Financial Markets

Hemchand J

Financial Markets  

 

The present organizational structure of the Financial System in India comprises of three independent components 1. Financial Markets 2. Financial institutions/Intermediaries 3. Financial Assets /Instruments/Securities

Financial Markets 

They perform a crucial function in the savings investment process as facilitating organisations. They are not sources of finance but are a link between users and investors. Based on the nature of funds, the financial markets are classified into money market and capital / securities market.

Money Market 

It is a market for dealing in monetary assets of short term nature, generally less than one year. It enables raising of short term funds for meeting temporary shortages of cash and obligations and temporary deployment of excess funds for earning returns. The major participants in the money market are RBI and commercial banks.

Money markets 

Its present structure comprises of a number of interrelated sub markets , i.e. Call Money Market, Treasury Bills Market, Commercial Bills Market, Commercial Paper (CP) Market, and Money Market Mutual Funds (MMMFs). The institutional structure of the market has been fortified by the setting up of PRIMARY DEALERS.

Capital Market 

It is a market for long term funds. Its focus is on financing of fixed investment. The main participants are mutual funds, insurance organizations, development / Public Financial Institutions, Foreign Institutional Investors, Corporates and Individuals. It is regulated by SEBI. The capital market has two segments Primary /New Issue Market and Secondary Market.

Primary Issue Market New Issue Market 

It deals in new securities, that is, securities which are not previously available and are offered to investors for the first time. Capital formation occurs in the New Issue Market as it supplies additional funds to the corporates directly. It performs three functions, namely, 1) Origination, that is, investigation, analysis and processing of new issue proposals, 2) Underwriting in terms of guaranteeing that the issue is sold and 3) Distribution of securities to the investors.

Secondary Market /Stock Market / Exchanges  

 

The stock exchange is the market for old / existing securities, i.e. those already issued and granted Stock Exchange quotation /Listing. There is an indirect role in industrial financing by providing liquidity to investments already made. The SEs discharge three vital functions in the orderly growth of Capital formation 1) Nexus between savings and investments 2) Liquidity to investors by offering a place for transaction in securities 3) Continuous price formation.

Foreign Exchange Market 

The main players in the foreign exchange market are the Authorised Dealers ( Banks and NBFCs , as permitted by RBI) . Since the high growth phase of 1993 -96 , the monthly turnover in the forex market has been rising gradually.

Foreign Exchange Market 

A notable development in this market has been its gradual integration with the money market and the resultant softening of forward premia during the second half of the nineties in the wake of significant moderation in short term interest rates and sustained stability in exchange rates.

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