* The market of an economy where funds are transacted between the fund-surplus and funds carry individuals and group is known as the Financial Market.
* This market might have its organised as well as non - organised (Non - Institutionalised) segments in an economy.
* Financial Markets in every economy are having two separate segments today, one catering to the requirements of short - term funds and the other to the requirements of long - term funds.
* The short - term financial market is known as the Money market.
* The long - term financial market is known as the Capital Market.
INDIAN MONEY MARKET
* Money Market is the short - term financial market of an economy.
* In this market, money is trade between individuals or groups (banks, government, companies etc.) who are either cash - surplus or cash - scare.
* Trading is done on a rate known as discount rate which is determined by the market and guided by the availability of and demand for the cash in the day-to-day trading.
* The Repo rate of the time (announced by the RBI) works as the guiding rate for the current 'Discount Rate'.
* The market operates in both organised and unorganised channels in India.
Need for Money Market
* The long - term capital can be raised either through bank loans, corporate bonds, debentures or shares.
* Such funds are required only short - period (days, fortnights or few months) and are need to meet short falls in working capital requirements.
* This requires creation of a different segment of the financial market. Which can later to the short term requirements of such funds for the enterprises known as the Money Market or the Working Capital market.
* Chakravarthy Committee (1985) which, for first time, market.
* Underlined the need of an organised Money Market in the country and the Vahul Committee (1987) laid the blue print for its development.
1. Unorganised Money Market: The Unorganised Money Market in India may be divided into three different categories.
i) Unregulated Non-Bank Financial Intermediaries: These are functioning in the form of Chit Funds, Nidhis (South India, which lend to only their member) and loan companies.
* They charge very high interest rates i.e., 36 to 48 percent per annum.
ii) Indigenous Bankers: Indigenous Bankers receive deposits and lend money in the capacity of an individual or a private firms.
a) Gujarati Shroffs: They operate in Mumbai, Kolkata as well as in industrial, trading and port cities in the region.
b) Multani or Shikarpuri Shroffs: They operate in Mumbai, Kolkata, Assam tea gardens and North Eastern India.
c) Marwari kayas: They operate mainly in Gujarat with a little bit of presence in Mumbai and Kolkata.
d) Chettiars: They are active in Chennai and at the ports of Southern India.
iii) Money Lenders: They constitute the most localised form of Money Market in India.
a) The Professional money lenders who lend their own money as a profession to earn income through interest.
b) The non-professional money lenders who might be business men and lend.
2. Organised Money Market
i) Treasury Bills (TBs): Present since independence got organised only in 1986.
* They are used by the Central Government to fulfil its short - term liquidity requirement up to the period of 364 days.
a) 14 day (Intermediate TBs)
b) 14 day (Actionable TBs)
c) 91 day TBs
d) 182 day TBs
e) 364 day TBs
* Out of the above five variants of the TBs at present only the 91 day TBs, 182 day TBs and the 364 day TBs are issued by the government - other two variants were discontinued in 2001.
ii) Certificate of Deposit (CD): It is organised in 1989, The CD is used by banks and issued to the depositors for a specified period ranging less than one year.
e.g.: IFCI, IDBI, IRBI, IIBI.
iii) Commercial Paper (CP): It is Organised in 1990 and used by the corporate house in India which should be a listed company with a working capital of not less than Rs.5 crore.
e.g.: CRISIL, ICRA.
iv) Commercial Bill (CB): It is Organised in 1990, a CB is issued by the All India Financial Institutions (AIFIs), Non - Banking Finance Companies (NBFCs), Scheduled Commercial Banks, Merchant Banks, Co-operative Banks and the Mutual Funds.
v) Call Money Market (CMM): This is basically an Inter-Bank Money Market where funds are borrowed and lent, generally, for one day.
* That's why this is also known as over-night borrowing market.
vi) Money Market Mutual Fund (MF): Popular as Mutual Funds (MFs). This Money Market Instrument was introduced / organised in 1992 to provide short - term investment opportunity to individuals.
vii) Repos and Reverse Repos: Repo is basically an acronym of the rate re-purchase.
* Repo in December 1992 and reverse repo in November 1996.
* Repo allow the banks and other financial institutions to barrow money from the RBI for short - term (by selling government securities to the RBI).
* In Reverse Repo the banks and financial institutions purchase government securities from the RBI.
viii) Cash Management Bill (CMB): The Cash Management Bill are non - standard and discounted instruments issued for maturities less than 91 days.
A Mutual Fund is a fund that is created when a large number of investors put in their money, and is managed by professionally qualified persons with experience in investing in different asset classes.
* Shares, bonds, money market instruments like call money and other assets such as gold and property.
There are three types of schemes offered by Mutual Funds.
i) Open - ended schemes: An Open - ended fund is one which is usually available from an MF on an ongoing basis that is, an investor can buy or sell as and when they intend to at a
NAV - based price.
ii) Closed - ended schemes: A Closed - ended fund usually issue units to investors only once, when they launch an offer, called New Fund Offer(NFO) in India.
