deals with capital market and money market in India

1. Dynamics of Indian Financial MarketsB.V.Raghunandan, SVS College, Bantwal ICWAI, Mangalore Chapter, SDM College, Mangalore. December 18, 2010

2. Components of Financial Markets Capital Market: A market for long-term funds Money Market: A market for short-term funds

3. Indian Financial Markets Symbol of Socialism Government is the Biggest Investor Big Institutions are not allowed to be bankrupt PSU dominance Savings Dominated Government is the biggest spender Stability is more important Family Owned Groups Lesser Professional Driven Companies Wiser Investors

4. Financial Markets: Organised Markets Predetermined Rules Standardised Practices Geographical Diversification Ready Demand and Ready Supply through market-makers/jobbers Speculation Investor Grievance Redressal Mechanism

5. Capital Market: Meaning The capital market is the market for securities, where companies and governments can raise long-term funds. It is a market in which money is lent for periods longer than a year. The capital market includes the stock market and the bond- wikipedia

6. Players in the Capital Market Governments Public Sector Undertakings Insurance Companies Mutual Funds Non-Banking Financial Companies Provident Funds and Pension Funds Commercial Banks Financial Institutions Corporates Retail Investors Others: FFI,HNI,NRI, Investment Trusts,

7. Capital Market Instruments Equity Shares Preference Shares Government Bonds Corporate Bonds / Debentures Perpetual Bonds

8. Classification of Markets Primary Markets Secondary Markets

9. Secondary Market for Corporate Securities:Stock Exchange Stock Exchange is, ” an organised market for second-hand corporate and government securities”

10. A More Inclusive Definition Stock Exchange is a regulated market for second-hand corporate securities, government securities, commodities, and foreign exchange

11. Characteristics of Stock Exchange Restricted Membership Dealing only by Members Standardised Practices Facilitator Speculation Organised Market Securities Market Secondary market Part of Capital Market Listed Securities

12. Role and Functions of a Stock Exchange Public Finance Growth of Joint Stock Companies Enabling Book-Building Route Capital Mobility Foreign Funds Index Compilation Technical Analysis Ready Market Liquidity for Securities Evaluation Price Stability Capital Formation Promoting Saving Habits Investor Protection Corporate Governance

13. Members of a Stock Exchange: Jobber & His Characteristics Dealer Specialist Stability in the Market Dealing with Brokers Jobber’s Profit Equalising Quantity Speculation Two-way Quotes Matching Demand and Supply Company Sponsorship

14. Brokers & Their Characteristics Agent Generalist Conduit between Jobber and the Public Income in the form of Commission

15. Types of Dealings Dealings in Cash Market Dealings in Futures & Options Market

16. Cash Market Rolling Settlement T+2 Settlement Trading Day Pay-In Day Pay-Out Day

17. Futures & Options Marker Meant for Risk Management Arising Out of Dealings in Cash Market Exchange Traded Big Investors and Institutions Take Positions For Protecting the Value of Holding Providing for the Risks Arising Out of Trading

18. Futures: Characteristics Standardised Features Counter-Party is the Clearing House Margin Requirement Time Spread Three Contracts for Settlement

19. Futures: Trading Mechanism Trading Strategies Uses: -Hedging -Speculation -Arbitrage Types of Futures: Stock Future and Index Future

20. Option A contract to buy or sell without an obligation European Option and American Option Call Option and Put Option Uses of Options: -Hedging -Speculation -Arbitrage

21. Advantages of Option No Big Investment No Margin as in Futures No Obligation No Marked-to-Market More Gain than Risk Premium paid alone is the Disadvantage

22. Money Market: Features Market for Short-term Funds Tenure of Instruments Wholesale Market Direct Market Daily Settlement Huge Volumes Large Size Transaction RBI Regulation Administered Interest Rates Credit Control Measures Telephone Market Many Players

