FINANCIAL MARKETS AND ENVIRONMENT

Paper Code: BBA-II-N-506

BBA (IIFSB) _ 5th Semester

UNIT 1

Nature of the Financial System

A system is a set of interrelated parts working together to achieve some purpose. Thus, a financial
system implies a set of complex and closely-connected or intermixed institutions, agents, practices,
markets and so on in an economy.

In other words, financial system may be said to be made up of all those channels through which
savings become available for investment.

These channels include:

(1) financial institutions/intermediaries like banks, insurance organizations, unit trusts/mutual funds and
so on which collect capital from savers-investors and distribute them to entrepreneurs/productive
enterprises;

(2) financial markets comprising of capital/securities market (i.e. stock exchange and new issue market),
the money market and the foreign exchange market (forex), and

(3) financial assets/instruments (securities) such as shares, debentures, units, derivatives and so on.

Functions

Financial systems are of crucial significance to capital formation. The main function of financial system
is the collection of savings and their distribution for industrial investment, thereby stimulation the
capital formation and, accelerating the process of economic growth. The process of capital formation
involves three distinct although inter-related activities:

1. Savings: The activity by which resources are set aside and become available for productive
purposes.
2. Finance: The activity by which resources are either assembled from those released by domestic
savings, obtained from abroad, or specially created usually as bank deposits and then placed in
the hands of the investors.
3. Investment: The activity by which resources are actually committed to production.

Role / Functions of Financial System:

A financial system performs the following functions:

1. It serves as a link between savers and investors. It helps in utilizing the mobilized savings of
scattered savers in more efficient and effective manner. It channelizes flow of saving into
productive investment.
2. It assists in the selection of the projects to be financed and also reviews the performance of such
projects periodically.
 3. It provides payment mechanism for exchange of goods and services.
4. It provides a mechanism for the transfer of resources across geographic boundaries.
5. It provides a mechanism for managing and controlling the risk involved in mobilizing savings
and allocating credit.
6. It promotes the process of capital formation by bringing together the supply of saving and the
demand for investible funds.
7. It helps in lowering the cost of transaction and increase returns. Reduce cost motives people to
save more.
8. It provides you detailed information to the operators/ players in the market such as individuals,
business houses, Governments etc.

Players in the Financial System

1. Central Bank (e.g. RBI in India)

2. Commercial Banks
3. Investment Banks
4. Stock Markets
5. Insurance Companies
6. Mutual Fund Companies
7. Non-Banking Finance Companies etc.

1. Commercial Banks
Commercial banks accept deposits and provide security and convenience to their customers. Part
of the original purpose of banks was to offer customers safe keeping for their money. By keeping
physical cash at home or in a wallet, there are risks of loss due to theft and accidents, not to
mention the loss of possible income from interest. With banks, consumers no longer need to keep
large amounts of currency on hand; transactions can be handled with checks, debit cards or credit
cards, instead.

Commercial banks also make loans that individuals and businesses use to buy goods or expand
business operations, which in turn lead to more deposited funds that make their way to banks. If
banks can lend money at a higher interest rate than they have to pay for funds and operating
costs, they make money.

Banks also serve often under-appreciated roles as payment agents within a country and between
nations. Not only does banks issue debit cards that allow account holders to pay for goods with
the swipe of a card, they can also arrange wire transfers with other institutions.

Banks essentially underwrite financial transactions by lending their reputation and credibility to
the transaction; a check is basically just a promissory note between two people, but without a
bank's name and information on that note, no merchant would accept it.

As payment agents, banks make commercial transactions much more convenient; it is not
necessary to carry around large amounts of physical currency when merchants will accept the
cheques, debit cards or credit cards that banks provide.
2. Investment Banks

The stock market crash of 1929 and ensuing Great Depression caused the United States
government to increase financial market regulation. The Glass-Steagall Act of 1933 resulted in
the separation of investment banking from commercial banking.

While investment banks may be called "banks," their operations are far different than deposit-
gathering commercial banks. An investment bank is a financial intermediary that performs a
variety of services for businesses and some governments. These services include underwriting
debt and equity offerings, acting as an intermediary between an issuer of securities and the
investing public, making markets, facilitating mergers and other corporate reorganizations, and
acting as a broker for institutional clients. They may also provide research and financial advisory
services to companies. As a general rule, investment banks focus on initial public
offerings (IPOs) and large public and private share offerings.

