FINANCIAL MARKETS

Dr. Arpita Amarnani

Goa Institute of Management
 A Financial Market is an institution or
arrangement that facilitates the exchange
of financial instruments, including deposits
and loans, and more exotic instruments
such as options and futures contract.

FINANCIAL MARKETS
 Transfer of resources from places of surplus
to places of deficit
 Enhancing income
 Productive usage of funds to further the
GNP
 Capital Formation: provide a channel
through which new savings flow to aid
capital formation of a country
 Price Determination: helps in determination
of price of the traded financial assets
through the interaction of buyers and sellers

FUNCTIONS OF FINANCIAL MARKETS

 Sale Mechanism: Marketability and liquidity
of financial assets through the interaction of
buyers and sellers
 Information exchange

FUNCTIONS OF FINANCIAL MARKETS CONT.

 Money Markets: short-term funds
 Capital Markets: long-term securities

TYPES OF MARKETS
MONEY MARKETS
Afinancial Market where short term funds are
borrowed and lent is called money market.
 Themajor players in this market are
commercial banks, other financial
intermediaries, corporate houses, Primary
Dealers, SBI DFHI Ltd. and RBI.
 The
market comes under the purview of RBI
and it is the major constituent of the money
market.

MONEY MARKETS
 Short term funds are borrowed and lent for a
maximum period of one year.
 No fixed place for the conduct of operations
 Dealings may be conducted with or without
the help of brokers
 Financial assets are close substitutes for money-
easy conversion, almost immediate, without
loss and with minimum transaction cost.
 Presence of a large number of sub-markets.

CHARACTERISTICS OF THE MONEY

MARKET:
 Provide
a balancing mechanism to even out
the demand for and the supply of funds.
 Focal point for the central bank intervention
for influencing liquidity and the level of
interest rates in the economy – monetary
policy transmission.
 Provide reasonable access to suppliers and
users of short-term funds at an efficient
market clearing price.

FUNCTIONS OF THE MONEY MARKET

The aim of money market interventions of RBI
are:
 Toensure that the liquidity and short-term
interest rates are maintained at levels
consistent with monetary policy of price
stability
 Tosupply adequate flow of funds to the
productive sector of the economy
bring about order in the foreign
 To
exchange market

ROLE OF RBI
 Repoor repurchase option is a means of short-term
borrowing, wherein banks sell approved
government securities to RBI and get funds in
exchange. In other words, in a repo transaction, RBI
repurchases government securities from banks,
depending on the level of money supply it decides
to maintain in the country's monetary system.
 Reverse
repo, in contrast means that banks buy
approved government securities from RBI.

REPO AND REVERSE REPO

CALL MONEY

A market where very short-term

uncollateralized funds are borrowed and
lent.
 Interbank market
 Call Money: overnight
 Notice Money: 1 to 15 days
 Participants:
 Banks and Primary Dealers
 Very short funds – 1 to 15 days
 Highly liquid, next only to cash
 No collateral security
A highly sensitive segment
 Providesquick and easy means of finance
for banks to meet their SLR requirement
 No brokers allowed

CHARACTERISTIC OF CALL MONEY

 It isa short term unsecured promissory note
issued by corporates and financial
institutions at a discounted value on face
value.
 Commercial Paper is a low-cost alternative
to bank loans.

COMMERCIAL PAPER
 They are usually issued with fixed maturity between
one to 270 days and for financing of accounts
receivables, inventories and meeting short term
liabilities.
 Chances of default are almost negligible but are
not zero risk instruments.
 Commercial Paper being an instrument not
backed by any collateral, only firms with high
quality credit ratings will find buyers easily without
offering any substantial discounts.
 They are issued by corporates to impart flexibility in
raising working capital resources at market
determined rates.
 Commercial Papers are actively traded in the
secondary market since they are issued in the form
of promissory notes and are freely transferable in
demat form.

CHARACTERISTICS OF CPS
 Treasury Bills or T-Bills as they are known are
issued by the Government of India to meet
their short-term requirement. T-Bills are issued
for 91-day, 182-day and 364-day maturities.
T-Bills are issued at a discount to their face
value and redeemed at par. The return to
the investor is the difference between the
maturity value and issue price

TREASURY BILLS
 91-day T-bill - maturity is in 91 days. Its auction is
weekly on every Wednesday.
 182-day T-bill - maturity is in 182 days. Its auction is
on every alternate Wednesday other than a
reporting week.
 364-Day T-bill - maturity is in 364 days. Its auction is
on every alternate Wednesday in a reporting week.

