The term ‘Financial Markets’ refers to all those organisations and institutions which lend funds to business enterprises and government/public authorities.

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Presentation transcript:

The term ‘Financial Markets’ refers to all those organisations and institutions which lend funds to business enterprises and government/public authorities. FINANCIAL MARKETS The Financial Market MONEY MARKET Short-term funds Organised and unorganised CAPITAL MARKET Medium and long-term funds

Money Market Money market refers to an mechanism whereby borrowers manage to obtain short-term funds on one hand. And on the others, lenders succeed in getting credit worthy borrowers for their money. In any money market, the Central Bank occupies a strategic position being the residual source of supply of funds, followed by commercial banks as the most important lenders. However, these banks are not only lenders of money, but they also create credit. The Central Bank’s role is therefore important as controller of credit.

Functions of Money Markets 1.By providing various kinds of attractive and suitable credit instruments, it increases the supply of funds. 2.Money Market avoids, gluts or shortages in funds arising out of seasonal variations in the flow and demand for funds. 3.It enhances the amount of liquidity in the economy. 4.It makes available funds at cheaper rates. 5.It reduces regional gluts and stringencies in funds through quick transfer of funds from one place to another. 6.By providing profitable investment opportunities for short-term surplus funds, it helps to enhance profitability of individuals and financial institutions.

The Organised Indian Money Market The Indian money market comprises two sectors: organised and unorganised segments. In the organised segment of the money market, the RBI occupies a pivotal position, followed by commercial banks, including public sector banks and joint stock banks, Indian and foreign. The structure of money market has undergone huge changes, particularly since economic reforms. The RBI has gradually developed money market through five-pronged approach.

Indian Money Market: Changing Structure Ceilings on interest rate of various money market instruments were withdrawn since Several new money market instruments introduced, viz auctions of Treasury Bills, Commercial Papers, RBI repos. Permitting increasing number of players: starting with Discount and Finance House of India (DFHI)

Money Market Instruments Call money market: These are money dealt for 1 to 14 days. Inter-bank lending/call money market is the major component of this market. Treasury Bills Market: Treasury Bills are short-term liability of the government. The market for these include, 14-day Auction TBs, 182-days, (1999), 364-days (not re- discountable with RBI). Repos: This is a money market instrument which enables collateralised short-term borrowing and lending through sale and purchase in debt instruments. Under a repo transactions, holder of a security can sell it to an investor with an agreement to purchase them at pre- determined rate and date.

Money Market Instruments providing liquidity to the commercial sector. Commercial Bills: Bill issued between merchant firms, between seller and buyer of goods. The purpose is to reimburse the seller while the buyer delays payments. Commercial Papers (CP): This is a short-term instrument of raising funds by corporates. It is essentially a sort of unsecured promissory note sold by the issuer to a banker. Following the recommendations of the Vaghul Committee, CP was introduced in 1990, can be issued by listed companies which have working capital of not less that 5 crores. These companies have to be rated by rating agencies approved by RBI, has to obtain P2 from CRISIL or A2 from ICRA. MMFs: Introduced in 1992, for providing additional short- term avenue for individual investor.

The Unorganised Segment of Indian Money Market –Money lenders, indigenous bankers, –Unregulated loan companies, chit funds, nidhis.

The Capital Market Capital Market can be divided into two constituents: 1) The Securities market 2) the Financial Institutions; IFCI, IDBI, LIC, UTI etc. The Securities market Government Securities Market Corporate Securities Market

Importance/Role of Capital Market Pace of development, is conditioned, among other things, by the rate of long-term investment and capital formation. That in turn, is conditioned by mobilisation, channelisation and augmentation of funds. With rise of joint stock companies, capital market becomes a necessary infrastructure for fast- paced industrialisation, hence promotes industrial growth. Raising long-term capital Ready and continuous market

The Government Securities market Gilt-edged Market: Market in government securities or securities guaranteed by the government. Imp features are: Risk free and returns are guaranteed RBI the sole dealer of these securities Investors in these securities are predominantly institutions which are required to hold government securities like comm. Bnks, LIC, UTI, etc.

Financial Institutions in the Indian Economy Institutions that allow savers and borrowers to interact are called financial intermediaries. Types of Financial Intermediaries: –Banks - Bond Market –Stock Market - Mutual Funds –Other

Financial Intermediaries: Banks Banks take in deposits from people who want to save and make loans to people who want to borrow. Banks pay depositors interest and charge borrowers higher interest on their loans. Banks help create a medium of exchange, by allowing people to write cheques against their deposits.

Financial Intermediaries: The Bond Market A bond is a certificate of indebtedness that specifies obligations of the borrower to the holder of the bond. Characteristics of a bond: –Term: the length of time until maturity. –Credit Risk: the probability that the borrower will fail to pay some of the interest or principle.

Stock represents ownership in a firm, thus the owner has claim to the profits that the firm makes. Sale of stock infers “equity finance” but offers both higher risk and potentially higher return. Primary Market: new issues market Secondary Market: stock market Markets in which stock is traded: –National Stock Exchange –Bombay Stock Exchange Financial Intermediaries: The Stock Market

Financial Intermediaries: Mutual Funds A Mutual Fund is an institution that sells shares to the public and uses the proceeds to buy a selection, or portfolio, of various types of stocks, bonds, or both. Allows people with small amounts of money to diversify.

Financial Intermediaries: Other Other financial intermediaries in the money market: –Money lenders, indigenous bankers, –Unregulated loan companies, chit funds, nidhis. –Pension Funds –Insurance Companies