Traditionally, investment banks do not deal with the general public. However, some of the big
names in investment banking, such as JP Morgan Chase, Bank of America and Citigroup, also
operate commercial banks. Other past and present investment banks you may have heard of
include Morgan Stanley, Goldman Sachs, Lehman Brothers and First Boston.

Generally speaking, investment banks are subject to less regulation than commercial banks.
While investment banks operate under the supervision of regulatory bodies, like the Securities
and Exchange Commission, FINRA, and the U.S. Treasury, there are typically fewer restrictions
when it comes to maintaining capital ratios or introducing new products.

3. Insurance Companies

Insurance companies pool risk by collecting premiums from a large group of people who want to
protect themselves and/or their loved ones against a particular loss, such as a fire, car accident,
illness, lawsuit, disability or death. Insurance helps individuals and companies manage risk and
preserve wealth. By insuring a large number of people, insurance companies can operate
profitably and at the same time pay for claims that may arise. Insurance companies use statistical
analysis to project what their actual losses will be within a given class. They know that not all
insured individuals will suffer losses at the same time or at all.

4. Brokerages

A brokerage acts as an intermediary between buyers and sellers to facilitate securities

transactions. Brokerage companies are compensated via commission after the transaction has
been successfully completed. For example, when a trade order for a stock is carried out, an
individual often pays a transaction fee for the brokerage company's efforts to execute the trade.

A brokerage can be either full service or discount. A full service brokerage provides investment
advice, portfolio management and trade execution. In exchange for this high level of service,
customers pay significant commissions on each trade. Discount brokers allow investors to
perform their own investment research and make their own decisions. The brokerage still
executes the investor's trades, but since it doesn't provide the other services of a full-service
brokerage, its trade commissions are much smaller.

5. Investment Companies (e.g. Mutual Funds)

An investment company is a corporation or a trust through which individuals invest in
diversified, professionally managed portfolios of securities by pooling their funds with those of
 other investors. Rather than purchasing combinations of individual stocks and bonds for a
portfolio, an investor can purchase securities indirectly through a package product like a mutual
fund. There are three fundamental types of investment companies: unit investment trusts (UITs),
face amount certificate companies and managed investment companies. All three types have the
following things in common :

An undivided interest in the fund proportional to the number of shares held

Diversification in a large number of securities
Professional management
Specific investment objectives

6. Nonbank Financial Institutions

The NBFCs are not technically banks but provide some of the same services as banks.

Components / Constituents of Indian Financial system:

The following are the four main components of Indian Financial system

1. Financial Institutions
2. Financial Markets
3. Financial Instruments/Assets/Securities
4. Financial Services.

Financial Markets
Every business unit has to raise short term as well as long term funds to meet its working and fixed
capital requirements. The necessary funds should be available whenever required and also wherever
required. In any economy there are two different groups, one who invests money or lends money and the
other who borrows or uses the money.
A financial market acts as a link between these two different groups. The financial market provides a
place where or a system through which transfer of funds by investors to the business units is adequately
facilitated.

Definition
According to Brigham Eugene F. "The place where people and organizations wanting to borrow money, are
brought together, with those having surplus funds is called a financial market". This definition makes it clear
that a financial market is a place where those who need money and those who have surplus money are
brought together. They may come together directly or indirectly.

Features

A financial market is a market that brings buyers and sellers together to trade in financial assets
such as stocks, bonds, commodities, derivatives and currencies.
Financial market is a market where financial instruments are exchanged or traded and helps in
determining the prices of the assets that are traded in.
Thus, financial markets facilitate the price discovery process of securities.
In a financial market, financial securities like stocks and bonds and commodities like valuable
metals are exchanged at efficient market prices.
 Here, by efficient market prices we mean the unbiased price that reflects belief at collective
speculation of all investors about the future prospect.

NOTE: The trading of stocks and bonds in the Financial Market can take place directly between buyers
and sellers or by the medium of Stock Exchange.

ROLE OF FINANCIAL MARKETS

A financial market is of great use for a country as it helps its economy in the following ways:

1. Saving mobilization: Obtaining funds from surplus units such as households, individuals, public sector
units, central government, etc. and channelizing these funds for productive purposes.

2. Investments: The financial market plays an important role in arranging to invest funds thus collected in
those units which are in need of funds.

3. National growth: The financial market contributes to the national growth by ensuring continuous flow of
surplus funds to deficit units.

