Indian Financial System The financial system of a country mainly The financial institutions can further be

aims at managing and governing the divided into two types:

The Indian Financial System is one of the mechanism of production, distribution,
most important aspects of the economic exchange and holding of financial assets  Banking Institutions or
development of our country. This system or instruments of all kinds. Depository Institutions – This
manages the flow of funds between the includes banks and other credit
people (household savings) of the country Further below in this article, we shall unions which collect money from
and the ones who may invest it wisely discuss the various components of the the public against interest
(investors/businessmen) for the betterment financial system in India. provided on the deposits made and
of both the parties. lend that money to the ones in
Components of Indian Financial System need
This is an important topic with respect to
the various Government exams conducted There are four main components of the  Non-Banking Institutions or
in the country, and aspirants must Indian Financial System. This includes: Non-Depository Institutions
carefully consider going through this – Insurance, mutual funds and
1. Financial Institutions
article and prepare themselves brokerage companies fall under
accordingly. 2. Financial Assets this category. They cannot ask for
monetary deposits but sell
In this article, you shall know about what 3. Financial Services financial products to their
the Indian Financial system is, its customers.
components and how it helps in the 4. Financial Markets
economic growth of a country. Also, get Further, Financial Institutions can be
Let’s discuss each component of the
some Sample Questions on the Indian classified into three categories:
system in detail. 
Financial System further below in this
article.  Regulatory – Institutes that
1. Financial Institutions
regulate the financial markets like
Indian Financial System – An Overview The Financial Institutions act as a RBI, IRDA, SEBI, etc.
mediator between the investor and the
The services that are provided to a person  Intermediates – Commercial
borrower. The investor’s savings are
by the various Financial Institutions banks which provide loans and
mobilised either directly or indirectly via
including banks, insurance companies, other financial assistance such as
the Financial Markets. 
pensions, funds, etc. constitute the SBI, BOB, PNB, etc. 
financial system.  The main functions of the Financial
 Non Intermediates – Institutions
Institutions are as follows:
Given below are the features of the Indian that provide financial aid to
Financial system:  A short term liability can be corporate customers. It includes
converted into a long term NABARD, SIBDI, etc. 
 It plays a vital role in the
investment
economic development of the 2. Financial Assets
country as it encourages both  It helps in conversion of a risky
savings and investment The products which are traded in the
investment into a risk-free
Financial Markets are called Financial
investment
 It helps in mobilising and Assets. Based on the different
allocating one’s savings  Also acts as a medium of requirements and needs of the credit
convenience denomination, which seeker, the securities in the market also
 It facilitates the expansion of differ from each other. 
means, it can match a small
financial institutions and markets
deposit with large loans and a
Some important Financial Assets have
 Plays a key role in capital large deposit with small loans
been discussed briefly below:
formation
The best example of a Financial Institution
 It helps form a link between the is a Bank. People with surplus amounts of
investor and the one saving money make savings in their accounts, and
people in dire need of money take loans.
 It is also concerned with the The bank acts as an intermediate between
Provision of funds the two.
  Call Money – When a loan is and brokerages, etc. are all a part  Foreign exchange Market – One
granted for one day and is repaid of the Insurance services of the most developed markets
on the second day, it is called call across the world, the Foreign
money. No collateral securities are  Investment Services – It mostly exchange market, deals with the
required for this kind of includes asset management requirements related to multi-
transaction.  currency. The transfer of funds in
 Foreign Exchange Services
this market takes place based on
 Notice Money – When a loan is – Exchange of currency, foreign
the foreign currency rate.
granted for more than a day and exchange, etc. are a part of the
for less than 14 days, it is called Foreign exchange services  Credit Market – A market where
notice money. No collateral short-term and long-term loans are
The main aim of the financial services is
securities are required for this granted to individuals or
to assist a person with selling, borrowing
kind of transaction. Organisations by various banks
or purchasing securities, allowing
and Financial and Non-Financial
 Term Money – When the payments and settlements and lending and
Institutions is called Credit Market
maturity period of a deposit is investing. 
beyond 14 days, it is called term 4. Financial Markets Definitions and Objectives of the
money.
Capital MarketLast updated
The marketplace where buyers and sellers
 Treasury Bills – Also known as interact with each other and participate in It refers to the part of the market where the
T-Bills, these are Government the trading of money, bonds, shares and financial instructions mobilize the savings
bonds or debt securities with other assets is called a financial market.  of the people and lend them long-term so
maturity of less than a year.
that new capital can be raised in the
Buying a T-Bill means lending The financial market can be further
country. A capital market is nothing but
money to the Government. divided into four types:
the process by which funds are borrowed
 Certificate of Deposits – It is a  Capital Market – Designed to and lent over a long period of time. The
dematerialised form finance the long term investment, capital market can also be considered a
(Electronically generated) for the Capital market deals with marketplace where financial securities
funds deposited in the bank for a transactions which are taking (stocks, bonds, and government-backed
specific period of time. place in the market for over a loans) are bought and sold.
year. The capital market can
 Commercial Paper – It is an Types of Capital Market
further be divided into three types:
unsecured short-term debt
instrument issued by corporations.          (a)Corporate Securities Market Primary Market A primary market is
the most important type of capital market.
3. Financial Services          (b)Government Securities Market  It is also known as the new issue market.
The primary function of this market is to
Services provided by Asset Management          (c)Long Term Loan Market  deal with new securities, i.e. securities that
and Liability Management Companies. are issued for the first time to a new
They help to get the required funds and  Money Market – Mostly
investor.Primary markets serve the most
also make sure that they are efficiently dominated by Government, Banks
important function of generating capital
invested. and other Large Institutions, the
for companies, governments, and
type of market is authorised for
The financial services in India include: institutions. Investors are able to find
small-term investments only. It is
companies through this service who are
a wholesale debt market which
 Banking Services – Any small or interested in investing in their expansion
works on low-risk and highly
big service provided by banks like or project
liquid instruments. The money
granting a loan, depositing money, market can further be divided into .Secondary MarketAnother type of
issuing debit/credit cards, opening two types: market besides primary markets is the
accounts, etc. 
         (a) Organised Money Market secondary market. The stock exchange
 Insurance Services – Services market is usually called the secondary
like issuing of insurance, selling          (b) Unorganised Money Market market. There are securities on the market
policies, insurance undertaking in the form of shares, debentures, bonds,
bills, etc., which are bought and sold  It helps in facilitating transaction When the company faces bankruptcy, then
between parties. A primary market deals settlement. the equity holders can only share the
solely with newly issued securities, residual interest that remains after debt
whereas a secondary market deals with  It improves the effectiveness of holders have been paid.
existing securities. However, the capital allocation.
secondary market deals with securities Companies also regularly give dividends
 It provides continuous availability to their shareholders as a part of earned
already in existence. The secondary of funds to the companies and profits coming from their core business
market does not issue new government. operations.
securities.Regulation and legalization of
the securities market ensure strict rules Capital Market Objectives 2. Debt Securities:
and regulations for the trading of
securities. To make sure that investors can Capital market regulation is primarily Debt Securities can be classified into
trade without fear of being scammed, this intended to protect investors, insider bonds and debentures:
step has been taken. Technology has dealings, creative accounting, and misuse
played a major role in advancing of client money are some of the vices 1. Bonds:
secondary capital markets during the last investors need protection from.Some of
the objectives of capital market regulation Bonds are fixed-income instruments that
decade.
are as follows:The protection of are primarily issued by the centre and state
What are the Functions of the investors.Make sure markets are fair, governments, municipalities, and even
efficient, and transparent.Taking steps to companies for financing infrastructural
Capital Market?
reduce systemic risk.Accordingly, capital development or other types of projects.
It is the best medium of finance for market regulation is intended to protect the It can be referred to as a loaning capital
companies and offers different modes of public interest, which operates on the need market instrument, where the issuer of the
investment avenues to all investors which to foster economic development and bond is known as the borrower.
encourage building capital. confidence, which in turn can boost
inward investment. Bonds generally carry a fixed lock-in
The main functions of the capital
period. Thus, the bond issuers have to
market are: What are the instruments traded in the repay the principal amount on the maturity
Capital Market?
 The capital market acts as the link date to the bondholders.
between the investors and savers. Below are the 5 types of instruments that
2. Debentures:
are traded in the capital market:
 It helps in facilitating the
Debentures are unsecured investment
movement of capital to more 1. Equities: options unlike bonds and they are not
productive areas to boost the
Equity securities refer to the part of backed by any collateral.
national income.
ownership that is held by shareholders in a The lending is based on mutual trust and,
 It boosts economic growth. company. herein, investors act as potential creditors
 It helps in the mobilization of In simple words, it refers to an investment of an issuing institution or company.
savings for financing long term in the company’s equity stock for 3. Derivatives:
investment. becoming a shareholder of the
organization. Derivative instruments are capital market
 It facilitates the trading of
financial instruments whose values are
securities. The main difference between equity determined from the underlying assets,
holders and debt holders is that the former such as currency, bonds, stocks, and stock
 It reduces transaction and
does not get regular payment, but they can indexes.
information cost.
profit from capital gains by selling the
 It helps in quick valuations of stocks. The four most common types
financial instruments. of derivative instruments are forwards,
Also, the equity holders get ownership futures, options and interest rate swaps:
 Through derivative trading, it rights and they become one of the owners
offers hedging against market of the company.  Forward: A forward is a contract
risks. between two parties in which the
 exchange occurs at the end of the foreign market. It mainly consists 5. Registrar and Transfer Agent
contract at a particular price. of currency agreements and derivatives. (RTA)

