Economic Analysis for Business Decision

As per RBI definitions “ A market for short terms financial assets that are close substitute for money, facilitates the exchange of money in primary and secondary market”.

The money market is a mechanism that deals with the lending and borrowing of short term funds (less than one year). A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded.

It doesn’t actually deal in cash or money but deals with substitute of cash like trade bills, promissory notes & govt papers which can converted into cash without any loss at low transaction cost. It includes all individual, institution and intermediaries.

 It is a market purely for short-terms funds or financial assets called near money. relevant document and written communication transaction can be done. In Money Market transaction can not take place formal like stock exchange. only through oral communication. It deals with financial assets having a maturity period less than one year only.   .

 Transaction have to be conducted without the help of brokers.   . it comprises of several submarket like call money market. The component of Money Market are the commercial banks. It is not a single homogeneous market. acceptance & bill market. acceptance houses & NBFC (Non-banking financial companies).

adequately at reasonable cost.  . To provide a reasonable access to users of short-term funds to meet their requirement quickly. To provide a parking place to employ short surplus funds. term  To provide room for overcoming short term deficits.  To enable the central bank to influence and regulate liquidity in the economy through its intervention in this market.

Development of trade & industry. o Development of capital market. o Smooth functioning of commercial banks. o Effective central bank control. o Formulation of suitable monetary policy. o Non inflationary source of finance government.
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A variety of instrument are available in a developed money market. In India till 1986, only a few instrument were available.

They were • Treasury bills • Money at call and short notice in the call loan market. • Commercial bills, promissory notes in the bill market.

Now, in addition to the above the following new instrument are available:
 Commercial

papers.  Certificate of deposit.  Inter-bank participation certificates.  Repo instrument  Banker's Acceptance  Repurchase agreement  Money Market mutual fund

The call money market is an integral part of the Indian Money Market, where the day-to-day surplus funds (mostly of banks) are traded. The loans are of shortterm duration varying from 1 to 14 days. The money that is lent for one day in this market is known as "Call Money", and if it exceeds one day (but less than 15 days) it is referred to as "Notice Money".

.Banks borrow in this market for the following purpose  To fill the gaps or temporary mismatches in funds  To meet the CRR & SLR mandatory requirements as stipulated by the Central bank  To meet sudden demand for funds arising out of large outflows.

cooperative banks  Discount and Finance House of India (DFHI)  Securities Trading Corporation of India (STCI).  .Scheduled commercial banks  Non-scheduled commercial banks  Foreign banks  State. district and urban. The DFHI and STCI borrow as well as lend. in the call market. like banks and primary dealers.

the government pays the holder the full par value.  They are issued with three-month. commonly referred to as T-Bills are issued by Government of India against their short term borrowing requirements with maturities ranging between 14 to 364 days.  .Treasury bills. when they mature. (T-bills) are the most marketable money market security.  T-Bills are so popular among money market instruments because of affordability to the individual investors.  T-bills are purchased for a price that is less than their par(face) value. six-month and one-year maturities.

Primary Dealers. .50 gets redeemed at the end of it's tenure at Rs. All these are issued at a discount-to-face value. For example a Treasury bill of Rs. 100. Financial Institutions. 91. State Governments. Insurance Companies. Provident Funds. NRIs & OCBs can invest in T-Bills. FIIs (as per prescribed norms). 100. NBFCs.  Banks.00.00 face value issued for Rs.

as "giltedged" as repayments of principal as well as interest are totally secured by sovereign guarantee.  . and state governments. The term government securities encompass all Bonds & T-bills issued by the Central Government. These securities are normally referred to.

 The main advantage of CD is their safety.  .  CD’s have specific maturity date. interest rate and it can be issued in any denomination.  Like most time deposit.A CD is a time deposit with a bank.  Anyone can earn more than a saving account interest. funds can not withdrawn before maturity without paying a penalty.