4. Entrepreneurship growth: Financial markets contribute to the, development of the entrepreneurial class
by making available the necessary financial resources.

5. Industrial development: The components of financial markets help towards accelerated growth of
industrial and economic development of a country, thus contributing to raising the standard of living and the
society's wellbeing.

'The Financial market is the foundation of the economy of any country.' Justify.

The purpose / functions of a financial market are:

1. To set prices for global trade,

2. Raise capital and
3. Transfer liquidity and risk.
4. Liquidity and marketability of securities
5. Fair price determination
6. Source of long-term funds
7. Helps in capital formation
8. Reflects general state of economy

SEGMENTS OF FINANCIAL MARKETS

Financial markets may be classified on the basis of

types of claims debt and equity markets

 maturity money market and capital market

trade spot market and delivery market

deals in financial claims primary market and secondary market

Indian Financial Market consists of the following markets:

1. Capital Market / Securities Market 2.) Money Market / Debt Market

Primary capital market

Secondary capital market

Money market deals in short term credit and capital market deals in medium term and long term credit.

Different Types of Financial Markets

1.) Capital market and money market:

Financial markets can broadly be divided into money and capital market.

Capital Market: Capital market is a market where buyers and sellers trade in financial securities
like bonds, stocks, etc. The buying / selling are undertaken by participants such as individuals
and institutions. Capital market is a market for long-term debt and equity shares. In this market,
the capital funds comprising of both equity and debt are issued and traded. This also includes
private placement sources of debt and equity as well as organized markets like stock exchanges.
Capital market includes financial instruments with more than one year maturity.

Money Market: Money Market facilitates short term debt financing and capital. Money market is
a market for debt securities that pay off in the short term usually less than one year, for example
the market for 90-days treasury bills. This market encompasses the trading and issuance of short
term non-equity debt instruments including treasury bills, commercial papers, bankers
acceptance, certificates of deposits, etc.

In other words, the money market is a segment of the financial market in which financial
instruments with high liquidity and very short maturities are traded.

Capital Market

Capital Market consists of primary market and secondary market. In primary market newly
issued bonds and stocks are exchanged and in secondary market buying and selling of already
existing bonds and stocks take place. So, the Capital Market can be divided into Bond Market
and Stock Market as well.

Bond Market provides financing by bond issuance and bond trading.

Stock Market provides financing by shares or stock issuance and by share trading.

The Primary market provides the channel for sale of new securities. The issuer of securities sells the
securities in the primary market to raise funds for investment and/or to discharge some obligation.
The Secondary market deals in securities previously issued. The secondary market enables those who
hold securities to adjust their holdings in response to charges in their assessment of risk and return. They
also sell securities for cash to meet their liquidity needs.

Difference Between

Primary market Secondary market

Deals with new securities Market for existing securities, which are
Provides additional capital to issuer already listed
companies No additional capital generated. Provides
liquidity to existing stock

As a whole, Capital Market facilitates raising of capital.

Types of issues in Primary market

Initial public offer (IPO) (in case of an unlisted company),

Follow-on public offer (FPO),

Rights offer such that securities are offered to existing shareholders,

Preferential issue/ bonus issue/ QIB placement

Composite issue, that is, mixture of a rights and public offer, or offer for sale

(Offer of securities by existing shareholders to the public for subscription).

Leading stock exchanges:

Bombay Stock Exchange Limited

Oldest in Asia
Presence in 417 cities and towns in India
Trading in equity, debt instrument and derivatives

National Stock Exchange

New York Stock Exchange NYSE)
NASDAQ
London Stock Exchange

MEANING OF MONEY MARKET:-

A money market is a market for borrowing and lending of short-term funds. It deals in
funds and financial instruments having a maturity period of one day to one year. It is a
 mechanism through which short-term funds are loaned or borrowed and through which a
large part of financial transactions of a particular country or of the world are cleared.

It is different from stock market. It is not a single market but a collection of markets for
several instruments like call money market, Commercial bill market etc. The Reserve
Bank of India is the most important constituent of Indian money market.

Thus RBI describes money market as the center for dealings, mainly of a short-term
character, in monetary assets, it meets the short-term requirements of borrowers and
provides liquidity or cash to lenders.

FUNCTIONS OF MONEY MARKET:-

1) It caters to the short-term financial needs of the economy.

