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SYSTEM: A System is a set of interacting and interdependent entities forming an integrated whole or a set of relationships which are differentiated from the set to other elements. FINANCE: The term finance refers to the concepts of time, money and risk and how they are interrelated.

FINANCIAL SYSTEM: The financial system consists of a variety of institutions, markets and instruments related in a systematic manner and provide the principal means by which savings are transformed into investments.


Financial Financial assets/instruments assets/instruments

Financial markets

Financial intermediaries Financial intermediaries

Fixed market

Capital market

Money market

Credit market

Primary market Mmmamarket


Money market instrument

Capital market instruments


V.N.V.SASTRY .MBA M.Com, M.phil

FINANCIAL MARKETS: A financial market can be defined as the market in which financial assets are created or transferred Money market: The money market is a market for short term financial assets that are close substitutes of money. Short term here means that the duration is less than one year.A money market instrument is liquid and can be quickly turned into money at a low cost. It is basically a telephone market as all the transactions are carried out through telephonic communication. Functions of financial sector: 1.Provide citizens with means of payment. 2. Spread and put a price on financial risk. 3.Channel capital further so that savings can be used for investments. 4.Creation of money and management. 5.Facility or distribution or exchange of goods and services. 6.Mobilization of funds for being transferred into capital accumulation and allocation. 7. mechanism or arrangement for transfer of resources. 8.Finding out ways and means of managing uncertainty and controlling risk. 9.Generating and disseminating information for coordination. 10.Contributing to the activities of promotion of the economy. Regulatory functions: 1.Bankers bank. 2.Supervision of financial institutions. 3.Regulation of stock exchanges. 4.Implementing monetary controls. 5.controlling foreign exchange. 6.Licensing,inspection and control.

V.N.V.SASTRY .MBA M.Com, M.phil

Developmental functions: 1.Deposit insurance. 2.Credit guarantee. information. 4.Training intermediaries. 5.investors education. 6.Conducting research. 7.Creating financial awareness. 8.upgrading managerial skills. 9.revival of sick units. RBI: The Reserve bank of india is the apex financial institutions of the country’s financial system entrusted with the tasks of control, supervision, promotion and development. The RBI has three main functions they are: 1.Monetary or central banking functions: -- Issue of currency notes. -- Acting as a banker to the government. -- Serving as bankers bank. -- control of credit. -- Control of foreign exchange operations. 2. Supervisory functions: excercising the powers related to licensing,branch expansion,liquidity,management,Amalgamation ,reconstruction,liquidation etc

V.N.V.SASTRY .MBA M.Com, M.phil

3. Promotional functions: 1.promotion of financial institutions for granting rural credit. 2.Promotion of special financial institutions for provision of industrial finance. 3.Extension of banking facilities to unbanked semi urban and rural areas and promotion of banking habit. 4. Collection and publication of statistics on financial and economic matters.

Monetary Policy: It is a tool used to maintain the stability in the economy and control of inflation and money supply. It is used to inject or withdraw the money flow in the economy. The following are important tool of monetary policy. They are 1. Repo rate: It is the lending rate of RBI or the borrowing rate of RBI used as a tool to tame inflation. Present repo rate is 8%. 2. Reverse repo rate: It is the borrowing rate of RBI or lending rate of commercial banks. It is also a tool used by RBI governor to maintain price stability and control Inflation in the economy.

Primary market: Primary market is a new issue market and includes IPO: Raising the capital for the first time through capital markets is called initial public offer. FPO: When a company raises capital which follows the IPO is known as FPO. Fast track: when company raises capital quickly by publishing more information ,the process is known as fast track issue. Derivative: A Derivative is a financial instrument whose value is derived from another underlying asset. The following are the instruments of derivative: 1.Forward contract: It is an agreement between buyer and seller to buy and sell an underlying asset at an agreed date at an agreed time.It is oral or telephonic.

V.N.V.SASTRY .MBA M.Com, M.phil

2.Future contract: It is an agreement between buyer and seller to buy and sell an underlying asset at an agreed date at an agreed time in the near future. It is a standardized contract. 3.Options: It is a financial instrument where the option holder has an option but no obligation. It includes 1.Call option: Call option gives the holder the right to buy an underlying asset from the writer but no obligation. 2.Put option: Put option gives the holder the right to sell an underlying asset from the writer but no obligation. Swap: A swap a financial arrangement done by a banker to exchange the wish of the parties with their obligation. The following are the two popular types of swaps: 1. Interest rate swap: 2. Currency swap: