Financial Markets in India

Financial markets are the centers that provide facilities for buying
and selling of financial assets. Financial assets are paper ( or electronic ) claims on some issuer such as the government or a corporate body. Important financial assets are
Govt. securities Deposits with banks Equity shares,debentures Mutual fund units, Insurance policies

Financial Markets in India

Participants on the demand and supply sides
of these

markets are financial institutions, brokers, borrowers, lenders and savers

The participants trade in financial products on these markets either directly or through brokers on organised exchanges or off exchanges.

Classification of Financial Markets

Unorganised markets Money lenders lend money to the public Indigenous bankers also collect deposits from public Regulations concerning their financial dealings are inadequate. Organised Markets Consist of standardised rules governing their financial dealings High degree of institutions and instruments. Subject to control by regulators like RBI, SEBI, IRDA.

Organised Markets
Organised markets can be classified into two categories
Capital Market Money Market

Capital Market It is a market for financial assets which have a long term maturity
period ( more than one year ) Its function is to transfer resources from savers to producers. It may be further divided into three types A) Industrial Securities market B) Govt. Securities market C) Long term loan market

Capital Market
A) Industrial Securities market It is a part of the capital market where companies raise their long term capital by issuing either shares or debentures. The shares can be equity shares or pref. Shares It consists of Primary market ( New Issue market ) and Secondary market

Capital Market
Primary market Primary market is a market for issue of new financial claims. It deals with those securities which are issued to the public for the first time. Borrowers exchange new financial securities for long term funds.

It facilitates capital formation.

Capital Market
Companies raise equity capital by Public issue of shares Rights issue of shares Private placement of shares Secondary Market It is a market for secondary sale of securities which were already issued in primary market. The equity shares are traded in the stock exchanges ( NSE or BSE ) to provide a continous market for buying and selling of shares.

Capital Market
B) Govt. Securities Market It is market where Govt. securities are traded. Govt. securities include securities issued by Central Govt, State Govt and others like NABARD, REC.

Long term securities are traded in this capital market whereas short term are traded in money market.
Major participants in this market are the commercial banks because they need to buy these to satisfy their SLR requirements.

Capital Market
C) Long Term Loan market This market includes
Term loan market Mortgage market Financial guarantee market Banks play a vital role in this market by supplying long term loans to corporate customers. A mortgage loan is a loan against the security of immovable property. Financial guarantee will be provided mainly by commercial banks and relate to deferred payments for imports and exports and other loans.

Importance of capital market

Capital market serves as an important source for the productive use

of the economys savings. Absence of capital market acts as a deterrent factor to capital formation and economic growth.

It provides an avenue for investors, both retail and HNIs, to invest in financial assets which are more productive than physical assets.
It facilitates increase in production in the economy and enhances economic welfare of the society. The operations of different institutions in the capital market induce economic growth.

Money Market
Money market is a market for dealing with financial assets which have a maturity period of upto 1 year ie. Short term funds market. It can be classified as Call money market Commercial bills market Treasury bills market Short term loan market

Money Market
Call money market

It is a market for extremely short period loans, ranging from 1 day to 14 days.
It is a highly liquid market and commercial banks are the major players in this market. The interest rate varies from day to day and sensitive to changes in demand and supply of cash liquidity.

Money Market
Commercial bills market
It is a market for Bills of Exchange arising out of genuine trade transactions. In the case of credit sale, the seller draws a Bill of Exchange on the buyer and once the buyer accepts this bill, the seller can discount it with a Bank and receive cash. Discount and Finance House of India was set up in 1988 to promote secondary market in bills.

Money Market
Treasury bills market
A treasury bill is a promissory note issued by the Govt. and its repayment is also guaranteed by the Govt.
It is an important instrument for short term borrowing of the Govt. T-Bills are issued to Banks and other financial institutions with a view to raising funds for Govt. to meet its short term financial needs.

T-Bills have a maturity period of 91 days or 182 or 364 days only.

Money Market
Short term loan market
It is a market where short term loans are given to corporates for meeting their working capital requirements. Commercial banks provide short term loans in the form of cash credit and overdraft .

Cash credit is given against the security of commodities and a proper limit is sanctioned by the Bank, which is normally a % of value of commodities pledged.
Overdraft is purely a temporary facility extended by Banks against the security of financial instruments like bonds, LIC policies.