23. Players in the Money Market Central Government Public Sector Undertakings Insurance Companies Mutual Funds Banks Corporates Others: PFs, Pension Funds, NBFCs, Primary Dealers, Discount Houses etc

24. Money Market Instruments Treasury Bill Liquidity Adjustment Facility: Repurchase Option (Repo) & Reverse Repo Call Money Collateralised Borrowing & Lending Obligation(CBLO) Certificate of Deposit Commercial Paper Commercial Bills (Bill Market)

25. Treasury Bill Borrower: the central government. The RBI issues the TBs Investors: banks, insurance companies like LIC, GIC etc., NABARD and UTI, corporates and (FII). Tenure: 14 days, 91 days, 182 days or 364 days. Mode of sale: The RBI sells the TBs by auction to banks and others.

26. Importance of TBs eligible securities for maintenance of Statutory Liquidity Ratio of banks. used for the Repo operation of the central bank. Corporates also park their funds in TBs because there is no risk of default a high level of liquidity in terms of refinance from SBI-DFHI a ready market in National Stock Exchange. discount rate on 91-Day TB is the benchmark interest rate for money market, risk-free interest rate for investment analysis and pricing of futures contract

27. Liquidity Adjustment Facility Introduced in 2000, it brought under its fold the already existing two instruments The instruments are: -Repurchase Option (REPO) -Reverse REPO Rates on these instruments were intended to form the interest rate corridor for the short-term funds

28. REPO An instrument to increase the liquidity of a day For simplicity, lending by RBI to banks In reality, buying securities from the banks and squaring up the transaction by selling the securities back to them In 1992, one-day and two-day repo In 1993, 14-day repo Participants are commercial banks, financial institutions, primary dealers, SBI-DFHI and Securities Trading Corporation

29. Reverse Repo For draining the liquidity from the market Simple meaning, borrowing by RBI from banks In reality, selling securities to banks and buying them back from them subsequently Introduced in 1994-95 Increased the profitability of bankers by borrowing from CBLO and lending in Reverse Repo

30. Call Money money lent for an extremely short-period, generally not exceeding one day. In India, money borrowed by one bank from another for a day Banks have to maintain the cash reserve ratio. When they run short of cash, they borrow from other banks. When they have surplus, they lend

31. Participating Institutions in Call Money Market Commercial Banks Co-operative Banks Foreign Banks SBI-DFHI Securities Trading Corporation of India Primary Dealers In addition to the above, UTI, LIC, GIC, IDBI, NABARD etc., are allowed to lend in the call money market.

32. Collateralised Borrowing & Lending Obligation (CBLO) Introduced by Clearing Corporation of India Ltd (CCIL) in 2003 CBLO is a money market instrument of borrowing against securities held in custody by the CCIL. The tenure is generally one day, but can go upto 364 days. For CBLO, borrower should deposit Treasury bill or Govt. Securities with CCIL. participants can be banks, financial institutions, insurance companies, mutual funds, Primary Dealers, Non-Banking Finance Companies, and corporates.

33. Certificate of Deposit Certificate of Deposit (CD) is a negotiable certificate issued by a bank on the receipt of a large deposit. CD is a negotiable certificate payable to bearer. CDs appeared in the U.S.A., in 1961. In India, the RBI permitted banks to issue CDs from June 1989.

34. Features of CDs Borrower: Borrower is any scheduled bank other than RRBs Lenders: corporates, institutions, HNI, trust funds or NRIs Tenure: three months to one year. The common tenure is three months. Denomination: Rs. 25 lakh and in multiples of Rs. 5 lakh thereafter.

35. Commercial Paper Commercial Paper (CP) is a short-term unsecured promissory note issued by well established corporates with the requisite credit rating. CP has been in existence in the US for more than 100 years In India, CP made its appearance from January 1990

36. Commercial Bills Market Arising out of trade Most of them are documentary bills Acceptance function has not become popular Only discounting Secondary market is not developed Mainly SBI-DFHI

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