Revision: Money Market and Capital Market in India Eco HSC Commerce (English Medium) 12th Standard Board Exam Maharashtra State Board

• Dr. M. H. de Kock: “Central bank is one which constitutes the apex of the monetary and banking structure of the country.”
• Prof. W. A. Shaw: “Central bank is a bank which controls credit.”

• “A bank collects money from those who have it to spare or who are saving it out of their incomes and it lends this money to those who require it.” — Crowther
• “Bank means accepting for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheque, draft or otherwise.” — According to Indian Companies Act, 1949
• Banking Regulation Act of 1949: “Banking means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, demand draft, order or otherwise.”
• Prof. Cairncross: “A bank is a financial intermediary, a dealer in loans and debts.”

• Finance = management of money; includes personal, corporate and public finance.
• India’s financial system: institutions, markets, instruments and services that move funds for development.
• Financial market = place to buy and sell financial assets like bonds, shares, derivatives, government securities and foreign currency.
• Main types of financial markets: money market and capital market.

Key instruments:

• Bonds – long‑term borrowing by firms/government.
• Equity shares – ownership in a company.
• Derivatives – value based on another asset.
• Government securities – government debt with repayment promise.
• Trade bills – bills of exchange used in trade payments.
• Promissory note – written promise to pay a fixed sum later.

• Money market is a market for short‑term funds used for lending and borrowing.
• It deals in “near money” instruments like trade bills, government securities and promissory notes.
• These instruments are highly liquid, low risk, easily marketable and have a maturity of up to one year.

• The Indian money market has two sectors: organised and unorganised.
• Organised sector: RBI, commercial banks, co‑operative banks, development financial institutions, investment institutions and DFHI.
• Unorganised sector: Indigenous bankers, moneylenders and other unregulated financial intermediaries.
• Main centres: Mumbai (most active), Delhi and Kolkata.

• The Indian money market has two sectors: organised and unorganised.
• Organised sector: RBI, commercial banks, co‑operative banks, development financial institutions, investment institutions and DFHI.
• Unorganised sector: Indigenous bankers, moneylenders and other unregulated financial intermediaries.
• Main centres: Mumbai (most active), Delhi and Kolkata.

• Co-operative banks give loans to local people, mainly small and middle‑income groups.
• They have a three‑tier structure:
  Primary Co‑operative Credit Societies (village level).
  District Central Co‑operative Banks (district level).
  State Co‑operative Banks / Apex Banks (state level).

• Development Financial Institutions (DFIs) give medium and long‑term loans to industry, agriculture and other key sectors.
• IFCI (1948) was the first DFI in India.
• After liberalisation, many DFIs expanded into services like commercial banking and infrastructure finance and some, like ICICI, became universal banks.

• Discount and Finance House of India (DFHI) is a money market institution started in 1988.
• It was set up on Vaghul Committee’s recommendation.
• It is jointly owned by the central bank, public sector banks and financial institutions.
• Main role: provide liquidity to money market instruments.

• The unorganised money market mainly operates in rural areas and includes indigenous bankers, moneylenders and some informal finance companies.
• Indigenous bankers: Work like small local banks, giving short‑term loans (e.g. via hundis) to farmers, traders and small businesses.
• Moneylenders: Village lenders who charge very high interest and give loans for any purpose to poor farmers, labourers and artisans.
• Unregulated intermediaries: Chit funds, Nidhis and loan companies that collect money from members and lend it, often at high interest.

• Money market instruments are short‑term tools for borrowing and lending (up to one year).
• Call / Notice money: Call = loan for 1 day; Notice = loan for 2–14 days.
• Treasury Bills: Short‑term government securities issued by RBI.
• Commercial Papers: Unsecured short‑term promissory notes issued by companies.
• Certificates of Deposit: Negotiable time deposits issued by banks/DFIs.
• Commercial Bills: Short‑term trade bills used to finance sale of goods.

• Money market gives short‑term funds to borrowers at reasonable rates.
• Helps the central bank manage liquidity and interest rates, supporting economic stability.
• Offers safe instruments for investors to manage portfolios and earn returns.
• Provides short‑term finance to the government (e.g. via Treasury Bills).
• Reduces the need to hold cash by using near‑money instruments.
• Supports trade, industry, agriculture and small businesses through short‑term credit.

• Indian money market is small and less liquid compared to advanced countries.
• Dual structure (organised + unorganised) causes poor integration and weak control.
• Different lenders charge different interest rates; no uniform rate.
• Shortage of funds due to low savings, low income and weak rural banking habits.
• Strong seasonal demand for funds creates fluctuations.
• Many poor/weak sections still lack access to banking (low financial inclusion).
• Slow technology adoption reduces efficiency of the market.

• New short‑term instruments: T‑bills (various maturities), CPs, CDs, MMMFs.
• Repo and Reverse Repo under LAF to manage liquidity.
• Interest rates mostly set by market forces.
• NEFT and RTGS introduced for fast electronic payments.
• Electronic dealing systems adopted to modernise trading.

• Capital market is a market for long‑term funds (more than one year), both equity and debt.
• It supplies finance for agriculture, trade and industry, helping investment and economic growth.
• Main suppliers of long‑term funds are individual savers, companies, banks, insurance firms and special financial institutions.

• India’s capital market has four main parts.
• Government Securities Market: Deals in government and semi‑government bonds with fixed interest.
• Industrial Securities Market: Deals in company shares and debentures via primary market (new issues) and secondary market (stock exchanges like BSE, NSE).
• Development Financial Institutions: Give medium/long‑term loans to industry (e.g. IFCI, IIBI, EXIM Bank).
• Financial Intermediaries: Link investors and borrowers (merchant banks, mutual funds, leasing firms, venture capital companies).

• The capital market mobilises long‑term savings from the public for industry and government.
• It provides equity capital to businesses for assets and operations.
• It improves efficiency by reducing costs and speeding up settlements.
• It enables quick, fair valuation of shares and bonds.
• It promotes integration of real and financial sectors, equity and debt, public and private, domestic and foreign funds.​

• The Indian capital market suffers from financial scams, causing investor distrust and loss.​
• Insider trading and price rigging distort fair prices and hurt smooth functioning.​
• The debt market is weak with low trading in bonds and debentures.​
• Regional exchanges see low trading as investors prefer BSE and NSE.​
• The market has low informational efficiency, so prices do not fully reflect all available information.​

• SEBI was made a statutory regulator in 1992 to protect investors and develop the securities market.​
• NSE was set up in 1992 with a modern, screen-based trading system.​
• Demat accounts were introduced in 1996 for electronic share holding and trading.​
• Firms can raise global funds via ADRs and GDRs.​
• The IEPF was started in 2001 to educate and protect investors.​