* Thereafter, these units are listed on the stock exchange they are traded on a daily basis.
* As these units are listed, any investor can buy and sell these units through the exchange.
iii) Exchange - Traded Funds (ETFs): ETFs are a mix of open - ended and close - ended scheme.
* ETFs, like close - ended schemes, are listed and traded on a Stock Exchange on a daily basis, but the price is usually very close to its NAV, or the underlying assets, like gold ETFs.
The Discount and Finance House of India Limited (DFHI) was set up in April 1988 by the RBI jointly with the public sector banks and financial and UTI.
i) To bring an equilibrium of liquidity in the Indian banking system and
ii) To impact liquidity to the instruments of the money market prevalent in the economy.
INDIAN CAPITAL MARKET
* The long - term financial market of an economy is known as the Capital Market.
* This market makes it possible to raise long - term money (capital) i.e., for a period of minimum 365 days and above.
After Independence, India went for intensive industrialisation to achieve rapid growth and development.
* To this end, the main responsibility was given to the Public Sector Undertaking (PSUs).
* To support the Capital requirement of the 'projects' of the Public Sector Industries.
Financial Institutions (FIs)
The requirement of project financing made India to go for a number of FIs from time to time, which are generally classified into four categories.
i) All India Financial Institutions (AIFIs):
* The all India FIs are IFCI (1948), ICICI (1955), IDBI (1964), SIDBI (1990), IIBI(1997).
* All of them were public sector FIs except ICICI.
* The AIFIs witnessed a sharp decline in recent years.
* At this juncture the government decided to convert them into development banks to be known as the All India Development Banks (AIDBs).
* In 2002, the government, proposed to merge IFCI and IIBI with the nationalised bank PNB to create a big Universal Bank.
* At present, there are only four financial institutions operating in the country as AIFIs regulated by the RBI, viz.
* The NABARD, SIDBI, Exim Bank and the NHB.
ii) Specialised Financial Institutions (SFIs)
* To finance risk and innovation in the area of industrial expansion.
* This was India's trial in the area of venture Capital Funding.
a) IFCI venture Capital Funds Ltd (IFCI venture), 2000
A society to provide financial assistance to first generation professionals and technocrat entrepreneurs for setting up own ventures through soft loans, under the Risk Capital Scheme.
b) Tourism Finance Corporation of India Ltd, (TFCI) 1989
National Committee On Tourism (Yunus Committee) set up under the aegis of the planning commission, decided in 1988, to promote a separate All India Financial Institution for providing financial assistance to tourism- related activities/ projects.
* TFCI was incorporated as a Public Limited Company in 1989.
iii) Investment Institutions(IIs)
There investment instutions also came up in the public sector which are yet another kind of FIs i.e., the LIC (1956), the UTI (1964) and the GIC (1971).
* LIC is now called an 'Insurance Company' part of the Indian Insurance Industry and is the one public sector paying in the life insurance segment competing with the private life insurance companies.
» Similarly, the UTI is now part of the Indian Mutual Fund Industry and the loan such firm in the public sector competing with other private sector Mutual Funds.
iv) State Level Finance Institutions (SLFIs)
* The central government allowed the states to set up their own financial institutions.
a) State Finance Corporations (SFCs): First coming up in punjab (1955) and other states followed - 18 SFCs working presently.
b) State Industrial Development Corporation (SIDCs): A fully dedicated state public sector FI to the cause of industrial development in the concerned states. First such FIs were setup (1960) in Andhra pradesh and Bihar.
B. Banking Industry
With the passage of time, the industry saw its nationalisation (1969 and 1980) and again opening up for private sector entry (1993 - 1994 ) to emerge as the most dependable segment of Indian Financial System.
* 19 Nationalised Banks, 7 banks in SBI group, one IDBI Bank Ltd., and 86 RRBs.
C. Insurance Industry
After Independence, for the purpose of expanding the industry, one after another the life and non-life insurance businesses were nationalised by the government (in 1956 and 1970, respectively).
* Presently, Indian Insurance Industry consists of 1 public sector Life Insurer (LIC) and 4 public sector general insurers, 2 specialised public sector insurers (AICIL and ECGC); 1 public sector re-insurer (GIC) and 37 private insurance companies.
MONETARY POLICY TOOLS
Monetary policy deals with all those instruments/means by which short - term money/capital is raised in the economy.
i) Call Money Market: Funds take place on over night basis.
ii) Open Market Operations (OMOs): OMOs are conducted by the RBI via the sale/purchase of government securities (G-sec) to/from the market with the primary aim of modulating rupee liquidity conditions in the market.
iii) Liquidity Adjustment Facility (LAF): The primary aim of such an operation is to assist banks to adjust their day-to-day mismatches in liquidity, via Repo and Reverse Repo Operations.
* LAF is fixed by the RBI from time to time.
Registrar of co-operative societies.