63 Financial Markets
63.1 Meaning
A financial market is the organised mechanism through which financial assets — money, securities, foreign exchange, derivatives — are traded between buyers and sellers. Financial markets enable price discovery, allocation of capital, liquidity provision and risk transfer (khan2022?; rbi2024?).
63.2 Classification of Financial Markets
| Basis | Categories |
|---|---|
| Maturity of instrument | Money market (≤ 1 year) vs Capital market (> 1 year) |
| Type of claim | Debt market vs Equity market |
| Stage of issuance | Primary market (new issues) vs Secondary market (existing securities) |
| Trading mechanism | Exchange-traded vs Over-the-counter (OTC) |
| Form of delivery | Cash / spot vs Derivatives / futures |
63.3 Money Market
The money market deals in short-term funds (≤ 1 year). It supplies the working-capital needs of business and the short-term liquidity needs of banks.
| Instrument | Issuer | Tenor | Working content |
|---|---|---|---|
| Call money / notice money | Banks | 1 day / 14 days | Inter-bank market |
| Treasury Bills (T-Bills) | RBI on behalf of GoI | 91, 182, 364 days | Issued at discount; redeemed at par |
| Commercial Paper (CP) | Companies | 7 days to 1 year | Unsecured; high credit rating required |
| Certificate of Deposit (CD) | Banks, FIs | 7 days to 1 year | Negotiable, unsecured |
| Repo / Reverse Repo | Banks ↔︎ RBI | Overnight, term | Collateralised lending |
| TREPS / CBLO | Various | Overnight | Triparty repo on G-Secs |
| Money market mutual funds | MFs | Various | Pooled investment in money-market instruments |
63.4 Capital Market
The capital market deals in long-term funds (> 1 year). It is split into primary and secondary markets.
| Segment | Working content |
|---|---|
| Primary market | Where new securities are issued — IPO, FPO, Rights, Bonus, Private Placement, QIP |
| Secondary market | Where existing securities are traded — BSE, NSE |
63.4.1 Methods of issuance in the primary market
| Method | Working content |
|---|---|
| Public issue (IPO / FPO) | Sale to the public |
| Rights issue | Existing shareholders get a right to buy more, in proportion |
| Bonus issue | Free shares to existing shareholders out of reserves |
| Private placement | Sale to a small group of qualified investors |
| Qualified Institutional Placement (QIP) | Listed company’s private placement to QIBs |
| Preferential allotment | Allotment to specified persons under SEBI rules |
| Sweat equity | Shares to directors / employees in lieu of services |
| Book-building | Price discovery via institutional bids |
63.5 Secondary Markets — Indian Stock Exchanges
| Exchange | Founded | Notable feature |
|---|---|---|
| Bombay Stock Exchange (BSE) | 1875 (Asia’s oldest) | Sensex (30 stocks) |
| National Stock Exchange (NSE) | 1992 (operational 1994) | Nifty 50 (50 stocks); largest by volume in India |
| MCX — Multi Commodity Exchange | 2003 | Commodity derivatives |
| NCDEX — National Commodity Derivatives Exchange | 2003 | Agricultural commodity derivatives |
| India INX at GIFT City | 2017 | International stock exchange |
| NSE IFSC at GIFT City | 2017 | International exchange |
The major equity indices: Sensex (BSE 30 stocks), Nifty 50 (NSE 50 stocks), Nifty Bank, Nifty IT, BSE 500.
63.6 Government Securities Market
The G-Sec market is the largest fixed-income market in India.
| Instrument | Tenor | Issuer |
|---|---|---|
| Treasury Bills (T-Bills) | 91, 182, 364 days | Centre |
| Dated G-Secs | 1 to 40 years | Centre |
| State Development Loans (SDLs) | Various | States |
| Cash Management Bills (CMBs) | < 91 days | Centre |
| Sovereign Gold Bonds (SGBs) | 8 years | RBI on behalf of GoI |
| Floating-Rate Bonds, Inflation-Indexed Bonds | Various | Centre |
The Negotiated Dealing System — Order Matching (NDS-OM) of the RBI is the electronic trading platform for G-Secs. Retail investors access through the RBI Retail Direct scheme (since 2021).
63.7 Foreign-Exchange Market
The forex market — covered in detail in topic 34 — handles cross-border conversion of currencies. Spot, forward, swap, futures, options and NDFs are traded.
63.8 Derivatives Market
| Instrument | Working content |
|---|---|
| Forward | OTC contract for future delivery |
| Future | Standardised, exchange-traded forward |
| Option | Right but not obligation to buy (call) or sell (put) |
| Swap | Exchange of cash flows over time |
| Exotic derivatives | Barriers, baskets, weather, credit-default swaps |
In India, exchange-traded derivatives trade on NSE / BSE: equity (index and stock futures and options), currency (USD/INR, EUR/INR, GBP/INR, JPY/INR), commodity (MCX, NCDEX, NSE Comm), interest-rate. OTC derivatives are largely between banks and corporates, regulated by RBI.
63.9 Indian Capital-Market Regulator — SEBI
The Securities and Exchange Board of India (SEBI), established in 1988 and made statutory in 1992, regulates the Indian capital market. Major SEBI regulations:
| Regulation | Year | Purpose |
|---|---|---|
| SEBI (LODR) | 2015 | Listing obligations and disclosure requirements |
| SEBI (Prohibition of Insider Trading) | 2015 | Insider-trading rules |
| SEBI (Substantial Acquisition of Shares and Takeovers) | 2011 | Takeover code |
| SEBI (ICDR) | 2018 | Issue of capital and disclosure requirements |
| SEBI (FPI) | 2019 | Foreign portfolio investors |
| SEBI (Mutual Funds) | 1996 | Mutual fund regulation |
| SEBI (Alternative Investment Funds) | 2012 | AIFs (Cat I, II, III) |
63.10 Recent Developments in Indian Markets
- T+1 settlement for equities (since 2023) — faster than international T+2 norm.