2) It helps the RBI in effective implementation of monetary policy.
3) It provides mechanism to achieve equilibrium between demand and supply of short-term
funds.
4) It helps in allocation of short term funds through inter-bank transactions and money
market Instruments.
5) It also provides funds in non-inflationary way to the government to meet its deficits.
6) It facilitates economic development.

PLAYERS OF MONEY MARKET:-

In money market transactions of large amount and high volume take place. It is dominated
by small number of large players. Money Market in India is divided into unorganized
sector and organized sector. The Unorganized market is old indigenous market which
includes indigenous bankers, money lenders etc. Organized market includes Governments
(Central and State), Discount and Finance House of India (DFHI), Mutual Funds,
Corporate, Commercial / Cooperative Banks, Public Sector Undertakings (PSUs),
Insurance Companies and Financial Institutions and Non-Banking Financial Companies
(NBFCs).

The role and level of participation by each type of player differs from that of others.

Organized Money Market is regulated by RBI as well as SEBI.

TYPES OF MONEY MARKET

COMPONENTS / CONSTITUENTS / STRUCTURE OF INDIAN MONEY MARKET :-

Indian money market is characterized by its dichotomy i.e. there are two sectors of money market.
The organized sector and unorganized sector. The organized sector is within the direct purview of
RBI regulations. The unorganized consist of indigenous bankers, money lenders, non-banking
financial institutions etc.
I. Organised Sector of Money Market:-

The Organized Money Market in India is not a single market, it consist of number of markets. The
most important feature of money market instrument is that it is liquid. It is characterized by high
degree of safety of principal. Following are the instruments which are traded in money market

1) Call Money / Notice Money / Term Money Market :-

The market for extremely short-period is referred as call money market. Under call money market,
funds are transacted (borrowing and lending of funds) on overnight basis. The participants are
mostly banks. Therefore it is also called Inter-Bank Money Market.

Under notice money market funds are transacted for 2 days to 14 days period. The lender issues a
notice to the borrower 2 to 3 days before the funds are to be paid. On receipt of notice, borrower has
to repay the funds.

Term money refers to borrowing and lending of funds for a period of more than 14 days.

In this market the rate at which funds are borrowed and lent is called the call money rate.

The call money rate is determined by demand and supply of short term funds.

In call money market the main participants are commercial banks, co-operative banks and primary
dealers. They participate as borrowers and lenders.
Discount and Finance House of India (DFHI), Non-banking financial institutions like LIC, GIC,
UTI, NABARD etc. are allowed to participate in call money market as lenders.

Call money markets are located in big commercial centres like Mumbai, Kolkata, Chennai, Delhi
etc. Call money market is the indicator of liquidity position of money market. RBI intervenes in call
money market as there is close link between the call money market and other segments of money
market.

2) Treasury Bill Market (T - Bills) / Commercial Bills market :-

There are two types of bills viz. Treasury Bills and Commercial Bills.

Treasury Bills or T-Bills are issued by the Central Government; Commercial Bills are issued by
financial institutions.

Treasury Bill Market (T-Bills):- This market deals in Treasury Bills of short term duration issued by
RBI on behalf of Government of India. At present three types of treasury bills are issued through
auctions, namely 91 day T-Bill, 182 day T-Bill and 364 day T-Bill.

T-Bills are issued on discount to face value, while the holder gets the face value on maturity. The return
on T-Bills is the difference between the issue price and face value. Thus, return on T-Bills depends upon
auctions. When the liquidity position in the economy is tight, returns are higher and vice versa.

State government does not issue any treasury bills. Interest is determined by market forces. Treasury
bills are available for a minimum amount of Rs. 25,000 and in multiples of Rs. 25,000. Periodic auctions
are held for their Issue. T-bills are highly liquid, readily available; there is absence of risk of default. In
India T-bills have narrow market and are undeveloped. Commercial Banks, Primary Dealers, Mutual
Funds, Corporates, Financial Institutions, Provident or Pension Funds and Insurance Companies can
participate in T-bills market.

3) Commercial Bills:-

Commercial bills are short term, negotiable and self liquidating money market instruments with low
risk. A bill of exchange is drawn by a seller on the buyer to make payment within a certain period of
time. Generally, the maturity period is of three months. Commercial bill can be resold a number of times
during the usance period of bill. The commercial bills are purchased and discounted by commercial
banks and are rediscounted by financial institutions like EXIM banks, SIDBI, IDBI etc.

