DISSERTATION

ON
FINANCIAL
MARKET
AND
ITS
INSTRUMENTS
 CONTENTS
Acknowledgement
Preface
Declaration
Objectives
Introduction
Research methodology
Chapterization
 Chapter 1- Analysis of financial market
 Chapter 2- Money market and its instruments
 Chapter 3- Defects of money market
 Chapter 4- Reforms of money market
 Chapter 5- capital market and its instruments
Finding study
Conclusion
Bibliography
 ACKNOWLEDGEMENT

I am extremely grateful to that entire member who

extends their co-operation and guidance for my
projects.
I am thankful to Mr. Devesh Gupta for their external
support I would also thank my project guide Mr.
Nityanand.
Whose valuable advice and guidance helped me to
complete this dissertation report.
Lastly I thank to the respondent in company, parents
and relatives, for their co-operation, love and
blessing and thankful to my all friends and
companions who directly- indirectly co-operate with
me in completing this dissertation report.

ADITI GUPTA
S.S.I.T.M
ALIGARH
 DECLARATION

I, FURQUAN KHAN, a student of MBA 4th sem

SSITM, ALIGARH batch 2007-2009 and roll no.
0700770023, here by declare that dissertation
report entitled “ROLE OF FDI IN RETAIL
SECTOR, ” is the out come of my own work and
same has not been submitted to any university/
institute for the award of any degree or professional
diploma.

FURQUAN KHAN
 PREFACE

The project entitled “FINANCIAL MARKET AND ITS

INSTRUMENTS” was under taken by me during the
month of march 2008 in fulfilment of requirement of
MBA 4th sem.
The information used in the project is based on the
primary as well as secondary data, it able to me
learn about the marketing skills, environment,
contributing to highly satisfactory performance of
the bank. Similarly, secondary data used in this
project have taken from the journals and bank
websites.
Due care, has been taken to present that material,
so gathered in a scientific & systematic manner
And in this projects to mentioned the all activity of
the financial market and its instruments and
mentioned the defects and reforms of the money
market in the RBI.
 OBJECTIVES

To analysis the financial

market

To analysis the money

market and its
instruments

To study the causes of

OBJECTIVE money market
S

To analysis the reforms

of the money market
 To study the capital
market and its
instruments

INTRODUCTION
OF
FINANCIAL MARKET
 HISTORY OF FINANCIAL MARKET

Here we look at the historical and empirical

evidence surrounding financial markets and assets.
The first part surveys the innovations regarding
financial instruments and the trading process in
financial markets. The second part surveys the
history of investment returns on financial assets.
Three questions are addressed in particular:
 What return can investors expect to earn when
investing in various types of financial assets?
 What are the risk characteristics of these
returns?
 Are returns and risk characteristics linked?
An interesting issue is the historic relationship
between the risk and return on various instruments.
If investors are risk averse we expect to find they
demand compensation for holding risky portfolios.
This will be discussed in relation to the so called
‘equity premium puzzle’.
A HISTORY OF FINANCIAL INNOVATION

Many early civilisations made use of loan

agreements between individuals, and in the old
Babylonia and Assyria there were at least two
banking firms in existence several thousand years
BC Equities and bonds were developed during the
sixteenth century. Convertible securities also have a
long history. In continental Europe in the sixteenth
century there existed equity issues that could be
converted into debt if certain regulations were
broken. Similarly, preferred stock has been in use
for a long time. Exchange trading of financial
securities also has a surprisingly long history. Equity
was traded in Antwerp and Amsterdam in the 1600s.
Moreover, options and futures (called time bargains
at the time) were traded on the Amsterdam Bourse
after it was opened in 1611.
Many of the European stock markets experienced
major stock market bubbles in the eighteenth
century. A famous example is the South Sea Bubble
(1720) where the price of the South Sea Company
rose from 131% of par in February to 950% by June
23, then fell back to 200% by December. This bubble
led to the so called Bubble Act which made it illegal
to form a company without a charter or to pursue
any line of business other than the one specified in
the charter.