  . CP is very safe investment because the financial situation of a company can easily be predicted over a few months. Only company with high credit rating issues CP’s. CP is a short term unsecured loan issued by a corporation typically financing day to day operation.

 They are usually very short term repurchases agreement.  The short term maturity and government backing usually mean that Repos provide lenders with extremely low risk.Repo is a form of overnight borrowing and is used by those who deal in government securities.  Repos are safe collateral for loans. from overnight to 30 days of more.  .

This is especially useful when the credit worthiness of a foreign trade partner is unknown.     A banker’s acceptance (BA) is a short-term credit investment created by a non-financial firm. BA’s are guaranteed by a bank to make payment. BA acts as a negotiable time draft for financing imports. Acceptances are traded at discounts from face value in the secondary market. . exports or other transactions in goods.

 Limited secondary market. in case of up in inflation.  No contact with foreign Money markets.Purchasing power of your money goes down.  Limited instruments.  Absence of integration.  Limited participants.  .  Absence of Bill market.

3. IFCI. 2. DFHI (discount and finance house of India). . Reserve bank of India. Development bank IDBI. ICICI. Private banks Indian Banks Foreign banks 4. NABARD. Public sector banks SBI with 7 subsidiaries Cooperative banks 20 nationalized banks ii. GIC. ORGANISED STRUCTURE 1. UTI etc. Commercial banks i. LIC.

CO-OPERATIVE SECTOR 1. State cooperative i. Chits 4. central cooperative banks Primary Agri credit societies Primary urban banks 2. State Land development banks central land development banks Primary land development banks . Nidhis III.UNORGANISED SECTOR 1. Indigenous banks 2 Money lenders 3.

 Integration of unorganised sector with the organised sector  Widening of call Money market  Introduction of innovative instrument  Offering of Market rates of interest  Promotion of bill culture  Entry of Money market mutual funds  Setting up of credit rating agencies  Adoption of suitable monetary policy  Establishment of DFHI  Setting up of security trading corporation of India ltd. (STCI) .

     The money market specializes in debt securities that mature in less than one year. . The easiest way for individuals to gain access to the money market is through a money market mutual fund. and are considered very safe. T-bills are short-term government securities that mature in one year or less from their issue date. As a result. they offer a lower return than other securities. Money market securities are very liquid. T-bills are considered to be one of the safest investments.

Commercial paper is an unsecured. but the returns aren't great. Repurchase agreement (repos) are a form of overnight borrowing backed by government securities. . and your money is tied up for the length of the CD. Returns are higher than T-bills because of the higher default risk. CDs are safe. Banker’s acceptance (BA) are negotiable time draft for financing transactions in goods. short-term loan issued by a corporation.     A certificate of deposit (CD) is a time deposit with a bank.

Reserve Bank Of India .

It was originally constituted with a capital of Rs.5 crores. . the reserve bank of India was nationalized .2 lakh subscribed by the central bank. 1935 in accordance with the provisions of the Reserve Bank of India Act. The Reserve Bank of India was established on April 1. 1934. After independence. The entire share capital was contributed privately with the exception of the nominal value of Rs 2.Introduction It is the central bank of India.

RBI Central Office Building. Mumbai .

I .B.Management Structure of Reserve Bank Of India Raghuram Rajan Current Governor of R.

.Objectives Of R.I  To manage the monetary and credit system of the country.B.  For balanced and systematic development of banking in the country. To stabilizes internal and external value of rupee.  For the development of organized money market in the country.

For proper management of public debts  To establish monetary relations with other countries of the world and international financial institutions.  For proper arrangement of industrial finance. . For centralization of cash reserves of commercial banks.  To maintain balance between the demand and supply of currency.For proper arrangement of agriculture finance.

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I --.ISSUER OF CURRENCY NOTES .

exchange bills and promissory notes and government of India bonds. and 1. It issues these notes against the security of gold bullion. 100. 10.000. rupee coins. foreign securities. 5. 500. Currently it is in denominations of Rs. The RBI has powers not only to issue and withdraw but even to exchange these currency notes for other denominations. 2.The RBI has the sole right or authority or monopoly of issuing currency notes These currency notes are legal tender issued by the RBI. 50. 20. .

