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Economic growth and development of any country depends upon a well-knit financial system. Financial system
comprises, a set of sub-systems of financial institutions, financial markets, financial instruments and
services which help in the formation of capital. Thus a financial system provides a mechanism by which
savings are transformed into investments and it can be said that financial system play an significant role in
economic growth of the country by mobilizing surplus funds and utilizing them effectively for productive
purpose.
The financial system is characterized by the presence of integrated, organized and regulated financial markets,
and institutions that meet the short term and long term financial needs of both the household and corporate
sector. Both financial markets and financial institutions play an important role in the financial system by
rendering various financial services to the community. They operate in close combination with each other.
financial system is a network of financial institutions, financial markets, financial instruments and financial
services to facilitate the transfer of funds. The system consists of savers, intermediaries, instruments and the
ultimate user of funds. The level of economic growth largely depends upon and is facilitated by the state of
financial system prevailing in the economy. Efficient financial system and sustainable economic growth are
corollary. The financial system mobilises the savings and channelizes them into the productive activity and thus
influences the pace of economic development. Broadly speaking, financial system deals with three inter-related
and interdependent variables, i.e., money, credit and finance.
The following are the four main components of Indian Financial system
1. Financial institutions
2. Financial Markets
3. Financial Instruments/Assets/Securities
4. Financial Services.
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FINANCIAL INSTITUTIONS
Financial institutions are the intermediaries who facilitates smooth functioning of the financial system by
making investors and borrowers meet. They mobilize savings of the surplus units and allocate them in
productive activities promising a better rate of return. Financial institutions also provide services to entities
seeking advises on various issues ranging from restructuring to diversification plans. They provide whole range
of services to the entities who want to raise funds from the markets elsewhere. Financial institutions act as
financial intermediaries because they act as middlemen between savers and borrowers. These financial
institutions may be Banking or Non-Banking institutions.
FINANCIAL MARKETS
Finance is a prerequisite for modern business and financial institutions play a vital role in economic system. It's
through financial markets the financial system of an economy works. A Financial Market can be defined as the
market in which financial assets are created or transferred, as against a real transaction that involves exchange
of money for real goods or services. A financial transaction involves creation or transfer of a financial asset.
Financial Assets or Financial Instruments represents a claim to the payment of a sum of money sometime in the
future and /or periodic payment in the form of interest or dividend.
CLASSIFICATION
Financial markets are an important constituent of any economy. They include money market viz. market of
short term debt fund of upto1 year and capital market viz. the market for equity and long term debt funds for
more than a year.
Government
Issuing companies
Financial markets make it possible for companies to mobilise money for the projects they want to
implement.
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The yield curve in the debt market sets the tone for the borrowing cost of issuing companies.
The market gives companies a benchmark for their valuation & top management to assess their
performance.
The financial market provide companies a currency with which they can reward employees.
The valuation effect of financial markets help companies to acquire other businesses without having to
pay from the bank account.
The stock exchanges gives companies visibility and raises their profile with investors, customers,
government and general public.
Investors
The market helps investor to take benefits from the performance of the economy & companies.
Price discovery in the markets provide messages to investors on where various companies stand.
Markets provide a platform for investors to punish poor management.
Economy
Organised (Banks)
Unorganised (money lenders, chit funds, etc.)
Capital Market- for long-term funds
Stock Market
Bond Market
CAPITAL MARKET
Capital market is market for long term securities. It contains financial instruments of maturity period exceeding
one year. It involves in long term nature of transactions. It is a growing element of the financial system in the
India economy. It differs from the money market in terms of maturity period & liquidity. It is the financial pillar
of industrialized economy. The development of a nation depends upon the functions & capabilities of the capital
market.
In short
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IMPORTANCE OF CAPITAL MARKET
Capital market plays an important role in mobilising resources, and diverting them in productive channels. In
this way, it facilitates and promotes the process of economic growth in the country.