RECENT FINANCIAL INNOVATION

The 1960s witnessed a number of innovations driven
by regulatory
Constraints. The Eurobond market emerged where
non-US companies could borrow in US $. At the time
foreign borrowers were excluded from the US
markets. Similarly, currency swaps were developed
during this period to circumvent UK exchange
controls. The 1970s witnessed the introduction of
floating-rate instruments (bonds with coupons tied
to a floating rate such as the LIBOR rate in London),
and the trading of financial futures, such as futures
on foreign currency, futures on interest rates, and
futures on stock market indices.
Often, the innovation of new securities is initially
driven to circumvent regulatory constraints or to
exploit market demand for new types of claims.
Once they become established, however, the
investors find they have other, broader, advantages
that make them a useful addition to the financial
system. Below you can find a few case studies of new
innovations.

Case study 1: Floating rate debt

Floating-rate notes were first issued in 1970, and it

was an instrument that was linked to a floating
reference rate – the London Interbank Offered Rate
(LIBOR). These instruments came in during a period
where inflation risk became a serious threat, so the
nominal rate would fluctuate dramatically. Allowing
loan rates to vary in accordance with these
fluctuations was a natural response. In the mid-
1970s the market for floating rate debt started
growing significantly, and these instruments were
fairly widely used in the early 1980s. Most floating-
rate debt is issued in the European market, and
these instruments have never been particularly
popular in the US. A spin-off innovation is floating-
rate preferred stock – a preferred stock in which the
dividend yield is linked to the variations in the
reference rate.

Case study 2: Zero-coupon bonds

These bonds were first issued in the 1960s, but they
did not become popular until the 1980s. The use of
these instruments was aided by an anomaly in the
US tax system, which allowed for deduction of the
discount on bonds relative to their par value. This
rule ignored the compounding of interest, and leads
to significant tax-savings when the interest rates are
high or the security has long maturity. Although the
tax-loophole was closed fairly quickly, the bonds
were desirable to investors because they were very
simple investment tools. For a bond that has interim
coupon payments the investor would have to
reinvest these coupon payments and there may be
considerable risk tied to these reinvestment
strategies. A zero-coupon bond has no reinvestment
risk.

Case study 3: Poison pill securities

The popularity of corporate acquisitions and

mergers has promoted the emergence of a number
of anti-takeover techniques. Some of these have
taken the form of financial innovations. One of the
earliest was the so called preferred stock plans. With
these, the target company (the one that the bidding
company seeks to acquire) issues a dividend of
convertible preferred stock to its shareholders which
grants certain rights if the bidding company buys a
large position in the target firm. These rights might
be in the form that the stockholders can require the
acquiring firm to redeem the preferred stock at the
highest price paid for common stock in the past
year. If the takeover actually goes through, the
highest price will almost certainly be the takeover
price, and the acquiring company must, therefore,
issue a number of new stock at the takeover price in
exchange for the old preferred stock already issued.
This will, obviously, dilute the gains of the takeover
to the acquiring party and reduce the likelihood of a
takeover.
Another poison pill security is the so called flip-over
plan. This consists of the issue of a common stock
dividend consisting of a special right. This right
enables the holder to purchase common stock at an
exercise price well above the current market price.
Normally, nobody would exercise these rights as the
exercise price is high compared to the current
market price. However, in the event of a merger,
they ‘flip-over’ and give the right to purchase
common stock at an exercise price well below the
current market price. Again, this makes takeovers
costly as the bidder’s profits from the takeover are
heavily diluted by the exercise of the flip-over plans.

Case study 4: Swaps

The first swaps emerged in the 1960s and were

currency swaps, and they emerged like many other
innovations on the back of regulation. In this case, a
UK based multinational company might have a
surplus of funds in the UK that it wished to invest in
a US subsidiary but was prevented due to UK
exchange controls. A counter party in the US with
the opposite problem, a surplus of US funds but a
need to invest in a UK subsidiary, could often be
identified. Since regulation prevented a straight
transfer within each company, the companies could
circumvent the rules by simply using parallel loans –
the US firm promised to lend dollars to the UK
subsidiary against the UK firm promising to lend
pounds to the US subsidiary. A major problem with
these arrangements soon emerged, however, which
was that there was a considerable amount of
counterparty risk involved. A company might have
entered into the agreement fully solvent but might
experience problems in the interim period before
expiry. If one party defaulted, would the other party
still be obliged to fulfil their part of the
arrangement? This deficiency could be overcome by
the swap agreement, where in principle the
companies deposited money with each other and
paid the interim interest payments to each other
according to the prevailing interest rates in the two
currencies, and finally the principal amount is
cleared at the end of the agreement. The interim
payments are normally netted out using the
prevailing exchange rate, so there is only one
payment made.
The swap agreement has also been modified to
agreements involving swapping cash flows of
adjustable (floating) rate loans and cash flows of
fixed rate loans. Principal payments are in this case
not made in the same way as currency swaps – these
are also netted out so that the swap agreement
effectively consists of a series of single payments.