In India, the commercial bill market is very much underdeveloped. RBI is trying to develop the bill
market in our country. RBI have introduced an innovative instrument known as Derivative .Usance
Promissory Notes, with a view to eliminate movement of papers and to facilitate multiple rediscounting.

4) Certificate Of Deposits (CDs):-

CDs are issued by Commercial banks and development financial institutions. CDs are unsecured,
negotiable promissory notes issued at a discount to the face value. The main purpose was to enable the
commercial banks to raise funds from market. At present, the maturity period of CDs ranges from 3
months to 1 year. They are issued in multiples of Rs. 25 lakh subject to a minimum size of Rs. 1crore.
CDs can be issued at discount to face value. They are freely transferable but only after the lock-in-period
of 45 days after the date of issue.
In India the size of CDs market is quite small.

In 1992, RBI allowed four financial institutions ICICI, IDBI, IFCI and IRBI to issue CDs with a
maturity period of one year to three years.

5) Commercial Papers (CP):-

Commercial Papers wereintroduced in January 1990. The Commercial Papers can be issued by listed
company which have working capital of not less than Rs. 5 crores. They could be issued in multiple of
Rs. 25 lakhs. The minimum size of issue being Rs. 1 crore. At present the maturity period of CPs ranges
between 7 days to 1 year. CPs are issued at a discount to its face value and redeemed at its face value.

6) Money Market Mutual Funds (MMMFs):-

A Scheme of MMMFs was introduced by RBI in 1992. The goal was to provide an additional short-term
avenue to individual investors. In November 1995 RBI made the scheme more flexible. The existing
guidelines allow banks, public financial institutions and also private sector institutions to set up
MMMFs. The ceiling of Rs. 50 crores on the size of MMMFs stipulated earlier, has been withdrawn.
MMMFs are allowed to issue units to corporate enterprises and others on par with other mutual funds.
Resources mobilised by MMMFs are now required to be invested in call money, CD, CPs, Commercial
Bills arising out of genuine trade transactions, treasury bills and government dated securities having an
unexpired maturity upto one year. Since March 7, 2000 MMMFs have been brought under the purview
of SEBI regulations. At present there are 3 MMMFs in operation.

7) The Repo Market;-

Repo was introduced in December 1992. Repo is a repurchase agreement. It means selling a security
under an agreement to repurchase it at a predetermined date and rate. Repo transactions are affected
between banks and financial institutions and among bank themselves, RBI also undertake Repo.

In November 1996, RBI introduced Reverse Repo. It means buying a security on a spot basis with a
commitment to resell on a forward basis. Reverse Repo transactions are affected with scheduled
commercial banks and primary dealers.

In March 2003, to broaden the Repo market, RBI allowed NBFCs, Mutual Funds, Housing Finance and
Companies and Insurance Companies to undertake REPO transactions.

8) Discount And Finance House Of India (DFHI)

In 1988, DFHI was set up by RBI. It is jointly owned by RBI, public sector banks and all India financial
institutions which have contributed to its paid up capital.It is playing an important role in developing an
active secondary market in Money Market Instruments. In February 1996, it was accredited as a Primary
Dealer (PD). The DFHI deals in treasury bills, commercial bills, CDs, CPs, short term deposits, call
money market and government securities.

II. Unorganised Sector Of Money Market :-

The economy on one hand performs through organised sector and on other hand in rural areas there is
continuance of unorganised, informal and indigenous sector. The unorganised money market mostly
finances short-term financial needs of farmers and small businessmen. The main constituents of
unorganised money market are:-
1) Indigenous Bankers (IBs)

Indigenous bankers are individuals or private firms who receive deposits and give loans and thereby
operate as banks. IBs accept deposits as well as lend money. They mostly operate in urban areas,
especially in western and southern regions of the country. The volume of their credit operations is
however not known. Further their lending operations are completely unsupervised and unregulated. Over
the years, the significance of IBs has declined due to growing organised banking sector.

2) Money Lenders (MLs)

They are those whose primary business is money lending. Money lending in India is very popular both
in urban and rural areas. Interest rates are generally high. Large amount of loans are given for
unproductive purposes. The operations of money lenders are prompt, informal and flexible. The
borrowers are mostly poor farmers, artisans, petty traders and manual workers. Over the years the role of
money lenders has declined due to the growing importance of organised banking sector.

3) Non - Banking Financial Companies (NBFCs)

They consist of:-

1. Chit Funds

Chit funds are savings institutions. It has regular members who make periodic subscriptions to the fund.
The beneficiary may be selected by drawing of lots. Chit fund is more popular in Kerala and Tamilnadu.
RBI has no control over the lending activities of chit funds.

