UNIT-1

INTRODUCTION TO FINANCIAL SYSTEM

Unit 1

An Overview of the Financial System

1.1-Introduction and Meaning

The financial system is an organized and regulated structure where an exchange of

funds takes place between the lender and the borrower. It supplies the necessary
financial inputs for the production of goods and services, in turn, promotes the well -
being and standard of living of people in the country.

The responsibility of the financial system is to mobilise the savings in the form of money and
monetary assets and invest them to productive ventures. An efficient functioning of the
financial system facilitates the free flow of funds to more productive activities and thus
promotes investment. Thus, the financial system provides the intermediation between savers
and investors and promotes faster economic development

Definition

1)A financial system is a network of financial institutions, financial markets, financial

instruments and financial services to facilitate the transfer of funds. The system consists of
savers, intermediaries, instruments and the ultimate user of funds.

2)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

1.2 Features of Financial System

1)Plays vital role in economic development of a country

2)Encourages both saving and investing

3) Provides linkage between saver and investor,

4)Helps in capital formations

5)Helps in allocation of risk

6)Facilitates expansion of financial markets

7)Aids in financial deepening and broadening

8)Promotes efficient allocation of financial resources for socially desirable and economically
productive proposes

1.3 Role and functions of Financial System

1) Link between savers & investors and borrowers -Public savings allow individuals and
businesses to invest in a range of investments and see them grow over time. Borrowers can use
them to fund new projects and increase future cash flow, and investors get a return on
investment in return.
2) Pooling of Funds -In a financial system, the Savings of people are transferred from
households to business organizations. With these production increases and better goods are
manufactured, which increases the standard of living of people.
3) Capital Formation -Business require finance. These are made available through banks,
households and different financial institutions. They mobilize savings which leads to Capital
Formation.
4)Facilitates Payment -The financial system offers convenient modes of payment for goods
and services. New methods of payments like credit cards, debit cards, cheques, etc. facilitates
quick and easy transactions.
5) Provides Liquidity -In financial system, liquidity means the ability to convert into cash.
The financial market provides the investors the opportunity to liquidate their investments,
which are in instruments like shares, debentures, bonds, etc. Price is determined on the daily
basis according to the operations of the market force of demand and supply.
6)Short- and Long-Term Needs -The financial market takes into account the various needs
of different individuals and organizations. This facilitates optimum use of finances for
productive purposes.
7)Economic Development -India is a mixed economy. The Government intervenes in the
financial system to influence macro-economic variables like interest rate or inflation. Thus,
credits can be made available to corporate at a cheaper rate. This leads to economic
development of the nation.
8) Risk Management -The derivatives market and the insurance market are an important part
of the financial system. These markets have been created with the sole purpose of rationalizin
g the risk, which is an inevitable part of the life of individuals as well as businesses.

2.1 COMPONENTS OF FINANCIAL MARKETS

1. Financial Institutions
2. Financial Markets
3. Financial Instruments
4. Financial Services

i. FINANCIAL INSTITUTIONS
 • Financial institutions are at the core of the financial system, giving individuals the
ability to save and invest whenever and wherever they want.
• Investors put their money in these institutions in form of savings. The borrowers use
these funds to for their use.
• Financial institutions act as intermediaries between the lender and the borrower when
providing financial services.

Financial Institutions includes

1. Banks
a) Scheduled Banks
b) Non-scheduled banks
2. Non-banking institutions
a) Non-banking financial companies
b) Developmental financial institutions
3. Mutual Funds
4. Insurance Company
5. Housing finance company
6. Regulatory institutions

ii. FINANCIAL MARKETS

Financial market is a market where financial assets are exchanged or bought or purchased and
sold.

Financial market includes

1. Money Market – short term funds which has less than one year as maturity period
Instruments of money market – Call money, Treasury bills, Commercial bill,
Commercial paper, Certificate of deposit.
2. Capital Market – long term funds which has more than one year as maturity period
Instruments of capital market – 1. Government securities 2. Industrial securities – a.
Primary Market and b. Secondary Market.

iii. FINANCIAL INSTRUMENTS

A financial instrument is a real or virtual document representing a legal agreement involving
any kind of monetary value. In simple words, it is a contract between two parties. It gives rise
to a financial asset of one party and financial liability of another party.

iv. FINANCIAL SERVICES

Financial Services are those services which ensures smooth flow of financial activities in the
economy.

2.2 HISTORY OF FINANCIAL SYSYTEM

History of Indian financial system dates back even before the period when India got
independence in the Year 1947. Evolution of Indian Financial system can be classified into 3
phases: –

1. Pre-Independence Phase (Before 1947)

2. Post-Independence Phase (1947-1991).
3. The Liberalization era (1991 and beyond).

EVOLUTION OF FIANANCIAL SYSTEM

The evolution of financial system has been divided on the basis of events during Pre and Post
World War period.

1. The period from 1870 to 1914 – Prior to First World War. - The events that marked
the evolution of global financial system prior to the advent of first world war are the
ones which had a huge influence on how the world saw the international financial system
later. The significands are as follows –
a) The gold standard system
b) Revolution in communication technology
c) Protection policy

2. The period from 1915 to 1938 – Prior to Second World War.

a) First World War

b) Great Depression
 c) Establishment of Bank for International Settlement (BIS)
1930
d) Inter War – 1939 to 45
3. The period from 1915 to current period.- The Global Economy suffered heavily from
the war. The United States emerged much richer than any other nation. The United
Kingdom was in a state of economic ruin. France, Italy, Germany and Japan experienced
rapid growth becoming the most powerful economies in the world by 1980’s
a) The Bretton wood period
b) Post Bretton wood period i. General Agreement on Trade and Tariff (GATT)-
1947
ii. Special drawing rights by International Monetary
Fund
iii. The birth of European Monetary Union
iv. The Basel Accord

2.3 INTERNATIONAL FINANCIAL INSTITUTIONS

1. INTERNATIONAL MONETARY FUND (IMF)-

➢ The International Monetary Fund is and organization of 190 countries, working

to foster global monetary cooperation, secure financial stability, facilitate
international trade, promote high employment and sustainable economic growth
and reduce poverty around the world.
➢ International Monetary Fund a specialized agency was founded at the Bretton
Woods Conference in 1944.
➢ International Monetary Fund’s headquarters is in Washington, D.C. There are
190 countries as members in IMF.

FUNCTIONS –

a) Surveillance
b) Lending
c) Research and data
d) Technical assistance and training
2. WORLD BANK –
 ➢ The World Bank is an international financial institution that
provides loans and grants to the governments of low- and middle-income
countries for the purpose of pursuing capital projects.
➢ The World Bank Group comprises five international organizations that provide
loans to developing countries. These are:
1) The International Bank for Reconstruction and Development (IBRD)
2)The International Development Association (IDA)
3) The International Finance Corporation (IFC)
4) The Multilateral Investment Guarantee Agency (MIGA)
5) The International Centre for Settlement of Investment Disputes (ICSID).

➢ The International Bank for Reconstruction and Development (IBRD) has 189
member countries, while the International Development Association (IDA) has
173.
➢ Each member state of IBRD should also be a member of the International Monetary
Fund (IMF) and only members of IBRD are allowed to join other institutions within
the Bank (such as IDA).

OBJECTIVES –
1. Eradication of Poverty
2. Universal Primary Education
3. Gender Equality
4. Empower Women
5. Improve maternal health.

3.1 Evolution of Indian Financial System

I. Introduction :

Financial Sector in the Indian economy has had a checkered history. The story of the post-
independent (i.e., post-1947) Indian financial sector can perhaps be portrayed in terms of three
distinct phases – the first phase spanning over the 1950s and 1960s exhibited some elements
of instability associated with laissez faire but underdeveloped banking; the second phase
covering the 1970s and 1980s began the process of financial development across the country
under government auspices but which was accompanied by a degree of financial repression;
and the third phase since the 1990s has been characterized by gradual and calibrated financial
deepening and liberalization. While the present paper is devoted primarily to the period since
the 1990s, we also provide a brief account of the earlier two phases.

II. Indian Financial Sector:

1950 - 1990 - From Laissez Faire to Government Control The Reserve Bank of India (RBI)
was founded in 1935 under the Reserve Bank of India Act “…to regulate the issue of Bank
Notes and keeping the reserves with a view to securing monetary stability in India and generally
to operate the credit and currency system of the country to its advantage.” Apart from being
the central bank and monetary policy authority, the RBI is the regulator of all banking activity,
including non-banking financial companies, manager of statutory reserves, debt manager of the
government, and banker to the government. At the time of independence in 1947, India had 97
scheduled1 private banks, 557 “non-scheduled” (small) private banks organized as joint stock
companies, and 395 cooperative banks. Thus, at the time of India’s independence, the
organized banking sector comprised three major types of players, viz., the Imperial Bank of
India, joint-stock banks (which included both joint stock English and Indian banks) and the
foreign owned exchange banks. The decade of 1950s and 1960s was characterized by limited
access to finance of the productive sector and a large number of banking failures.2 Such
dissatisfaction led the government of left-leaning Prime Minister (and then Finance Minister)
Mrs. Indira Gandhi to nationalize fourteen private sector banks on 20 July 1969; and later six
more commercial banks in 1980. Thus, by the early 1980's the Indian banking sector was
substantially nationalized, and exhibited classical symptoms of financial repression, viz., high
pre-emption of banks' investible resources (with associated effects of crowding out of credit to
the private sector), subject to an intricate cobweb of administered interest rates, and
accompanied by quantitative ceilings on sectoral credit, as governed by the Reserve Bank of
India.
III Banking in India since the 1990s:

Towards Modern Competitive Banking The initial foundation of the banking sector reforms
in India came from two official reports, viz., the Report of the Committee on Financial System
(Reserve Bank of India, 1991) and the Report of the Committee on Banking Sector Reforms
(Government of India, 1998), both chaired by former Governor of the RBI, M Narasimham.
The Narasimham Committee 1991 was primarily devoted to enhancing operational freedom in
the commercial banking sector and recommended measures like reduction of pre-emption of
banks' investible resources (via a reduction of cash reserve ratio (CRR) and statutory liquidity
ratio (SLR)) and gradual elimination of the administered interest rate structure. Narasimham
Committee 1998 recommended further measures for modernizing the banking sector through
better regulation and supervision, and introduction of prudential norms. It also suggested a
review of the bank ownership structure in India. Other elements of financial sector reforms in
India include significant reduction of financial repression (including removal of automatic
monetization); dismantling of the complex administered interest rate structure to enable the
process of price discovery; providing operational and functional autonomy to public sector
institutions; preparing the financial system for increasing international competition; opening
the external sector in a calibrated manner; and promoting financial stability in the wake of
domestic and external shocks (Mohan, 2006). All these measures were designed to create an
efficient, productive and profitable financial sector. Illustratively, gradual reduction of CRR
from 15% to about 4%, and reduction in the SLR7 from nearly 40% to 21.5% between the early
1990s and the mid-2010s have made a huge improvement to the availability of lendable
resources to the banking sector .

