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Financial Market
Financial Market
A market where funds are transacted
Basis: interest or dividend
It has two parts:
- Money Market
- Capital Market
Money Market
It is a short term financial market where the duration of transaction is 1- 364 days. It can be sub-divided into:
- Organized
- Unorganized
Organized Money Market
It is in existence since independence but its real development took place after 1986.
Following are the instruments used in it:
- Treasury Bills
- Call Money Market
- Certificate of Deposit
- Commercial Bills
- Commercial Papers
- Cash Management Bill
- Mutual Funds
- Repo & Reverse Repo Market
Treasury Bills
Organized in 1986
Used by central government for short term liquidity requirement
They are of 5 types:
- 14 days (intermediate)
- 14 days (auctionable)
- 91 days
- 182 days
- 364 days
Call Monet Market
It is an inter-bank money market where funds are borrowed and lent for one day.
No collateral required
Funds are raised upto 3 days
Interest rate depends on demand and supply on a particular day.
Certificate of Deposits
Organized in 1989
Used by the Banks and issued to the depositors for a specified period (less than one year)
Commercial Papers
Organized in 1990
Used by corporate houses of India
Issuing company need to obtain a specified credit rating (from CRISIL etc.)
Commercial Bills
Organized in 1990
Issued by All India Financial institutions, Non-Banking financial companies, scheduled commercial banks& Mutual funds etc
Cash Management Bill
Started in August 2009 to meet the temporary cash flow mismatch of the government
Unoragnised Money Market
It is comparatively older market than that of Money Market.
Its components are:
Hundis
Marwari
Indigenous Bankers
Moneylenders / small and big businessmen
* Money Market is regulated by the RBI except the Mutual Funds which have dual regulators RBI & SEBI.
Capital Market
It facilitates long term requirement of funds in economy.
Structure & components:
- Financial institutions
- Banking industry
- Security Market
Financial regulators:
I. RBI
II. SEBI
III. NABARD
IV. IRDA
V. SIDBI
The document Financial Market - Economics, UPSC, IAS. | Indian Economy (Prelims) by Shahid Ali is a part of the UPSC Course Indian Economy (Prelims) by Shahid Ali.
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FAQs on Financial Market - Economics, UPSC, IAS. - Indian Economy (Prelims) by Shahid Ali
| 1. What is the significance of financial markets in the field of economics? |  |
Financial markets play a crucial role in the field of economics as they facilitate the efficient allocation of resources and enable the flow of funds between borrowers and lenders. These markets provide a platform for individuals, institutions, and governments to buy and sell financial instruments such as stocks, bonds, currencies, and derivatives. By allowing participants to trade these instruments, financial markets help determine prices, raise capital for businesses, and provide opportunities for investors to earn returns on their investments.
| 2. How does the functioning of financial markets impact the overall economy? | |
The functioning of financial markets has a significant impact on the overall economy. When financial markets are efficient and well-functioning, they promote economic growth, allocate resources efficiently, and facilitate economic stability. For example, efficient stock markets provide companies with access to capital, allowing them to invest in new projects and expand their operations. Additionally, the availability of various financial instruments in the market helps to manage risk, provide liquidity, and encourage investment and savings.
| 3. What are the different types of financial markets? | |
Financial markets can be categorized into several types based on the type of financial instruments traded and the maturity of the instruments. Some common types of financial markets include:
1. Capital markets: These markets facilitate the buying and selling of long-term financial instruments such as stocks and bonds. They are crucial for raising capital for businesses and financing government projects.
2. Money markets: Money markets deal with short-term debt instruments with high liquidity, such as Treasury bills, commercial papers, and certificates of deposit. They provide a platform for short-term borrowing and lending between financial institutions and corporations.
3. Foreign exchange markets: Foreign exchange markets enable the exchange of different currencies. They play a vital role in facilitating international trade and investment by allowing individuals and businesses to convert one currency into another.
4. Derivatives markets: Derivatives markets involve the trading of financial contracts whose value is derived from an underlying asset. Examples include options, futures, and swaps. These markets help manage risks and provide opportunities for speculation.
| 4. How does government regulation influence financial markets? | |
Government regulation plays a crucial role in ensuring the stability, transparency, and fairness of financial markets. Regulations are put in place to protect investors, prevent fraud, maintain market integrity, and promote fair competition. Some common ways in which government regulation influences financial markets include:
1. Setting capital requirements: Regulators may impose minimum capital requirements on financial institutions to ensure their solvency and stability. This helps protect depositors and investors from potential losses.
2. Enforcing disclosure rules: Regulations require companies to provide accurate and timely information to investors. This enhances transparency and allows investors to make informed decisions.
3. Monitoring market activities: Regulators oversee market activities to detect and prevent manipulation, insider trading, and other fraudulent practices. They may impose penalties and sanctions on individuals or institutions found to be in violation of the rules.
4. Implementing monetary policy: Central banks, through their regulatory powers, influence interest rates, money supply, and credit availability. These measures can impact the overall functioning of financial markets and the economy.
| 5. How do financial markets contribute to economic inequality? | |
Financial markets can contribute to economic inequality in several ways. Firstly, individuals with greater financial resources and knowledge are often better positioned to participate in these markets and benefit from investment opportunities, thereby widening the wealth gap between the rich and the poor. Additionally, income generated from investments in financial markets, such as dividends or capital gains, tends to disproportionately benefit those who already hold significant wealth.
Furthermore, financial markets can amplify economic instability. During periods of financial crisis or market downturns, the impact is often felt more severely by individuals with limited financial resources, while those with greater wealth may be better able to weather the storm. This can further exacerbate existing inequalities in society.
It is important for policymakers to address these concerns and ensure that financial markets are inclusive and accessible to all, while also promoting regulations that mitigate the risks of inequality and instability.
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