Financial market

1. CONSTITUENTS
• The Debt market: Debt instruments are traded in the debt market,
also often referred to as the bond market.
• The Equity market: Equity instruments are traded in the equity
market, also known as the stock market.
• The Foreign-exchange market: Foreign-exchange markets are where
currencies are converted so that funds can be moved from one country
to another. Activities in the foreign-exchange market determine the
foreign-exchange rate, the price of one currency in terms of another.
• The Mortgage market: A mortgage is a long-term loan secured by a
pledge of real estate. Mortgage-backed securities (also called
securitized mortgages) are securities issued to sell mortgages directly
to investors.
• The Derivative market: Financial derivatives are contracts that derive
their values from the underlying financial assets.

2. FUNCTIONS OF FINANCIAL MARKET
• Price Determination: The prices at which the financial instruments trade in the
financial market are determined by the market forces, i.e., demand and supply.
• Funds Mobilization: The financial market helps in the mobilization of the
investors’ savings.
• Liquidity: It provides an opportunity for the investors to sell their financial
instruments at their fair value prevailing in the market
• Risk Sharing: The risk is transferred from the person who undertakes the
investments to those who provide the funds for making those investments.
• Easy Access: Financial market platform provides the potential buyer and seller
easily, which helps them save their time and money in finding the potential buyer
and seller.
• Reduction in Transaction costs and provision of the information: Financial
market helps provide every type of information to the traders without the
requirement of spending any money by them.
• Capital formation: Financial markets provide the channel through which the new
investors’ savings flow in the country, which aids in the country’s capital
formation.

3. INSTRUMENTS OF FINANCIAL MARKET
•Cash Instruments: Deposits and Loans
•Debt-Based Financial Instrument: Bonds, Debentures
•Equity-Based Financial Instrument: Stocks
•Derivative Instruments
•Foreign Exchange Instruments: Currency Swap, Spot

4. RECENT TRENDS IN INDIAN MONEY MARKET
Deregulation of Interest Rates
The ceiling on interest rates on the call money, inter-bank short-term deposits,
bills rediscounting and inter-bank participation was removed and the rates
were permitted to be determined by the market forces.
Introduction of New Money Market Instruments
182-days treasury bills, 364-day treasury bills, CDs, CPs, Money Market
mutual funds
Repurchase Agreements (Repos)
Repos and reverse repos help to even out short-term fluctuations in liquidity
in the money market. They also provide a short-term avenue to banks to park
their surplus funds.

5. RECENT TRENDS IN INDIAN MONEY MARKET
Liquidity Adjustment Facility (LAF)
In the recent years RBI is using repos and reverse repos as a policy to adjust liquidity
in the money market and therefore, to stabilize the short-term interest rates or call
rates.
Discount and Finance House of India (DFHI)
In order to impart liquidity to money market instruments and help the development of
secondary market in such instruments, DFHI was set up in 1988 jointly by RBI, public
sector banks and financial institutions.
Regulation of NBFCs
No NFBC can carry on any business of a financial institution, including acceptance of
public deposit, without obtaining a Certificate of Registration (CoR) from RBI.
The Clearing Corporation of India Limited (CCIL)
The CCIL clears all transactions in government securities and repos reported on the
Negotiated Dealing System (NDS) of RBI.

6. PRIMARY MARKET
• The primary market is the part of the capital market that deals
with issuing of new securities. Companies, governments or
public sector institutions can obtain funds through the sale of a
new stock or bond issues through primary market.
• The process of selling new issues to investors is called
underwriting.
• In the case of a new stock issue, this sale is an initial public
offering (IPO). Dealers earn a commission that is built into the
price of the security offering, though it can be found in the
prospectus.
• Primary markets create long term instruments through which
corporate entities borrow from capital market.

7. SECONDARY MARKET
 Secondary market deals in previously issued securities.
 This market is not the place of the origin of the security.
 Securities are not issued directly by the company to investors.
 Securities are sold by the existing investors to another investors.
 It transfer existing securities between buyers and sellers.
 Secondary market does not directly contribute to capital formation.