3.2 STRUCTURE OF INIDAN FINACIAL SYSTEM

Components of Indian Financial System

There are four main components of the Indian Financial System. This includes:

1. Financial Institutions
2. Financial Assets
3. Financial Services
4. Financial Markets

Let’s discuss each component of the system in detail.

1. Financial Institutions

The Financial Institutions act as a mediator between the investor and the borrower. The
investor’s savings are mobilised either directly or indirectly via the Financial Markets.

The main functions of the Financial Institutions are as follows:

• A short term liability can be converted into a long term investment

• It helps in conversion of a risky investment into a risk-free investment

• Also acts as a medium of convenience denomination, which means, it can match a small
deposit with large loans and a large deposit with small loans

The best example of a Financial Institution is a Bank. People with surplus amounts of money
make savings in their accounts, and people in dire need of money take loans. The bank acts as
an intermediate between the two.

The financial institutions can further be divided into two types:

 • Banking Institutions or Depository Institutions – This includes banks and other
credit unions which collect money from the public against interest provided on the
deposits made and lend that money to the ones in need

• Non-Banking Institutions or Non-Depository Institutions – Insurance, mutual funds

and brokerage companies fall under this category. They cannot ask for monetary
deposits but sell financial products to their customers.

Further, Financial Institutions can be classified into three categories:

• Regulatory – Institutes that regulate the financial markets like RBI, IRDA, SEBI, etc.

• Intermediates – Commercial banks which provide loans and other financial assistance
such as SBI, BOB, PNB, etc.

• Non Intermediates – Institutions that provide financial aid to corporate customers. It

includes NABARD, SIBDI, etc.

2. Financial Assets

The products which are traded in the Financial Markets are called Financial Assets. Based on
the different requirements and needs of the credit seeker, the securities in the market also differ
from each other.

Some important Financial Assets have been discussed briefly below:

• Call Money – When a loan is granted for one day and is repaid on the second day, it is
called call money. No collateral securities are required for this kind of transaction.

• Notice Money – When a loan is granted for more than a day and for less than 14 days,
it is called notice money. No collateral securities are required for this kind of
transaction.

• Term Money – When the maturity period of a deposit is beyond 14 days, it is called
term money.

• Treasury Bills – Also known as T-Bills, these are Government bonds or debt securities
with maturity of less than a year. Buying a T-Bill means lending money to the
Government.

• Certificate of Deposits – It is a dematerialised form (Electronically generated) for

funds deposited in the bank for a specific period of time.
 • Commercial Paper – It is an unsecured short-term debt instrument issued by
corporations.

3. Financial Services

Services provided by Asset Management and Liability Management Companies. They help to
get the required funds and also make sure that they are efficiently invested.

The financial services in India include:

• Banking Services – Any small or big service provided by banks like granting a loan,
depositing money, issuing debit/credit cards, opening accounts, etc.

• Insurance Services – Services like issuing of insurance, selling policies, insurance

undertaking and brokerages, etc. are all a part of the Insurance services

• Investment Services – It mostly includes asset management

• Foreign Exchange Services – Exchange of currency, foreign exchange, etc. are a part
of the Foreign exchange services

The main aim of the financial services is to assist a person with selling, borrowing or
purchasing securities, allowing payments and settlements and lending and investing.

4. Financial Markets

The marketplace where buyers and sellers interact with each other and participate in the trading
of money, bonds, shares and other assets is called a financial market.

The financial market can be further divided into four types:

• Capital Market – Designed to finance the long term investment, the Capital market
deals with transactions which are taking place in the market for over a year. The capital
market can further be divided into three types:

(a)Corporate Securities Market

(b)Government Securities Market

(c)Long Term Loan Market

• Money Market – Mostly dominated by Government, Banks and other Large

Institutions, the type of market is authorised for small-term investments only. It is a
 wholesale debt market which works on low-risk and highly liquid instruments. The
money market can further be divided into two types:

(a) Organised Money Market

(b) Unorganised Money Market

• Foreign exchange Market – One of the most developed markets across the world, the
Foreign exchange market, deals with the requirements related to multi-currency. The
transfer of funds in this market takes place based on the foreign currency rate.

• Credit Market – A market where short-term and long-term loans are granted to
individuals or Organisations by various banks and Financial and Non-Financial
Institutions is called Credit Market

WEAKNESS OF INDIAN FINANCIAL SYSTEM

• Following are the weakness of Indian Financial system:

o Lack of Co-ordination between different Financial Institutions : There are a large

number of financial intermediaries. Most of the vital financial institutions are owned by the
Government. At the same time, the Government is also the controlling authority of these
institutions. In these circumstances, the problem of co-ordination arises. As there is
multiplicity of institutions in the Indian financial system, there is a lack of co-ordination in
the working of these institutions.
o Monopolistic Market Structures : In India, some financial institutions are so large that
they have created a monopolistic market structure in the financial system. For instance, a
major part of life insurance business is in the hands of LIC. The UTI has more or less
monopolised the mutual fund industry. The weakness of this large structure is that it could
lead to inefficiency in their working or mismanagement or lack of effort in mobilising
savings of the public and so on. Ultimately, it would retard the development of the financial
system of the country itself.
o Dominance of Development Banks in Industrial Financing : The development banks
constitute the backbone of the Indian financial system occupying an important place in the
capital market. The industrial financing today in India is largely through the financial
institutions created by the Government, both at the national and regional levels. These
development banks act as distributive agencies only, since, they derive most of their funds
 from their sponsors. As such, they fail to mobilise the savings of the public. This would be
a serious bottleneck which stands in the way of the growth of an efficient financial system
in the country. For industries abroad, institutional finance has been a result of
institutionalisation of personal savings through media like banks, LIC, pension and
provident funds, unit trusts and so on. But they play a less significant role in the Indian
financial system, as far as industrial financing is concerned. However, in recent times
attempts are being made to raise funds from the public through the issue of bonds, units,
debentures and so on. It will go a long way in forging a link between the normal channels
of savings and the distributing mechanism.
o Inactive and Erratic Capital Market : The important function of any capital market is to
promote economic development through mobilisation of savings and their distribution to
productive ventures. As far as industrial finance in India is concerned, corporate customers
are able to raise their financial resources through development banks. So, they need not go
to the capital market. Moreover, they don't resort to capital market, since it is very erratic
and inactive. Investors too prefer investments in physical assets to investments in financial
assets. The weakness of the capital market is a serious problem in our financial system.
o Imprudent Financial Practice : The dominance of development banks has developed
imprudent financial practice among the corporate customers. The development banks
provide most of the funds in the form of term loans. So there is a preponderance of debt in
the financial structure of corporate enterprises. This predominance of debt capital has made
the capital structure of the borrowing concerns uneven and lopsided. To make matters
worse, when corporate enterprises face any financial crisis, these financial institutions
permit a greater use of debt than is warranted. It is against the traditional concept of a sound
capital structure.

4 Comparison of Indian Financial System with other countries

Indian Financial System

India has a diversified financial sector undergoing rapid expansion, both in terms of strong
growth of existing financial services firms and new entities entering the market. The sector
comprises commercial banks, insurance companies, non-banking financial companies, co-
operatives, pension funds, mutual funds and
other smaller financial entities. The banking
regulator has allowed new entities such as
payment banks to be created recently, thereby
adding to the type of entities operating in the
sector. However, financial sector in India is
predominantly a banking sector with
commercial banks accounting for more than
64% of the total assets held by the financial
system. The process of savings, finance and investment involves financial institutions, markets,
instruments and services. Above all, supervision control and regulation are equally significant.
Thus, financial management is an integral part of the financial system.

