Interlink between Money and Capital markets

Both the money market (MT) and capital market (CT) are the centers which
arrange for the transfer of f’unda from the lender of funds to borrowers of
funds.They differ with respect to the time lengths ,or maturity period or financial
assetscreated for affecting the transfer of funds. Money market deals with short
term ( less than or up to one year)and capital market provides medium and long
term funds.

Money market and CT remained insufficiently developed and segregated from

each other as they operated under a regulated framework of strict entry
restrictions.

A significant aspect of the interdependence of these markets is the suppliers to

both the markets are savers of household sector.That is both markets depend on
a common source of funds. The common choice of financial assets held by these
savers include bank deposits, post office deposits, insurance policies or direct
purchase of primary securities.(shares/equities).

1.The important aspect which interlink these markets is that banks operate and
serve in both the markets.The commercial banks are the major source of short
term credit and hence constitute a major player in the money market.At the same
time the banks provide medium and long term loans and also invest in securities
issued by government and corporate sector .In other words ,the functioning of
banks result in transformation of short term funds into long term funds.

2.The role of commercial banks as an interlinking factor was further activated in

1983 when Banking Regulation Act was amended .The banks were permitted to
undertake non-banking functions like merchant banking and mutual funds.As a
result banks started operating in the capital market through their subsidiaries by
forming mutual fund,banks could channelise small savings from money market to
capital market.

3.The Discount and Finance House of India ( DFHI) was set up in 1988.This
became a major institution for bills rediscounting and clearance. This linked or
became a common clearing agent for both money market and capital market
institutions.

4.In 1990 some development financial institutions ,mutual funds and selected
urban co-operative banks were allowed to participate in the bills rediscounting
market and also became lenders in the call money market.

5.In 1993 specialized financial institutions like IDBI ,ICICI,SIDBI and EXIM Bank
were allowed to borrow from the money market for a short duration of 3 to 6
months loans.
6.CDs which were issued by commercial banks can now be issued by other
financial institutions i.e.capital market participants can now use a money market
instrument .Similarly FIIs are permitted to purchase and sell treasury bills since
1998.

7.The Narsimhan Committee Report of April 1998 has brought banks and
development institutions closer to each other in their activities.The interlinking of
different market segments during 1980s and 1990s is a key factor in developing
a better integrated financial system in our country.