DERANATUNG GOVERNMENT COLLEGE

ITANAGAR ARUMACHAL PRADESH

DEPARTNMENT OF COMMERCE
SUBJECT: INDIAN FINANCIAL SYSTEM

TOPIC:

1. structure of Indian financial system and evolution of IFS

2. Functions of IFS and role of IFS in the countrys economic
development
3. Financial markets meaning, types and function

Assignment -1st 1A

Submitted to submitted by
Geyir ete name: Liyom puyimg
Assistant proffersor Roll no.: 19c06092
Department of commerce B-com III semster
What are Financial Markets?

Financial markets, from the name itself, are a type of

marketplace that provides an avenue for the sale and
purchase of assets such as bonds, stocks, foreign
exchange, and derivatives. Often, they are called by
different names, including “Wall Street” and “capital
market,” but all of them still mean one and the same
thing. Simply put, businesses and investors can go to
financial markets to raise money to grow their business
and to make more money, respectively.

To state it more clearly, let us imagine a bank where an

individual maintains a savings account. The bank can
use their money and the money of other depositors to
loan to other individuals and organizations and charge
an interest fee.

The depositors themselves also earn and see their

money grow through the interest that is paid to it.
Therefore, the bank serves as a financial market that
benefits both the depositors and the debtors.

 
What is the Money Market?

The money market is an organized exchange market

where participants can lend and borrow short-term,
high-quality debt securities with average maturities of
one year or less. It enables governments, banks, and
other large institutions to sell short-term securities to
fund their short-term cash flow needs. Money markets
also allow individual investors to invest small amounts
of money in a low-risk setting. 

 
 

Some of the instruments traded in the money market

include Treasury bills, certificates of deposit,
commercial paper, federal funds, bills of exchange, and
short-term mortgage-backed securities and asset-
backed securities.

Large corporations with short-term cash flow needs

can borrow from the market directly through their
dealer while small companies with excess cash can
borrow through money market mutual funds.
Individual investors who want to profit from the money
market can invest through their money market bank
account or a money market mutual fund. A money
market mutual fund is a professionally managed fund
that buys money market securities on behalf of
individual investors.

 
Functions of the Money Market

The money market contributes to the economic

stability and development of a country by providing
short-term liquidity to governments, commercial
banks, and other large organizations. Investors with
excess money that they do not need can invest it in the
money market and earn interest.

Here are the main functions of the money market:

 
1. Financing Trade

The money market provides financing to local and

international traders who are in urgent need of short-
term funds. It provides a facility to discount bills of
exchange, and this provides immediate financing to
pay for goods and services.

International traders benefit from the acceptance

houses and discount markets. The money market also
makes funds available for other units of the economy
such as agriculture and small-scale industries.

 
2. Central Bank Policies

The central bank is responsible for guiding the

monetary policy of a country and taking measures to
ensure a healthy financial system. Through the money
market, the central bank can perform its policy-making
function efficiently.

For example, the short-term interest rates in the

money market represent the prevailing conditions in
the banking industry and can guide the central bank in
developing an appropriate interest rate policy. Also,
the integrated money markets help the central bank to
influence the sub-markets and implement its monetary
policy objectives.
 
3. Growth of Industries

The money market provides an easy avenue where

businesses can obtain short-term loans to finance their
working capital needs. Due to the large volume of
transactions, businesses may experience cash
shortages related to buying raw materials, paying
employees, or meeting other short-term expenses.

Through commercial paper and finance bills, they can

easily borrow money on a short-term basis. Although
money markets do not provide long-term loans, it
influences the capital market and can also help
businesses obtain long-term financing. The capital
market benchmarks its interest rates based on the
prevailing interest rate in the money market.

 
4. Commercial Banks Self-Sufficiency

The money market provides commercial banks with a

ready market where they can invest their excess
reserves and earn interest while maintaining liquidity.
The short-term investments such as bills of exchange
can easily be converted to cash to support customer
withdrawals.
Also, when faced with liquidity problems, they can
borrow from the money market on a short-term basis
as an alternative to borrowing from the central bank.
The advantage of this is that the money market may
charge lower interest rates on short-term loans than
the central bank typically does.

 
Types of Instruments Traded in the Money Market

Several financial instruments are created for short-term

lending and borrowing in the money market, they
include:

 
1. Treasury Bills

Treasury bills are considered the safest instruments

since they are issued with a full guarantee by the
United States government. They are issued by the U.S.
Treasury regularly to refinance Treasury bills reaching
maturity and to finance the federal government’s
deficits. They come with a maturity of one, three, six, or
twelve months.

Treasury bills are sold at a discount to their face value,

and the difference between the discounted purchase
price and face value represents the interest rate. They
are purchased by banks, broker-dealers, individual
investors, pension funds, insurance companies, and
other large institutions.

 
2. Certificate of Deposit (CD)

A certificate of deposit (CD) is issued directly by a

commercial bank, but it can be purchased through
brokerage firms. It comes with a maturity date ranging
from three months to five years and can be issued in
any denomination.

Most CDs offer a fixed maturity date and interest rate,

and they attract a penalty for withdrawing prior to the
time of maturity. Just like a bank’s checking account, a
certificate of deposit is insured by the Federal Deposit
Insurance Corporation (FDIC).

 
3. Commercial Paper

Commercial paper is an unsecured loan issued by large

institutions or corporations to finance short-term cash
flow needs, such as inventory and accounts payables. It
is issued at a discount, with the difference between the
price and face value of the commercial paper being the
profit to the investor.

