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
| Instrument | Description | Maturity | Example |
|---|---|---|---|
| Treasury Bills (T-Bills) | Short-term debt instruments issued by the government | Up to 364 days | RBI issues in India |
| Commercial Paper (CP) | Unsecured short-term promissory notes issued by companies | Up to 364 days | Large corporates |
| Banker’s Acceptance (BA) | A time draft drawn on a bank | Up to 270 days | Used in international trade |
| Certificate of Deposit (CD) | Time deposit with a fixed maturity | Up to 1 year | Banks issue |
| Call Money | Short-term funds borrowed for a day or overnight | 1 day | Used by banks |
| Repo/Reverse Repo | Short-term borrowing/lending by central bank | Up to 1 year | RBI uses for liquidity |
| Money Market Mutual Funds | Invest in short-term instruments | 1 year | Institutional investors |
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
| Instrument | Description | Maturity | Example |
|---|---|---|---|
| Equity Shares | Ownership in a company | No fixed maturity | Stocks on stock exchanges |
| Debentures | Debt instruments with fixed interest | 5–15 years | Corporate debentures |
| Bonds | Debt instruments issued by governments or corporations | 10–30 years | Government securities (G-Secs) |
| Mutual Funds | Pool of investments in equity, debt, etc. | Varies | Equity mutual funds |
| Derivatives | Financial contracts based on underlying assets | Varies | Futures, options |
| REITs (Real Estate Investment Trusts) | Invest in real estate assets | Varies | Listed on stock exchanges |
| ETFs (Exchange Traded Funds) | Track an index, sector, or commodity | Varies | Nifty 50 ETF |
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
| Feature | Money Market | Capital Market |
|---|---|---|
| Maturity | < 1 year | > 1 year |
| Risk | Low | High |
| Liquidity | High | Low |
| Participants | Banks, NBFCs, Govt. | Corporates, Investors, SEBI |
| Purpose | Liquidity management | Capital formation |
| Instruments | T-Bills, CP, CDs | Shares, Bonds, Mutual Funds |
| Regulator | RBI | SEBI |
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
| Topic | Key Points |
|---|---|
| Money Market | Short-term, low risk, high liquidity, instruments: T-Bills, CP, CDs |
| Capital Market | Long-term, high risk, instruments: Shares, Bonds, Mutual Funds |
| Regulators | RBI (Money Market), SEBI (Capital Market) |
| Purpose | Liquidity management (Money Market), Capital formation (Capital Market) |
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