 Future: A future is a derivative Based on currency agreements, they can Depository

transaction that involves the be broken into three categories i.e spot,
exchange of derivatives on a outright forwards and currency swap.: The Depository is an institution which
determined future date at a maintains an electronic record of
predetermined price. Depository System in India | How ownership of securities. It is company that
Depository System Works? has been formed and registered under the
 Options: An option is an Indian Companies Act, 2013 & has been
agreement between two parties in What is Depository System? granted a certificate of registration by
which the buyer has the right to SEBI, subsequent to registration under the
Depository system is a system in which
purchase or sell a particular Depositories Act, 1996. It is an institution
the securities of investors are held in the
number of derivatives at a alike bank for securities where the
electronic form with the depository. It
particular price for a particular dematerialized physical securities are
eliminates the voluminous and
period of time. traded and held in custody. Thus,
cumbersome paper work involved in the
depository is a custodian of its client’s
 Interest Rate Swap: An interest scrip-based system The transfer of
securities.  It interfaces with its investors
rate swap is an agreement between securities takes place by means of book
two parties which involves the entries on the ledger of the depository. The through its agents called depository
swapping of interest rates where depository holds the securities of investors participants.
both parties agree to pay each at the request of the investors through a The legal ownership of securities is with
other interest rates on their loans registered depository participant. It holds depository, but the beneficial ownership is
in different currencies, options, securities like shares, bonds, debentures, with investor. The depository name is
and swaps. mutual funds, government securities etc. registered in the ownership register
maintained by the company. Thus, instead
4. Exchange-Traded Funds: Functions of Depository System
of name of several owners, the name of
The prominent functions of depository depository figures in the register of
Exchange-traded funds are a pool of the
system are: company.
financial resources of many investors
which are used to buy different capital Depository Participant
 It acts as link between companies
market instruments such as shares, debt that issues securities and
securities such as bonds and derivatives. A Depository Participant (DP) is an agent
investors.
of the depository through which it
Most ETFs are registered with the interfaces with the investor and provides
 It allows quick transfer of
Securities and Exchange Board of India depository services. DP is the intermediary
securities from one investor to
(SEBI) which makes it an appealing between the investor and the depository.
another.
option for investors with a limited expert The relationship between the depository
having limited knowledge of the stock  It eliminates the chance of and the DP will be of a principal and
market. forgery, fake certificates, bad agent.
deliveries, theft, damage of
ETFs having features of both shares as The depository holding the securities
securities.
well as mutual funds are generally traded maintains ownership records in the name
in the stock market in the form of shares Parties involved in Depository System of each DP, DP in return as an agent of
produced through blocks. depository, maintains ownership records
There are five parties involved in
of every beneficial owner (investor) in
 ETF funds are listed on stock exchanges Depository System:
book entry form.
and can be bought and sold as per
requirement during the equity trading 1. Depository
The following entities can register
time. themselves as depository participant with
2. Depository Participant
SEBI:
5. Foreign Exchange Instruments:
3. Beneficial Owner
 Public financial institutions
Foreign exchange instruments are
4. Issuer
financial instruments represented on the  Scheduled commercial banks
  Foreign banks operating in India  A company formed and registered Development Bank of India, Unit
with the approval of the Reserve under the Companies Act, 1956 Trust of India and National Stock
Bank of India and Exchange emerged as the first
depository to be registered in
 State financial corporations  Which has been granted a India in 1996.
certificate of registration under
 Custodians section 12(1A) of the SEBI Act, 2. Central Depository Services
1992. (India) Limited (CDSL): The
 Stock-brokers
Central Depository Services
Advantages of Depository System (India) Limited (CDSL) is the
 Clearing corporations / clearing
houses second depository in India that has
The important advantages of depository
been promoted by Bombay Stock
system are:
 NBFCs Exchange Limited (BSE) together
 Dematerialization of securities with leading banks such as State
 Registrar to an issue or share
Bank of India, HDFC Bank and
transfer agent  Fungibility: Securities does not others in 1999.
carry a distinct number or
A demat account can be opened only
certificate numbers. Thus, all What is NSDL?
though a depository participant of
depository. It cannot be opened directly shares of particular company are
 NSDL is the oldest and largest
identical to each other and are
with depository. depository in India. It commenced
interchangeable. However, each
operations in 1996 in Mumbai. It
Beneficial Owner/Investor security held in dematerialized
was the first depository to provide
form is given an identity and it is
The investor whose securities are held in trading services in electronic
in form of a distinctive ISIN
electronic form in a demat account opened format.
(International Securities
with a depository through a Depository Identification Number). ISIN is a  According to data from SEBI,
Participant is called as ‘Beneficial Owner’ 12-character long identification NSDL has around 2.4 crore active
(BO). All the benefits as a result of the mark. investors, with more than 36,123
holding the securities are given to such
depository participant service
beneficial owner.  Free transferability of shares
centres across 2,000 cities.
Issuer  No risk like theft or loss of share
 NSDL is entrusted with the
certificates