Comparison of Financial System in India and China

A comparative analysis of financial systems in India and China brings out some interesting
features as detailed below:
• In both the countries, commercial banks dominate the financial system.
The relative significance of commercial banks in the financial system in both India and China
is more or less same. Also, in both the countries, public sector banks dominate the banking
system, followed by join stock/private sector banks. Foreign banks in India are ertively more
significant than they are in China.
• The relative share of cooperative banks in the banking system is more or less same in both
the countries.
• Asset quality of commercial banks in India has improved significantly. Profitability of Indian
banks has also improved discernibly.
• The cost of intermediation by banks in India is significantly higher than that of China.
• The size of the banking system in China in relation to the size of the
economy (measured as ratios of total assets/credit/deposits to GDP) was
also significantly higher than that of the Indian banking system.
• On the whole, the financial system in China is much larger than that of India. The size of the
commercial banking system of China is about eight times the size of the Indian commercial
banking system.
*The Bombay Stock Exchange (BSE), Asia's first stock exchange, was founded in 1875 in
Mumbai. At present, India has two principal national exchanges: the BSE and the National
Stock Exchange of India (NSE), established in Mumbai in 1992.
*China's stock market started later. The Shanghai Stock Exchange (SSE) was established at the
end of 1990, and the Shenzhen Stock Exchange (SZSE) was established half a year later.
*India's stock market has two major indexes, the BSE Sensex, an index of 30 well-established
companies listed on the BSE, and the Nifty 50, the NSE's flagship index. The Sensex is
regarded as the pulse of India's domestic stock markets, as the overall market capitalization of
its listed companies accounts for around 45 percent of the total capitalization of all listed
companies on the BSE.
*The Shanghai Composite Index, the Shenzhen Component Index and the blue-chip CSI300
Index are China's most widely recognized indexes and considered to be the most representative.
*Starting from 100 points in 1990, currently, the index is at around 2,900 points, a nearly 30-
fold rise in three decades. The Sensex has seen a 15-fold rise since liberalization reform in the
early 1990s.
*India's stock market is much more inclusive than China's, particularly for smaller companies.
A total of around 7,000 companies were listed on the country's two bourses by the end of 2018,
including two foreign companies.
*China's two exchanges had 3,584 listed companies by the end of 2018. As of January, India's
stock market had seen a total capitalization of more than $2 trillion, while China's stock market
had approached $6 trillion.
The IPO systems and numbers in China and India are also different. India's stock market
abolished its administrative-approval system in 1992.
Two foreign companies have listed on India's stock market, but China's has none. India was
opened to foreign capital earlier, having approved foreign investments in India's stock and
bonds markets in 1992.
*However, China is expediting its opening-up process. From the Shenzhen-Hong Kong Stock
Connect to the Shanghai-London Stock Connect, foreign investment is being increasingly
facilitated in China's market.
*India's securitization ratio was 76.42 percent in 2018, while China's was 46.48 percent, which
shows that India's stock market enjoys a more important status in its national economy than
China's does in its own.

*It's important for China's A-share market to promote reform, including the establishment of a
short mechanism and the promotion of registration-based IPOs.

COMPARSION OF BANKING SECTOR OF INDIA AND CHINA

Not- so Sweeping Coverage: China may have larger and richer banks, but is surprisingly
almost at a par with India in terms of coverage, or rather lack of coverage, of population that
uses formal or semi-formal financial services. A McKinsey study shows that in India and
China, the percentage of adult population that doesn't use formal or semi-formal financial
services is 51-75%.

Power Performance: Banks from both sides have recorded high revenue growth, unlike
counterparts of developed countries. For instance, McKinsey data show revenues of Indian and
Chinese banks grew 19.8% and 13.7% in 2007-10, respectively. The non-performing asset ratio
of the countries' banks too is comparable. NPAs of Indian banks stood at 2.5% in 2010 while
those of the Chinese were 1.7%. Likewise, the cost to income ratio, another measure of
banking.

Measure of Woes: Most experts agree that the woes of China's banking sector are bigger than
India's, thanks to the huge fiscal stimulus package the Chinese government handed to banks
during the 2008 recession to overcome a slowdown in exports. Up to $2.5 trillion of new loans
was disbursed, accounting for 30% of GDP in 2009.

Cyclical vs Structural:In contrast, Indian banks are far more conservative than their Chinese
counterparts, even more so during global crises. Not surprisingly, the scale of credit expansion
in India was much smaller. Yet the balance sheet of Indian banks' is weaker than in 2008 as
“the impaired loan ratio is closer to 6% as against 3.5% in 2008”, according to Morgan Stanley
analysts. The gross NPA ratio of scheduled commercial banks in India increases.

IMPORTANT POINTS:
China and India are the two emerging economies in the world. As of 2021, China and India are
the 2nd and 5th largest economies in the world, respectively, on a nominal basis. On a PPP
basis, China is at 1st, and India is at 3rd place. Both countries share 21% and 26% of the
total global wealth in nominal and PPP terms, respectively. Among Asian countries, China and
India together contribute more than half of Asia's GDP.

In 1987, the GDP (Nominal) of both countries was almost equal; even in ppp terms, China was
slightly ahead of India in 1990. Now in 2021, China's GDP is 5.46 times higher than India. On
a ppp basis, the GDP of China is 2.61x of India. China crossed the $1 trillion mark in 1998,
while India crossed nine years later in 2007 on an exchange rate basis.

Both countries have been neck-to-neck in GDP per capita terms till 1990. As per both methods,
India was richer than China in 1990. In 2021, China is almost 5.4 times richer than India on
the nominal and 2.58 times richer in the ppp method. China attains a maximum GDP growth
rate of 19.30% in 1970 and a minimum of -27.27% in 1961. India reached an all-time high of
9.63% in 1988 and a record low of -5.24% in 1979. From 1961 to 2019, China grew by more
than 10% in 22 years while India never. GDP growth rate was negative in five and four years
for China and India, respectively.

COMPARISON OF INDIAN FINANCIAL SYSTEM WITH USA

India is developing into an open-market economy, yet traces of its past autarkic policies remain.
Economic liberalization measures, including industrial deregulation, privatization of state-
owned enterprises, and reduced controls on foreign trade and investment, began in the early
1990s and have served to accelerate the country's growth, which averaged under 7% per year
since 1997. India's diverse economy encompasses traditional village farming, modern
agriculture, handicrafts, a wide range of modern industries, and a multitude of services. Slightly
more than half of the work force is in agriculture, but services are the major source of economic
growth, accounting for nearly two-thirds of India's output, with less than one-third of its labor
force. India has capitalized on its large educated English-speaking population to become a
major exporter of information technology services, business outsourcing services, and software
workers. In 2010, the Indian economy rebounded robustly from the global financial crisis - in
large part because of strong domestic demand - and growth exceeded 8% year-on-year in real
terms. However, India's economic growth began slowing in 2011 because of a slowdown in
government spending and a decline in investment, caused by investor pessimism about the
government's commitment to further economic reforms and about the global situation

The US has the largest and most technologically powerful economy in the world, with a per
capita GDP of $49,800. In this market-oriented economy, private individuals and business
firms make most of the decisions, and the federal and state governments buy needed goods and
services predominantly in the private marketplace. US business firms enjoy greater flexibility
than their counterparts in Western Europe and Japan in decisions to expand capital plant, to lay
off surplus workers, and to develop new products. At the same time, they face higher barriers
to enter their rivals' home markets than foreign firms face entering US markets. US firms are
at or near the forefront in technological advances, especially in computers and in medical,
aerospace, and military equipment; their advantage has narrowed since the end of World War
II. The onrush of technology largely explains the gradual development of a "two-tier labor
market" in which those at the bottom lack the education and the professional/technical skills of
those at the top and, more and more, fail to get comparable pay raises, health insurance
coverage, and other benefits. Since 1975, practically all the gains in household income have
gone to the top 20% of households. Since 1996, dividends and capital gains have grown faster
than wages or any other category of after-tax income. Imported oil accounts for nearly 55% of
US consumption. Crude oil prices doubled between 2001 and 2006, the year home prices
peaked; higher gasoline prices ate into consumers' budgets and many individuals fell behind in
their mortgage payments. Oil prices climbed another 50% between 2006 and 2008, and bank
foreclosures more than doubled in the same period. Besides dampening the housing market,
soaring oil prices caused a drop in the value of the dollar and a deterioration in the US
merchandise trade deficit, which peaked at $840 billion in 2008. The sub-prime mortgage
crisis, falling home prices, investment bank failures, tight credit, and the global economic
downturn pushed the United States into a recession by mid-2008. GDP contracted until the
third quarter of 2009, making this the deepest and longest downturn since the Great Depression.
To help stabilize financial markets, in October 2008 the US Congress established a $700 billion
Troubled Asset Relief Program (TARP). The government used some of these funds to purchase
equity in US banks and industrial corporations, much of which had been returned to the
government by early 2011.

Global Factors: While the Indian startup ecosystem has been thriving, the US markets
continue to host all major corporations leading their sectors with innovative offerings. For
investors in India, it isn’t possible to participate in growth stories at home – since Indian laws
mandate 3 years of consecutive profits before a company can go public. The story of many
startups being one of deferred profits for growth and market share, this effectively shuts most
Indian investors out of the opportunity to show their confidence in new business models. But
relatively lax requirements in the US, means it’s possible for investors globally to participate
in the journeys of many innovative models – and we’ve seen often how that plays out. Uber,
Amazon, Tesla, Facebook – all these and more are the results of the US market and its model.
For many investors, it can be crucial for their investment portfolio to evolve to keep up with
these opportunities. The US market therefore, is a more promising prospect as it allows global
exposure and enables investors to grow with the biggest companies in the world, such as
Google, Amazon, Facebook, etc.

Volatility: When compared to Indian markets, the US markets have been less volatile in the
long run. Indian equities have shown great volatility, with bigger swings in returns over the
years. This is another reason experts recommend diversification when it comes to investing,
since risks are spread out and diminished. Moreover, investors who choose to diversify by
investing in US markets can expect their portfolios to move differently from Indian indices.
The US stock markets have always been an enigma to Indian retail investors. Some of the
biggest companies in the world are listed there. Now, that there are various ways to invest in
the US stock markets, directly and indirectly, they decided to do a comparison study between
the two and how they have performed in the last ten years.

