(IGP) GS Paper 1 – Economic & Social Development – “Money Market & Capital Market In India”

Integrated Guidance Programme of
General Studies for IAS (Pre)

Subject – Economic and Social Development
Chapter – Money Market & Capital Market In India

Money Market

Money market refers to lending and borrowing short term
funds- funds with a maturity of less than one year. Banks and financial
institutions (IDBI, LIC etc) are the main lenders and borrowers while
individuals, companies, Government and others are the main borrowers.

Call Money / Notice Money

Call/Notice money is money borrowed or lent for a very short
period. If the period is more than one day and upto 14 days it is called ‘Notice
money’ otherwise the amount is known as ‘Call money’.

Treasury Bills

  • Treasury bills are short-term money market instruments,
    which are issued by the RBI on behalf of the GOI. The GOI uses these funds
    to meet its short-term financial requirements of the government. T-Bills are
    sovereign zero risk instruments.

  • There are T-Bills of 14 days, 91 days, 182 days and 364
    days maturity. Minimum investment required in case of T-Bills is Rs 25,000

Inter Bank Term Money

Inter bank market for deposits of maturity beyond 14 days and
upto three months is referred to as the term money market.

Certificates Of Deposit

After treasury bills, the next lowest risk category
investment option is the certificate of deposit (CD) issued by scheduled
commercial banks and FIs, Regional rural banks and Local area banks can not
issue CDs.

Commercial Paper

It represents short term unsecured promissory notes issued by
top rated corporates, primary dealers (PDS), Satellite dealers(SDS) and the
all-India financial institutions (FIs).

Commercial Bills

Bills of exchange are negotiable instruments drawn by the
seller (drawer) of the goods on the buyer (drawee) of the goods for the value of
the goods delivered. These bills are called trade bills. These trade bills are
called commercial bills when they are accepted by commercial banks. If the bill
is payable at a future date and the seller needs money immediately, he may
approach his bank for discounting the bill.

Capital Market

It refers to market for funds with a maturity of 1 year and
above, referred to as term funds that includes medium and long term funds. The
demand for these funds comes from both the government for its investment
purposes and also the private sector. Banks, public financial institutions like
LIC and CIIC; development financial institutions like ICICI, 1DBI etc; mutual
funds like UTI are the main participants in the market.

Gilt edged securities

  • Government securities, or G-Secs as they are popularly
    known, are securities issued by the RBI on behalf of the Government of India
    to meet the latter’s borrowing programme for financing fiscal deficit. The
    G- Sec instrument is in the nature of a bond.

  • GOI Dated Security can be held by any person, firm,
    company, corporate body or institution, State Governments, Provident Funds
    and Trusts.

  • Non-Resident Indians (NRIs, viz., Indian citizens and
    Individuals of Indian origin), Overseas corporate bodies predominantly owned
    by NRIs and Foreign Institutional, Investors registered with SEBI and
    approved by Reserve Bank of India are also eligible to invest in the
    Government Stock.

  • G-Secs have a maturity period ranging from one to 30
    years and they carry a coupon rate (interest rate) which is paid
    semi-annually. They are issued both in demat and physical form.

  • The minimum investment in G-Secs is Rs 10,000. G-Secs
    could be of the following types
    (i)Dated Securities: They have fixed maturity and fixed coupon rates payable
    half yearly and are identified by their year of maturity.
    (ii)Floating Rate Bonds: They are bonds with variable interest rates with a
    fixed percentage over a benchmark rate. There may also be a cap and a floor
    rate attached, thereby fixing a maximum and minimum interest rate payable on
    (iii)Capital Indexed Bonds: They are bonds where the interest rate is a
    fixed percentage over the wholesale price index. Redemption is linked to the
    wholesale price index.

Merchant Banks/Investment Banks

MBs are those who manage and underwrite (Underwriting an
issue means to guarantee to purchase any shares in a new issue of rights issue
not fully subscribed by the public) new public issues floated by companies to
raise funds from public. They advise corporate clients on fund raising. They are
also called investment banks (I banks). They deal only with corporates and not
general public, essentially.

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Mutual Funds

Mutual funds raise money from public and invest them in stock market
securities, bonds etc. Mutual funds were virtually synonymous with the Unit
Trust of India (UTI) till two decades ago when India witnessed financial sector
liberalization and many more public sector and private mutual funds came up,
SEBI regulates mutual funds.

Venture Capital

Venture capital is money provided by financial institutions who invest
alongside management in young, rapidly growing companies that have the potential
to develop into significant economic contributors. Venture capital is an
important source of equity for start-up companies.

Qualified Institutional Placement

The QIP Scheme is open to investments made by Qualified Institutional
Placement which includes public financial institutions, mutual funds, foreign
institutional investors, venture capital funds and foreign venture capital funds
registered with the SEBI) in any issue of equity shares / fully convertible
debentures / partly convertible debentures or any securities which are
convertible into or exchangeable with equity shares at a later date


  • A company is treated as an NBFC if its financial assets are more than
    50% of total assets and income from financial assets is more than 50% of the
    gross income.
  • NBFC means Non-banking financial company. A non-banking
    financial company (NBFC) is a company registered under the Companies Act,
    1956 and is engaged in the business of loans and advances, acquisition of
    shares/stock/bonds/debentures/ securities issued by government or local
    authority or other securities of like marketable nature, leasing,
    hire-purchase, insurance business, chit business, but does not include any
    institution whose principal business is that of agriculture activity,
    industrial activity, sale/purchase/construction of immovable property. NBFCs
    are similar to banks; however they do not accept demand deposits.

ECB (External Commercial Borrowings)

ECB (External Commercial Borrowings) is an instrument used to
facilitate the access to foreign money by Indian corporations and PSUs (Public
Sector undertakings). ECBs include commercial bank loans, buyer& credit, credit
from official export credit agencies and commercial borrowings from the private
sector window of Multilateral Financial institutions such as International
Finance Corporation (Washington), ADB and Investment by Foreign Institutional
Investors (FIIs) in dedicated debt funds. ECBs cannot be used for investment in
stock market or speculation in real estate.

Credit Default Swap

It is a form of insurance against debt default. When an investor buys
corporate (or government) bonds he/she faces the risks of default on part of the
issuing agent. The investor can insure its investment in such bonds against
default through a third party. The investor pays a premium to the party
providing insurance. In the event of default by the bond issuer, the insurer
would step in and pay the investor. A CDS is just that insurance, which is
bought by those who fear default.

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