Issuer means any entity such as a safekeeping of the following
corporate / state or central government  Cost efficiency and convenient financial securities in the
organizations issuing securities which can electronic format:
 Faster risk free and low-cost
be held by depository in electronic form
settlement o Stocks
Registrar and Transfer Agent (RTA)
 Reduction in paperwork o Bonds
An RTA is an agent of the issuer. RTA
Depositories in India – NSDL vs CSDL o Debentures
acts as an intermediary between the issuer
and depository for providing services such In India, a depository has to be promoted o Commercial papers
as dematerialization, rematerialization, as a corporate body under Companies Act,
initial public offers (IPO) and corporate 1956. It is also to be Registered as a o Mutual Funds
actions. depository with SEBI. The minimum net
 NSDL offers a wide range of
worth stipulated by SEBI to operate as
The Depositories Act 1996 services, like:
depository is Rs.100 crores. There are two
The Government of India enacted the SEBI registered depositories in India: o Dematerialisation services
Depositories Act 1996 to start depository
1. National Securities Depository o Rematerialisation services
services in India. According to this act, the
Limited (NSDL): National
Depository means:
Securities Depositories Ltd. o Transfers between
(NSDL) promoted by Industrial depositories
 o Off-market transfers commodity is decided by the rules of investing in the stock market. It
demand and supply. In India, the most ensures a better quality of
o Lending of securities prominent stock exchange is the Bombay transactions and smooth
Stock Exchange. There are a total of functioning. The idea is to get
o Collateral and mortgage
twenty-one stock exchanges in India. more public investors and spread
of securities
the ownership of securities for the
Functions of the Stock Exchange benefit of everyone.
What is CDSL?
 Liquidity and Marketability: One  Speculation: One often hears that
 CDSL started operations in
of the main drawing factors of the the stock exchange is a
Mumbai in 1999 and is the
stock exchange is that it speculative market. And while this
second-largest depository in the
enables high liquidity. The is true, the speculation is kept
country after NSDL.
securities can be sold at a within the legal framework. For
 Like NSDL, it provides all moment’s notice and be converted the stake of liquidity and
services, like holding financial to cash. It is a price determination, a healthy
securities in the electronic format continuous market and the dose of speculative trading is
and facilitating trade and investors can divest and reinvest necessary, and the stock exchange
settlement of orders. All forms of with ease as per their wishes. provides us with such a platform.
stocks and securities - just like
 Price Determination: In a Trading and Settlement Procedure
NSDL - are held at this central
secondary market, the only way to
depository.
determine the price of securities in 1] Selecting a Broker or Sub-broker
 According to data from SEBI, it via the rules of supply and
demand. A stock exchange When a person wishes to trade in the stock
has more than 5.2 crore active
enables this process via constant market, it cannot do so in his/her
customer accounts with around
valuation of all the securities. individual capacity. The transactions can
21,434 depository participant
Such prices of shares of various only occur through a broker or a sub-
service centres.
companies can be tracked via the broker. So according to one’s requirement,
Registration of DPs with NSDL and index we call the Sensex. a broker must be appointed.
CDSL:
 Safety: The government strictly Now such a broker can be an individual or
A stockbroking firm usually selects governs and regulates the stock a partnership or a company or a financial
between the two depositories for exchanges. In the case of the BSE, institution (like banks). They must be
registration on the basis of fees and the Securities Board of India is the registered under SEBI. Once such a broker
charges, services, and other aspects such governing body. All transactions is appointed you can buy/sell shares on the
as ease of doing business. As an investor, occur within the legal framework. stock exchange.
you can check with your DP to know This provides the investor with 2] Opening a Demat Account
whether they are registered with NSDL or assurances and a safe place to
CDSL. Some stockbrokers are also transact in securities. Since the reforms, all securities are now in
registered with both depositories. electronic format. There are no issues of
 Contribution to the Economy: As physical shares/securities anymore. So an
Stock Exchange we know the stock exchange deals investor must open a dematerialized
in already-issued securities. But
The secondary tier of the capital market is account, i.e. a Demat account to hold and
these securities are continuously
what we call the stock market or the stock trade in such electronic securities.
sold and resold and so on. This
exchange. The stock exchange is a virtual
allows the funds to be mobilized So you or your broker will open a Demat
market where buyers and sellers trade in
and channelized instead of sitting account with the depository participant.
existing securities. It is a market hosted by
idle. This boosts the economy. Currently, in India, there are two
an institute or any such government body
depository participants, namely Central
where shares, stocks, debentures, bonds,  Spreading of Equity: The stock Depository Services Ltd. (CDSL) and
futures, options, etc are traded. exchange ensures National Depository Services Ltd.
wider ownership of securities. It
A stock exchange is a meeting place for (NDSL).
actually educates the public about
buyers and sellers. These can be brokers,
the safety and the benefits of 3] Placing Orders
agents, individuals. The price of the
And then the investor will actually place What Is the Money Market? market has retail locations, including local
an order to buy or sell shares. The order banks and the U.S. government's
will be placed with his broker, or the The money market refers to trading in TreasuryDirect website. Brokers are
individual can transact online if the broker very short-term debt investments. At the another avenue for investing in the money
provides such services. One thing of wholesale level, it involves large-volume market.