Performance: In the last ten years, both the US and the Indian markets have generated a similar
return for their investors. The DJI has generated a compounded annual return of 9.75% whereas
the Sensex has generated a return of 9.70% in the last ten years. The returns in the first five
years of the decade (2011-15) were also pretty similar with the US markets growing at 12.86%
compounded annually whereas the Indian markets grew at 12.11% compounded annually. In
the table below, you will find returns in each year for the last ten years:

Valuations: In terms of valuations, the Dow Jones industrial average has a PE Ratio of 16
whereas the Sensex has a PE ratio of 33.13. This doesn’t mean that the Indian market is
overvalued and you should only invest in the US Markets. It essentially means that the market
believes that the earnings of Indian companies will grow faster than US companies. Given that
the Indian GDP has grown at a faster rate than the US GDP in recent years, this might not be
an unreasonable expectation. In the last ten years too, profit after tax of Indian companies in
the index grew 12.6% compounded annually against 11% compounded annual growth of US
companies.

Size: In terms of size, there is no comparison between the two. The combined market
capitalization of all stocks in the DJIA amounts to 8.33 trillion dollars, nearly 8 times the
combined market capitalization of all stocks in the BSE Sensex at 1.16 trillion dollars. Given
the size of the two countries, this shouldn’t come as a surprise.

COMPARISON OF BANKING SECTOR OF INDIA AND USA

Banking System
In India, banks have a branch banking system. This means that a handful of banks have a
network of hundreds of branches each, all over the country. But this is not the same in the
United States. American banks follow a unit banking system. This means that there are over
thousands of independent banks spread across the US. It is true that some of these banks have
branches too, but they are very small in comparison to the Indian banking system. Most of the
US banks have regional operations.
Control
In India, there is a single statutory central bank called the Reserve Bank of India (RBI). The
RBI is responsible for all the banking activities and regulations in India. The United States of
America on the other hand, has 12 Federal Reserve Banks whose areas of responsibility are
clearly demarcated based on geographical boundaries. Now, in order to control these 12 Federal
Banks, there is the Federal Reserve Board based in Washington DC. The Chairman of the
Federal Reserve Board, has more power than the Governor of RBI. This is a glaring difference
of the US banking system vs other countries.
Ownership
Whether it is Indian banks or USA banks for education loan, both countries are heavily
controlled by a central bank. The RBI is owned by the Union Government whereas the Fed
Banks are owned by bankers. The bankers elect the Board of Directors who act as
representatives of the bankers.
Freedom
Since the RBI is a part of the Ministry of Finance of India, it has limited freedom in its
operations. The US Federal System on the other hand, enjoys complete freedom as it operates
independently. They are not answerable to either the Secretary of Treasury or even to the
President.
Borrowing
The banking system in India is such that banks rarely borrow funds from the Reserve Bank of
India. However, in the US, American banks are known to frequently borrow funds from the
Fed.
Interest Rate
The Repo Rate, which is the rate at which RBI lends to Banks is moved rarely. But in the US,
the Fed Board reviews the Fed Fund Rate every six weeks in the Fed Open Market Committee
(FOMC) and is often moved.

Multiple Choice Questions:

1. Which of the below is not role & function of the financial system.
a) Pooling of fund b) Credit rating
c) Price information d) Economic development
2. Which one of the following does not comes under financial system?
a) Financial Instruments b) Financial Markets
c) Financial Institutions d) Financial Banking
3. Capital markets provides which type of funds?
a) Short term b) Long term
c) Medium term d) None of the above
4. Money markets provides which type of funds?
a) Short term b) Long term
c) Medium term d) None of the above
5. Primary and Secondary comes under which type of financial system?
a) Financial Institutions b) Financial Services
c) Financial Markets d) Financial Instruments
6. International Monetary Fund (IMF) was established in which year?
a) 1954 b) 1976
c) 1944 d) 1945
7. Which of these functions are not in the IMF?
a) Surveillance b) Lending
 c) Promote d) Research & Data
8. Which one of these are objective of world bank.
a) Promote b) Facilitate
c) Assist d) Empower women
9. Indian financial system post-independent was up to which year?
a) 1951 b) 1975
c)1990 d) 1991
10. What are the growth and development of Indian financial system?
a) New economic policy b) Overall efficiency
c) Intermediaries d) Reform in financial market
11. Which one of these is not overview of financial system?
a) Japanese financial system b) UK financial system
c) France financial system d) US financial system
12. Indian financial system is based on?
a) Market-based b) Fund based
c) Bank-based d) Monetary based
13. What is the weakness in IFS?
a) Lack of transparency b) Eradication in poverty
c) Gender equality d) Technical assistance & training
14. What is the full form of IBRD?
a) Indian bank of rural development
b) Indian bank for Reconstruction & Development
c) International bank Research & Department
d) International bank for Reconstruction & Development
15. Which of the following is not the component of money market?
a) Chit fund b) Bills market
c) T-Bills d) Repo market
16. Evolution of financial system between 1870 to 1914 are?
a) First world war b) Great depression
c) The gold standard system d) Basel accord
17. How many member are there in IMF?
a) 192 b) 190
 c) 180 d) 200
18. Bretton wood period comes under which evolution of financial system?
Joy
a) 1870-1914 b) 1915-1938
c) 1945 to till d) None of the above
19. Which one of the below is not the type of NBFC?
a) Loan company b) Mutual benefit finance
c) Investment company d) Bank loan
20. Which one of the below is not the weakness in IFS ?
a) Lack of direction b) Lack of coordination
c) Lack of professionalism d) Lack of democracy

Prepared by

Parth Singh, Vighnesh Salunkhe, Rujula Patil ,Yash Patil & Joy Kotrik
UNIT 2

Financial Markets

UNIT 2 : FINANCIAL MARKETS

FINANCIAL MARKETS

Meaning:

A financial market refers to a marketplace where different types of bonds and securities are
traded. This includes different financial securities like bond markets, share markets, forex
markets, derivative markets, etc. Financial markets are crucial for the smooth functioning of a
capitalist economy and it serves as an agent between various collectors and investors.
Essentially, these markets mobilise capital flow between investors and collectors. There exist
two different types of exchange in financial market-

1. Direct Finance - In this lenders and borrowers meet directly to exchange securities.
Common examples are stocks, bonds and foreing exchange.
2. Indirect Finance - In this lenders and borrowers don't meet directly, but lenders
provide their funds to financial intermediaries such as a bank and they independently
pass these funds to borrowers.

Functions of Financial Markets:

1. Pooling of Funds - In a financial system, the Savings of people are transferred from
households to business organizations. With these production increases and better goods
are manufactured, which increases the standard of living of people.
2. Capital Formation - Business requires finance. These are made available through
banks, households and different financial institutions. They mobilize savings which
leads to Capital formation.
 3. Liquidity - The existence of financial markets enabled the owners of assets to buy and
resell these assets. Generally this leads to an increase in the liquidity of these financial
instruments.
4. Price Determination - Financial markets determine prices of financial assets. The
secondary market herein plays an important role in determining the prices for newly
issued assets.
5. Provision of Information - The exchange of funds is characterized by incomplete
information. Financial markets collect and provide much information to facilitate this
exchange.

Role of Financial Markets:

1. Mobilizing domestic savings - Financial market channel funds from households,

firms, governments and foreigners that have surplus funds to those who encounter a
shortage of funds (for purpose to consumption and investment )
1. Short and Long Term Needs - The financial market takes into account the various
needs of different individuals and organizations. This facilitates optimum use of
finances for productive purposes.
2. Create New Assets and Liabilities - Financial markets also encourage the creation of
new assets in the form of investments and liabilities through borrowings.
3. Risk Sharing - Trade in the financial market is partly motivated by transfer of risk from
borrowers to lenders who use the abstained funds to invest.
4. Efficiency - the facilitation of financial transactions through financial markets lead to
a decrease in informational cost and transaction cost, which from an economic point of
view leads to increase in efficiency.
5. Economic Growth - Financial markets contribute to a nation's growth by ensuring flow
of surplus funds.
6. Finances Government Needs - Government needs a huge amount of money for the
development of defense infrastructure. It also requires finance for social welfare
activities, public health, education, etc. This is supplied to them by financial markets.
Importance of Financial Markets:

1. It accelerates the rate and volume of saving through provision of various financial
instruments and efficient mobilization of saving.
2. It aids in increasing the national output of the country by providing funds to corporate
customers to expand their respective business
3. It protects the interests of investors and ensures smooth financial transactions through
regulatory bodies such as RBI, SEBI etc.
4. It helps economic development and raises the standard of living of people.
5. A sound financial system touching every aspect of economic activities is a prerequisite
of a vibrant and developed economy.
6. Comparison of financial system across countries reveal that the system is well
developed in rich countries and not so in others

CAPITAL MARKET

Meaning: Capital Market is referred to as a place where savings and investments are done
between capital suppliers and those who need capital. It is therefore a place where various
entities trade different financial instruments.

There are two types of Capital Markets

• Primary Market
• Secondary Market

Capital Market is where both equity and debt instruments like equity shares, preference shares,
debentures, bonds etc. are bought and sold.

Functions Of Capital Market:

• It acts in linking investors and savers.

 • Facilitates the movement of capital to be used more profitably and productively to boost
the National Income.
• Boosts Economic growth.
• Mobilization of savings to finance long term investment.
• Facilitates trading of securities.
• Minimization of transaction and information cost.
• Encourages a massive range of ownership of productive assets.
• Quick valuation of financial instruments.
• Through derivative trading, it offers insurance against market or price threats.
• Facilitates transaction settlement.
• Improvement in the effectiveness of capital allocation.
• Continuous availability of funds.

The Capital Market is the best source of finance for companies. It offers a spectrum of
investment avenues to all investors which encourages capital creation.

