64Financial markets: Money market; Capital market; Government securities market
64.1 Concept of Financial Markets
A financial market is “a marketplace where financial instruments — equity, debt, derivatives, currencies — are traded between buyers and sellers, mobilising savings and pricing risk”. Indian financial markets are layered: money market (short-term, < 1 year), capital market (long-term, > 1 year), government securities (G-sec) market, forex market, derivatives market, commodity market. Each is overseen by different regulators — money & G-sec by RBI, capital and derivatives by SEBI, commodities by SEBI (since 2015 merger of FMC), forex by RBI.
64.2 Money Market
The money market is the segment for short-term funds (< 1 year). Main participants: RBI, banks, NBFCs, large corporates, mutual funds.
TipMajor Money Market Instruments
Instrument
Issuer
Maturity
Call money / Notice money
Banks
Overnight to 14 days
Treasury Bills (T-bills)
Government
91, 182, 364 days
Commercial Paper (CP)
Listed corporates with rating
7 days to 1 year
Certificate of Deposit (CD)
Banks / FIs
7 days to 1 year
Repo / Reverse repo
RBI ↔︎ Banks
Overnight, term
TREPS (Tri-party Repo)
Via CCIL
Overnight
Cash Management Bills (CMB)
Government
< 91 days
Bills of exchange / Commercial bills
Trade-credit
Up to 90 days
64.2.1 CCIL — Clearing Corporation of India Ltd
Established in 2001, CCIL is the central counterparty for G-sec, forex, repo, and money-market trades — central to settlement of Indian money market.
64.2.2 Money Market Mutual Funds (MMMFs)
Investment vehicles that invest exclusively in money-market instruments; provide liquidity to retail and corporate investors.
64.3 Capital Market
The capital market is for long-term funds (> 1 year). Two segments:
TipCapital Market — Primary vs Secondary
Segment
Working
Primary market
Issue of new securities — IPO, FPO, rights issue, bonus, private placement, QIP, preferential allotment
Secondary market
Trading of existing securities — stock exchanges (BSE, NSE)
64.3.1 Primary Market — Methods of Issue
TipMethods of Primary Issue
Public issue — IPO (first time) or FPO (follow-on).
Rights issue (§62 Companies Act) — to existing shareholders.
Bonus issue — capitalisation of free reserves.
Private placement (§42; ≤ 200 persons/year).
Preferential allotment — to specific persons.
Qualified Institutional Placement (QIP) — to QIBs.
Offer for Sale (OFS) — by existing shareholders via exchange.
Sweat equity, ESOPs.
64.3.2 IPO Process
TipIPO Process
Appointment of merchant banker / lead manager.
Draft Red Herring Prospectus (DRHP) — file with SEBI.
SEBI comments; market roadshows.
Red Herring Prospectus.
Book building (price discovery) or fixed price.
Anchor investors (1 day before).
IPO subscription — retail (35 % min if profitable; lower otherwise), HNI/NII (15 %), QIB (50 % when profitability route not met).
NSE (1992; operations 1994) — Nifty 50; largest by turnover.
MSE (Metropolitan) — third national exchange.
NSE IFSC and India INX — at GIFT City, USD-denominated trading.
Calcutta SE (1908) — minimal activity.
64.4 Indian Capital Market — Recent Innovations
TipRecent Capital Market Innovations
REITs — Real Estate Investment Trusts (first listed: Embassy Office Parks REIT 2019).
InvITs — Infrastructure Investment Trusts.
AIFs — Alternative Investment Funds; SEBI Cat I, II, III.
SME Exchange — BSE SME, NSE Emerge.
Innovators Growth Platform (IGP) — for start-ups.
GIFT IFSC — international finance hub at GIFT City, Gujarat.
Social Stock Exchange (SSE) — for non-profit and impact enterprises (2022).
64.5 Government Securities Market
G-secs are debt instruments issued by the Government of India and State Governments. Most liquid and risk-free debt segment.
TipMajor G-sec Instruments
Treasury Bills — short-term (91, 182, 364 days).
Dated Securities (G-sec) — fixed-coupon, 1-40 years.
State Development Loans (SDLs) — issued by States.
Inflation-Indexed Bonds (IIBs).
Sovereign Gold Bonds (SGBs) — gold-linked.
Floating Rate Bonds (FRBs).
STRIPS — Separate Trading of Registered Interest and Principal of Securities.
Capital Indexed Bonds.
64.5.1 RBI as Debt Manager
RBI manages the Government’s public debt through: - Primary auctions of T-bills (weekly) and G-secs (mostly Friday). - Negotiated Dealing System-Order Matching (NDS-OM) — secondary trading platform. - Way and Means Advances (WMA) — short-term RBI advances to Government.
64.6 Forex Market
Forex market in India — OTC; regulated by RBI under FEMA 1999; Authorised Dealer (AD) Category I banks are main participants. Also: CCIL clearing.
64.7 Derivatives Market
Indian derivatives market launched 2000 (index futures on Nifty). Today:
TipIndian Derivatives Segments
Equity derivatives — index/stock futures and options (NSE, BSE).
Commodity derivatives — agricultural, metals, energy (MCX, NCDEX, ICEX).
Single-stock futures — unique to India among major markets.
flowchart TB
FM[Financial Markets] --> MM[Money Market<br/>< 1 year — RBI]
FM --> CM[Capital Market<br/>> 1 year — SEBI]
FM --> GS[G-sec Market<br/>RBI]
FM --> FX[Forex<br/>RBI / FEMA]
FM --> DV[Derivatives<br/>SEBI]
CM --> PR[Primary]
CM --> SE[Secondary]
classDef default fill:#003366,color:#ffffff,stroke:#ffcc00,stroke-width:3px,rx:10px,ry:10px;
NoteDistractor warning
PYQ trap: Money market < 1 year, regulated by RBI; Capital market > 1 year, regulated by SEBI. G-sec market under RBI.