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🟠 Topic 52: Financial Market – Money Market & Capital Market
📌 Introduction
The financial market is the backbone of a modern economy, facilitating the mobilisation of savings and efficient allocation of resources. It connects investors (who have surplus funds) with borrowers (who need funds), thus supporting economic development.
The financial market is broadly divided into two segments — Money Market and Capital Market, each serving distinct purposes.
🔹 What is a Financial Market?
📖 Definition
A financial market is a marketplace where financial instruments (stocks, bonds, treasury bills, etc.) are traded, facilitating the flow of funds between savers and borrowers.
🔹 Types of Financial Markets
| Type |
Key Feature |
| Money Market |
Short-term instruments (maturity ≤ 1 year) |
| Capital Market |
Long-term instruments (maturity > 1 year) |
🔹 1️⃣ Money Market 💸
📖 Definition
The money market deals with short-term financial instruments that have high liquidity and low risk. It helps businesses and governments manage short-term liquidity requirements.
Key Features
✔️ Short-term maturity (less than 1 year).
✔️ Highly liquid.
✔️ Instruments traded over-the-counter (OTC), not on stock exchanges.
✔️ Low return, low risk.
Major Participants
✔️ RBI
✔️ Commercial Banks
✔️ Corporates
✔️ Mutual Funds
✔️ Primary Dealers
Key Instruments of Money Market
| Instrument |
Description |
| Treasury Bills (T-Bills) |
Short-term sovereign securities (91, 182, 364 days) |
| Certificate of Deposit (CD) |
Time deposit issued by banks |
| Commercial Paper (CP) |
Short-term unsecured borrowing by corporates |
| Call Money & Notice Money |
Interbank lending (overnight to 14 days) |
| Repo & Reverse Repo |
RBI liquidity operations (collateralised) |
Role of Money Market
✔️ Provides short-term liquidity to governments, banks, and corporates.
✔️ Supports monetary policy transmission by RBI.
✔️ Acts as a platform for cash flow management.
Example
If a bank faces a temporary shortage of cash, it can borrow from another bank through the call money market.
🔹 2️⃣ Capital Market 📊
📖 Definition
The capital market deals with long-term financial instruments, helping companies raise long-term capital for expansion and projects.
Key Features
✔️ Long-term maturity (more than 1 year).
✔️ Higher risk but also higher returns.
✔️ Traded on stock exchanges and over-the-counter (OTC).
Segments of Capital Market
| Segment |
Description |
| Primary Market |
Fresh issue of securities via IPO/FPO |
| Secondary Market |
Trading of already issued securities (NSE, BSE) |
Major Participants
✔️ Companies raising funds.
✔️ Retail & institutional investors.
✔️ Stock exchanges (BSE, NSE).
✔️ Regulators (SEBI).
✔️ Investment banks & merchant banks.
Key Instruments of Capital Market
| Instrument |
Description |
| Equity Shares |
Ownership in a company (risky, high returns) |
| Bonds/Debentures |
Fixed income instruments |
| Preference Shares |
Hybrid — fixed dividend + ownership |
| Mutual Funds |
Pooled investment vehicles |
| Exchange Traded Funds (ETFs) |
Index-based tradeable funds |
Role of Capital Market
✔️ Provides long-term funds to companies for expansion and innovation.
✔️ Enhances investment opportunities for savers.
✔️ Enables price discovery through stock trading.
✔️ Facilitates wealth creation.
Example
When Reliance Industries wants to raise ₹10,000 crore for expansion, it can issue bonds or equity shares in the capital market.
🔹 Key Differences – Money Market vs Capital Market
| Parameter |
Money Market |
Capital Market |
| Maturity |
≤ 1 year |
> 1 year |
| Risk |
Low |
Higher |
| Return |
Lower |
Higher |
| Liquidity |
High |
Moderate |
| Regulator |
RBI |
SEBI |
| Purpose |
Short-term liquidity |
Long-term investment & capital raising |
🔹 Role of SEBI & RBI
| Body |
Role |
| RBI |
Regulates money market |
| SEBI |
Regulates capital market, protects investor interests, ensures transparency |
🔹 Recent Reforms in Financial Markets
1️⃣ Introduction of Bond Market Reforms
- Facilitating corporate bond issuance.
- Easing listing norms for Infrastructure Investment Trusts (InvITs).
2️⃣ Digitisation & T+1 Settlement
- Faster settlement cycle in stock markets.
3️⃣ Boosting Retail Participation
- Tax incentives for Equity Linked Savings Schemes (ELSS).
- Encouraging Government Securities (G-Sec) trading for individuals.
🔹 Financial Market Innovations
| Innovation |
Description |
| Exchange Traded Funds (ETFs) |
Passively managed funds tracking indices |
| Green Bonds |
Bonds raising funds for environmental projects |
| Sovereign Gold Bonds (SGBs) |
Digital gold investment option |
| Algorithmic Trading |
Automated stock trading using pre-set algorithms |
🔹 Case Study – UPI & Retail Bond Market
- In 2022, RBI allowed UPI-based investment in Government Securities (G-Secs).
- Retail investors can buy T-Bills, Government Bonds using RBI Retail Direct Portal.
- This boosts financial inclusion in the government bond market.
Role in Economic Development
✔️ Efficient financial markets mobilise savings into productive investments.
✔️ Support infrastructure financing via bonds.
✔️ Encourage entrepreneurship and innovation through equity investments.
✔️ Enhance financial inclusion by providing investment avenues to small savers.
📚 Practice MCQ
1️⃣ Which of the following is a short-term money market instrument?
✅ Options:
(a) Corporate Bond
(b) Treasury Bill
(c) Equity Share
(d) Preference Share
Answer: (b) Treasury Bill
Explanation: T-Bills are short-term instruments (maturity up to 1 year).