II---Banker and Debt Manager To Government .

It performs various banking function such as to accept deposits. It provides overdraft facility to the government when it faces financial crunch. The RBI being the apex monitory body has to work as an agent of the central and state governments. . taxes and make payments on behalf of the government.  It manages government public debts and maintains foreign exchange reserves on behalf of the government. It maintains government accounts.  It works as a representative of the government even at the international level. provides financial advice to the government.

III---BANKER TO BANKS .

Similarly in need or in urgency these banks approach the RBI for funds. . help and direct other commercial banks in the country.  It facilitates the clearing & rediscounting of promissory notes. The RBI controls the credit created by commercial banks by varying the proportion of reserves. Every commercial bank has to maintain a part of their reserves with the RBI. The RBI being an apex monitory institution has obligatory powers to guide. bills of exchange and cheques and also helps in inter bank transfer of funds. Thus it is called as the lender of the last resort.

IV---CREDIT CONTROL .

the RBI uses both quantitative and qualitative methods. the RBI achieves the following: Maintains the desired level of circulation of money in the economy.The RBI controls the credit creation by commercial banks. For this. Maintains the stability in the price level prevailing in the economy. By controlling credit. Controls the effects of trade cycles Controls the fluctuations in the foreign exchange rate Channelizes credit to the productive sectors of the economy .

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It has successfully rendered service in this direction by increasing the flow of credit to this sector. Development of the Financial System : The financial system comprises the financial institutions. These functions are country specific functions and can change according to the requirements of that country.Along with the routine traditional functions. central banks especially in the developing country like India have to perform numerous functions. financial markets and financial instruments. . The sound and efficient financial system is a precondition of the rapid economic development of the nation. The RBI has encouraged establishment of main banking and non-banking institutions to cater to the credit requirements of diverse sectors of the economy. the RBI has to provide special attention for the credit need of agriculture and allied activities. Development of Agriculture : In an agrarian economy like ours.

Provision of Industrial Finance : In this regard the RBI has always been instrumental in setting up special financial institutions such as ICICI Ltd. the RBI always tries to promote the banking habits in the country. SIDBI and EXIM BANK etc for the adequate and timely availability of credit to small. Publication of the Reports : This RBI collects and publishes data on several sectors of the economy. It institutionalizes savings and takes measures for an expansion of the banking network. IDBI. Collection of Data : Being the apex monetary authority of the country. the RBI collects process and disseminates statistical data on several topics. Promotion of Banking Habits : As an apex organization. . medium and large industry is very significant..This data proves to be quite useful for researchers and policy makers. The reports and bulletins are regularly published by the RBI. It includes RBI weekly reports. RBI Annual Report This information is made available to the public also at cheaper rates.

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Granting license to banks : The RBI grants license to banks for carrying its business. License is also given for opening extension counters. In addition to this it can ask for periodical information from banks on various components of assets and liabilities. . It has authority to regulate and administer the entire banking and financial system. However RBI has a right to issue directives to the NBFIs from time to time regarding their functioning. Bank Inspection : The RBI grants license to banks working as per the directives and in a prudent manner without undue risk. Some of its supervisory functions are given below.The reserve bank also performs many supervisory functions. Through periodic inspection. even to close down existing branches. new branches. Control over NBFIs : The Non-Bank Financial Institutions are not influenced by the working of a monitory policy. it can control the NBFIs.

Instruments of Monetary Policy .