The capital market functions as a link between savers and investors. It plays an important role in mobilising the
savings and diverting them in productive investment. In this way, capital market plays a vital role in transferring
the financial resources from surplus and wasteful areas to deficit and productive areas, thus increasing the
productivity and prosperity of the country.
2. Encouragement to Saving:
With the development of capital market, the banking and non-banking institutions provide facilities, which
encourage people to save more. In the less- developed countries, in the absence of a capital market, there are
very little savings and those who save often invest their savings in unproductive and wasteful directions, i.e., in
real estate (like land, gold, and jewellery) and conspicuous consumption.
3. Encouragement to Investment:
The capital market facilitates lending to the businessmen and the government and thus encourages investment.
It provides facilities through banks and nonbank financial institutions. Various financial assets, e.g., shares,
securities, bonds, etc., induce savers to lend to the government or invest in industry. With the development of
financial institutions, capital becomes more mobile, interest rate falls and investment increases.
The capital market not only reflects the general condition of the economy, but also smoothens and accelerates
the process of economic growth. Various institutions of the capital market, like nonbank financial
intermediaries, allocate the resources rationally in accordance with the development needs of the country. The
proper allocation of resources results in the expansion of trade and industry in both public and private sectors,
thus promoting balanced economic growth in the country.
The capital market tends to stabilise the values of stocks and securities and reduce the fluctuations in the prices
to the minimum. The process of stabilisation is facilitated by providing capital to the borrowers at a lower
interest rate and reducing the speculative and unproductive activities.
6. Service Provision : As an important financial set up capital market provides various types of services. It
includes long term and medium term loans to industry, underwriting services, consultancy services, export
finance, etc. These services help the manufacturing sector in a large spectrum.
7. Continuous Availability of Funds : Capital market is place where the investment avenue is continuously
available for long term investment. This is a liquid market as it makes fund available on continues basis. Both
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buyers and seller can easily buy and sell securities as they are continuously available. Basically capital market
transactions are related to the stock exchanges. Thus marketability in the capital market becomes easy.
8. Benefits to Investors:
The credit market helps the investors, i.e., those who have funds to invest in long-term financial assets, in many
ways:
(a) It brings together the buyers and sellers of securities and thus ensure the marketability of investments,
(b) By advertising security prices, the Stock Exchange enables the investors to keep track of their investments
and channelize them into most profitable lines,
(c) It safeguards the interests of the investors by compensating them from the Stock Exchange Compensating
Fund in the event of fraud and default.
Capital market is a market for long term funds. It requires a well structured market to enhance the financial
capability of the country. The market consist a number of players. They are categorized as:-
• Companies : Generally every company can access the capital market. The companies which are in need
of finance for their project can approach the market. The capital market provides funds from the savers
of the community. The companies can mobilize the resources for their long term needs such as project
cost, expansion & diversification of projects & other expenditure of India to raise the capital from the
market.
• Financial Intermediaries: Financial intermediaries are those who assist in the process of converting
savings into capital formation in the country. The major intermediaries in the capital market are:-
Brokers, Stock brokers ,Underwriters, Registrars, Mutual funds Collecting agents, Depositories Agents ,
Portfolio Managers etc.
• Individual Investors: These are net savers and purchase the securities issued by corporates. Individuals
provide funds by subscribing to these security or by making other investments.
Broadly speaking the capital market is classified in to two categories. They are the Primary market (New Issues
Market) and the Secondary market (Old (Existing) Issues Market). This classification is done on the basis of the
nature of the instrument brought in the market. However on the basis of the types of institutions involved in
capital market, it can be classified into various categories such as the Government Securities market or Gilt-
edged market, Industrial Securities market, Development Financial Institutions (DFIs) and Financial
intermediaries. All of these components have specific features to mention. The structure of the Indian capital
market has its distinct features. These different segments of the capital market help to develop the institution of
capital market in many dimensions. The primary market helps to raise fresh capital in the market. In the
secondary market, the buying and selling (trading) of capital market instruments takes place. The following
chart will help us in understanding the organizational structure of the Indian Capital market.