2. Nidhis

Nidhis operate as a kind of mutual benefit for their members only. The loans are given to members at a
reasonable rate of interest. Nidhis operate particularly in South India.

3. Loan Or Finance Companies

Loan companies are found in all parts of the country. Their total capital consists of borrowings,
deposits and owned funds. They give loans to retailers, wholesalers, artisans and self employed
persons. They offer a high rate of interest along with other incentives to attract deposits. They charge
high rate of interest varying from 36% to 48% p.a.

4. Finance Brokers

They are found in all major urban markets specially in cloth, grain and commodity markets. They act as
middlemen between lenders and borrowers. They charge commission for their services.

FEATURES / DEFICIENCIES OF INDIAN MONEY MARKET

Indian money market is relatively underdeveloped when compared with advanced markets like New
York and London Money Markets. Its' main features / defects are as follows

1. Dichotomy:-
A major feature of Indian Money Market is the existence of dichotomy i.e. existence of two markets: -
Organised Money Market and Unorganised Money Market. Organised Sector consist of RBI,
Commercial Banks, Financial Institutions etc. The Unorganised Sector consist of IBs, MLs, Chit Funds,
Nidhis etc. It is difficult for RBI to integrate the Organised and Unorganised Money Markets. Several
segments are loosely connected with each other. Thus there is dichotomy in Indian Money Market.

2. Lack of Co-ordination and Integration:-

It is difficult for RBI to integrate the organised and unorganised sector of money market. RBT is fully
effective in organised sector but unorganised market is out of RBIs control. Thus there is lack of
integration between various sub-markets as well as various institutions and agencies. There is less co-
ordination between co-operative and commercial banks as well as State and Foreign banks. The
indigenous bankers have their own ways of doing business.

3. Diversity in Interest Rates:-

There are different rates of interest existing in different segments of money market. In rural
unorganised sectors the rate of interest are high and they differ with the purpose and borrower. There
are differences in the interest rates within the organised sector also. Although wide differences have
been narrowed down, yet the existing differences do hamper the efficiency of money market.

4. Seasonality of Money Market:-

Indian agriculture is busy during the period November to June resulting in heavy demand for funds.
During this period money market suffers from Monetary Shortage resulting in high rate of interest.
During slack season rate of interest falls &s there are plenty offunds available. RBI has taken steps to
reduce the seasonal fluctuations, but still the variations exist.

5. Shortage of Funds:-

In Indian Money Market demand for funds exceeds the supply. There is shortage of funds in Indian
Money Market an account of various factors like inadequate banking facilities, low savings, lack of
banking habits, existence of parallel economy etc. There is also vast amount of black money in the
country which have caused shortage of funds. However, in recent years development of banking has
improved the mobilisation of funds to some extent.

6. Absence of Organized Bill Market:-

A bill market refers to a mechanism where bills of exchange are purchased and discounted by banks in
India. A bill market provides short term funds to businessmen. The bill market in India is not popular
due to overdependence of cash transactions, high discounting rates, problem of dishonor of bills etc.

7. Inadequate Banking Facilities:-

Though the commercial banks, have been opened on a large scale, yet banking facilities are inadequate
in our country. The rural areas are not covered due to poverty. Their savings are very small and
mobilisation of small savings is difficult. The involvement of banking system in different scams and the
failure of RBI to prevent these abuses of banking system shows that Indian banking system is not yet a
well organised sector.

8. Inefficient and Corrupt Management:-

One of the major problems of Indian Money Market is its inefficient and corrupt management.
Inefficiency is due to faulty selection, lack of training, poor performance appraisal, faulty promotions
etc. For the growth and success of money market, there is need for well trained and dedicated
workforce in banks. However, in India some of the bank officials are inefficient and corrupt.

CONCLUSION:-

The above features / defects of Indian Money Market clearly indicate that it is relatively less developed
and has yet to acquire sufficient depth and width. The deficiencies are slowly and steadily overcomed
by policy measures undertaken by RBI from time to time.

REFORMS / MEASURES TO STRENGTHEN THE INDIAN MONEY MARKET:-

On the recommendations of S. Chakravarty Committee and Narasimhan Committee, the RBI has
initiated a number of reforms.

