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Neeraj Mishra
Aug 24 Bank & Insurance

Big Bank Theory: Understanding Financial Markets

Dear aspirants,
In continuation with our Big Bank Theory initiative, today we will discuss an
important topic of Economics i.e. Understanding Financial Markets.
Understanding Financial Markets
Financial Market Let us explain rst, If we talk about market it is not a particular
tangible place but its refer to a group of entities which participate in borrowing and
lending. The products can be classied as bonds, equities, currencies and
derivatives. It is a medium of channel between depositors and borrowers.
Financial Market is divided into two parts:

1. Money Market
2. Capital Market

Money Market
Money Market is a key element of the nancial system. It is also known as Short
Term Market because here trading is done between 1 day to 365 days. In this
market, trading is done for a small span of time so Risk Factor is very low as well
as returns are very less. Shortterm instrument like - Treasury bills, Commercial
papers, Certicates of deposits, etc are issued and traded in this market.
The money market provides facilities to the banks and primary dealers (PDs) to
lend or borrow money when there is a mismatch of funds. Scheduled Commercial
Banks (except RRB), Co-operative Banks and Primary Dealers participates in these
markets. In Call and Notice Money both the borrowers and lenders need to maintain
a current account with RBI because this trading happens for very small tenure. This
borrowing and lending are on unsecured basis which are
1. Call Money - When money is lend or borrowed only for 1 day.
2. Notice Money - Where money is borrowed or lend for the period between 2 days
and 14 days.
3. Term Money I Where money is borrowed or lend for a period exceeding 14
days.
Capital Market
Capital market is another key component of the nancial system. It is also known
as Long Term Market where trading is done for more than a year. In this market,
the capital funds comprising of both equity and debt are issued and traded. This
also includes private placement sources of debt and equity as well as organized
markets like stock exchanges.

Capital market can be further divided into primary and secondary markets.

(i) Primary Market It is a market which deals with deals with trading & issuance
of stocks and other securities.
(ii) Secondary Market It is a market which comprises of equity and debt markets.
(ii) Secondary Market It is a market which comprises of equity and debt markets.
It deals with the exchange of existing or previously-issued securities.
In this article, we will discuss on some money market instruments -
1. Treasury bills (T-bills) - In Money Market, if we talk about lowest risk instruments
then it is Treasury Bills. It is also known as T-Bills. It is issued by Central
Government with xed day and xed amount. They are highly liquid as bill holder
can transfer or get discount of bill any time from RBI. They are issued as well as
auctioned by RBI only but can be purchased by Individuals, Firms, Trusts,
Institutions and Banks.
Generally, they are of three types-
Generally, they are of three types-91 days. They are issued with maturity is in 91
days.
(i) 91 days-They are issued with maturity is in 91 days.
(ii) 182 days-They are issued with a maturity of 182 days. 364 days.
(iii) 364 days-They are issued with a maturity of 364 days.
Note:
(i) Treasury bills are available for a minimum amount of Rs. 25,000 and in multiples
of Rs. 25,000.
(ii) Kindly note government has also introduced T-Bills for 14 days as well, these
are known as intermediate bills.
In T-Bills, most of the time investors request instruments in demat form instead of
securities. Hence, RBI maintains this ledger in SGL (Subsidiary General Ledger).
2. Commercial Paper It is unsecured money market instrument which was
introduced in 1990. It is issued in the form of a promissory note.
Who can issue CP All India nancial Institutions (FIs), Primary dealers (PDs), big
companies are permitted to issue commercial paper to enable them to meet their
short-term funding requirements.
Tenor - CP shall be issued for maturities between a minimum of 7 days and a
maximum of up to one year from the date of issue. The maturity date of the CP
shall not go beyond the date up to which the credit rating of the issuer is valid.
Denomination CP shall be issued in denominations of Rs. 5 lakh and multiples
thereof. The amount invested by a single investor should not be less than Rs. 5
lakh (face value).
3. Certicate of Deposits It is negotiable money market instrument which was
introduced in 1989.
Who can issue CD CDs can be issued by (i) scheduled commercial banks
{excluding Regional Rural Banks and Local Area Banks}; and (ii) select All-India
Financial Institutions (FIs) that have been permitted by RBI.
Tenor CD shall be issued for maturities between a minimum of 7 days and a
maximum of up to one year from the date of issue.
Note: Financial Institutions can issue for a period not less than 1 year and not
exceeding 3 years.
Denomination CD shall be issued in denominations of Rs. 1 lakh and multiples
thereof. The amount invested by a single investor should not be less than Rs. 1
lakh (face value).
4. Cash Management Bills It is a short-term instrument issued by Central
Government to meet the temporary cash ow mismatches of the Government. The
announcement of the auction of the Bills is be made by the Reserve Bank of India.

Tenor It is a non-standard, discounted instruments issued for maturities less

than 91 days.
Note: In next post, we will discuss in detail on Capital Market.
Thanks
Team GradeUp

Tags : Bank & Insurance RBI Ocer Grade B General Awareness

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Jan 4
Is only bank can deal with money market?
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rasmi Jan 8
Aaawqqqsa,
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Prashanth Pandu Jan 15

Thanku sir
0 0

Lucky R Jan 16
@Ashish Singh Rajput
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YOGESH KUMAR Jan 17

T bill issued by?????
0 1
 0 1

Ramalinga Ghl Feb 1

THANKS
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Abhishek Feb 4
Where is the next topics of moneymarket
0 0

Shubham Soni Feb 14

Too good
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Praful Ghagare Apr 3

Capital markets
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A.manjudevi Ies Apr 24

Thank u
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