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Government Securities Market : This is also known as the Gilt-edged market. This refers to the
market for government and semi-government securities backed by the Reserve Bank of India
Industrial Securities Market : This is a market for industrial securities i.e. market for shares and
debentures of the existing and new corporate firms. Buying and selling of such instruments take place in
this market. This market is further classified into two types such as the New Issues Market (Primary)
and the Old (Existing) Issues Market (secondary). In primary market fresh capital is raised by
companies by issuing new shares, bonds, units of mutual funds and debentures. However in the
secondary market already existing i.e old shares and debentures are traded. This trading takes place
through the registered stock exchanges. In India we have three prominent stock exchanges. They are the
Bombay Stock Exchange (BSE), the National Stock Exchange (NSE) and Over The Counter Exchange
of India (OTCEI).
Development Financial Institutions (DFIs) : This is yet another important segment of Indian capital
market. This comprises various financial institutions. These can be special purpose institutions like IFCI,
ICICI, SFCs, IDBI, IIBI, UTI, etc. These financial institutions provide long term finance for those
purposes for which they are set up.
Financial Intermediaries : The fourth important segment of the Indian capital market is the financial
intermediaries. This comprises various merchant banking institutions, mutual funds, leasing finance
companies, venture capital companies and other financial institutions.
Capital market has instruments of longer maturity period. These instruments are :
Ownership Securities
• Equity Shares
• Preference Shares
Debt Securities
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• Non-convertible Debentures
• Partly Convertible Debentures
• Zero-Interest Fully Convertible Debentures
• Optionally Convertible Debentures
• Deep Discount Bonds
Mutual Fund Units
• Income Schemes
• Growth Schemes
• Sectoral Schemes
• Balanced Fund Schemes
EQUITY SHARES means that part of the share capital of the company which are not preference shares.
The majority of Share Capital will be raised through the issue of Ordinary Shares. Ordinary Shareholders,
are the legal owners of the business, and are entitled to full shareholder voting rights at meetings - the
Annual General Meeting (A.G.M.), or at Extra-Ordinary General Meetings (E.G.M.s). They are entitled to
receive returns out of the companies profit, in the form of Dividends.
1. Right to control
2. Voting rights
3. Claim on income
4. Claim on assets
5. Limited liability
•
PREFERENCE SHARES means shares which fulfill the following 2 conditions. Therefore, a share which is
does not fulfill both these conditions is an equity share.
• It carries Preferential rights in respect of Dividend at fixed amount or at fixed rate i.e. dividend payable
is payable on fixed figure or percent and this dividend must paid before the equity shares holder’s
dividend.
• It also carries preferential right in regard to payment of capital on winding up or otherwise. It means the
amount paid on preference share must be paid back to preference shareholders before anything is paid to
the equity shareholders. In other words, preference share capital has priority both in repayment of
dividend as well as capital.
Fixed dividend
Convertibility
Voting rights
Cumulative dividend
Redemption
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DEBENTURE: When a company intends to raise the loan amount from the public it issues debentures. A
person holding debenture or debentures is called a debenture holder. A debenture is a document issued
under the seal of the company. It is an acknowledgment of the loan received by the company equal to the
nominal value of the debenture. It bears the date of redemption and rate and mode of payment of interest. A
debenture holder is the creditor of the company.
Kinds of debentures
1. Non-convertible debentures
2. Fully convertible debentures
3. Partly convertible debentures
4. Redeemable and Irredeemable debentures
5. Secured and Unsecured debentures
Features of debentures
On the basis of issuer the capital market can be classified again two types:-
On the basis of financial instruments the capital markets are classifieds into two kinds:-
• Equity market: The equity market can be divided into two categories
(a) primary market
(b) secondary market
• Debt market: Debt market represents the market for long term financial instruments such as debentures,
bonds, etc.
Primary Market
It is that market in which shares, debentures and other securities are sold for the first time for collecting
long-term capital.
This market is concerned with new issues. Therefore, the primary market is also called New issue
market.