1. Deregulation of Interest Rates:-

RBI has deregulated interest rates. Banks have been advised to ensure that the interest rates changed
remained within reasonable limits. From May 1989, the ceiling on interest rates on call money, inter-
bank short-term deposits, bills rediscounting and inter-bank participation was removed and rates were
permitted to be determined by market forces.

2. Reforms in Call and Term Money Market:-

To provide more liquidity RBI liberalized entry in to call money market. At present Banks and primary
dealers operate as both lenders and borrowers. Lenders other than UTI and LIC are also allowed to
participate in call money market operations. RBI has taken several steps in recent years to remove
constraints in term money market. In October 1998, RBI announced that there should be no
participation of non-banking institutions in call / term money market operations and it should be purely
an interbank market.

3. Introducing New Money Market Instruments:-

In order to widen and diversify the Indian Money Market, RBI has introduced many new money market
instruments like 182 days Treasury bills, 364 days Treasury bills, CD3 and CPs. Through these
instruments, the government, commercial banks, financial institutions and corporates can raise funds
through money market. They also provide investors additional instruments for investments.

4. Repo:-

Repos were introduced in 1992 to do away. With short term fluctuations in liquidity of money market.
In 1996 reverse repos were introduced. RBI has been using Repo and Reverse repo operations to
influence the volume of liquidity and to stabilise short term rate of interest or call rate. Repo rate was
6.75% in March 2011 and reverse repo rate, was 5.75%.

5. Refinance by RBI:-

The RBI uses refinance facilities to various sectors to meet liquidity shortages and control the credit
conditions. At present two schemes of refinancing are in operations:- Export credit refinance and
general refinance. RBI has kept the refinance rate linked to bank rate.
6. MMMFs:-

Money Market Mutual Funds were introduced in 1992. The objective of the scheme was to provide an
additional short-term avenue to the individual investors. In 1995, RBI modified the scheme to allow
private sector organisation to set up MMMFs. So far, three MMMFs have been set up one each by
IDBI, UTI and one in private sector.

7. DFHI:-

The Discount and Finance House of India was set up on 25th April 1988. It buys bills and other short
term paper from banks and financial institutions. Bank can sell their short term securities to DFHI and
obtain funds in case they need them, without disturbing their investments.

8. The Clearing Corporation Of India Limited (CCIL):-

CCIL was registered in 2001 under the Companies Act, 1956 with the State Bank of India as Chief
Promoter. CCIL clears all transaction in government securities and repos reported on NDS (Negotiated
Dealing System) of RBI and also Rupee / US $ foreign exchange spot and forward deals.

9. Regulation of NBFCs:-

In 1997, RBI Act was amended and it provided a comprehensive regulation for non-banking financial
companies (NBFCs) sector. According to amendment, no NBFC can carry on any business of a
financial institution including acceptance of public deposit, without obtaining a Certificate of
Registration from RBI. They are required to submit periodic returns to RBI.

10. Recovery of Debts:-

In 1993 for speedy recovery of debts, RBI has set up special Recovery Tribunals. The Special
Recovery Tribunals provides legal assistance to banks to recover dues.
Apart from capital and money markets, there exist other types of financial markets as well:

Derivatives market

Derivatives Market provides instruments which help in controlling financial risk.

Foreign Exchange market

Foreign Exchange Market facilitates the foreign exchange trading.

Insurance Market

Insurance Market helps in relocation of various risks.

Commodity Market

Commodity Market organizes trading of commodities.

Contribution of Financial Markets

Financial Markets are essential for fund raising. Through Financial Market borrowers can find suitable
lenders. Banks also help in the process of financing by working as intermediaries. They use the money,
which is saved and deposited by a group of people; for giving loans to another group of people who
need it. Generally, banks provide financing in the form of loans and mortgages. Except banks other
intermediaries in the Financial Market can be Insurance Companies and Mutual Funds. But more
complicated transactions of Financial Market take place in stock exchange. In stock exchange, a
company can buy others' company's shares or can sell own shares to raise funds or they can buy their
own shares existing in the market.

Although there are many components to a financial market, two of the most commonly used are money
markets and capital markets.

Money markets are used for a short-term basis, usually for assets up to one year. Conversely, capital
markets are used for long-term assets, which are any asset with maturity greater than one year. Capital
markets include the equity (stock) market and debt (bond) market. Together the money and capital
markets comprise a large portion of the financial market and are often used together to manage liquidity
and risks for companies, governments and individuals.