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.