Role Of Capital Market:

The primary role of capital market is to raise long-term funds for Government, banks, and
corporations while providing a platform for the trading of securities. The member organisation
of the capital market may issue stocks and bonds in order to raise funds. Investor can then
invest in the capital market by purchasing those stocks and bonds. The role of capital market
is explained below

1. Capital Formation and Saving Mobilisation: Various types of securities helps to

mobilize savings from various sectors of population. The twin feature of reasonable return
and liquidity in stock exchange are definite incentives to the people to invest in securities.
2. Raising Long-Term Capital: The existence of a stock exchange enables companies to
raise permanent capital.
3. Promotion Of Industrial Growth: The stock exchange is a central market through which
resources are transferred to the industrial sector of the economy.
 4. Ready And Continuous Market: The stock exchange provides a central convenient
place where buyers and sellers can easily purchase and sell securities. Easy marketability
makes investments in securities more liquid as compared to other assets.
5. Technical Assistance: By offering advisory services relating to preparation of feasibility
reports, identifying growth potential and training entrepreneurs in project management,
the financial intermediaries in capital market play in important role.
6. Proper Channelisation Of Funds: The prevailing market price of a security and relative
yield are the guiding factors for the people to channelise their funds in a particular
company.
7. Source Of Acquiring Foreign Capital: Capital markets make it possible to generate
foreign capital. Indian firms are able to generate capital funds from overseas markets by
way of bonds and other securities.
8. Easy Liquidity: With the help of secondary markets investors can sell off their holdings
and convert them into liquid cash. Commercial banks also allow investors to withdraw
their deposits, as and when they are in need of funds.

MONEY MARKET

The money Market in India is a correlation for short term funds with maturity ranging from
overnight to one year in India including financial instruments that are deemed to be closed
substitutes of money .

Similar to develop economies the Indian money Market is diversified and has evolved through
many stages from the conventional platform of treasury bills and call Money to commercial
papers , certificates of deposit , repos , forward rate agreement .

Meaning

The Indian money Market is a monetory system that involves the lending and borrowing of
short term funds . It has been observed that financial institutions do employ money Market
instruments for financing short term monetory requirements of various sectors such as
agriculture , finance , and manufacturing.it involves large volume traders between institution
and traders .

Role

Money Market is a dynamic market . It facilitates better management of liquidity and money
in the economy by the monetory authorities . This in turn leads to economic stability and
development of the country . The primary purpose of a money Market fund is to provide
investors a safe Avenue for investing in secure and highly liquid , cash – equivalent , debt based
assets using smaller investment amounts .

Participants

Participants in call / notice Money market currently include banks , primary dealers , companies
and select mutual funds . The major player of Indian money Market is a central bank . The
mone Market is the trade in short term debt . It is a constant flow of cash between government
, corporations , banks , and financial institutions , borrowing and lending for a term as short as
overnight and no longer than a year .

Features

Money Market is a market for short term funds. We define the short term as a period of 364
days or less , the borrowing and repayment take place in 364 days or less . The most important
functions of the money Market is to bridge this liquidity gap . Thus , business and finance firms
can tide over the mismatch of cash receipts and cash expenditure purchasing ( for selling ) the
shortfall ( or surplus) of funds in the money Market.

Types of money Market in india

1. Treasury bills , T – bills are one of the most popular mone Market instruments .
 2. Commercial bills , also a money Market instruments , works more like the bill of
exchange .
3. Certificate of deposit.
4. Commercial paper.
5. Call Money.

Characteristics of Money Market:

• It is not a single market but a collection of markets for several instruments

• It is wholesale market of short term debt instruments
• Its principal feature is honor where the creditworthiness of the participants is important.
• The main players are: Reserve bank of India (RBI), Discount and Finance House of
India (DFHI), mutual funds, banks, corporate investor, non-banking finance companies
(NBFCs), state governments, provident funds, Primary dealers. Securities Trading
Corporation of India (STCI), public sector undertaking (PSUs), non-resident Indians
and overseas corporate bodies.
• It is a need based market wherein the demand and supply of money shape the market.

Importance of Money Market are :

• Development Of Trade And Industry:

Money market is an important source of financing trade and industry. The money
market, through discounting operations and commercial papers, finances the short-
term working capital requirement of trade and industry and facilities the development
of industry and trade both — national and international.

• Development Of Capital Market:

The short-term rates of interest and the conditions that prevail in the money market
influence the long-term interest as well as the resource mobilization in capital market.
Hence, the development of capital depends upon the existence of a development of
capital money market.
 • Smooth Functioning of Commercial Banks:

The money market provides the commercial banks with facilities for temporarily
employing their surplus funds in easily realizable assets. The banks can get back the
funds quickly, in times of need, by resorting to the money market. It also enables
commercial banks to meet their statutory requirements of cash reserve ratio (CRR) and
Statutory Liquidity Ratio (SLR) by utilizing the money market mechanism.

• Effective Central Bank Control:

A developed money market helps the effective functioning of a central bank. It facilities
effective implementation of the monetary policy of a central bank.

• Formulation Of Suitable Monetary Policy:

Conditions prevailing in a money market serve as a true indicator of the monetary state
of an economy. Hence, it serves as a guide to the Government in formulating and
revising the monetary policy then and there depending upon the monetary conditions
prevailing in the market.

• Non-Inflationary Source Of Finance To Government:

A developed money market helps the Government to raise short-term funds through the
treasury bills floated in the market. In the absence of a developed money market, the
Government would be forced to print and issue more money or borrow from the central
bank. Both ways would lead to an increase in prices and the consequent inflationary
trend in the economy.

Structure of Money Market :

The Indian monetary market has two broad categories – the organized sector and the unorganized
sector.

• Organized Sector:
 This sector comprises of the governments, the RBI, the other commercial banks, rural
banks, and even foreign banks. The RBI organizes and controls this sector. Other
corporations like the LIC, UTI, etc also participate in this sector but not directly. Other
large companies and corporates also participate in this sector through banks.

• Unorganized Sector:

These are the indigenous banks and the local money lenders and hundis etc. Their
activities are not controlled by the RBI or any other body, so they are the unorganized
sector.

Money Markets Instruments

The main money market instruments are Treasury Bills, Commercial Papers, Certificate of
deposits, Commercial Bills and Call Money. Money market instruments are short-term
financing instruments aiming to increase the financial liquidity of businesses. The main
characteristic of these kinds of securities is that they can be converted to cash with ease, thereby
preserving the cash requirements of an investor. Market for short term funds which deals in
monetary assets whose period of maturity is up to one year.

• Treasury Bills : An instruments of short-term borrowing by the government of India

maturing in less than one year. Also know as zero coupon bonds issued by the Reserve
Bank of India on behalf of the Central Government to meet its short-term requirement
of funds. Issued in form of promissory note. Highly liquid and have assured yield and
negligible risk of default. It has a maturity of less than one year. Issued at discount &
paid at par. For example-issued at 95,000 7 investor will get 100,000. Treasury bills are
available for a minimum amount of Rs 25,000 and in multiples thereof.

• Commercial Paper : Unsecured promissory note having a maturity of 15 days to 1

year. Negotiable instrument transferable by endorsement and delivery. Sold at discount
and redeemed at par. Alternative to bank borrowing. Bridge financing – Suppose a
company needs long- term finance to buy some machinery. In order to raise the long
term funds in the capital market the company will have to incur floatation costs (costs
 associated with floating of an issue are brokage, commission, printing of applications
and advertising etc.). Funds raised through commercial paper are used to meet the
floatation costs.

• Call Money : Short term finance repayable on demand. Maturity period of one day to
fifteen day. Commercial banks maintain CRR as per directives of RBI. Call Money -
method by which banks borrow from each other to be able to maintain the CRR. Interest
rate paid on call money – call rate. Inverse relationship between call rates and other
short- term money market Instruments - certificates of deposit and commercial paper.
A rise in call money rates makes other sources of finance.

• Certificate of Deposit : Unsecured, negotiable, short-term instruments in bearer form,

issued by commercial banks and development financial institutions. Issued in periods
of tight liquidity, when the deposits by individuals and households is less but demand
for credit is high. Help to mobile large amounts of money in a short time period.

• Commercial Bill : Short – term , self- liquidating, negotiable instrument used for
financing credit sales of a firm. When goods are sold on credit, the buyer becomes liable
to make payment on a specified date or make use of a bill of exchange. If the seller
draws a BOE on buyer who accepts it then it becomes marketable instrument known as
trade bills. When the seller presents this to Bank & accepts it and give funds against it
to seller, it becomes commercial bill.
DIFFERENCE BETWEEN MONEY MARKET AND CAPITAL MARKET

Money Market Capital Market

Definition

A random course of financial A kind of financial market where the company or

institutions, bill brokers, money dealers, government securities are generated and
banks, etc., wherein dealing on short- patronised with the intention of establishing
term financial tools are being settled is long-term finance to coincide with the capital
referred to as Money Market. necessary is called Capital Market.

Market Nature

Money markets are informal in nature. Capital markets are formal in nature.

Instruments involved

Commercial Papers, Treasury Bonds, Debentures, Shares, Asset

Certificate of Deposit, Bills, Trade Secularisation, Retained Earnings, Euro Issues,
Credit, etc. etc.

Investor Types

Commercial banks, non-financial Stockbrokers, insurance companies,

institutions, central bank, chit funds, etc. Commercial banks, underwriters, etc.

Market Liquidity

Money markets are highly liquid. Capital markets are comparatively less liquid.

Risk Involved
 Money markets have low risk. Capital markets are riskier in comparison to
money markets.

Maturity of Instruments

Instruments mature within a year. Instruments take longer time to attain maturity

Purpose served

To achieve short term credit To achieve long term credit requirements of the
requirements of the trade. trade.

Functions served

Increasing liquidity of funds in the Stabilising economy by increase in savings

economy

Return on investment achieved

ROI is usually low in money market ROI is comparatively high in capital market

Features of Money Market

A few general money market features are:

• It is fund-term market funds.