essential importance is that the order trades between institutions and traders. At
/instructions should be very clear. the retail level, it includes money market The U.S. government issues Treasury
Example: Buy 100 shares of XYZ Co. for mutual funds bought by individual bills in the money market, with maturities
a price of Rs. 140/- or less. investors and money market accounts ranging from a few days to one
opened by bank customers.. year.2 Primary dealers buy them in large
Then the broker will act according to your amounts directly from the government to
transactions and place an order for the Understanding the Money Market trade between themselves or to sell to
shares at the price mentioned or an even The money market is one of the pillars of individual investors. Individual investors
better price if available. The broker will can buy them directly from the
the global financial system. It involves
issue an order confirmation slip to the overnight swaps of vast amounts of money government through its TreasuryDirect
investor. website or through a bank or a broker.
between banks and the U.S. government.
State, county, and municipal governments
4] Execution of the Order The majority of money market
also issue short-term notes.
transactions are wholesale transactions
Once the broker receives the order from that take place between financial Types of Money Market Instruments
the investor, he executes it. Within 24 institutions and companies.
hours of this, the broker must issue a Money Market Funds
Contract Note. This document contains all Institutions that participate in the money
the information about the transactions, like market include banks that lend to one The wholesale money market is limited to
the number of shares transacted, the price, another and to large companies in companies and financial institutions that
date and time of the transaction, brokerage the eurocurrency and time deposit lend and borrow in amounts ranging from
amount, etc. markets; companies that raise money by $5 million to well over $1 billion per
selling commercial paper into the market, transaction. Mutual funds offer baskets of
Contract Note is an important document. which can be bought by other companies these products to individual investors.
In the case of a legal dispute, it is evidence or funds; and investors who purchase bank The net asset value (NAV) of such funds
of the transaction. It also contains the CDs as a safe place to park money in the is intended to stay at $1. During the 2008
Unique Order Code assigned to it by the short term. Some of those wholesale financial crisis, one fund fell below that
stock exchange. transactions eventually make their way level.4 That triggered market panic and a
into the hands of consumers as mass exodus from the funds, which
5] Settlement components of money market mutual ultimately led to additional restrictions on
funds and other investments. their access to riskier investments.
Here the actual securities are transferred
from the buyer to the seller. And the funds Who Uses the Money Market? Money Market Accounts 
will also be transferred. Here too the
broker will deal with the transfer. There In the wholesale market, commercial Money market accounts are a type of
are two types of settlements, paper is a popular borrowing mechanism savings account. They pay interest, but
because the interest rates are higher than some issuers offer account holders limited
 On the Spot settlement: Here we for bank time deposits or Treasury bills, rights to occasionally withdraw money or
exchange the funds immediately and a greater range of maturities is write checks against the account.
and the settlement follows the T+2 available, from overnight to 270 days.1 (Withdrawals are limited by federal
pattern. So a transaction occurring regulations. If they are exceeded, the bank
on Monday will be settled by  However, the risk of default is promptly converts it to a checking
Wednesday (by the second significantly higher for commercial paper account.) Banks typically calculate interest
working day) than for bank or government instruments. on a money market account on a daily
basis and make a monthly credit to the
 Forward Settlement: Simply Individuals can invest in the money
account.
means both parties have decided market by buying money market funds,
the settlement will take place on short-term certificates of deposit  Funds in money market accounts are
some future date. It can be T+% or (CDs), municipal notes, or U.S. Treasury insured by the Federal Deposit Insurance
T+9 etc. bills. For individual investors, the money
Corporation (FDIC) at banks and the Repos liquidity to lenders. Some of the common
National Credit Union money market instruments include
Administration (NCUA) in credit The repo, or repurchase agreement (repo), Banker's Acceptance, Treasury Bills,
unions.35  is part of the overnight lending money Repurchase Agreements, Certificate of
market. Treasury bills or other government Deposits and Commercial Papers.
Certificates of Deposit (CDs) securities are sold to another party with an
agreement to repurchase them at a set Characteristics of Money Market
Most certificates of deposit (CDs) are not price on a set date. Instruments
strictly money market funds because they
are sold with terms of up to 10 years. Advantages and Disadvantages of Money market instruments allow
However, CDs with terms as short as three Money Markets governments, financial organizations and
months to six months are available. businesses to finance their short-term cash
There are several pros and cons of money
requirements. Some of the notable
As with money market accounts, bigger market investments. Most money market
characteristics of money market
deposits and longer terms yield better securities are considered extremely low-
instruments are as follows.
interest rates. Rates in August 2021 for 12- risk, due to the protection of FDIC
month CDs ranged from about 0.50% to insurance, backing by a government or  Liquidity - Money market
0.70% depending on the size of the bank, or the high creditworthiness of the instruments are highly liquid
deposit. Unlike a money market account, borrowers. They are also very liquid, because they are fixed-income
the rates offered with a CD remain meaning that they can readily be securities which carry short
constant for the deposit period. There is exchanged for cash at short notice. maturity periods of a year or less.
usually a penalty associated with an early
withdrawal of funds deposited in a CD. Pros and Cons of Money Market  Safety - Issuers of money market
Accounts instruments have strong credit
Commercial Paper ratings, which automatically
Pros
means that the money instruments
The commercial paper market is for
 Extremely low risk. issued by them will also be safe.
buying and selling unsecured loans for
corporations in need of a short-term cash  Discount Pricing - Another
 May be insured by FDIC.
infusion. Only highly creditworthy important characteristic feature of
companies participate, so the risks are low.  Highly liquid. money market instruments is that
they are issued at a discount on
Banker's Acceptances  Higher returns than most bank
their face value.
accounts.
The banker's acceptance is a short-term
Types Of Money Market
loan that is guaranteed by a bank. Used Cons
extensively in foreign trade, a banker's Instruments
acceptance is like a post-dated check and  Low returns that may not keep
Treasury Bills (T-Bills)
serves as a guarantee that an importer can pace with inflation.
pay for the goods. There is a secondary Issued by the Central Government,
 Not all money market securities
market for buying and selling banker's Treasury Bills are known to be one of the
are insured.
acceptances at a discount. safest money market instruments
 May have high minimum available. However, treasury bills carry
Eurodollars zero risk. I.e. are zero risk instruments.
investments or withdrawal
Eurodollars are dollar-denominated restrictions. Therefore, the returns one gets on them are
deposits held in foreign banks, and are not attractive. Treasury bills come with
What Are Money Market Instruments? different maturity periods like 3-month, 6-
thus, not subject to Federal Reserve
regulations. Very large deposits of month and 1 year and are circulated by
As the name suggests, Money Market
eurodollars are held in banks in the primary and secondary markets. Treasury
Instruments are simply the instruments or
Cayman Islands and the Bahamas. Money bills are issued by the Central government
tools which can help one operate in the
market funds, foreign banks, and large at a lesser price than their face value. The
money market. These instruments serve a
corporations invest in them because they interest earned by the buyer will be the
dual purpose of not only allowing
pay a slightly higher interest rate than U.S. difference of the maturity value of the
borrowers meet their short-term
government debt. instrument and the buying price of the bill,
requirements but also provide easy
which is decided with the help of bidding Commercial papers are actively traded in regulators, for instance, limit tariffs to
done via auctions. Currently, there are 3 secondary market. reasonable levels to avoid the exertion of
types of treasury bills issued by the market power. This restricts the budget
Government of India via auctions, which Repurchase Agreements (Repo) available to the operator for administering
are 91-day, 182-day and 364-day treasury the system, but it has no bearing on how
Repurchase Agreements, also known as
bills. the operator uses that budget for the same.
Reverse Repo or simply as Repo, loans of
Economic regulators also give operators
Certificate of Deposits (CDs) a short duration which are agreed upon by
cash incentives to work toward goals like
buyers and sellers for the purpose of
raising service standards.
A Certificate of Deposit or CD, functions selling and repurchasing. These
as a deposit receipt for money which is transactions can only be carried out Kinds of Regulators in India
deposited with a financial organization or between RBI approved parties Repo /
bank. However, a Certificate of Deposit is Reverse Repo transactions can be done The share, credit, and derivatives
different from a Fixed Deposit Receipt in only between the parties approved by RBI. exchanges in India are all subject to
two aspects. The first aspect of difference Transactions are only permitted between regulation, oversight, and policy
is that a CD is only issued for a larger sum securities approved by the RBI like formulation by the Indian Capital Markets,
of money. Secondly, a Certificate of treasury bills, central or state government which is also in charge of safeguarding
Deposit is freely negotiable. First securities, corporate bonds and PSU investor interests.
announced in 1989 by RBI, Certificate of bonds.
Deposits have become a preferred 1-Securities & Exchange Board of India
investment choice for organizations in Banker's Acceptance (BA) (SEBI)It is the main agency for stock
terms of short-term surplus investment as Banker's Acceptance or BA is basically a exchanges in India and was founded under
they carry low risk while providing the SEBI Act of 1992. Whether internal or
document promising future payment
interest rates which are higher than those external, SEBI laws apply to all financial
which is guaranteed by a commercial
provided by Treasury bills and term intermediaries who have been given
bank. Similar to a treasury bill, Banker's
deposits. Certificate of Deposits are also permission by their individual regulators
Acceptance is often used in money market
relatively liquid, which is an added to operate in the Indian securities markets.
funds and specifies the details of the
advantage, especially for issuing banks. SEBI, who regulates the money market,
repayment like the amount to be repaid,
Like treasury bills, CDs are also issued at date of repayment and the details of the was created to keep up with the growing
a discounted price and their tenor ranges demand for limiting hazardous activities in
individual to which the repayment is due.
between a span of 7 days up to 1 year. the quickly growing securities industry
Banker's Acceptance features maturity
However, banks issue Certificates of and to safeguard investors' interests. The
periods ranging between 30 days up to 180
Deposits for durations ranging from 3 following are SEBI's main responsibilities:
days.
months, 6 months and 12 months. They
Protective Functions
can be issued to individuals (except Money Market regulation and
minors), trusts, companies, corporations, It plays the role of stock market
associations, funds, non-resident Indians, regulators regulators.It looks for price