- T+0 settlement (pilot 2024).
- REITs and InvITs since 2014 / 2017.
- Sovereign Green Bonds (SGrB), since 2023.
- Social Stock Exchange (SSE) — separate segment for social enterprises (BSE, NSE).
- Direct listing of Indian firms abroad at IFSC.
63.11 Exam-Pattern MCQs
Q1. Which of the following is not a money-market instrument?
A. Treasury Bill B. Commercial Paper C. Equity share D. Certificate of Deposit
Answer: C. Equity shares are capital-market instruments.
Q2. Match each Indian stock exchange / institution with its feature:
| Institution | Feature | ||
|---|---|---|---|
| (i) | BSE | (a) | Nifty 50; largest by volume |
| (ii) | NSE | (b) | Asia’s oldest stock exchange |
| (iii) | MCX | (c) | International stock exchange |
| (iv) | India INX | (d) | Commodity derivatives exchange |
A. (i)-(b), (ii)-(a), (iii)-(d), (iv)-(c) B. (i)-(a), (ii)-(b), (iii)-(c), (iv)-(d) C. (i)-(c), (ii)-(d), (iii)-(b), (iv)-(a) D. (i)-(d), (ii)-(c), (iii)-(a), (iv)-(b)
Answer: A.
Q3. Sensex is the index of:
A. NSE B. BSE C. MCX D. India INX
Answer: B. Sensex = BSE 30-stock index. Nifty 50 = NSE.
Q4. Match each capital-market issue method with its description:
| Method | Description | ||
|---|---|---|---|
| (i) | IPO | (a) | Free shares from reserves |
| (ii) | Rights issue | (b) | Sale to a small group of qualified investors |
| (iii) | Bonus issue | (c) | First sale of shares to the public |
| (iv) | Private placement | (d) | Existing shareholders get a right to buy in proportion |
A. (i)-(c), (ii)-(d), (iii)-(a), (iv)-(b) B. (i)-(a), (ii)-(b), (iii)-(c), (iv)-(d) C. (i)-(b), (ii)-(c), (iii)-(d), (iv)-(a) D. (i)-(d), (ii)-(a), (iii)-(b), (iv)-(c)
Answer: A.
Q5. Treasury Bills (T-Bills) are issued in tenors of:
A. 30, 60, 90 days B. 91, 182, 364 days C. 1, 5, 10 years D. 1 month, 3 months only
Answer: B. The standard T-Bill tenors in India are 91, 182, 364 days.
Q6. Match each Indian regulation with its purpose:
| Regulation | Purpose | ||
|---|---|---|---|
| (i) | SEBI (LODR) 2015 | (a) | Foreign portfolio investors |
| (ii) | SEBI (Insider Trading) 2015 | (b) | Listing obligations and disclosure |
| (iii) | SEBI (FPI) 2019 | (c) | Issue of capital and disclosures |
| (iv) | SEBI (ICDR) 2018 | (d) | Insider-trading rules |
A. (i)-(b), (ii)-(d), (iii)-(a), (iv)-(c) B. (i)-(a), (ii)-(b), (iii)-(c), (iv)-(d) C. (i)-(c), (ii)-(a), (iii)-(b), (iv)-(d) D. (i)-(d), (ii)-(c), (iii)-(a), (iv)-(b)
Answer: A.
Q7. India’s equity-settlement cycle was shortened to:
A. T+5 B. T+3 C. T+2 D. T+1
Answer: D. India moved to T+1 settlement in 2023, with a T+0 pilot in 2024.
Q8. Arrange the following Indian institutions in chronological order of founding:
- NSE
- BSE
- MCX
- India INX
A. (ii), (i), (iii), (iv) B. (i), (ii), (iii), (iv) C. (iv), (iii), (ii), (i) D. (iii), (iv), (i), (ii)
Answer: A. BSE 1875 → NSE 1992 → MCX 2003 → India INX 2017.
- Financial markets — money (≤1 yr) vs capital (>1 yr); debt vs equity; primary vs secondary; exchange vs OTC; spot vs derivatives.
- Money-market instruments: Call money, T-Bills (91/182/364), CP, CD, Repo / Reverse Repo, TREPS, MM mutual funds.
- Capital market: Primary (IPO, FPO, Rights, Bonus, Private placement, QIP, Preferential, Sweat equity) + Secondary (BSE 1875, NSE 1992).
- Major Indian indices: Sensex (BSE 30), Nifty 50, Nifty Bank, Nifty IT.
- G-Sec market: T-Bills, dated G-Secs, SDLs, CMBs, SGBs, FRBs, IIBs. Platform: NDS-OM; Retail Direct since 2021.
- Derivatives: Forward, Future, Option, Swap; equity / currency / commodity / IRD.
- SEBI (statutory 1992) — regulator. Key regs: LODR 2015, ICDR 2018, FPI 2019, IT 2015, SAST 2011, MF 1996, AIF 2012.
- Recent: REITs/InvITs (2014/2017), T+1 (2023), Sovereign Green Bonds (2023), Social Stock Exchange, India INX at GIFT (2017).