MONEY MARKET AND CAPITAL MARKET IN INDIA

Hello Guys.......em back with another topic. Apologies for the delay as i got struck wid a few personal things.... Today's topic of discussion will be Money and Capital market in India and the instruments being used. Will b trying to keep it short n crisp as iss a very very long topic. What you all may do is to put ur doubts n queries into d comment section so dat d answer might help sundry n all...Happy Learning Guyzzzz.....Barely r we left wid a week's time for our interview....:

Capital Market and Money Market in India: Both the markets are meant for borrowing and lending of funds.

Before getting into individual details of these, we will try to figure out the difference b/w d two. Capital market is meant for medium to long term lending/borrowing where as Money market is meant for short term lending/borrowing and iss usages.

Now what is short term, medium term and long term

SHORT TERM: Tenures less than 1(one) year

MEDIUM TERM : Tenures more than an year but less than 3(three) years

LONG TERM : Tenures greater than 3 years

Differences: Money market is distinguished from capital on the basis of the maturity

period, credit instruments and the institutions.

1. Maturity Period: The money market deals in the lending and borrowing of shortterm

finance. But the capital market deals in lending and borrowing of long-term

finance.

2. Credit Instruments: The main credit instruments of the money market are trade

bills, promissory notes and Government papers or bills. On the other hand, the main

instruments used in the capital market are stocks, shares, debentures, bonds and

securities of the Government.

3. Nature of Credit Instruments: The credit instruments dealt within the capital

market are more heterogeneous than those in money market.

4. Institutions: Important institutions operating in the money market are central

bank, commercial banks, acceptance houses, non-banking financial institutions,

bill brokers etc. Important institutions in the stock market are stock exchanges,

commercial banks, development banks and non-banking financial institutions such

as insurance companies, mortgage banks and building societies.

5. Purpose of Loans: The money market meets the short-term credit needs of business.

It provides working capital to the industrialists. The capital market, on the other

hand, meets the long-term needs of the industrialists and provides fixed capital to

buy land, machinery etc.

6. Risk: The degree of risk is small in the money market. The risk is much greater in

capital market.

7. Relation with Central Bank: The money market is closely and directly linked with

the central bank of the country. The capital market feels central bank's influence,

but mainly indirectly and through the money market.

8. Market Regulation: In the money market, commercial banks are closely regulated.

In the capital market, the institutions are not much regulated.

9. Basic Role: The basic role of money market is that of liquidity adjustment. The

basic role of capital market is that of putting capital to work preferably to long-term

and productive employment.

CAPITAL MARKET IN INDIA : Capital market operations are operated and regulated in India by SEBI

Functions of Capital Market

The major functions performed by a capital market are as follows:

(a) Mobilisation of financial resources on a nation-wide scale.

(b) Securing the foreign capital and know how to fill up the deficit in the required

resources for economic growth at a faster rate.

(c) Effective allocation of the mobilised financial resources by directing the same to

projects yielding highest yield or to the projects needed to promote balanced economic

development.

Capital Market has three components namely:

1) The Equity Market

2) The Debt Market

3) The Derivative Market

1) and 2) ie Equity and Debt Market both have two segments:

A) Primary Market: which deals with new issues of equity and debt instruments

B) Secondary Market : Which facilitates trading in equity(already existing equities/shares and not the new ones) and debt instruments

A) PRIMARY MARKET: It is a channel for sale of new securities meant for both Govt and Corporates, to raise resources(funds) to meet their requirements of investors and/or discharge their obligations.

Now this issuance f securities may be done at face value or discounted value or at premium. Iska simple sa matlab hai ki Face Value = Rs. 100 ka share Rs.100 main bechha....., Discounted = Rs.100 ka share aaj Rs.90 main becha...kal ko uski keemat shuru 100 se hi maani jayegiii plus d bonus or d interest which it generates after getting available in market....... Premium = Rs. 100/- ka share Rs.120 main beccha aaj....kal se uski value 100 pe hi calculate hogi.

Now, What are the different Kinds of Issues:

1) IPO(Initial Public Offering) : fresh issue of securities for the first time to the public

2) Further Issue : IPO ke baad ki public offerings ko further Issue kehate hain. Means Issuance of securities after IPO one.

3) Rights Issue : A listed organisation proposes to issue a frsh securities to its existing shareholders as on a record date. The rights are offered in a particular ratio to the number of securities held prior to the issue. This route is best suited for orgs who would like to raise capital without diluting the stake of its existing shareholders.

4) Preferential Issue: Dis s an issue f either shares or convertible securities by listed organisations to a select group of people under section 81 of the Companies Act, 1956. This issue is neither a Rights nor Public Issue and is a faster way for any orgs to raise capital.

B) SECOONDARY MARKET :

It facilitates trading in equity(already existing securities or pre-issued securities are traded among investors) and long term debt instruments. These impart liquidity and price discovery. Now, This market could be:

A) Auction Market : Stock exchange is a part of the auction market

B) Dealer Market - OTC(Over-the-Counter) is a part of Dealer Mart

Terms related to Secondary Market:

Corporate action: declaration of dividends, issue of bonus shares, and splitting shares into smaller denominations are called corporate actions. They impact the market price of shares as they alter(change) the intrinsic value of the shares.

Index: Index shows how a specified portfolio of share prices is moving to give an indication of the market trends. ex. S & P CNX Nifty...it is a scientifically developed 50 stock index

SENSEX : is an index based on shares traded on BSE. BSE is a scientifically developed 30 stock index.

3) Derivatives: Equity and debt market is covered in the primary and secondary market.

Derivative is a product whose value is derived from the value of one or more basic variables called underlying. The underlying asset can be equity, foreign exchange, commodity or any other asset.