In this market, the flow of funds is from savers to borrowers (industries), hence, it helps directly in the
capital formation of the country.
The money collected from this market is generally used by the companies to modernize the plant,
machinery and buildings, for extending business, and for setting up new business unit.
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Features of Primary Market
It Is Related With New Issues
It Has No Particular Place
It Has Various Methods Of Float Capital: Following are the methods of raising capital in the primary
market:
i) Public Issue
ii) Offer For Sale
iii) Private Placement
iv) Right Issue
v) Electronic-Initial Public Offer
It comes before Secondary Market
PRIMARY MARKET
In the primary market, governments, companies, or public sector organizations can obtain funding
through the sale of a new stock or bonds. These are normally issued through securities dealers and
banks, which underwrite the offered stocks or bonds. The issuers earn a commission, which is built into
the price of the security offering.
TYPES OF ISSUE
A company can raise its capital through issue of share and debenture by means of :-
PUBLIC ISSUE :-
Public issue is the most popular method of raising capital and involves raising capital and fund direct
from the public .
RIGHT ISSUE :-
Right issue is the method of raising additional finance from existing members by offering securities to
them on pro rata basis. A company proposing to issue securities on right basis should send a letter of
offer to the shareholders giving adequate discloser as to how the additional amount received by the
issue is used by the company.
BONUS ISSUE:-
Some companies distribute profits to existing shareholders by way of fully paid up bonus share in lieu of
dividend. Bonus share are issued in the ratio of existing share held. The shareholder do not have to pay
additional payment for these share .
PRIVATE PLACEMENT:-
The sale of securities to a relatively small number of select investors as a way of raising capital.
Investors involved in private placements are usually large banks, mutual funds, insurance companies and
pension funds. Private placement is the opposite of a public issue, in which securities are made available
for sale on the open market.
Secondary Market
The secondary market is that segment of the capital market where the outstanding securities are traded.
From the investors point of view the secondary market imparts liquidity to the long – term securities
held by them by providing an auction market for these securities.
The secondary market is that market in which the buying and selling of the previously issued securities
is done.
The transactions of the secondary market are generally done through the medium of stock exchange.
The chief purpose of the secondary market is to create liquidity in securities.
Features of Secondary Market
It Creates Liquidity
It Comes After Primary Market
It Has A Particular Place
It Encourage New Investments
FUNCTIONS OF THE SECONDARY MARKET
1. To facilitate liquidity and marketability of the outstanding equity and debt instruments.
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2. To contribute to economic growth through allocation of funds to the most efficient channel through the
process of disinvestments to reinvestment.
3. To provide instant valuation of securities caused by changes in the internal environment (that is,
company-wide and industry wide factors). Such valuation facilitates the measurement of the cost of capital
and the rate of return of the economic entities at the micro level.
4. To ensure a measure of safety and fair dealing to protect investors’ interest.
5. To induce companies to improve performance since the market price at the stock exchanges reflects the
performance and this market price is readily available to investors.
Money Market
The money market is a wholesale debt market for low-risk, highly-liquid, short-term instrument.
This market is dominated mostly by government, banks and financial institutions.
The money market is a market for lending and borrowing of short-term funds.
Money market deals in funds and financial instrument having a maturity period of one day to one year.
The instruments in the money market are close substitutes for money as they are of short-term nature
and highly liquid.
Money market is not a place (like the stock market). It is in fact, a mechanism undertaken by telephone.
Also, it is a collection of markets for several financial instruments such as call money market,
commercial bill market, etc
FUNCTIONS OF MONEY MARKET:
1. To channelize savings into short term productive investments like working capital.
2. It facilitates economic development through provision of short term funds to industrial and other
sectors.
3. It provides a mechanism to achieve EQUILIBRIUM between DEMAND and SUPPLY of short-
term funds.
4. It facilitates effective implementation of the RBIs monetary policy.
5. It provides ample avenues for short-term fundswith fair returns to investors.
6. It instills financial discipline in commercial banks.
7. It provides funds to meet short – term needs.
8. It enhances capital formation through savings and investment.
9. Short-term allocation of funds is made possible through inter-bank transactions and money
market instruments.
