MACRO ECONOMIC ENVIRONMENT

SUBMITTED BY:

AANCHAL NARANG(241)
PARUL GUPTA(297)
 FINANCIAL MARKETS

•Market where entities

can trade financial securities, commodities, at low transaction
costs and at prices that reflect supply and demand.

•Securities include stocks and bonds, and commodities include

precious metals or agricultural goods.
KINDS OF FINANCIAL MARKET
 MONEY MARKET

As per RBI “ A market for short terms financial

assets that are close substitute for money, facilitates
the exchange of money in primary and secondary
market”.

A mechanism that deals with the lending and

borrowing of short term funds.

A segment of the financial market in which

financial instruments with high liquidity and very
short maturities are traded.
 COMPOSITION OF MONEY MARKET
Money Market consists of a number of sub-markets which
collectively constitute the money market. They are:

Call Money:

• lending and borrowing transactions are carried out for one

day that may or may not be renewed the next day.

•Demand comes from commercial banks that need to meet

requirements of CRR and SLR,whereas supply comes from
commercial banks with excess funds, and FIs like IDBI, etc.
The Treasury Bill Market:

• It deals in Treasury Bills of short term duration: 14

days, 182 days ,91 days, and 364 days.

• They are issued by Government and largely held by

RBI.

•The treasury bills facilitate the financing of Central

Government temporary deficits.

• The rate of interest for treasury bills is determined

by the market, depending on the demand and supply
of funds in the money market.
The Commercial Bill Market:
•Deals in bills of exchange, a seller draws a bill of
exchange on the buyer to make payment within a
certain period of time.

•The bills can be domestic bills or foreign bills of

exchange.

•The commercial bills are purchased and

discounted by commercial banks, and
are rediscounted by FIs like EXIM Bank, SIDBI, IDBI,
etc.
The Commercial Paper Market:
•The scheme of Commercial Paper (CP) was introduced in
1990 for short term financing issue . They can be issued in
multiples of Rs. 5 lakhs and in multiples thereof

• As per RBI guidelines, CPs can be issued on the following

conditions:

a) The minimum tangible net worth of the company to be at

least Rs. 4 crores.

a) The working capital limit should have been sanctioned by

a bank or financial institution.
 STRUCTURE OF MONEY MARKETS

ORGANISED MONEY STRUCTURE

UNORGANISED MONEY STRUCTURE

 ORGANISED MONEY STRUCTURE
PARTICIPANTS:

 Reserve bank of India.

 DFHI (discount and finance house of India)
 Commercial banks:-
(i)Public sector banks
SBI with 7 subsidiaries
Cooperative banks
20 nationalized banks
(ii)Private banks
Indian Banks
Foreign banks
 Development bank
-- IDBI, IFCI, ICICI, NABARD, LIC, GIC, UTI etc.
UNORGANISED SECTOR

 Indigenous

 Money lenders

 Unregulated Intermediaries
 INDEGENEOUS BANKS

Private firms that receive deposits and give loans and

thereby operate as banks

As activities are not regulated properly ,they are

unorganized segment

Broadly classified into 4 groups- GUJRATI

SHROFFS,MULTANI SHROFFS,CHETTIARS AND MARWARI
KAYAS
 MONEYLENDERS

Broadly classified into 3 categories:

PROFESSIONAL MONEYLENDERS

ITINERANT MONEYLENDERS

NON PROFESSIONAL MONEYLENDERS

 UNREGULATED INTERMEDIARIES

A)FINANCE COMPANIES- gives loans to the

retailers,artisians and other self-employed
persons

B) CHIT FUNDS- are saving institutions

C) NIDHIS- operate in unregulated credit

market and provide kind of mutual benefit
funds
DISADVANTAGES OF MONEY MARKET

Absence of integration

Shortage of funds

Lower rate of return

Larger amount of transaction fee

 CAPITAL MARKET

 The market where investment instruments like

bonds, equities and mortgages are traded is known
as the capital market.

 The primal role of this market is to make investment

from investors who have surplus funds to the ones
who are running a deficit.
 CAPITAL MARKET
 The capital market offers both long term and
overnight funds.
 The different types of financial instruments that are
traded in the capital markets are:
> equity instruments
> credit market instruments,
> insurance instruments,
> foreign exchange instruments,
> hybrid instruments and
> derivative instruments.
 STRUCTURE OF THE CAPITAL MARKET

• Capital market is divided into 2 constituents :

– The financial institutions
provide long-term and medium term loan
facilities.
– The securities market
»Gilt-edged market
»The corporate securities market
 Gilt-edged Market

• Market in government securities.