etc. manipulation.It makes insider trading
Who are Regulators? illegal.It forbids unfair and dishonest
Commercial Papers (CPs)
Last updated date: 07th Jan 2023•Total business practises.
Commercial Papers are can be compared views: 41.4k•Views today: 4.10kIs this
Development Functions
to an unsecured short-term promissory page helpful?The efficient provision of
note which is issued by highly rated infrastructure services is the responsibility SEBI supports the education of securities
companies with the purpose of raising of economic regulators. Most regulators of market middlemen.SEBI has a versatile
capital to meet requirements directly from the financial market are not actively and adaptable strategy to encourage stock
the market. CPs usually feature a fixed involved in the precise judgement that exchange activity.
maturity period which can range anywhere takes place in each phase of the
from 1 day up to 270 days. Highly popular infrastructure lifespan when competition Regulatory Functions
in countries like Japan, UK, USA, alone is unable to produce this result.
For the purpose of regulating
Australia and many others, Commercial Instead, they aim to shape the operator's
intermediaries, including merchant
Papers promise higher returns as actions as it oversees the lifetime
bankers, brokers, underwriters, and others,
compared to treasury bills and are management of the system.Economic
SEBI has established rules, regulations,
automatically not as secure in comparison.
and a conduct code.SEBI regulates and Economic Expansion: In addition to SEBI is a statutory regulatory body
controls how mutual funds, among other reflecting economic health, the capital established on the 12th of April, 1992. It
things, operate.SEBI investigates and market also promotes it. It transfers monitors and regulates the Indian capital
inspects stock exchanges. resources from those who have excess and securities market while ensuring to
capital to others who have not. As a result, protect the interests of the investors,
2-Reserve Bank of India (RBI)The the nation experiences equitable economic formulating regulations and guidelines.
Reserve Bank of India Act, 1934 governs growth. The head office of SEBI is at Bandra
it. The nation's central bank is the Reserve Kurla Complex, Mumbai.
Bank of India. It serves as the Indian Encourage Individuals to Save More:
financial state's nerve centre. It oversees As capital markets have grown, banking Structure of SEBI
all organisations involved in allocating institutions have been able to offer
capital and saving. The two main SEBI has a corporate framework
facilities and provisions that will assist
categories of entities that are under RBI people to save more. Due to the lack of acomprising of various departments each
supervision are commercial banks and capital market, individuals may have managed by a department head. There are
non-banking financial institutions instead invested in gold or real estate about 20 departments under SEBI. Some
(NBFC). of these departments are corporation
.Stock Price Stabilisation: Capital finance, economic and policy analysis,
Monetary Authority - Creates, directs, Market authorities have curbed speculative debt and hybrid securities, enforcement,
and implements monetary policy to keep activity and also given borrowers money human resources, investment
prices stable while keeping the goal of at the least potential interest rates. This management, commodity derivatives
growth in mind. made it easier to prevent fluctuations in market regulation, legal affairs, and more.
stock values The hierarchical structure of SEBI consists
Regulator and Supervisor of the of the following members:
Financial System - Defines the conditions .Proper Fund Redistribution: The
under which India's banking and financial capital market is a crucial platform for  The chairman of SEBI is
sector must operate. It also safeguards directing people's idle resources towards nominated by the Union
depositors' interests, keeps public an economy's productive sectors. It invests Government of India.
confidence in the banking system, and idle money in wise ways.
offers everyone affordable banking  Two officers from the Union
services Capital Formation: It is assisted by the Finance Ministry will be a part of
capital market, which increases the this structure.
.Foreign Exchange Manager - The amount of capital already present in the
Foreign Exchange Management Act of economy. This facilitates the growth of  One member will be appointed
1999 is overseen by RBI to facilitate capital in the economy. from the Reserve Bank of India.
international trade and payments while Five other members will be
assisting the foreign exchange market's SEBI – Securities and Exchange nominated by the Union
orderly expansion and sustainability in Board of India Government of India.
India.
The listed companies or public limited Functions of SEBI
Issuer of Currency - Issues, trades, and companies issuing right shares by 31st
 SEBI is primarily set up to protect
destroys coins that can't be used in July 2020 and intending to send notices to
the interests of investors in the
commerce. To ensure that the public has the shareholders, may do so in any other
securities market.
an adequate supply of coins and cash in mode other than registered post, speed
good condition post or courier and is not considered a  It promotes the development of
violation of SEBI circular. the securities market and regulates
.Regulator and Supervisor of Payment the business.
And Settlement Systems - Introduces and SEBI plays an important role in regulating
improves secure and effective payment all the players operating in the Indian  SEBI provides a platform for
solutions throughout the nation to meet capital market. It attempts to protect the stockbrokers, sub-brokers,
people's needs. Maintain public interest of investors and aims at portfolio managers, investment
confidence in the payment and settlement developing the capital markets by advisers, share transfer agents,
process. enforcing various rules and regulations. bankers, merchant bankers,
trustees of trust deeds, registrars,
Functions of Regulators What is SEBI
underwriters, and other associated
 people to register and regulate Securities Appellate Tribunal and the Secs), repo on G-Secs, cash, and
work. Supreme Court of India. treasury bills.