Types Of Derivatives:

a) Forwards: dis s a customised contract between two entities where settlment takes place on a specific date n d future at today's pre-agreed price.

b) Futures: An agreement b/w 2 partis to buy or sell an asset at a certain time in future at a certain price.

c) Options: a contract which gives the right, but not an obligation to buy or sell d underlying at a stated date and a stated price.

d) Options ki life hoti hai usually upto 1(one) year. Most f d options on the exchanges hv max maturity of nine months. Issassey lambey options huye toh inhe warrant kehate hain. and these are usually traded over the counter(OTC).

Now, Money Market in India

It is the market in which short term funds are borrowed n lent. Lending money institutions are:

Govt f India and other sovereign bodies

Banks n other Developmental Financial institutions

PSUs

Private sector Orgs

Govt/Quasi-govt owned non-corporate bodies

Instruments of Money Market:

1) Call Money: Call or notice money is an amount borrowed or lent on demand for a very short period. If Period >1 day<14days = Notice money otherwise it is called as Call money. No collateral s needed to cover dese transactions.

This is a completely inter-bank market. Interest rates r market determined. both borrowers n lenders need to hv a current account wid RBI. Call market enable banks n institutions to even out their day-to-day deficits n surpluses of money. Co-operative banks, Commercial banks and primary dealers are only allowed to lend or borrow for adjusting their cash reserve adjustments.

2) Treasury Bills: dese r d lowest risk category instruments for d short term. RBI issues T -Bills at a prefixed date and for a fixed amount. There r 4 types f T-Bills which r mentioned below:

a) 14 Day T-Bills: Maturity: 14 days, auctioned on every friday f every week, Notified amount for auction = 100 crores

b) 91 Day T-Bill: Maturity : 91 days, auctioned on every friday f every week, Notified amount for auction = 100 crores
c) 182 day T-Bill : Maturiy : 182 days, auctioned on every alternate wednesday which is not a reporting week, Notified amount for auction = 100 crores

d 364 days T-Bill : Matuity is 364 days, auctioned on every alternate wednesday which is a reporting week, Notified amount for auction = 500 crores

3) Certificates of Deposits(CODs) : After T-Bills, the next lower risk category investment option is CODs issues by banks n Financial institutions. Allowed in 1989. A COD is a promissory note, secured n short term, of upto one year in nature.

A COD is issued at a discount to the face value. discount rate being negotiated b/w the issuer n d investor. 90 days CODs are most famous even if till one year maturity are allowed in the market.

4) Commercial Papers : Negotiable Short term unsecured promissory notes with fixed maturities, issued by well-rated organisations. Generally sold on discount basis. Orgs can issue it directly or through banks or merchant banks(called as dealers). Normally issued in d multiples of Rs.5 Crores for 30/45/60/90/120/180/270/364 days.

5) Inter-corporate deposits : It is an unnsecured loan extended by one corporate to another. This market allows fund surplus corporate to lend to other corporate. High Risk with High Returns. Better rated Corporates lend money from banking system aur kam ratings waale corporates ko loan de dete hain at high rates kyunki unko kam ratings ki wajah se bank se loan nahin mil paata. Risk is high and so is the return.

6) Commercial Bills : Start karte hain Bills of exchange(BOE) se.... BOE are negotiable instruments drawn by the seller or drawer of the goods on the buyer or drawee of the good for the value of goods delivered. Inn Bills ko TRADE BILLS kehate hain. Ab inn Trade bills ko commercial bills tab kahaa jaata hai jab when they are accepted by commercial banks.

Now technically, The commercial bill is a bill drawn by one merchant firm on the other.

Generally, commercial bills arise out of domestic transactions. The legitimate purpose of

a commercial bill is to reimburse the seller while the buyer delays payment. In India, the

commercial bill market is highly undeveloped. The two major factors which have arrested

the growth of a bill market are: (i) popularity of cash credit system in bank lending, and

(ii) the unwillingness of the larger buyer to bind himself to payment discipline associated

with the commercial bill. Among other factors which have prevented growth of genuine bill

market are lack of uniformity in drawing bills, high stamp duty on usance or time bills and

the practice of sales on credit without specified time limit.

7) Ready Forward Contracts: transactions in which two parties agree to sell and purchase the same security.Isme seller* securities becchta hai iss waade ke saath ki woh dobara inn securities ko ek fixed rate pe certain fixed time ke baad khud waapis khareed lega. Issi tarah Buyer^ securities kharidata haii iss waade ke saath ki woh ek fixed time pe fixed price pe inn securities ko seller ko waapis becch dega.

Ab aise transaction ko Repo tab kahaa jaata hai jab hum issey buyer^ of securities ke prospective se dekhein. Aur Reverse Repo tab kahaa jaata hai jab hum issey seller* of funds ke prospective se dekhein.

* -- Seller

^ -- Buyer. Yeh samjhane ke liye hai.... seller/buyer concept oopar hindi main issiliye diya hai. Ussase relate karke repo/reverse repo samajhane ki koshish karein. Theek se samajh aaiyega...... 

8) Dated Govt Securities : Lowest risk category instrument. Issued by GOV and state Govts. Date f maturity is specified n dat s why it s called as Dated Govt Secs. Govt borrows money/funds through the issue of long term dated securities. Issued through auctions conducted by RBI, where RBI decides the coupon or discount rate depending upon the response received. Jyaadatar fixed interest bearing securities hi rehati hain per kavi kavi Zero coupon instruments aur floating rate securities bhi aati hain.

Hope you all would have got a glimpse of indian money and capital market...... Share your feedback in the comments section guys....Happy Learning.

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