.

Structure of
Indian Money
Market

Unorganized Sector Cooperative Sector Organized Sector

RBI Public Sector Private Development DFHI

Banks Sector Banks Banks

Non-scheduled
Banks

Scheduled Banks

Foreign Banks

Indian Banks
 . Unlike moneylenders
who only lend money, IBs accept deposits as well
as lend money. They operate mostly in urban
areas, especially in western and southern regions
of the country.
FINANCE BROKERS
They act as middlemen between
lenders and borrowers. They
charge commission for their
services. They are found mostly
in urban markets, especially in
cloth markets and commodity
markets.
They act as middlemen between
lenders and borrowers
The Reserve Bank of India (RBI) is India's
central banking institution, which
controls the monetary policy of the
Indian rupee. It was established on 1
April 1935 during the British Raj in
accordance with the provisions of the
Reserve Bank of India Act, 1934.
Following India's independence in 1947,
the RBI was nationalized in the year 1949.
Public Sector Banks (PSBs) are banks where
a majority stake (i.e. more than 50%) is
held by a government. The shares of
these banks are listed on stock
exchanges. There are a total of 26 PSBs
in India.
 The banks which are not registered in the list of
central bank under its charter are known as non-
scheduled banks. They are not bound to perform
banking services according to the policies and
instructions of central bank e.g. Bank of Punjab was
a non-scheduled bank.

These banks do not fulfill the required qualifications

of a scheduled bank as prescribed by the central
bank. They also do not enjoy the public confidence.
In many countries, many non-scheduled banks are
also working.
 Scheduled Banks in India are those banks which have
been included in the Second Schedule of Reserve Bank of
India (RBI) Act, 1934. RBI in turn includes only those
banks in this schedule which satisfy the criteria laid
down vide section 42 (6) (a) of the Act.

As on 30th June, 1999, there were 300 scheduled banks

in India having a total network of 64,918 branches.
Scheduled commercial banks in India include State Bank
of India and its associates (5), nationalised banks (19),
foreign banks (45), private sector banks (32), co-
operative banks and regional rural banks.
All those banks where greater parts of
stake or equity are held by the private
shareholders and not by government are
called "private-sector banks". These are
the major players in the banking sector
as well as in expansion of the business
activities India.
Development banks are specialized financial
institutions. They provide medium and long-
term finance to the industrial and
agricultural sector. They provide finance to
both private and public sector.
Development banks are multipurpose
financial institutions. They do term lending,
investment in securities and other activities.
They even promote saving and investment
habit in the public.
 Industrial Development Banks : It includes, for
example, Industrial Finance Corporation of
India (IFCI), Industrial Development Bank of
India (IDBI), and Small Industries Development
Bank of India (SIDBI).
Agricultural Development Banks : It includes,
for example, National Bank for Agriculture &
Rural Development (NABARD).
Export-Import Development Banks : It includes,
for example, Export-Import Bank of India (EXIM
Bank).
Housing Development Banks : It includes, for
example, National Housing Bank (NHB).
Discount and Finance House of India Ltd.
(DFHI), a unique institution of its kind, was
set up in April 1988. The discount has
been established to deal in money
market instruments in order to provide
liquidity in the money market. Thus the
task assigned to DFHI is to develop a
secondary market in the existing money
market instruments.
 Direct discounting as well as re-discounting of bills arising out
of sale of machinery of capital equipment by manufacturers
in small scale sector on deferred credit.

Equity type assistance under national Equity Funds and by

way of seed capital to entrepreneurs

Re-discounting of short term bills arising out of sale of

products of small scale sector.

