasury Department
• Investment Institutions

1.5 Role in Economy

• Liquidity Management
• Monetary Policy Implementation
• Short-term Funding for Corporates
• Interest Rate Regulation

1.6 Important Dates and Terms

• RBI’s Money Market Operations: Conducted regularly to manage liquidity.
• T-Bill Auctions: Conducted by RBI bi-weekly.
• Repo Rate: Policy rate used by RBI to control liquidity.
• Reverse Repo Rate: Rate at which RBI borrows from banks.

1.7 Frequently Asked Questions (SSC, RRB)

• What is the maturity period of T-Bills?
  • Up to 364 days.
• Which body regulates the money market in India?
  • Reserve Bank of India (RBI).
• What is the purpose of repo rate?
  • To control liquidity and inflation.
• What is the difference between T-Bills and Commercial Paper?
  • T-Bills are government-issued, while CP is issued by corporates.

2. Capital Market

2.1 Definition

• Capital Market is a segment of the financial market where long-term financial instruments are traded.
• It facilitates long-term financing for businesses and governments.

2.2 Key Characteristics

• Long-term instruments (maturity > 1 year)
• Higher risk and return
• Less liquidity compared to money market
• Used for investment and capital formation

2.3 Instruments

2.4 Key Players

• Stock Exchanges (NSE, BSE)
• Securities and Exchange Board of India (SEBI)
• Central Government and State Governments
• Corporations and Companies
• Investors (Individuals, Institutions)

2.5 Role in Economy

• Capital Formation
• Investment Opportunities
• Price Discovery
• Economic Growth and Development

2.6 Important Dates and Terms

• SEBI Established: April 12, 1988
• NSE Established: 1992
• BSE Established: 1875
• G-Sec Auctions: Conducted by RBI for government bonds
• Primary Market: Where new securities are issued
• Secondary Market: Where existing securities are traded

2.7 Frequently Asked Questions (SSC, RRB)

• What is the role of SEBI in the capital market?
  • Regulates and protects investors.
• What is the difference between primary and secondary market?
  • Primary is for new issues, secondary is for existing securities.
• What is a debenture?
  • A debt instrument with fixed interest.
• What is the purpose of the capital market?
  • To facilitate long-term financing and investment.

3. Difference Between Money Market and Capital Market

4. Important Facts for Competitive Exams

• Money Market Instruments: T-Bills, CP, CDs, Repo, Call Money
• Capital Market Instruments: Shares, Bonds, Mutual Funds, ETFs, REITs
• RBI’s Role: Regulates money market, conducts repo operations
• SEBI’s Role: Regulates capital market, protects investors
• Key Dates:
  • RBI established: 1935
  • SEBI established: 1988
  • NSE established: 1992
  • BSE established: 1875
• G-Secs: Government securities, issued by RBI, traded in capital market
• Repo Rate: Used by RBI to control liquidity and inflation
• Reverse Repo Rate: Used by RBI to absorb excess liquidity

5. Quick Revision Table