I. RBI) rediscounts bills and prepares of commercial banks or provides advance to commercial banks against approved securities.  Open Market Operations.SLR & CRR -RBI increases VRR during the inflation to reduce the purchasing power and credit creation.e.It refers to the purchase and/or sale of short term and long term securities by the RBI in the open market. But during the recession or depression it lowers the VRR making more cash reserves available for credit expansion. The OMO is used to wipe out shortage of money in the money market  Variations in Reserve Ratios. Quantitative Tools  Bank Rate Policy – It refers to rate at which the central bank (i. .

it is that part of a loan which a borrower has to raise in order to get finance for his purpose. how much volume of money a commercial bank can grant as loan for a particular activity.  Moral suasion. Consumer credit regulation . .2. To arrest inflationary situation RBI persuades and request the commercial banks to refrain from giving loans for non-essential purposes. Qualitative Tools Prescription of margin requirements. On the other hand. It means at maximum.RBI fixes the quota of credit for commercial banks. Thus by increasing this quota RBI can increase the credit supply in an economy and by decreasing quota RBI can restrict credit supply. to counteract deflation central bank persuades the commercial banks to extend credit for different purposes. Or in other words.It means persuasion and request.It refers to the "proportion of the loan amount which is not financed by the bank".

. Direct action may take any of the following forms: •Central banks may charge a penal rate of interest over and above the bank rate upon the defaulting banks.Direct action -This method is adopted when a commercial bank does not co-operate the central bank in achieving its desirable objectives. •Central bank may refuse to rediscount the bills of those banks which are not following its directives. •Central bank may refuse to grant further accommodation to those banks whose borrowings are in excess of their capital and reserves.

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The market where investment instruments like bonds. The primal role of this market is to make investment from investors who have surplus funds to the ones who are running a deficit. . equities and mortgages are traded is known as the capital market.

> hybrid instruments and > derivative instruments. > foreign exchange instruments.  The different types of financial instruments that are traded in the capital markets are: > equity instruments > credit market instruments. > insurance instruments.The capital market offers both long term and overnight funds. .

The nature of capital market is brought out by the following facts:  It Has Two Segments  It Deals In Long-Term Securities  It Performs Trade-off Function  It Creates Dispersion In Business Ownership  It Helps In Capital Formation  It Helps In Creating Liquidity .

Secondary market .There are two types of capital market: Primary market.

Therefore.  This market is concerned with new issues. . the primary market is also called NEW ISSUE MARKET. It is that market in which shares. debentures and other securities are sold for the first time for collecting long-term capital.

 In this market. the flow of funds is from savers to borrowers (industries). it helps directly in the capital formation of the country.  The . and for setting up new business unit. machinery and buildings. hence. for extending business. money collected from this market is generally used by the companies to modernize the plant.

 It Is Related With New Issues  It  It Has No Particular Place Has Various Methods Of Float Capital: Following are the methods of raising capital in the primary market: i) Public Issue ii) Offer For Sale iii) Private Placement iv) Right Issue v) Electronic-Initial Public Offer  It comes before Secondary Market .

 The transactions of the secondary market are generally done through the medium of stock exchange.  The chief purpose of the secondary market is to create liquidity in securities.The secondary market is that market in which the buying and selling of the previously issued securities is done.  .

he can do so through the medium of stock exchange to sell . or purchase through the medium of stock exchange requires the services of the broker presently. . their are 24 stock exchange in India. If an individual has bought some security and he now wants to sell it.

    It Creates Liquidity It Comes After Primary Market It Has A Particular Place It Encourage New Investments .

 So risks are present in both the market.  .Investment in long term financial instruments is accompanied by high capital market risks. Since there are two types of capital marketsthe stock market and the bond market.

 The efficient market hypothesis shows the effect of fundamental factors in changing the price of the stock market. . Stock prices keep fluctuating over a wide range unlike the bank deposits or government bonds.

 The Efficient Market Hypothesis shows that all price movements are random whereas there are plenty of studies that reflect the fact that there is a specific trend in the stock market prices over a period of time. has shown that there are certain psychological factors that shape the stock market prices.  Research .