• It’s maturity period up to one year.
• It trades with assets that can be transformed into cash easily.
• All the transactions take place through phone, email, text, etc.
• Broker not required for the transaction
• The components of a money market are the Commercial Banks, Non-banking financial
companies and Central Bank, etc.

Features of Capital Market

Important features of the capital market are:
 • Unites entrepreneurial borrowers and savers
• Deals with long-term investments.
• Agents are required.
• It is controlled by government rules and regulations.
• Deals in both commercial and non-commercial securities.
• Foreign Investors.

Types of Money Markets

Money market instruments have different securities, which can be utilised for short term
borrowings. A few different types of market money are:

• Call Money- It portrays a short-term loan with maturities term starting from one day
to fourteen days, and it can be repaid on demand.
• Treasury Bill- It is the oldest and traditional money market instrument and is practised
across the globe. The instrument is declared by the Government and does not have to
pay any interest. This is available at a discounted rate at the time of issue.
• Ready Forward Contract (Repo)-The word repo is acquired from the phrase
“repurchase agreement”. It is an agreement that specifies the sale and purchase of an
asset. In India, this agreement is prepared between different banks and sometimes
between bank and RBI for short term loans.
• Money Market Mutual Fund-This is the alternative name for liquid funds and are the
lowest risk debt funds.
• Interest Rate Swaps- This is the latest money market instruments in India. Here, two
parties sign an agreement, where one decides to pay a fixed rate of interest, and the
other pays a floating rate of interest.

Types of Capital Market

The Capital Market instrument involves both the auction market and dealer market. It is
classified into two sections: Primary Market and Secondary Market.

• Primary Market: Here, fresh contracts are given to the people for the subscription
purpose.
• Secondary Market: The securities that have already been issued are exchanged among
investors.
 PRIMARY MARKET

1). Meaning

The primary market is a part of the capital market. It enables the government, companies and
other primary market securities can be notes, bills, government bonds, corporate bonds and
stocks of the companies.

2) Features

• The primary market deals with the new issue of securities that any shares, bonds or any
marketable securities is firstly introduced in the primary market.
• Unlike the secondary market, the primary market has no physical existence, which exists
in the form of stocks exchange.
• Security is floated on the primary market before going to the secondary market. Hence it
precedes the secondary market.
• The primary market companies deal directly with the investors as they offer shares tp the
public through an initial public offering unlike secondary markets where the company has
no role to play as investor and traders shares of the company among themselves.
• In primary market legal and regulatory requirements are strict which ensures that only
quality companies approaches in stock exchange for the issue of shares to the public.

3).Types of primary market issues

I.Public Issue
The public issue is one of the most common methods of issuing securities to the public.
The company enters the capital market to raise money from the investors. The securities
are offered for sale to new investors. These new investors becomes the shareholder of
issuing company. The further classification of the public issues are –
 1. Initial Public Offer (IPO) – It is a fresh issue of equity shares by an unlisted company.
These securities are traded previously or offered for sale to the general public. After the
process of listing the company’s share is traded on the stock exchange. The investor
can buy and sell securities after listing in the secondary market.
2. Further Public Offer / Follow-On Public Offer (FPO) – When listed company’s on
the stock exchange announces fresh issues of shares to the general public. The listed
company does this to raise additional funds.

II. Right Issue

This is another type of issue in the primary market in which companies issues shares to its
existing shareholders by offering them to purchase more. The issue of securities is at
predetermined price. In Right issue the investors have a choice of buying shares at a
discount price within a specific period. It enhances the control to the existing shareholders
of the company. It helps the company to raise funds without any additional costs.

III. Bonus Issue

When a company issues fully paid additional shares to its existing shareholders for free,
The company issues shares from its free reserve. These shares are a gift for its current
shareholders, as bonus shares does not require any fresh capital.

IV. Private Placements

Private placements mean that when a company offers its securities to a small group of
people. The securities may be bonds, stocks, or other securities. The investors can be either
individual or institution. The private placements are more manageable to issue than an IPO.
The regulatory norms are significantly less. It also reduces the cost and time.
Secondary Markets

The term "secondary market" is also used to refer to the market for any used goods or
assets, or an alternative use for an existing product or asset where the customer base is the
second market (for example, corn has been traditionally used primarily for food production
and feedstock, but a "second" or "third" market has developed for use in ethanol
production).

Functions

1. Economic Barometer: A stock exchange is a reliable barometer to measure the

economic condition of a country.Every major change in country and economy is reflected
in the prices of shares. The rise or fall in the share prices indicates the boom or recession
cycle of the economy.

2. Pricing of Securities: The stock market helps to value the securities on the basis of
demand and supply factors. The securities of profitable and growth oriented companies are
valued higher as there is more demand for such securities.

3. Safety of Transactions: In stock market only the listed securities are traded and stock
exchange authorities include the companies names in the trade list only after verifying the
soundness of company. The companies which are listed they also have to operate within
the strict rules and regulations. This ensures safety of dealing through stock exchange.

4. Contributes to Economic Growth : In stock exchange securities of various companies

are bought and sold. This process of disinvestment and reinvestment helps to invest in most
productive investment proposal and this leads to capital formation and economic growth.

5. Spreading of Equity Cult: Stock exchange encourages people to invest in ownership

securities by regulating new issues, better trading practices and by educating public about
investment.
 6. Providing Scope for Speculation: To ensure liquidity and demand of supply of
securities the stock exchange permits healthy speculation of securities.

7. Liquidity: The main function of stock market is to provide ready market for sale and
purchase of securities. The presence of stock exchange market gives assurance to investors
that their investment can be converted into cash whenever they want. The investors can
invest in long term investment projects without any hesitation, as because of stock
exchange they can convert long term investment into short term and medium term.

8. Better Allocation of Capital: The shares of profit making companies are quoted at
higher prices and are actively traded so such companies can easily raise fresh capital from
stock market. The general public hesitates to invest in securities of loss making companies.
So stock exchange facilitates allocation of investor’s fund to profitable channels.

9. Promotes the Habits of Savings and Investment: The 5stock market offers attractive
opportunities of investment in various securities. These attractive opportunities encourage
people to save more and invest in securities of corporate sector rather than investing in
unproductive assets such as gold, silver, etc.

Money Market Examples

Since they are extremely liquid in nature, the money market recovery period is restricted to one
year. A few examples of Money Market are:

• Trade Credit
• Commercial Paper
• Certificate of Deposit
• Treasury Bills

Capital Market Examples

The capital market circulates the capital in the economy among the user and the suppliers of
money.
The maturity period is more than one year or sometimes it is incurable (no maturity).

• Stocks
 • Bonds
• Debentures
• Euro issues

Debt market

• A market meant for trading fixed income instruments, that could be securities issued by
Central & State Government, Municipal corporation, banks.

Features

• It is a market of Fixed Income Securities

• It Includes Both Primary & Secondary Market
• The Debt market is a part of Capital Market
• They are Stable & Reliable source of long-term financing for Government &
Corporates
• It serves as an alternate source of funding to Banking Finance & have credit ratings.

Role & Importance of Debt Market in Indian Economy

• Efficient mobilization and allocation of resources in the Economy

• Financing the development activities of the government
• Transmitting signals for implementations of the monetary policy
• Facilitating liquidity management
• Better Corporate Governance
• Less risk compared to the Equity Market, encouraging low risk Investment which leads
to inflow of funds in the economy.

FOREIGN EXCHANGE MARKET

Introduction
The foreign exchange market or forex market is the market where currencies are traded. The
forex market is the world’s largest financial market where trillions are traded daily. It is the
most liquid among all the markets in the financial world. Moreover, there is no central
marketplace for the exchange of currency in the forex market, foreign exchange trading refers
to trading one country's money for that of another country. The kind of money specifically
traded takes the form of bank deposits or bank transfers of deposits denominated in foreign
currency. The foreign exchange market typically refers to large commercial bank in financial
centers, such as New York or London, that trade foreign currency denominated deposits with
each other.

Meaning

Foreign exchange market institutions for the exchange of one country's currency with that of
another country. Foreign exchange markets are made up of many different markets, because
the trade between individual currencies-say, the euro and the U.S. dollar-each constitutes a
market.

Participant

This article throws light upon the four main participants of the foreign exchange market. The
participants are:

1.COMMERCIAL BANK OR MARKET MARKETS: - Commercial banks are normally

taking over the position to support the economy of the country by carrying over the foreign
currency from one period to another, to meet the future need of the country. They foreign
currency without any real capacity to satisfy the need of firms to make payments. As they are
buying the foreign currency from the customer, the rate they quote for buying the foreign
currency is technically called a bid rate.

2.FOREIGN EXCHANGE BROKERS: -Foreign exchange brokers do not buy or sell the
foreign currency on their own account, as done by markets makers. They are working as an
intermediary between two parties, to satisfy their respective needs. As they are working as a
bridge between buyers and sellers of the foreign currency, they are only earning the fees in the
form of brokerage charges.

3.CENTRAL BANKS OR RESERVE BANK OF INDIA: - To protect the financial strength

and stability of the country's balance of payments, internal money supply, interest rates and
inflation, RBI, intervenes in foreign conversion.

4.CORPORATES AND ENTERPRENEURS: - Corporate are the players in the FE market, to

satisfy their need for payment in foreign currency towards imports of goods, commodities and
services. On the other hand, they need to convert foreign currency into how currency on
account of export of goods, commodities, and services. The need for conversion also happens
on account of transactions in financial markets across the globe, for loan disbursement,
repayment of loans, receipt and payment of annual charges. Etc.

TYPES OF FOREIGN EXCHANGE MARKET

The Foreign Exchange Market has its own varieties. We will know about the types of these
markets in the section below

1.SPORT MARKET: - In this market, the quickest transaction of currency occurs. This foreign
exchange market provides immediate payment to the buyers and the sellers as per the current
exchange rate. The spot market accounts for almost one-third of the currency exchange, and
trade usually takes one or two days to settle the transactions.