Sources support to National Small industries Corporation and

other institutions concerned with small industries

Share capital and resources support to factoring

organizations.
 The call money market deals in short term
finance repayable on demand, with a maturity
period varying from one day to 14 days.
Commercial banks, both Indian and foreign,
co-operative banks, Discount and Finance
House of India Ltd.(DFHI), Securities trading
corporation of India (STCI) participate as both
lenders and borrowers and Life Insurance
Corporation of India (LIC), Unit Trust of
India(UTI), National Bank for Agriculture and
Rural Development (NABARD)can participate
only as lenders.
The interest rate paid on call money loans,
known as the call rate, is highly volatile
Treasury Bills are the instruments of
short term borrowing by the
Central/State govt. They are
promissory notes issued at discount
and for a fixed period. These were first
issued in India in 1917.
These are issued to raise funds for
meeting expenditure needs and also
provide outlet for parking temporary
surplus funds by investors.
Treasury bills can be purchased by any
one (including individuals) except
State govt. These are issued by RBI
and sold through fortnightly or monthly
auctions at varying discount rate
depending upon the bids.
Minimum amount of face value Rs.1
lakh and in multiples there of. There is
no specific amount/limit on the extent
to which these can be issued or
purchased.
91 days and 364 days.
Market determined, based on demand
for and supply of funds in the money
market.
 These are highly liquid and safe
investment giving attractive yield.
Approved assets for SLR purposes and
DFHI is the market maker in these
instruments and provide (daily) two way
quotes to assure liquidity.
RBI sells treasury bills on auction basis
(to bidders quoting above the cut-off
price fixed by RBI) every fortnight by
calling bids from banks, State Govt. and
other specified bodies.
 Commercial bill Market

A commercial bill is one which arises out of a

genuine trade transaction, i.e. credit transaction. As
soon as goods are sold on credit, the seller draws a
bill on the buyer for the amount due. The buyer
accepts it immediately agreeing to pay amount
mentioned therein after a certain specified date.
Thus, a bill of exchange contains a written order
from the creditor to the debtor, to pay a certain sum,
to a certain person, after a creation period. A bill of
exchange is a self-liquidating paper and negotiable;
it is drawn always for a short period ranging between
3 months and 6 months.
THE CERTIFICATE OF DEPOSIT MARKET
The scheme of Certificate of Deposit (CD) was
introduced by RBI in 1989. The main purpose of
CD is to enable the commercial banks to raise
funds from the market. The CDs maturity period
ranges from 7 days to 1 year (in case of FIs
minimum 1 year and maximum 3 years). The
CDs are issued at a discount to its face value.
The CDs are issued in denomination of Rs. 1
lakh and thereafter, multiples of Rs. 1 lakh. The
holder is entitled to receive a fixed rate of
interest and have no lock-in period.
HOW CDS WORK

CDs typically require a minimum deposit, and may offer

higher rates for larger deposits. The best rates are
generally offered on "Jumbo CDs" with minimum deposits
of $100,000.

The consumer who opens a CD may receive a paper

certificate, but it is now common for a CD to consist
simply of a book entry and an item shown in the
consumer's periodic bank statements; that is, there is
often no "certificate" as such. Consumers who wish to
have a hard copy verifying their CD purchase may
request a paper statement from the bank or print out their
own from the financial institution's online banking service.
The Commercial Paper Market
The scheme of Commercial Paper (CP) was introduced in 1990.
Blue chip companies for short term financing issue CPs. As per
RBI guidelines, CPs can be issued on the following conditions:
The minimum tangible net worth of the company to be at least
Rs. 4 crores.
The CP receives a minimum rating of A-2 or such other rating
from recognized rating agencies like CRISIL, CARE, ICRA, Fitch
Ratings, etc.
The company has been sanctioned working capital limit by bank/s
or all-India FIs.