• Risk-free market.
• Government securities market consist of
 The new issue market
 The secondary market
 RBI plays a dominant role
 The investors are predominantly institutions which are
required statutorily to invest in g-sec.
• G-sec are the most liquid debt instruments.
• Transaction in Government securities market are
very large.
 CORPORATE SECURITIES MARKET

• It is a market where securities issued by firms can be

bought and sold freely.
 It consist of – the new issues market
- the stock exchange
 THE NEW ISSUE MARKET

 It Is Related With issue of new securities.

 It Has No Particular Place.
 The public limited companies often raise funds
through primary market for setting up or expanding
their business.
 Following are the methods of raising capital in the
primary market:
i) Prospectus
ii) Offer For Sale
iii) Private Placement
iv) Right Issue
 THE STOCK EXCHANGE

 The stock exchange market is a highly organized

market for the purchase and sale of second-hand
quoted or listed securities.
 ‘quoting’ or ‘listing’ of a particular security implies
incorporating the security in the register of the stock
exchange so that it can be bought and sold there.
 ROLE OF CAPITAL MARKET IN INDIA’S
INDUSTRIAL GROWTH
• Financing Five Year Plans
• Mobilization of savings and acceleration of capital
formation.
• Promotion of industrial growth.
• Raising long-term capital.
• Ready and continuous market.
• Proper channelization of funds.
• Provision of a variety of services.
FACTORS CONTRIBUTING TO THE GROWTH OF
CAPITAL MARKET IN INDIA

• Establishment of development banks and industrial

financing institutions.
• Legislative measures.
• Growth of underwriting business.
• Growing public confidence.
• Increasing awareness of investment opportunities.
• Setting up of SEBI.
• Mutual funds.
• Credit rating agencies.
 PROBLEMS OF THE INDIAN CAPITAL MARKET :
THE PRE-REFORM PHASE
EQUITY MARKET
• as of 1992, BSE was a monopoly, so it had high cost
of intermediation.
• “open outcry” , brokers used to charge the investors
a much higher price.
• No price-time priority.
• Manipulative practices prevailed.
• Retail investors were dependent on sub-brokers.
• Inefficiency of the exchange for the below largest
100 stocks.

• Future-style settlement

• Order execution was unreliable and costly.

• Share certificates were printed on paper.

 DEBT MARKET
 in 1992, debt trading took place without an
exchange.
 Credit risk narrowed the market.
 Enforcement of Cartels.
 Trading took place by telephone in Mumbai.
 Trade prices were not centrally reported.
 RBI tracks ownership of G-sec in a database called
SGL(subsidiary general ledger). It was maintained
manually.
 STRENGTHENING THE CAPITAL MARKET:
THE POST-REFORM PHASE
GOVERNMENT SECURITIES MARKET
 The auction system for the sale of government of
india medium and long-term securities was
introduced from june 3, 1992.
 the government of india set up the Securities trading
corporation of india.
 Scheme of 14-day intermediate treasury bills was
introduced.
 A system of primary dealers was established in 1995.
 Market orientation to issues of government securities
paved the way for the RBI to activate the open market
operation as a tool of market intervention.
 Improvement were brought in transparency of
operations and data dissemination.
 A practise of pre-announcing a calendar of treasury bills
was introduced.
 Foreign institutional investors were allowed to set up
100per cent debt funds to invest in government
securities.
 Retail trading in government securities commenced in
2003.
 SECURITIES AND EXCHANGE BOARD OF INDIA
(SEBI)
• SEBI set up in 1988 was given statutory recognition in
1992 on recommendations of the Narasimham
Committee.
• The Aims of SEBI are :
 regulating the business in stock market and other
security market.
 Registering and regulating the working of stock
brokers.
 Registering and regulating the working of
investment schemes.
 Promoting and regulating the self-regulatory
organizations.

 Prohibiting fraudulent and unfair trade practices.

 Prohibiting insider trading.

 Regulating substantial acquisition of shares and

takeover of companies.
 NATIONAL STOCK EXCHANGE OF INDIA

• NSE is a securities exchange set up in 1992.

• It is a limited liability company.
• The physical floor was replaced by
anonymous, computerized order-matching with strict
price-time priority.
• Satellite communication removed the limitation of
physical place.
• Transparency.