2.FORWARD MARKET: - In the forward market, there are two parties which can be either
two companies, two individuals, or government nodal agencies. In these types of market, there
is an agreement to do a trade at some future date, at a defined price and quantity.

3.FUTURE MARKETS: - The future markets come with solutions to several problems that are
being encountered in the forward markets. Future markets work on similar lines and basic
philosophy as the forward markets.
4.OPTION MARKET: - An option is a contract that allows an investor to buy or sell an
instrument that is underlying like a security, ETF, or even index at a determined price over a
definite period. buying and selling(option)are done in this type of market.

5.SWAP MARKET: - A swap is a type of derivative contract through which two parties
exchange cash flows or liabilities from two different financial instruments. Most swaps involve
these cash flows based on a principal amount.

Features of Foreign Echange Market

This kind of exchange market does have the characteristics of their own, which is required to
be identified. The features of the Foreign Exchange Market are as follows:

1.High Liquidity

The foreign exchange market is the most liquid financial market in the world. It involves the
trading of various currencies across the globe. All traders in this market are free to buy or sell
currencies anytime as per their choice. They are free to exchange currencies without prices of
currencies being traded getting affected. Currencies prices remain the same both at the time of
order placed and executed thereby enabling to earn the expected prices.

2.Market Transparency

Trader in the foreign exchange market has full access to all market data and information. They
can easily monitor different countries’ currencies price fluctuations through real-time portfolio
and account tracking without the need of a broker. All this information helps in making better
trading decisions and control over investments.

3.Dynamic Market

The foreign exchange market is a dynamic market. In these markets, currency values change
every second and hour. These values changes in accordance with changing forces of demand
and supply which also helps in determining the exchange rates. Due to its fast-changing
character, 4.Operates 24 Hours
Foreign exchange markets function 24 hours a day. It provides a platform where currencies can
be traded anytime by traders. It provides a convenient time to all necessary adjustments when
and wherever needed.

5.Lower Trading Cost

The forex market has a very low trading cost. In these markets, there are no commissions like
in case of any other investments. Any difference between buying and selling prices of
currencies is the only cost of trading in the forex market. As there are low costs then the
possibility of incurring losses is also minimum thereby making it possible for small investors
to make good profit from trading.

6.Dollar Most Widely Traded

The dollar is the most dominant currency in the foreign exchange market. This currency is
paired with every country’s currency being traded in the forex market.

Functions of Foreign Exchange Market

Transfer Function :

The basic and the most obvious function of the foreign exchange market is to transfer the funds
or the foreign currencies from one country to another for settling their payments. The market
basically converts one's currency to another.

Credit Function :

The FOREX provides short-term credit to the importers in order to facilitate the smooth flow
of goods and services from various countries. The importer can use his own credit to finance
foreign purchases.
Hedging Function :

The third function of a foreign exchange market is to hedge the foreign exchange risks. The
parties in the foreign exchange are often afraid of the fluctuations in the exchange rates, which
means the price of one currency in terms of another currency. This might result in a gain or
loss to the party concerned.

INTRODUCTION TO COMMODITY MARKET

India, a commodity based economy where two-third of the one billion population depends on
agricultural commodities, surprisingly has an under developed commodity market. Unlike the
physical market, futures markets trades in commodity are largely used as risk management
(hedging) mechanism on either physical commodity itself or open positions in commodity
stock.

DIFFERENT TYPES OF COMMODITIES :

Market exists for almost all the commodities known to us. These commodities can be broadly
classified Into the following

(i) Precious Metals: Gold, Silver, Platinum, etc.

(ii) Other Metals: Nickel, Aluminum, Copper, etc.

(iii) Agro-Based Commodities: Wheat, Cotton, Oils, Oil seeds, etc.

(iv) Soft Commodities: Coffee, Cocoa, Sugar, etc.

(v) Live-Stock: Live Cattle, Pork Bellies, etc. (vi) Energy: Crude Oil, Natural Gas

SIGNIFICANCE OF COMMODITY MARKET

(i) 50% of GDP is Commodity related

(ii) 18% of GDP is from Agriculture

(iii) India is 5th largest producer of Steel

(iV) Over 65% of 1 trillion population depend on agriculture directly

(v) Over 7500 physical market yards History of more than 150 years of derivatives

trading.

OBJECTIVES OF COMMODITY MARKETS

(i) Hedging with the objective of transferring risk related to the possession of physical assets

through any adverse moments in price.

(ii) Liquidity and Price discovery to ensure base minimum volume in trading of a commodity

through market information and demand supply factors that facilitates a regular and authentic

price discovery mechanism.

(iii) Maintaining buffer stock and better allocation of resources as it augments reduction in

inventory requirement and thus the exposure to risks related with price fluctuation declines.
Resources can thus be diversified for investments.

(iv) Price stabilization along with balancing demand and supply position. Futures trading leads

to predictability in assessing the domestic prices, which maintains stability, thus safeguarding
against any short term adverse price movements. Liquidity in Contracts of the commodities
traded. also ensures in maintaining the equilibrium between demand and supply.

(V) Flexibility, certainty and transparency in purchasing commodities facilitate bank financing.
Predictability in prices of commodity would lead to stability, which in turn would eliminate
the risks associated with running the business of trading commodities. This would make
funding easier and less stringent for banks to Commodity market players.
FUNCTIONS OF COMMODITY MARKETS:

1. Price Discovery

Based on inputs regarding specific market information, the demand and supply equilibrium,
weather forecasts, expert views and comments, inflation rates, Government policies, market
dynamics, hopes and fears, buyers and sellers conduct trading at futures exchanges. This
transforms in to continuous price discovery mechanism. The execution of trade between buyers
and sellers leads to assessment of fair value of a particular commodity that is immediately
disseminated on the trading terminal.

2. Price Risk Management

Hedging is the most common method of price risk management. It is strategy of offering price
risk that is inherent in spot market by taking an equal but opposite position in the futures
market. Futures markets are used as a mode by hedgers to protect their business from adverse
price change. This could dent the profitability of their business. Hedging benefits who are
involved in trading of commodities like farmers, processors, merchandisers, manufacturers,

exporters, importers etc.

3. Import Export competitiveness

The exporters can hedge their price risk and improve their competitiveness by making Use of
futures market. A majority of traders which are involved in physical trade internationally Intend
to buy forwards. The purchases made from the physical market might expose them to The risk
of price risk resulting to losses. The existence of futures market would allow the Exporters to
hedge their proposed purchase by temporarily substituting for actual purchase till The time is
ripe to buy in physical market. In the absence of futures market it will be meticulous, Time
consuming and costly physical transactions.

4. Predictable Pricing

The demand for certain commodities is highly price elastic. The manufacturers have to Ensure
that the prices should be stable in order to protect their market share with the free entry Of
imports. Futures contracts will enable predictability in domestic prices. The manufacturers
Can, as a result smooth out the influence of changes in their input prices very easily. With no
Futures market, the manufacturer can be caught between severe short-term price movements
of Oils and necessity to maintain price stability, which could only be possible through sufficient
Financial reserves that could otherwise be utilized for making other profitable investments.

5. Benefits for farmers/Agriculturalists

Price instability has a direct bearing on farmers in the absence of futures market. There Would
be no need to have large reserves to cover against unfavorable Price fluctuations. This Would
reduce the risk premiums associated with the marketing or processing margins enabling More
returns on produce. Storing more and being more active in the markets. The price Information
accessible to the farmers determines the extent to which traders/processors Increase price to
them. Since one of the objectives or futures exchange is to make available These prices as far
as possible it is very likely to benefit the farmers. Also, due to the time lag Between planning
and production, the market-determined price information disseminated by Future exchanges
would be crucial for their production decisions.

6. Credit Accessibility

The absence of proper risk management tools would attract the marketing and Processing of
commodities to high-risk exposure making it risky business activity to fund. Even A small
movement in prices can eat up a huge proportion of capital owned by traders, at times Making
it virtually impossible to payback the loan. There is a high degree of reluctance among Banks
to fund commodity traders, especially those who do not manage price risks. If in case They do,
the interest rate is likely to be high and terms and conditions very stringent. This Possesses a
huge obstacle in the smooth functioning and competition of commodities market. Hedging,
which is possible through futures markets, would cut down the discount rate in Commodity
lending.

7. Commodities as an asset class for diversification of portfolio risk

Commodities have historically an inverse correlation of daily returns as compared to Equities.

The skewness of daily returns favors commodities, thereby indicating that in a given Time
period commodities have a greater probability of providing positive returns as compared To
equities. Another aspect to be noted is that the “Sharpe ratio” of a portfolio consisting of
Different asset classes is higher in the case of a portfolio consisting of commodities as well as
Equities. Thus, an Investor can effectively minimize the portfolio risk arising due to price
Fluctuations in other asset classes by including commodities in the portfolio.