The CPs maturity period ranges from 7 days to 1 year. They can be
issued in multiples of Rs. 5 lakhs and in multiples thereof. They
are sold at a discount to its face value and redeemed at its face
value.
REPO MARKET
A repurchase agreement, also known as a repo,
RP, or sale and repurchase agreement, is the sale
of securities together with an agreement for the
seller to buy back the securities at a later date.
The repurchase price should be greater than the
original sale price, the difference effectively
representing interest, sometimes called the repo
rate. The party that originally buys the securities
effectively acts as a lender. The original seller is
effectively acting as a borrower, using their
security as collateral for a secured cash loan at a
fixed rate of interest.
REVERSE REPO
A reverse repo is simply the same repurchase
agreement from the buyer's viewpoint, not the seller's.
Hence, the seller executing the transaction would
describe it as a "repo", while the buyer in the same
transaction would describe it a "reverse repo". The
term "reverse repo and sale" is commonly used to
describe the creation of a short position in a debt
instrument where the buyer in the repo transaction
immediately sells the security provided by the seller
on the open market.
On the settlement date of the repo, the buyer
acquires the relevant security on the open market and
delivers it to the seller. In such a short transaction the
seller is wagering that the relevant security will decline
in value between the date of the repo and the
settlement date.
 The MMMFs were introduced in 1992. The
objective of MMMFs is to provide an additional
short term avenue to the individual investors. In
1995, RBI modified the scheme to allow private
sector organizations to setup MMMFs.
The scheme has been made more attractive to
investors by reducing lock in period from 45 days
to 15 days. Resources mobilized from MMMFs are
required to be invested in call money, CDs, CPs,
commercial bills, treasury bills, and government
dated securities having an unexpired maturity of
up to 1 year.
 A mutual fund is a type of professionally
managed collective investment vehicle that
pools money from many investors to purchase
securities.
They are sometimes referred to as "investment
companies" or "registered investment
companies." Most mutual funds are "open-
ended," meaning investors can buy or sell
shares of the fund at any time. Hedge funds are
not considered a type of mutual fund.
Drawbacks of Indian
Money Market
 Absence of Integration

The Indian money market is broadly divided into the

Organized and Unorganized Sectors. The former
comprises the legal financial institutions backed by
the RBI. The unorganized statement of it includes
various institutions such as indigenous bankers,
village money lenders, traders, etc. There is lack of
proper integration between these two segments.
 Multiple rate of interest
In the Indian money market, especially the
banks, there exists too many rates of interests.
These rates vary for lending, borrowing,
government activities, etc. Many rates of
interests create confusion among the
investors.
 Insufficient Funds or Resources
The Indian economy with its seasonal structure
faces frequent shortage of financial recourse.
Lower income, lower savings, and lack of
banking habits among people are some of the
reasons for it.
 Shortage of Investment Instruments
In the Indian money market, various investment
instruments such as Treasury Bills, Commercial
Bills, Certificate of Deposits, Commercial
Papers, etc. are used. But taking into account
the size of the population and market these
instruments are inadequate.
 Lack of Organized Banking System
In India even through we have a big network of
commercial banks, still the banking system suffers
from major weaknesses such as the NPA, huge
losses, poor efficiency. The absence of the organized
banking system is major problem for Indian money
market.
 Less number of Dealers
There are poor number of dealers in the short-
term assets who can act as mediators
between the government and the banking
system. The less number of dealers leads to
the slow contact between the end lender and
end borrowers.

MOVING ON
Capital markets are financial markets for the buying and
selling of long-term debt- or equity-backed securities.
These markets channel the wealth of savers to those
who can put it to long-term productive use, such as
companies or governments making long-term
investments. Financial regulators, such as the UK's
Bank of England (BoE) or the U.S. Securities and
Exchange Commission (SEC), oversee the capital
markets in their jurisdictions to protect investors
against fraud, among other duties.
Capital market is an important source for mobilizing
idle savings from the economy. It mobilizes funds
from people for further investments in the
productive channels of an economy. In that sense it
activate the ideal monetary resources and puts them
in proper investments.
Capital market helps in capital formation. Capital
formation is net addition to the existing stock of
capital in the economy. Through mobilization of ideal
resources it generates savings; the mobilized savings
are made available to various segments such as
agriculture, industry, etc. This helps in increasing
capital formation.
Capital market enhances production and productivity in
the national economy. As it makes funds available for
long period of time, the financial requirements of
business houses are met by the capital market. It
helps in research and development. This helps in,
increasing production and productivity in economy
by generation of employment and development of
infrastructure.
Capital markets not only helps in fund
mobilization, but it also helps in proper
allocation of these resources. It can have
regulation over the resources so that it can
direct funds in a qualitative manner.
As an important financial set up capital market
provides various types of services. It includes
long term and medium term loans to industry,
underwriting services, consultancy services,
export finance, etc. These services help the
manufacturing sector in a large spectrum.
Capital market is place where the investment avenue is
continuously available for long term investment. This
is a liquid market as it makes fund available on
continues basis. Both buyers and seller can easily buy
and sell securities as they are continuously available.
Basically capital market transactions are related to
the stock exchanges. Thus marketability in the capital
market becomes easy.
 Structure of
capital market in India
Gilt Edged Industrial Development banks Financial Service
Securities Securities
Market Market IFI Merchant
Banking

