Money Market and Capital Market in India
Introduction
Financial markets are crucial for the mobilization of funds, efficient allocation of resources, and economic growth.
They are broadly classified into:
- Money Market – Short-term funds
- Capital Market – Long-term funds
This module explains the meaning, features, instruments, and interlinkages of these markets, along with SEBI regulation and derivatives trading.
Learning Outcome (LO):
After this module, students will be able to analyze financial instruments, calculate value of stocks and bonds, and understand market regulations.
1. Money Market
Meaning
The money market is a segment of the financial market where short-term funds (up to 1 year) are borrowed and lent.
Constituents of Organized Money Market
- Commercial Banks – Provide short-term credit and accept deposits
- RBI (Reserve Bank of India) – Controls liquidity and short-term credit
- Discount and Finance Houses – Deal with bills of exchange and commercial papers
- Mutual Funds – Invest in short-term instruments
- Other Financial Institutions – NABARD, SIDBI, LIC, etc.
Features of Indian Money Market
- Deals in short-term funds
- High liquidity
- Safe investment instruments
- Influenced by RBI’s monetary policy
- Participants include banks, corporations, government, and RBI
Instruments of Money Market
| Instrument | Meaning / Use |
|---|---|
| Treasury Bills (T-bills) | Short-term government securities (91, 182, 364 days) |
| Commercial Paper (CP) | Unsecured, short-term promissory note issued by companies |
| Call Money | Very short-term borrowing/lending (1 day to 14 days) between banks |
| Certificate of Deposit (CD) | Time deposit issued by banks |
| Repurchase Agreements (Repo/Reverse Repo) | Short-term borrowing/lending using securities as collateral |
2. Capital Market
Meaning
The capital market deals with long-term funds (more than 1 year) for investment in productive assets and infrastructure.
Capital Market Instruments
- Equities / Shares
- Represent ownership in a company
- Shareholders receive dividends and capital gains
- Types: Common shares, Preferred shares
- Debentures
- Long-term loan instruments issued by companies
- Fixed interest payment
- Secured or unsecured
- Bonds
- Debt instruments issued by government or corporations
- Types: Government bonds, Corporate bonds, Tax-free bonds
- New Instruments
- Convertible debentures
- Derivatives (Futures, Options, Forwards)
- Exchange Traded Funds (ETFs)
Primary Market and Secondary Market
- Primary Market: Companies issue new securities to raise capital (IPOs, FPOs)
- Secondary Market: Existing securities are traded among investors (Stock Exchanges)
Interlink Between Money Market and Capital Market
- Short-term money market instruments often act as temporary investment options for funds before investing in long-term securities.
- Liquidity in the money market affects interest rates, which influences long-term investments in the capital market.
- Efficient capital market depends on a well-functioning money market.
3. SEBI and Capital Market in India
Securities and Exchange Board of India (SEBI):
- Established in 1988, statutory authority in 1992
- Functions:
- Regulates stock exchanges and securities market
- Protects investors’ interests
- Promotes fair trading practices
- Monitors mergers, takeovers, and insider trading
4. Derivatives Market in India
Meaning
Derivatives are financial contracts whose value is derived from an underlying asset like stocks, bonds, commodities, or currencies.
Types of Derivatives
- Forward Contracts
- Agreement to buy/sell at a future date at a pre-determined price
- Customized, OTC contracts
- Futures Contracts
- Standardized forward contracts traded on exchanges
- Regulated by SEBI
- Options
- Contract giving the right but not obligation to buy/sell an asset at a future date
- Call option: Buy
- Put option: Sell
Significance
- Hedging risk
- Price discovery
- Speculation
- Arbitrage opportunities
Derivatives Trading in India
- NSE and BSE provide platforms for futures and options
- SEBI regulates contracts, margins, and disclosures
5. Learning Outcome (LO)
After studying this module, students will:
- Understand money and capital markets and their instruments
- Analyze primary and secondary markets
- Evaluate risk and return of shares, bonds, and derivatives
- Understand SEBI’s role in regulation
- Appreciate interlinkages between money market and capital market
Conclusion
The Indian financial market is dynamic and diverse, with money market ensuring short-term liquidity and capital market facilitating long-term investment. SEBI’s regulation ensures transparency and investor protection, while derivatives provide advanced tools for risk management. A sound understanding of these markets is crucial for investment planning, portfolio management, and financial decision-making.
📌 UG Exam Writing Tips
- Define money market and capital market
- List instruments with examples
- Explain primary vs secondary markets
- Include SEBI and derivatives details
- End with the interlinkage of markets
If you want:
✔️ Short notes (2–5 marks)
✔️ MCQs with answers
✔️ PDF with diagrams/images
✔️ Hindi / Odia version
I can prepare a ready-to-use illustrated PDF for this module.
Do you want me to create that PDF version?
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