10. It helps in employment generation.
11. It provides funds to government to meet its deficits.
12. It helps to control inflation.
Importance of Money Market
A developed money market plays an important role in the financial system of a country by supplying short-term
funds adequately and quickly to trade and industry. The money market is an integral part of a country’s
economy. Therefore, a developed money market is highly indispensable for the rapid development of the
economy. A developed money market helps the smooth functioning of the financial system in any economy in
the following ways:
Development Of Trade And Industry: Money market is an important source of financing trade and
industry. The money market, through discounting operations and commercial papers, finances the short-
term working capital requirements of trade and industry and facilities the development of industry and
trade both – national and international.
Development Of Capital Market: The short-term rates of interest and the conditions that prevail in the
money market influence the long-term interest as well as the resource mobilization in capital market.
Hence, the development of capital market depends upon the existence of a developed money market.
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Smooth Functioning of Commercial Banks: The money market provides the commercial banks with
facilities for temporarily employing their surplus funds in easily realizable assets. The banks can get
back the funds quickly, in times of need, by resorting to the money market. The commercial banks gain
immensely by economizing on their cash balances in hand and at the same time meeting the demand for
large withdrawal of their depositors. It also enables commercial banks to meet their statutory
requirements of cash reserve ratio (CRR) and Statutory Liquidity Ratio (SLR) by utilizing the money
market mechanism.
Effective Central Bank Control: A developed money market helps the effective functioning of a
central bank. It facilitates effective implementation of the monetary policy of a central bank. The central
bank, through the money market, pumps new money into the economy in slump and siphons it off in
boom. The central bank, thus, regulates the flow of money so as to promote economic growth with
stability.
Formulation Of Suitable Monetary Policy: Conditions prevailing in a money market serve as a true
indicator of the monetary state of an economy. Hence, it serves as a guide to the Government in
formulating and revising the monetary policy then and there depending upon the monetary conditions
prevailing in the market.
I :- ORGANISED STRUCTURE
3. Commercial banks
i. Public sector banks
SBI with 7 subsidiaries
Cooperative banks
20 nationalized banks
ii. Private banks
Indian Banks
Foreign banks
4. Development bank
IDBI, IFCI, ICICI, NABARD, LIC, GIC, UTI etc.
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3. Chits
4. Nidhis
The following are some of the drawbacks of the Indian Money Market:-
i)DICHOTOMY:
~ Dichotomy i.e. existence of two markets (organised money market and unorganised money market) is a major
defect of the Indian Money Market.
~ The unorganised money market comprises of indigenous bankers, money lenders, chit funds, nidhis, loan
companies and finance brokers that do not come under the control and supervision of the RBI.
~ This unorganised sector is mainly concentrated in the rural areas and it does not differentiate between short
term and long term finance and between the purposes of finance.
~This puts a limit on the RBI’s control over the money market.
ii) LACK OF INTEGRATION:
~The RBI finds it difficult to integrate the organised and the unorganised money market.
~While the RBI can control and supervise the working of the organised sector effectively, the heterogeneous
unorganised sector is out of RBI’s control.
~ There is no uniformity in the practices and operations of the unorganised money market.
~ Moreover, the interest rates in both the markets are also different.
~ Thus there is lack of integration in the Indian money market.
iii) MULTIPLICITY IN INTEREST RATES:
~ There is diversity in rates of interest in the Indian money market.
~ This multiplicity in the interest rates is due to lack of mobility of funds from one section of the money market
to another.
~ The rates differ from institution to institution even for funds of the same duration.
~ Although the wide differences are being narrowed down, the existing differences do hamper the efficiency of
the money market.
iv) ABSENCE OF ORGANISED BILL MARKET:
~ The existence of a well-organised bill market is essential for effective linking up various credit agencies.
~ It refers to a mechanism where bills of exchange are purchased and discounted by commercial banks /
financial institutions.