IDBI
Leasing
Primary Secondary
Market Market ICICI
Factoring

SFC Venture
Capital

UTI Mutual
Funds

LIC
Others

Others
Primary market is the part of capital market where
issue of new securities takes place. Public sector
institutions, companies and governments obtain
funds for further growth of the company after the
sale of their securities or bonds in primary market.
The selling process of new issues in primary market is
called as Underwriting and this process is done by
a group of people called underwriters or security
dealers. From a retail investors point of view,
investing in the primary market is the first step
towards trading in stocks and shares
 Capital formation - It provides attractive issue to the potential
investors and with this company can raise capital at lower costs.

Liquidity - As the securities issued in primary market can be

immediately sold in secondary market the rate of liquidity is higher.

Diversification - Many financial intermediaries invest in primary

market; therefore there is less risk if there is failure in investment as the
company does not depend on a single investor. The diversification of
investment reduces the overall risk.

Reduction in cost - Prospectus containing all details about the

securities are given to the investors hence reducing the cost is searching
and assessing the individual securities.
Features of Primary
Market
It is the new issue market for the new long term
capital.
Here the securities are issued by company directly to
the investors and not through any intermediaries.
On receiving the money from the new issues, the
company will issue the security certificates to the
investors.
The amount obtained by the company after the new
issues are utilized for expansion of the present
business or for setting up new ventures.
External finance for longer term such as loans from
financial institutions is not included in primary market.
There is an option called going public in which the
borrowers in new issue market raise capital for
converting private capital into public capital.
PAN Number
Bank Account
Demat Account
Secondary market
Secondary market refers to a market where
securities are traded after being initially
offered to the public in the primary market
and/or listed on the Stock Exchange.
Majority of the trading is done in the
secondary market. Secondary market
comprises of equity markets and the debt
markets.
Also
Secondary market is that financial market in
which investor can buy and sell shares and
bonds after its issue by company. After
issuing shares or debentures, it becomes
existing product and it will be saleable like
any other product.
Not only secondary market for shares but
secondary market for any thing can be made
according to requirement.
What is the role of the Secondary
Market?
For the general investor, the secondary market
provides an efficient platform for trading of his
securities.
For the management of the company, Secondary
equity markets serve as a monitoring and control
conduit-by facilitating value-enhancing control
activities, enabling implementation of incentive-
based management contracts, and aggregating
information (via price discovery) that guides
management decisions.
DIFFERENCE:
Basis Primary Market Secondary Market
Meaning Deals in the issuance of Deals in the securities
new securities. already issued in the
primary market.
Trading Price Securities in the primary Securities in the secondary
market are issued at the market are trader at the
issue price. market price.
Creation/Transfer of Primary market is the Secondary market simply
Securities market for the creation of transfers of securities from
new securities one hand to another.
Regulation It is subject to the rules and Secondary market is
regulations framed by the subject to the rules and
SEBI and the companies regulations framed by the
act, 1956. SEBI fro time-to-time.

