FINANCIAL MARKETS

FINANCIAL
MARKET

MONEY
MARKET

CAPITAL
MARKET

BOND
MARKET

FOEX
MARKET

EQUITY
MARKET

INSURANCE
MARKET

MUTUAL
FUND
MARKET

Capital Market
Equity Market
Bond Market
Primary Market
New Issues, No stock exchange,
Intermediaries

Secondary Market
Trading in securities, Stock exchange, Demat

Derivatives Market

Foreign Exchange Market

Market for currencies
24 hours market
Major currencies are USD, JPY, EUR,
CHF, GBP, CAD, AUD
Spot and Forward
Efficient market
High volatility of rates

Insurance Market
Life Insurance and General Insurance
Invest in securities and bank deposits
Provide risk management tools to
corporates and banks
Regulated by Insurance Regulatory
Authority of India

Mutual Funds
Pool small investments to invest in
diversified and/or sectoral securities
Formed as Asset Management
Companies
Invest in capital markets
Regulated by SEBI

PARTICIPANTS IN FINANCIAL
MARKET

Banks
Primary Dealers
Financial Institutions
Stock Exchange
Brokers
Investment Bankers
Foreign Institutional Investors
Custodians
Depositories

Money Market
Lenders and borrowers of money, other than
equity capital
Generally for short term, up to one year
Objectives:
Provide equilibrating mechanism for evening out short
term surplus and deficits
Provide a focal point for central bank intervention for
liquidity management
Provide reasonable access to users of short-term
money to meet their requirements at a realistic price

MM Instruments

Call Money/Notice Money

Term Money
Bank fixed deposits
Certificate of Deposits
Commercial Paper
Bill Rediscounting Scheme
Inter-bank Participation certificates
Collateralised Borrowing and Lending Obligation
Treasury Bills
Repurchase Agreements

Call Money/Notice Money

Call money repayable on call by lender
Notice money repayable after one/two days notice
by lender
Tenor ranges from overnight to fourteen days
Most call money is overnight
Participants banks
Use for meeting CRR requirements
Interest rates varies widely depending on season
Lenders keep exposure limit on borrowers
Statutory ceiling on lending

Term Money
Interbank borrowing beyond 14 days
No statutory ceiling

Bank Fixed Deposits

Period from 7 days to 10 years

Interest rates differ from bank to bank
Interest rates varies on period of deposits
Premature withdrawals permitted with
penalty

Certificate of Deposit
Negotiable money market instrument for
funds deposited at a bank or financial
institution
Demat format or Usance promissory note
Banks issue for periods from 7 days to
one year
FIs issue for periods from one year to 3
years

Certificate of deposit contd

Generally issued at a discount on face
value
Can be issued on floating rate basis also
with spread over a transparent benchmark
Issued to resident individuals, firms etc.
To NRIs on non-repatriable basis.
Rs. 1 lakh and multiples of it
No loans, No buy back before maturity

Commercial Paper
An instrument of disintermediation for
corporates
Now issued by primary dealers and FIs
also
Conditions:
Tangible net worth Min. Rs. 4 crores
Has been sanction WC limits by bank
Classified by bank as standard asset
Minimum credit rating P-2 of CRISIL

Commercial paper contd

Features:
Issued in the form of a promissory note or
demat form
Issued to individuals banks, corporates and
NRIs and FIIs
Issued at a discount to face value
Cannot be underwritten or co-accepted by
banks

Bill Rediscounting Scheme

Promissory note raised by bank on trade
bills discounted by them
This promissory note is rediscounted by
other banks
Minimum 15 days, Maximum 90 days
Unexpired tenor of supporting bills not to
exceed 90 days

Interbank Participation Certificates

A form of securitisation of loan portfolio
Period:
Without risk sharing : Maximum 90 days
With risk sharing : Min. 91 days, Max. 180
days

Maximum participation: lower of 40%

balance outstanding or limit sanction
Not transferable
Not redeemable before due date

Treasury Bills
Short term borrowing by Government
through RBI
Tenor: 14 days, 28 days, 91 days, 182
days and 364 days
Issued at discount to face value of Rs.100
Auctioned every week
Cut-off price determined at a level where
the notified amount of auction is fully bid
for.

Repurchase Agreements (Repos)

Sale and buy back of security, to facilitate short
term borrowing
Not a instrument, but a process
Borrower sells to the lender at the prevailing
market rate, along with the interest accrued. He
agrees to buy back the securities at a specified
price on a specified future date, along with
interest due. Repurchase price is adjusted to
reflect the agreed rate of interest.
For the lender, this is a reverse repo

Repos contd
Eligible Instruments : Government dated
securities, treasury bills, corporate bonds,
money market securities and equity
Types
Buy-Sell repo (Normal Repo)
Classic repo (ready and forward prices are same,
interest paid separately)
Hold in custody repo (securities held by borrower)
Bond lending/borrowing transaction (customer lends
bonds for a period for a fee)

Repos contd
Repo period : No restriction. Generally
overnight to about a week
Uses:
For borrower: For meeting short term assetliability gap of banks
For lender: Parking of surplus funds for short
term

Bond Market
Bond is an instrument medium/long term
borrowing
Bonds can be government bonds or corporate
bonds (debentures)
Government bonds include:
SLR Securities
Government of India securities
State Development Loans
Other approved securities (PSUs, guaranteed by Govt)

Non SLR Securities

PSU Bonds
Corporate Debentures

Interest Rate Terminology

Fixed and Floating Rate of Interest
Simple and compound rate of Interest
Yield:
Nominal yield = Coupon
Current Yield : Effective yield based on
current market price
Yield to Maturity