Ch 9 : Money Market and Capital Market
in India
6) Collection and Publication of Data:
relating to banking & other financial
sectors.
Financial Market
7) Promotional and Developmental
Financial market refers to a market where
Functions: extending banking services to
sale and purchase of financial assets is
semi urban and rural areas and
undertaken. Financial market includes two
development of specialised
distinct markets i.e. Money Market and
developmental institutions.
Capital Market.
8) Other Functions: acts as clearing house,
A. Money Market: Money Market is a
lender of Last resort, provides liquidity to
market for lending and borrowing of short
banks, etc.
term funds (upto 1 year).
b) Commercial Banks - These banks
Structure of Money Market in India:
provide services with the main intention
1) Organised Sector of earning profit. - can be classified into
Public, Private, RRBs and Foreign Banks
a) Reserve Bank of India (RBI) - apex
banking institution - central bank of our Functions:
country - RBI Act, 1934 - commenced
1) Acceptance of Deposits
operations on 1st April, 1935 -
nationalised on 1st January, 1949
Functions of RBI: • Demand Deposits: Deposits
withdrawable on demand.
1) Issue of Currency Notes: all currency
notes, except one-rupee notes and coins. - Current Account
2) Banker to the Government: banker, - Saving Account
advisor, and agent to the Government.
• Time Deposits: Deposits withdrawable
3) Banker’s bank: financial assistance to after a certain period of time.
banks.
- Fixed Deposit
4) Custodian of Foreign Exchange
- Recurring Deposit
Reserves: maintain the official rate of
exchange of rupee as well as ensure its 2) Providing Loans and Advances
stability.
- Loans: Short Term, Medium Term, Long
5) Controller of Credit: using Quantitative Term.
and Qualitative Credit Control methods.
- Advances: Cash Credit, Overdraft,
Discounting of BoE.
3) Ancillary Functions: Transfer of funds, - their activities are restricted by RBI due
collection of money, D-mat facility, etc. to their exploitative tendencies
4) Credit Creation: Primary Deposits and (3) Unregulated Non-Bank Financial
Secondary Deposits. Intermediaries
c) Co-operative Banks: The main aim of - includes Chit Funds, Nidhi, Loan
these banks is not to earn profit but to companies.
provide services.
Role of Money Market
- State Level – State Co-operative
1. Short-term requirements of Borrowers:
Bank(Apex Bank)
access to short-term fund needs.
- District Level – District Central Co-
2. Liquidity Management: economic
operative Bank
stability and development.
- Primary Level – Primary Co-operative
3. Portfolio Management: different type
Credit Societies
of financial instruments.
d) Development Financial Institutions
4. Equilibrating Mechanism: between
(DFIs)
demand for and supply of short term
- Agencies providing medium and long- funds.
term financial assistance
5. Financial requirements of the
e) Discount and Finance House of India Government: by issuing Treasury Bills.
(DFHI)
6. Implementation of Monetary Policy:
- Set up in 1988 on the recommendations managing quantity of money.
of Vaghul Committee
7. Economizes the use of cash: various
- Jointly owned by RBI, Public Sector banks financial instruments which are close
and financial institutions substitutes of money and not actual
money.
2) Unorganised sector
8. Growth of Commerce, industry and
(1) Indigenous Bankers
trade: discounting of Bills, providing
- financial intermediaries like Banks working capital for Agro industries and
Small scale industries.
- mostly deal in indigenous short-term
credit instruments (Hundi)
- important source of funds in unbanked
area
(2) Money Lenders
- mostly operating in Villages
- charges very high rate of interest