MAJOR REGIONAL COMMODITY EXCHANGES IN INDIA

1. Batinda Commodity and Oil Exchange Ltd.

2. The Bombay Commodity Exchange

3. The Rajkot Seeds Oil And Bullion Merchant

4. The Kanpur Commodity Exchange And Oil seeds exchange

5. The Meerut Agra Commodity Exchange

6. Ahmadabad Commodity Exchange

7. Vijay Beopar Chamber Ltd. (Muzaffarnagar)

8. India Peppers And Spice Trade Association ( K00“i ) Rajdhani Oils And Seeds

Exchange ( Delhi)

9. The Chamber Of Commerce (Hapur)

10. The East India Cotton Association (Mumbai)

11. The Central Commercial Exchange ( Gwalior )

12. The East India Jute and Hessian Exchange Of India (Kolkata)

13. First Commodity Exchange Of India ( Kochi )

14. Bikaner Commodity Exchange Ltd. ( Bikaner )

15. The Coffee Future Exchange Ltd. ( Bangalore )

16. E Sugar India Ltd. (Mumbai).

DERIVATIVES MARKET

Introduction

The emergence of the market for derivative products, most notably forwards, futures and
options, can be traced back to the willingness of risk-averse economic agents to guard
themselves against uncertainties arising out of fluctuations in asset prices. By the very nature,
the financial markets are marked by a very high degree of volatility. Through the use of
derivative products, it is possible to partially or fully transfer price risks by locking-in asset
prices. As instruments of risk management, these generally do not influence the fluctuations in
the underlying asset prices. However, by locking-in asset prices, derivative products minimize
the impact of fluctuations in asset prices on the profitability and cash flow situation of risk-
averse investors.
Indian Derivatives Market
A significant development in the Indian stock market during recent years (2000-01) has been
the introduction of trading in equity derivatives at the stock exchanges. Derivative product
which are permitted to be transacted include both options and futures on both equity' index and
on individual stocks. Thus, there are four equity derivative products available in Indian stock
markets.

Meaning And Definition Of Derivatives

Investments based on some underlying assets are known as derivatives. The capital invested is
less than the price of the underlying asset. Derivative is a product whose value is derived from
the value of one or more basic variables, called bases (underlying asset, index, or reference
rate), in a contractual manner. The underlying asset can be equity, forex, commodity or any
other asset. For example, wheat farmers may wish to sell their harvest at a future date to
eliminate the risk of a change in prices by that date. Such a transaction is an example of a
derivative. The price of this derivative is driven by the spot price of wheat which is the
"underlying".

In the Indian context the Securities Contracts (Regulation) Act, 1956 (SC(R) A) defines
"derivative" to include –
 1. A security derived from a debt instrument, share, loan whether secured or
unsecured, risk instrument or contract for differences or any other form of security.
2. A contract, which derives its value from the prices, or index of prices, of underlying
securities. Derivatives are securities under the SC(R) A and hence the trading of
derivatives is governed by the regulatory framework under the SC(R) A.

Participants Of Derivatives

Derivative contracts have several variants. The most common variants are forwards, futures,
options and swaps. The following three broad categories of participants:

Hedgers: Hedgers face risk associated with the price of an asset. They use futures or options
markets to reduce or eliminate this risk.

Speculators: Speculators wish to bet on future movements in the price of an asset. Futures
and options contracts can give them an extra leverage; that is, they can increase both the
potential gains and potential losses in a speculative venture.

Arbitrageurs: Arbitrageurs trade in the derivatives market business to take advantage of a

discrepancy between prices in two different markets. If, for example, they see the futures price
of an asset getting out of line with cash price, they will take offsetting positions in the two
markets to lock in a profit.

Functions Of Derivatives Market

Helps in discovery of the future as well as current prices:Prices in an organized derivatives
market reflect the perception of market participants about the future and lead the prices of
underlying to the perceived future level. It concludes that derivatives helps in discovery of
future as well as current prices.
Helps to transfer risk: The derivatives market helps to transfer risks from those who have
them but may not like them to those who have an appetite for them.
Higher trading volumes: Derivatives, due to their inherent nature, are linked to the underlying
cash markets. With the introduction of derivatives, the underlying market witnesses higher
trading volumes because of participation by more players who would not otherwise participate
for lack of an arrangement to transfer risk.
Speculative trade: There is a shift to a more controlled environment of derivatives market. In
the absence of an organized derivatives market, speculators trade in the underlying cash
markets. Margining, monitoring and surveillance of the activities of various participants
become extremely difficult in these kind of mixed markets.
Acts as a catalyst for new entrepreneurial activity: An important incidental benefit that
flows from derivatives trading is that it acts as a catalyst for new entrepreneurial activity. The
derivatives have a history of attracting many bright, creative, well-educated people with an
entrepreneurial attitude. They often energize others to create new businesses, new products and
new employment opportunities, the benefit of which are immense.
Help increase savings and investment: Derivatives markets help increase savings and
investment in the long run. Transfer of risk enables market participants to expand their volume
of activity.

Instruments Of Derivatives Markets

There are various types of instruments to chose from. The instruments of derivatives differ in
the conditions of the contract, objectives and risk and return pattern.
There are four instruments of derivative:

1. Forward Contract
A forward contract is one of the simplest and oldest instruments of derivatives. It is an
agreement between two parties, buyer and seller, to buy or sell an asset at a future date
at a price that is decided upon today. They are also called forward commitments and
they do not give the right of cancellation to either of the parties. The forward contract
can also be customized according to the needs of the involved parties and does not have
to follow a standardized format. The contract is, truly and literally, of a private nature
between the buyer and the seller and there is no obligation to release the information of
the transaction publicly.

2. Future Contract
A futures contract is one of the instrument of derivatives which evolved out of the
forward contracts. Futures contract involves a legal agreement to buy or sell a derivative
at a predetermined price at a predetermined time in the future. The underlying asset of
the derivative can be a commodity or a financial instrument.
3. Options Contract
Options are one of the most widely used instruments of derivatives. Furthermore, there
are multiple types of options. Option Trading is a form of contract in which the buyer
of the option has the night to exercise his option at a specified price within a specified
period of time. It is to be noted here that in options trading, the buyer does not have the
obligation to exercise the option. He may or not exercise the option to buy or sell a
security, depending on the market price of the security. A fee or premium is charged
for entering into an options contract. Options are also traded on the exchange and are
standardized. Options are of two types: Call and Put.A call option gives the buyer the
right to buy an underlying asset at a predetermined price at or before the expiry whereas
a put option gives the buyer the right and not the obligation to sell anunderlying asset
at a predetermined price at or before the expiry.
4. Swap Contracts
Swaps are one of the most complicated instruments of derivatives.
A swap contract is a private agreement between two parties to exchange their cash flows
in thefuture according to a formula that is predetermined. Since the swaps are private
agreements, theycarry huge amounts of risks.This is one of the types of currency
derivatives like other trading segments, the currency segment also has multiple
derivative contract types such as Currency Futures Contract, Currency Forward
Contracts, Currency Options contract and of course the one in this context i.e. Currency
Swap Contract. They are also risky because the underlying security in most swaps is
currency or interest rate which are very volatile. The two most common types of swaps
are interest rate swaps and currency swaps. In interest rate swaps, there is swapping of
only interest related cash flows between the parties, in the same currency, but in
currency swaps, both principal and interest related cash flows are swapped and the
currency of cash flows in one direction is different from the currency of the cash flow
in the other direction.
Match the Following:

1) who controls the capital market in India?

(A) SERI
(B) RBI
(C)IRDA
(D)NABARD
2) A financial market is a market where Financial Instruments are _________.
A) Exchanged
B) sell
C) buy
D) rent
3) The ____________ is the market where debt instruments are traded.
A) Equity Market
B) Debt Market
C) Primary Market
D) Secondary Market
4) Capital markets provide _______ to businesses so that they can run and grow smoothly.
A) Plants
B) Building
C) capital
D) Machinery
5) ______ markets Are wholesale Markets of short term debt instruments.
A) Capital
B) Money
C) Currency
D) Commodity
6) The _________ are a platform where financial instruments are traded.
A) Financial Market
B) Money Market
C) Capital Market
7) Common instruments of derivative market include ______, futures, options and swaps.
A) Upwards
 B) Backwords
C) Forwards
8) How many types of financial markets are there?
A) Seven
B) Three
C) Two
D) Four
9) ______ market is the market in which foreign currencies are bought and sold.
A) Capital
B) Currency
C) Commodity
D) Money
10) The First organised structure of commodities market operation in India appears in ____.
A) 1875
B) 1978
C) 1877
D) 1840
11) Commodity Market perform the function of ________ , hedging and liquidity provision.
A) Credit function
B) Price discovery
C) Transfer function
12) The financial market are a platform where financial instruments are ____.
A) Exchange
B) deal
C) buy
D) Trade
13) Market form short term funds usually
For 1 year is called _______.
A. Capital market
B. Money market
C. Primary market
D. Secondary market
14) The main organised financial markets in India are the _____ and the _____ markets.
A) primary and Secondary
 B) Equity and Debt
C) Capital and Money
D) Currency and Commodity
15) The Markets in which new securities are issued by the corporations to raise funds are called:
A) Primary Markets
B) Secondary Markets
C) Equity Markets
D) Debt Markets
16) _______ is a link between savers & borrowers, helps to establish a link between savers &
investors.
A) Marketing
B) Financial market
C) Money market
D) None of these
17) Which of the following is the function of financial market?
A)Mobilization of savings
B) Price fixation
C) Provide liquidity to financial assets
D) All of the above
18) __________ is the organisations, institutions that provide long term funds.
A) Capital market
B) Money market
C) Primary market
D) Secondary market
19) _________ is a market for lending & borrowing of short term funds.
A) Money market
B) Primary market
C) Capital market
D) All of the above
20) Stock exchange is known as __________ market for securities.
A) Primary market
B) Secondary market
C) Capital market
D) None of the above
Answers:- 1)-A 2)-A 3)-B 4)-C 5)-B 6)-A 7)-C 8)-D 9)-B
10) -A 11)-B 12)-D 13)-B 14)-C 15)-A 16)-B 17)-D
18)-D 119-A 20-)B
Prepared by

1. Yashvi Singh,
2. Aman Chourasiya .
3. Siddesh Pande
4. Divesh Patil
5. Saba Kausar Shaikh
6. Saraubh Kumar
7. Aryan Gedam
8. Shravani Boddupeli
9. Atharva Kolambekar
10. Aishwarya Mahadik
11. Shewali Meshram
12. Saloni Jadhav
13. Khusbu Yadav