Features of T-Bills auction

 All T-Bills auctions are Price-based.
 All T-Bills are auctioned on Multiple-Price basis

TREASURY BILLS
 CD is a short term borrowing more like a bank term deposit
account.
 It is a promissory note issued by a bank in form of a certificate
entitling the bearer to receive interest.
 The certificate bears the maturity date, the fixed rate of
interest and the value. It can be issued in any denomination.
 They are stamped and transferred by endorsement.
 Its term generally ranges from three months to five years and
restricts the holders to withdraw funds on demand. However,
on payment of certain penalty the money can be withdrawn
on demand.
 The returns on Certificate of Deposits are higher than T-Bills
because it assumes higher level of risk.
 Return calculation method could either be Annual
percentage yield (compound interest) or Anuual percentage
rate (simple interest).

CERTIFICATE OF DEPOSIT
 The
Liquidity Adjustment Facility (LAF), introduced in
June 2000,
 enables the Reserve Bank to modulate short-term
liquidity, of a temporary nature, under varied
financial market conditions in order to ensure stable
conditions in the overnight (call) money market.
 TheLAF operates through reverse repo and repo
auctions, thereby setting a corridor for the short-
term interest rate consistent with the policy
objectives.

LIQUIDITY ADJUSTMENT FACTOR

 Government of India issues treasury bills or
other dated securities under the MSS
scheme in order to absorb excess liquidity
from the markets.
 Theseinstruments are indistinguishable from
the other govt. securities and
 are eligible for the banks’ SLR requirement

MARKET STABILISATION SCHEME

CAPITAL MARKETS
 Capital market for borrowing and lending
long-term capital funds required by business
enterprises.
 It refers to all the facilities and the
institutional arrangements for the borrowing
and lending of medium-term to long-term
funds.

CAPITAL MARKETS
 Equity Market
 Debt Market
 Government securities market
 Corporate bond market

SEGMENTS OF THE CAPITAL MARKETS

 DIFFERENCE BETWEEN MONEY MARKET
AND CAPITAL MARKET:
Sr. No. Parameter Capital market
1 Term of finance Long term
2 Nature of capital Capital used for fixed and
working capital needs
3 Main function Mobilisation and effective
utilisation through lending
4 Main constituent Primary mkts and sec.
mkts, with the stock
exchange acting as a
bridge for buying and
selling of securities
5 Link Between investors and
entrepreneurs
6 Underwriting A primary function
7 Institutions Investment houses and
mortgage banks
Money market
Short term
Capital used mainly for
the working capital needs
Lending and borrowing
for liquidity adjustment
Call money mkt., treasury
bills mkt, comm.bills mkt,
mkt for Cert. of Deposits
and Commercial Paper
Between depositors and
borrowers
Not a primary function
Commercial banks and
discount houses
 DIFFERENCE BETWEEN MONEY MARKET
AND CAPITAL MARKET:
Sr. No. Parameter Capital market Money market
8 Negotiation Funds lent after prolonged Dealings are conducted
negotiation between through the over-the-
lending financial institutions phone-market
and the borrowing
corporate entity
9 Development Provided to central and Provided to government
Assistance state govts, public and local by discounting treasury
bodies, etc. bills, etc.
10 Market Place Dealings conducted Dealings conducted
through stock exchanges through the over-the-
phone market
11 Liquidity Low High
12 Regulator Besides Central Bank, Central Bank
special regulatory
authorities like SEBI, IRDA
RESOURCE MOBILIZATION IN PRIMARY
MARKETS
DEBT MARKET
A market where fixed income securities of
various types and features are issued and
traded is known as debt market.
 Fixedincome securities can be issued by
any legal entity like corporate business
houses, banks, financial institutions,
municipal corporations, central and state
governments, public bodies, statutory
corporations, etc.

DEBT MARKET

Arpita Amarnani
 Efficient
mobilization and allocation of
financial and other resources in the economy
 Financing
the development activities of the
government
 Transmitting
signals for the implementation of
various monetary and other policies of the
central bank of the country

ROLE OF DEBT MARKET

Arpita Amarnani
 The role of RBI in the govt. securities market
has changed.
 The role of central government as a financial
intermediary for the state government is
effectively ending.
 The sustenance of such growth will be possible
only if investments in both infrastructure and
industry accelerate. This will require debt
financing with medium to long term maturity
to supplement traditional bank financing.

INCREASING RELEVANCE OF THE INDIAN

DEBT MARKET
GROWTH OF THE DEBT MARKET
HOLDING PATTERN OF GOVT. SECURITIES
 Fixed Rate Bonds
 Floating Rate Bonds
 Zero Coupon Bonds
 Capital indexed bonds
 Bonds with call/put option
 Special securities
 Separate Trading of Registered
Interest and Principal of Securities
(STRIPS)

TYPES OF DATED GOVERNMENT

SECURITIES
THANK YOU!!!