Transcript Capital and Money Market

The Financial Market
• The term ‘Financial Markets’ refers to all those
organisations and institutions which lend funds to
business enterprises and government/public
authorities.
FINANCIAL MARKETS
MONEY MARKET
Short-term funds
Organised and unorganised
CAPITAL MARKET
Medium and long-term funds
Money Market
• Money market refers to an mechanism whereby
borrowers manage to obtain short-term funds on one
hand. And on the others, lenders succeed in getting
credit worthy borrowers for their money.
• In any money market, the Central Bank occupies a
strategic position being the residual source of supply of
funds, followed by commercial banks as the most
important lenders.
• However, these banks are not only lenders of money, but
they also create credit. The Central Bank’s role is
therefore important as controller of credit.
Functions of Money Markets
1. By providing various kinds of attractive and suitable
credit instruments, it increases the supply of funds.
2. Money Market avoids, gluts or shortages in funds
arising out of seasonal variations in the flow and
demand for funds.
3. It enhances the amount of liquidity in the economy.
4. It makes available funds at cheaper rates.
5. It reduces regional gluts and stringencies in funds
through quick transfer of funds from one place to
another.
6. By providing profitable investment opportunities for
short-term surplus funds, it helps to enhance
profitability of individuals and financial institutions.
The Organised Indian Money Market
• The Indian money market comprises two
sectors: organised and unorganised segments.
• In the organised segment of the money market,
the RBI occupies a pivotal position, followed by
commercial banks, including public sector banks
and joint stock banks, Indian and foreign.
• The structure of money market has undergone
huge changes, particularly since economic
reforms.
• The RBI has gradually developed money market
through five-pronged approach.
Indian Money Market: Changing Structure
• Ceilings on interest rate of various money
market instruments were withdrawn since 1989.
• Several new money market instruments
introduced, viz auctions of Treasury Bills,
Commercial Papers, RBI repos.
• Permitting increasing number of players: starting
with Discount and Finance House of India
(DFHI)
Money Market Instruments
• Call money market: These are money dealt for 1 to 14
days. Inter-bank lending/call money market is the major
component of this market.
• Treasury Bills Market: Treasury Bills are short-term
liability of the government. The market for these include,
14-day Auction TBs, 182-days, (1999), 364-days (not rediscountable with RBI).
• Repos: This is a money market instrument which
enables collateralised short-term borrowing and lending
through sale and purchase in debt instruments. Under a
repo transactions, holder of a security can sell it to an
investor with an agreement to purchase them at predetermined rate and date.
Money Market Instruments providing liquidity
to the commercial sector.
• Commercial Bills: Bill issued between merchant firms,
between seller and buyer of goods. The purpose is to
reimburse the seller while the buyer delays payments.
• Commercial Papers (CP): This is a short-term instrument
of raising funds by corporates. It is essentially a sort of
unsecured promissory note sold by the issuer to a
banker. Following the recommendations of the Vaghul
Committee, CP was introduced in 1990, can be issued
by listed companies which have working capital of not
less that 5 crores. These companies have to be rated by
rating agencies approved by RBI, has to obtain P2 from
CRISIL or A2 from ICRA.
• MMFs: Introduced in 1992, for providing additional shortterm avenue for individual investor.
The Unorganised Segment of Indian Money
Market
– Money lenders, indigenous bankers,
– Unregulated loan companies, chit funds,
nidhis.
The Capital Market
• Capital Market can be divided into two
constituents:
• 1) The Securities market
• 2) the Financial Institutions; IFCI, IDBI, LIC, UTI
etc.
The Securities market
Government Securities Market
Corporate Securities Market
Importance/Role of Capital Market
• Pace of development, is conditioned, among
other things, by the rate of long-term investment
and capital formation. That in turn, is conditioned
by mobilisation, channelisation and
augmentation of funds.
• With rise of joint stock companies, capital market
becomes a necessary infrastructure for fastpaced industrialisation, hence promotes
industrial growth.
• Raising long-term capital
• Ready and continuous market
The Government Securities market
• Gilt-edged Market: Market in government
securities or securities guaranteed by the
government. Imp features are:
• Risk free and returns are guaranteed
• RBI the sole dealer of these securities
• Investors in these securities are predominantly
institutions which are required to hold
government securities like comm. Bnks, LIC,
UTI, etc.
Financial Institutions
in the Indian Economy
• Institutions that allow savers and borrowers to
interact are called financial intermediaries.
• Types of Financial Intermediaries:
– Banks
- Bond Market
– Stock Market
- Mutual Funds
– Other
Financial Intermediaries:
Banks
• Banks take in deposits from people who want to save
and make loans to people who want to borrow.
• Banks pay depositors interest and charge borrowers
higher interest on their loans.
• Banks help create a medium of exchange, by
allowing people to write cheques against their
deposits.
Financial Intermediaries:
The Bond Market
• A bond is a certificate of indebtedness that specifies
obligations of the borrower to the holder of the bond.
• Characteristics of a bond:
– Term: the length of time until maturity.
– Credit Risk: the probability that the borrower will
fail to pay some of the interest or principle.
Financial Intermediaries:
The Stock Market
• Stock represents ownership in a firm, thus the owner has
claim to the profits that the firm makes.
• Sale of stock infers “equity finance” but offers both higher risk
and potentially higher return.
• Primary Market: new issues market
• Secondary Market: stock market
• Markets in which stock is traded:
– National Stock Exchange
– Bombay Stock Exchange
Financial Intermediaries:
Mutual Funds
• A Mutual Fund is an institution that sells shares to
the public and uses the proceeds to buy a selection,
or portfolio, of various types of stocks, bonds, or both.
• Allows people with small amounts of money to
diversify.
Financial Intermediaries:
Other
• Other financial intermediaries in the money market:
– Money lenders, indigenous bankers,
– Unregulated loan companies, chit funds, nidhis.
– Pension Funds
– Insurance Companies