Only institutions with a high credit rating can issue

commercial paper, and it is therefore considered a safe
investment. Commercial paper is issued in
denominations of $100,000 and above. Individual
investors can invest in the commercial paper market
indirectly through money market funds. Commercial
paper comes with a maturity date between one month
and nine months.

 
4. Banker’s Acceptance

A banker’s acceptance is a form of short-term debt

that is issued by a firm but guaranteed by a bank. It is
created by a drawer, providing the bearer the rights to
the money indicated on its face at a specified date. It is
often used in international trade because of the
benefits to both the drawer and the bearer.

The holder of the acceptance may decide to sell it on a

secondary market, and investors can profit from the
short-term investment. The maturity date usually lies
between one month and six months from the issuing
date.

 
5. Repurchase Agreements

A repurchase agreement (repo) is a short-term form of

borrowing that involves selling a security with an
agreement to repurchase it at a higher price at a later
date. It commonly used by dealers in government
securities who sell Treasury bills to a lender and agree
to repurchase them at an agreed price at a later date.

The Federal Reserve buys repurchase agreements as a

way of regulating the money supply and bank reserves.
The agreements’ date of maturity ranges from
overnight to 30 days or more.

Capital market :-

Capital Market
There are broadly two types of financial markets in
an economy – capital market and money market. Now
capital market deals in financial instruments and
commodities that are long-term securities. They have a
maturity of at least more than one year.

Capital markets perform the same functions as the money

market. It provides a link between the savings/investors and
the wealth creators. The funds will be used for productive
purposes and create wealth in the economy in the long term.

One of the important functions of the capital markets is to

provide ease of transactions for both the investors and the
companies. Both parties should be able to find each other
with ease and the legal aspect of things should go smoothly.
Now let us take a look at the two major types of capital
markets.
Primary Market
The most important type of capital market is the primary
market. It is what we call the new issue market. It
exclusively deals with the issue of new securities, i.e.
securities that are issued to investors for the very first time.

The main function of the primary market is capital

formation for the likes of companies, governments,
institutions etc. It helps investors invest their savings and
extra funds in companies starting
new projects or enterprises looking to expand their
companies.

The companies raise money in the primary market through

securities such as shares, debentures, loans and deposits,
preference shares etc. Let us take a look the various
methods of how new securities are floated in the primary
market.

Read the Concept of Financial Market here.

Methods of Raising Funds

1] Offer through Prospectus
This is a method of public issue. It is also the most used
method in the primary market to raise funds. Here the
company invites the investors (general members of the
public) to invest in their company via an advertisement also
known as a prospectus.

After a prospectus is issued, the public subscribes to shares,

debentures etc. As per the response, shares are allotted to
the public. If the subscriptions are very high, allotment will
be done on lottery or pro-rata basis.

The company can sell the shares directly to the public, but it
generally hires brokers and underwriters. Merchant banks
are another option to help out with the process, especially
Initial Public Offerings.

2] Private Placement
Public offers are an expensive affair. The incidental costs of
IPO’s tend to be very high. This is why some companies
prefer not to go down this route. They offer investment
opportunities to a select few individuals.
So the company will sell its shares to financial
institutes, banks, insurance companies and some select
individuals. This will help them raise the funds efficiently,
quickly and economically. Such companies do not sell or
offer their securities to the public at large.

3] Rights Issue
Generally, when a company is looking to expand or are in
need of additional funds, they first turn to their current
investors. So the current shareholders are given an
opportunity to further invest in the company. They are given
the “right” to buy new shares before the public is offered
the chance.

This allotment of new shares is done on pro-rata basis. If the

shareholder chooses to execute his right and buy the shares,
he will be allotted the new shares. However, if the
shareholder chooses to let go of his rights issue, then these
shares can be offered to the public.

4] e-IPO
It stands for Electronic Initial Public Offer. When a
company wants to offer its shares to the public it can now
also do so online. An agreement is signed between the
company and the relevant stock exchange known as the e-
IPO.

This system was introduced in India some three years ago

by the SEBI. This makes the process of the IPO speedy and
efficient. The company will have to hire brokers to accept
the applications received. And a registrar to the issue must
also be appointed.

Secondary Market
After the primary market is the secondary capital market.
This is more commonly known as the stock market or
the stock exchange. Here the securities
(shares, debentures, bonds, bills etc) are bought and sold by
the investors.

The main point of difference between the primary and the

secondary market is that in the primary market only new
securities were issued, whereas in the secondary market the
trading is for already existing securities. There is no fresh
issue in the secondary market.

The securities are traded in a highly regularised and

legalized market within strict rules and regulations. This
ensures that the investors can trade without the fear of being
cheated. In the last decade or so due to the advancement of
technology, the secondary capital market in India has seen a
great boom.
 DERANATUNG GOVERNMENT COLLEGE
ITANAGAR ARUNACHAL PRADESH
DEPERNMENT OF COMMERCE

SUBJECT: INDIAN FINANCIAL SYSTEM

TOPIC:

(1) Structure of Indian financial system and evolution of IFS

(2) Function of IFS and role of IFS in the country’s economic development
(3) Financial markets meaning types and function

ASSIGNEMENT-1ST 1A

Submitted to submitted by
Geyir Ete Name: Liyom puying
Assistant professor Roll no: 19c06092
Department of commerce B-Com III Semester