~ The bill market is not yet developed in India due to the following reasons:
^ Banks keeping large amount of cash.
^ Preference for borrowing rather than discounting bills.
^ Overdependence on cash / cheque transactions.
^ High stamp duty on usance bill, etc.
v) SHORTAGE OF FUNDS:
~ The Indian money market is characterized by shortage of funds.
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~ Various factors like inadequate banking facilities, low savings, lack of banking habits, existence of parallel
economy, etc lead to shortage of funds.
~ Thus, demand for short-term funds far exceeds the supply. This results in high interest rate.
~ However now banks are flush with funds especially in urban area as people prefer to invest their money with
banks rather than keeping them as deposits in the unorganised sector.
vi) SEASONAL STRINGENCY OF MONEY:
~ Since agriculture continues to play a major role in the Indian economy, farm operations do influence the
demand for and supply of money.
~ Thus seasonal stringency of money and high interest rate during the busy season (November to June) is a
striking feature of the Indian money market.
~ Also, there a wide fluctuations in the interest rates from one reason to another.
~ however, the RBI makes attempt to reduce the fluctuations by adding money into the money market during
the busy season and withdrawing the funds during the slack season.
vii) INADEQUATE CREDIT INSTRUMENTS:
~ The Indian money market lacked adequate short-term paper instruments till 1985-86.
~ Only call money market and bill market existed.
~ Also there were no specialised dealers / brokers in the money market.
~ After 1985-86 the RBI Introduced new credit instruments in the market like CDs, CPs, MMMF, etc, but they
are not yet fully developed in India.
viii) ABSENCE OF A WELL-ORGANISED BANKING SECTOR IN RURAL AREA:
~ There is poor banking system in the rural area due to the problems of overheads and maintenance of branches.
~ The commercial bank branches in rural area are only 40% of the total bank branches.
~ This also hampers the development of money market in India.
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• The size of the market for these funds in India is between Rs
60,000 million to Rs 70,000 million, Of which public sector banks account for 80% of borrowings and Foreign
banks/private sector banks account for the balance 20%.
TREASURY BILLS
• Defined as the instruments of short term borrowing by the Central/State govt.
• They are promissory notes issued at discount and for a fixed period.
• Maturity less than one year
• At present, the Government of India issues three types of treasury bills through auctions, namely, 91-
day, 182-day and 364-day. There are no treasury bills issued by State Governments.
• Treasury bills are available for a minimum amount of Rs.25,000 and in multiples of Rs. 25,000
• Issued by RBI and sold through fortnightly or monthly auctions at varying discount rate depending upon
the bids.
• Highly liquid and safe investment giving attractive yield.
• Eligibility for inclusion in SLR.
• Buyers banks, financial institutions, Primary Dealers, firms, companies, corporate bodies, partnership
firms, institutions, mutual funds, Foreign Institutional Investors, Provident Funds, trusts, research
organizations,
• It is available both in primary market as well as secondary market.
COMMERCIAL PAPERS
• Unsecured Promissory note.
• Introduced in India in 1990.
• CP can be issued either in the form of a promissory note (Schedule I) or in a
dematerialised form through any of the depositories approved by and registered with SEBI.
• Issued by Corporate, primary dealers (PDs) and the All-India Financial Institutions (FIs) with strong
and high credit rating.
• Sold directly by the issuers to investors or through agents like merchant banks and security houses.
• Individuals, banking companies, other corporate bodies, Non-Resident Indians (NRIs) and Foreign
Institutional Investors (FIIs) etc. can invest in CPs.
• CP’s can be issued for maturities between a minimum of 7 days and a maximum of 1 year and for
meeting short term requirement of fund.
• 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.
• Issued in denominations of Rs.5 lakhs or multiples thereof.
• Commercial paper is usually sold at a discount from face value
CERTIFICATES OF DEPOSIT
• Introduced in July 1989, to enable the banking system to mobilise bulk deposits from the market, which
they can have at competitive rates of interest.