 . In the short run the stock market prices may be very volatile due to the occurrences of the fast market changing events. The stock market prices are also subject to speculation. Sometimes the market behaves illogically to any economic news.  The stock market prices can be diverted in any direction in response to press releases. rumors and mass panic.

the bond prices are sensitive to the monetary policy of the country as well as economic changes. Capital market risk in the bond market arises due to interest rate changes. There is an inverse relationship existing between the interest rate and the price of the bond.  Hence .

 Capital market investment that takes place through the bond and the stock market may be elucidated in the following heads.Capital market investment takes place through the bond market and the stock market.  .  The capital market is basically the financial pool in which different companies as well as the government can raise long term funds.

.  The capital market investments can occur either in: 1) The physical market by a method known as the open outcry.Capital market investments in the stock market  The stock market is basically the trading ground capital market investment in the following: i) Company’s stocks ii) Derivatives iii) Other securities  The capital market investments in the stock market take place by: 1) Small individual stock investors 2) Large hedge fund traders.

.2) Trading can also occur in the virtual exchange where trading is done in the computer network.  The stock exchanges basically function as the clearing house for such liquid transactions. bonds or real estate.  The investors in the stock market have the liberty to buy or sell the stock that they are holding at their own discretion unlike the case of government securities.  The capital market investments in the stock market are also done through the derivative instruments like the stock options and the stock futures.

 Government and agency.  The bond market is also differently known as the debt.Capital Market Investments in the Bond Market The bond market is a financial market where the participants buy and sell debt securities.  Bonds backed by mortgages & assets. They are:  Corporate. credit or fixed income market.  There are different types of bond markets based on the different types of bonds that are traded.  Collateralized Debt Obligation.  Municipal.  .

 The capital market investment in the bond market is done by:  Institutional investors  Governments. closed-end-funds or the unit investment trusts.counter.  Individual investors are attracted to the bond market and make investments through the bond funds. traders and  Individuals.  . except for the corporate bonds do not have formal exchanges but are traded overthe.  Another way of investing directly in the bond issue is the Exchange-traded-funds.The bonds.

 Mobilization of Savings & acceleration of Capital Formation  Promotion of Industrial Growth  Raising of long term Capital  Ready & Continuous Markets  Proper Channelisation of Funds  Use of updated technology is possible 73 .

regulating or controlling the business of buying. selling or dealing in securities.“ Stock exchange is a market in which securities are brought and sold” “ Stock exchange means any body of individuals whether incorporated or not.” . constituted for the purpose of assisting.

Directs flow of capital in the most profitable channels. Promotes habit of savings and investment.     Provides a ready market for buying and selling of securities. . Facilitates speculation. Promotes industrial growth and economic development.

Jindal .K.K.

 Registering and regulating the working of stock brokers.  .  It was made a statutory body by the Securities and Exchange Board of India Act 1992. Objectives  Regulating the business in stock markets and other securities market.  Registering and regulating the working of investment schemes.SEBI was constituted in 1988 by a resolution of govt. of India.

 .Promoting and regulating the selfregulatory organizations.  Regulating substantial acquisition of shares and take over of the companies.  Prohibiting fraudulent and unfair trade practices relating to securities market.

sub brokers. and such other intermediaries who are associated with securities in any manner. Registering and regulating the working of collective investment schemes.    Regulating the business in stock exchanges and any other securities market. Promoting and regulating self-regulatory organizations. underwriters. . merchant bankers. share transfer agents. portfolio managers. investment advisors. Registering and regulating the working of stock brokers.

Regulating substantial acquisition of shares and take over of companies.    Promoting of investors education and training of intermediaries in securities market. conducting enquiries and audits of the stock exchanges. . Prohibiting insider trading in securities. undertaking inspection. Calling information. intermediaries and self-regulatory organizations.

1956 As May Be Delegated To It By The Central Government. Levying Fees Or Other Charges For Carrying Out The Purposes Of This Section Conducting Research For The Above Purposes   . Inspection And Inquiries   Regulating Substantial Acquisition Of Shares And Take-overs Performing Such Functions And Exercising Such Powers Under The Provisions Of The Securities Contracts (Regulation) Act.