 It regulates the operations of Mutual Fund Regulations by SEBI  A debt mutual fund can invest up
depositories, participants, to only 20% of its assets in one
custodians of securities, foreign Some of the regulations for mutual funds sector; previously the cap was
portfolio investors, and credit laid down by SEBI are: 25%. The additional exposure to
rating agencies. housing finance companies
 A sponsor of a mutual fund, an
(HFCs) is updated to 15% from
 It prohibits insider trading, i.e. associate or a group company,
10% and a 5% exposure on
fraudulent and unfair trade which includes the asset
securitised debt based on retail
practices related to the securities management company of a fund,
housing loan and affordable
market. through the schemes of the mutual
housing loan portfolios.
fund in any form cannot hold:
 It ensures that investors are (a)10% or more of the  As per SEBI’s recommendation,
educated on the intermediaries of shareholding and voting rights in amortisation is not the only
securities markets. the asset management company or method for evaluating debt and
any other mutual fund. (b) An money market instruments. The
 It monitors substantial asset management company
acquisitions of shares and take- mark-to-market methodology is
cannot have representation on a also used.
over of companies. board of any other mutual fund.
 An exit penalty will be levied on
 SEBI takes care of research and  A shareholder cannot hold 10% or investors of liquid schemes who
development to ensure the more of the shareholding directly exit the scheme within a period of
securities market is efficient at all or indirectly in the asset seven days.
times. management company of a mutual
fund.  Mutual funds schemes must invest
Authority and Power of SEBI
only in the listed non-convertible
 No single stock can have more debentures (NCD). Any fresh
The SEBI has three main powers: 
than 35% weight in the index for a investment in commercial papers
i. Quasi-Judicial: SEBI has the authority sectoral or thematic index; the cap (CPs) and equity shares are
to deliver judgements related to fraud and is 25% for other indices. allowed in listed securities as per
other unethical practices in terms of the the guidelines issued by the
 The cumulative weight of the top
securities market. This helps to ensure regulator.
three constituents of the index
fairness, transparency, and accountability
cannot exceed 65%.  Liquid and overnight schemes are
in the securities market. 
no longer allowed to invest in
 An individual constituent of the
ii. Quasi-Executive: SEBI is empowered short-term deposits, debt, and
index should have a trading
to implement the regulations and money market instruments that
frequency of a minimum of 80%.
judgements made and to take legal action have structured obligations or
against the violators. It is also authorised  AMCs must evaluate and ensure credit enhancements.
to inspect Books of accounts and other compliance to the norms at the
documents if it comes across any violation  When investing in debt securities
end of every calendar quarter. The
of the regulations.  having credit enhancements, a
constituents of the indices must be
minimum of four times security
made public by publishing them
iii. Quasi-Legislative: SEBI reserves the cover is mandatory for investing
on their website.
right to frame rules and regulations to in mutual funds schemes. A
protect the interests of the investors. Some  New funds must submit their prudential limit of 10% is
of its regulations consist of insider trading compliance status to SEBI before prescribed on total investment by
regulations, listing obligations, and being launched. such schemes in debt and money
disclosure requirements. These have been market instruments.
formulated to keep malpractices at bay.  All liquid schemes must hold a
Despite the powers, the results of SEBI’s minimum of 20% in liquid assets
functions still have to go through the such as government securities (G-
Primary Market Secondary Market