• Defined as a negotiable money market instrument and issued in dematerialised form or as a Usance
Promissory Note, for funds deposited at a bank or other eligible financial institution for a specified time
period.
• Greater flexibility to investors in the deployment of surplus funds.
• Permitted by the RBI to banks
• Eligible for SLR & CRR requirement
• Issued by Scheduled commercial banks (except RRBs) and All India Financial Institutions .
• Buyers Individuals (other than minors), corporations, companies, trusts, funds, associations etc
• Maturity of not less than 7 days and not more than 1 year. (In case of FIs minimum 1 year and maximum
3 years)
• Minimum amount of investment Rs. 1 lakhs and multiples of Rs. 1 lakhs thereafter.
• Transferable in nature
• Free negotiability and limited flexibility.
• Physical CDs are freely transferable by endorsement and delivery. Dematted CDs can be transferred as
per the procedure applicable to other demat securities. There is no lock-in period for the CDs.
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MONEY MARKET MF
The RBI achieves the function of maintaining liquidity in the money market through REPOS / REVERSE
REPOS.
The repo / reverse repo is a very important money market instrument to facilitate short-term liquidity
adjustment among banks, financial institutions and other money market players.
A repo / reverse repo is a transaction in which two parties agree to sell and repurchase the same security
at a mutually decided future date and price.
From the seller’s point of view (Borrower), the transaction is called a repo, whereby the seller gets
immediate funds by selling the securities with an agreement to repurchase the same at a future date.
Similarly, from the buyer’s point of view (Lender), the transaction is called a reverse repo, whereby the
purchaser buys the securities with an agreement to resell the same at a future date.
Repo or ready forward contact is an instrument for borrowing funds by selling securities with an
agreement to repurchase the said securities on a mutually agreed future date at an agreed price which
includes interest for the funds borrowed.
The reverse of the repo transaction is called ‘reverse repo’ which is lending of funds against buying of
securities with an agreement to resell the said securities on a mutually agreed future date at an agreed
price which includes interest for the funds lent.
The RBI, commercial banks and primary Dealers deal in the repos and reverse repo transactions.
The financial institutions can deal only in the reverse repo transactions i.e. they are allowed only to lend
money through reverse repos to the RBI, other banks and Primary dealers.
The maturity date varies from 1 day to 14 days.
The two types of repos are:
Inter-bank repos (the transaction takes place between banks and DFHI).
RBI repos (The repos / reverse repos are undertaken between banks and the RBI to stabilize and
maintain liquidity in the market).
Repos and Reverse Repos are used for following purposes:-
For injection / absorption of liquidity.
To create an equilibrium between the demand for and supply of short-term funds.
To borrow securities to meet SLR requirements.
To increase returns on funds.
To meet shortfall in cash positions.
Current Rate:
REPO-6.25%
REVERSE REPO- 6%
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BANKER'S ACCEPTANCE
A banker’s acceptance (BA) is a short-term credit investment created by a non-financial firm.
BA’s are guaranteed by a bank to make payment.
Acceptances are traded at discounts from face value in the secondary market.
BA acts as a negotiable time draft for financing imports, exports or other transactions in goods.
This is especially useful when the credit worthiness of a foreign trade partner is unknown.
Financial Instruments
Another important constituent of financial system is financial instruments. They represent a claim against the
future income and wealth of others. It can be a claim against a person or an institutions, for the payment of a
sum of money at a specified future date.
Enable channelizing funds from surplus units to deficit units
There are instruments for savers such as deposits, equities, mutual fund units, etc.
There are instruments for borrowers such as loans, overdrafts, etc.
Like businesses, governments too raise funds through issuing of bonds, Treasury bills, etc.
Instruments like PPF, NSC, etc. are available to savers who wish to lend money to the government
Financial Services
Efficiency of emerging financial system largely depends upon the quality and variety of financial services
provided by financial intermediaries. The term financial services can be defined as "activites, benefits and
satisfaction connected with sale of money, that offers to users and customers, financial related value".
Ø Capital Restructuring
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