Main objective To create long term capital. To provide liquidity and

marketability to the long
term securities.
Stock exchange
A stock exchange is a form of exchange which provides
services for stock brokers and traders to trade stocks,
bonds, and other securities. Stock exchanges also provide
facilities for issue and redemption of securities and other
financial instruments, and capital events including the
payment of income and dividends. Securities traded on a
stock exchange include shares issued by companies, unit
trusts, derivatives, pooled investment products and bonds.
Stock exchange provides a ready and continuous
market for purchase and sale of securities. It
provides ready outlet for buying and selling of
securities. Stock exchange also acts as an
outlet/counter for the sale of listed securities.
Stock exchange is useful for the evaluation of
industrial securities. This enables investors to
know the true worth of their holdings at any
time. Comparison of companies in the same
industry is possible through stock exchange
quotations (i.e price list).
Stock exchange accelerates the process of capital
formation. It creates the habit of saving,
investing and risk taking among the investing
class and converts their savings into profitable
investment. It acts as an instrument of capital
formation. In addition, it also acts as a channel
for right (safe and profitable) investment.
Stock exchange provides safety, security and equity
(justice) in dealings as transactions are conducted as
per well defined rules and regulations. The
managing body of the exchange keeps control on the
members. Fraudulent practices are also checked
effectively. Due to various rules and regulations,
stock exchange functions as the custodian of funds
of genuine investors.
Listed companies have to comply with rules and
regulations of concerned stock exchange and
work under the vigilance (i.e. supervision) of
stock exchange authorities.
Stock exchange serves as a platform for marketing
Government securities. It enables government to
raise public debt easily and quickly.
Stock exchange provides a clearing house facility
to members. It settles the transactions among
the members quickly and with ease. The
members have to pay or receive only the net
dues (balance amounts) because of the clearing
house facility.
Banks easily know the prices of quoted securities.
They offer loans to customers against corporate
securities. This gives convenience to the owners
of securities.
 BSE is the oldest stock exchange in Asia. The
extensiveness of the indigenous equity broking
industry in India led to the formation of the
Native Share Brokers Association in 1875, which
later became Bombay Stock Exchange Limited
(BSE).
BSE is widely recognized due to its pivotal and
pre-eminent role in the development of the
Indian capital market.
The National Stock Exchange (NSE) (Hindi:
Rashtriya Share Bazaar) is stock exchange
located at Mumbai, India. It is the 11th largest stock
exchange in the world by market capitalization and
largest in India by daily turnover and number of
trades, for both equities and derivative trading.

NSE was recognized as a stock exchange in April

1993 under the Securities Contracts (Regulation)
Act. It commenced its operations in Wholesale Debt
Market in June 1994. The capital market segment
commenced its operations in November 1994,
whereas the derivative segment started in 2000.
OTC Exchange Of India (OTCEI)
OTC Exchange Of India (OTCEI) also known as Over-the-
Counter Exchange of India based in Mumbai, Maharashtra. It
is the first exchange for small companies. It is the first screen
based nationwide stock exchange in India. It was set up to
access high-technology enterprising promoters in raising
finance for new product development in a cost effective
manner and to provide transparent and efficient trading
system to the investors.

OTCEI is promoted by the Unit Trust of India, the Industrial

Credit and Investment Corporation of India, the Industrial
Development Bank of India, the Industrial Finance
Corporation of India and others and is a recognized stock
exchange under the SCR Act.
The Securities and Exchange Board
of India (frequently abbreviated
SEBI) is the regulator for the
securities market in India. It was
established on 12 April 1992
through the SEBI Act, 1992.
 For the discharge of its functions efficiently, SEBI has
been invested with the necessary powers which are:
to approve bylaws of stock exchanges.
to require the stock exchange to amend their bylaws.
inspect the books of accounts and call for periodical
returns from recognized stock exchanges.
inspect the books of accounts of a financial
intermediaries.
compel certain companies to list their shares in one or
more stock exchanges.
levy fees and other charges on the intermediaries for
performing its functions.
prosecute and judge directly the violation of certain
provisions of the companies Act.
The first objective of SEBI is to regulate stock
exchanges so that efficient services may be
provided to all the parties operating there.
 The capital market is meaningless in the absence of the
investors. Therefore, it is important to protect the interests of
the investors.

The protection of the interests of the investors means

protecting them from the wrong information given by the
companies in their prospectus, reducing the risk of delivery
and payment, etc. Hence, the foremost objective of the SEBI is
to provide security to the investors.
 It is important to keep an eye on the activities
of the brokers and other middlemen in order
to control the capital market. To have a control
over them, it was necessary to establish the
SEBI.

last