A marketplace where formerly

Meaning A marketplace for new shares
issued securities are traded

Another Name New Issue Market (NIM) After Market

Shares, debentures, warrants,

Products IPO and FPO
derivatives, etc.

Type of PurchasingDirect Indirect

Parties of buying Buying and selling takes place between Buying and selling takes place
and selling the company and investors between the investors

Intermediaries
Underwriters Brokers
involved

Fluctuates with variations in

Price Levels Remains Fixed
demand and supply

It provides financing to the existing

Financing provided
companies for facilitating growth and No Financing is provided
to
expansion.

The company issuing the shares is

The purchase process happens directly
Purchase Process not involved in the purchasing
in the primary market.
process.

Beneficiary The beneficiary is the company The beneficiary is the investor

Government A company issues shares and the There is no involvement of the

involvement government interferes in the process government in the process.
Top 10 Differences between Money Market and Capital Market
Money Market Capital Market

                                                                           Definition

A random course of financial institutions, bill A kind of financial market where the company or
brokers, money dealers, banks, etc., wherein government securities are generated and patronised with
dealing on short-term financial tools are being the intention of establishing long-term finance to coincide
settled is referred to as Money Market. with the capital necessary is called Capital Market.

                                                                    Market Nature

Money markets are informal in nature. Capital markets are formal in nature.

                                                                Instruments involved

Commercial Papers, Treasury Certificate of Bonds, Debentures, Shares, Asset Secularisation, Retaine
Deposit, Bills, Trade Credit, etc. Earnings, Euro Issues, etc.

                                                                   Investor Types

Commercial banks,  non-financial institutions, Stockbrokers, insurance companies, Commercial banks,

central bank, chit funds, etc. underwriters, etc.

                                                                 Market Liquidity 

Money markets are highly liquid. Capital markets are comparatively less liquid.

                                                                       Risk Involved

Money markets have low risk. Capital markets are riskier in comparison to money
markets.

                                                             Maturity of Instruments

Instruments mature within a year. Instruments take longer time to attain maturity

                                                                  Purpose served

To achieve short term credit requirements of the To achieve long term credit requirements of the trade.
trade.

                                                               Functions served

Increasing liquidity of funds in the economy Stabilising economy by increase in savings

                                                     Return on investment achieved

ROI is usually low in money market ROI is comparatively high in capital market