Case study 5: Futures trading

The standardised financial futures contracts are a

relatively recent
innovation, in contrast to the older, forward style
agreements that have existed since the emergence
of a financial system. An important feature of this
contract is the way it is traded, which makes it easy
for investors to enter and exit existing futures
agreements in between the start of the contract and
the maturity date of the contract. More importantly,
however, is that futures trading allow investors to
shift large amounts of risk with very little
investment. Futures trades are, therefore, highly
levered. For example, margin trading of equity
typically involves a margin of 50%, so even if the
investor can borrow he still needs to finance half the
investment cost (and further margin calls if the stock
price goes down). With futures positions, investors
normally maintain margins less than 10% of the face
value of the futures contract. The futures contract is
marked to market each day, so the investor can
unwind his position (sell if the original transaction
was a buy and vice versa) and his account is settled
with no further cash flows taking place

Investment returns in equity and bond

markets

What returns have investors historically made in the

bond and equity markets around the world? We have
about a hundred years of data on stock market
returns, and the brief answer globally is that the
countries most devastated by World War II had the
lowest long-run cumulative returns - Italy, Belgium,
Germany and Japan. The countries that experienced
the least damage, in contrast, have the highest long
run cumulative returns - Australia, Canada, and the
US. However, the real returns (corrected for
inflation) are pretty much similar across all
countries.
A major theoretical prediction from pricing models is
that the expected or average return on assets is
linked to the risk of holding these assets. Again, the
overall empirical evidence supports this prediction.
Looking, for instance, to the US experience from
1926 to 2002, we find the following.
Asset type Geometric average Arithmetic
average return
Small-company stocks 11.64% 17.74%
Large-company stocks 10.01% 12.04%
Long-term treasury bonds 5.38% 5.68%
US T-bills 3.78% 3.82%
Inflation 3.05% 3.14%

The equity premium puzzle

The return on equity is greater than the return on

bonds because the risk is smaller. What has been
found, however, is that the difference (the so called
equity premium) appears to be bigger than should
be expected. The following example from US stock
and bond markets is compelling. A person who
invested $1000 in Treasury bills on December 31,
1925 and kept it in safe US Treasury bills until
December 31, 1995 would have an investment in
1995 worth $12,720. If the money were invested in
the stock market the corresponding number is
$842,000 (66 times the amount for T-bills).
Considering that the equity investment would have
survived two large stock market crashes (one in
1929 and another one in 1987), the difference is
strikingly large.
How should we compare a risky investment with a
risk free one? One way to do this is by assuming a
risk averse investor holds both risk free T-bills and
risky equities in his portfolio (for a review of utility
theory and risk aversion). The premium on the
equity is then compensation for his risk aversion.
The greater the premium is, the greater the risk
aversion of the investor must be. Using historical
data, we can therefore make inferences about the
risk aversion of investors. Risk aversion is measured
by the risk Aversion coefficient, formally derived
from the utility function by the relationship. This is a
fairly reasonable number, but asset returns are not
normal so we cannot use this simple model to
estimate the implied risk aversion coefficient. This is
the motivation for Mehra and Prescott’s study. They
fit a rigorous theoretical model to data on the return
on stock market investments and government bonds.
The model generates the risk aversion coefficient of
a representative investor. Can the equity premium
puzzle be resolved? Mehra and Prescott might have
sampled data that were special in two senses. First,
it might have been too short so there is a possibility
that the period was in some sense too ‘special’ to
make safe inferences about the implied risk aversion
coefficient. Their work has been extended to include
data all the way back to 1802. The main finding of
this exercise is that the real returns of short-term
fixed income have fallen dramatically over time. The
real excess return on equity would, therefore, on
average be about one percentage point lower than
that reported by Mehra and Prescott. This will of
course reduce the magnitude of the risk aversion
coefficient but it is doubtful that the puzzle would be
completely resolved.
The second way the data might have been special is
that the time series are too long. This might lead to
survivorship bias in the data. When collecting
masses of data we inevitably sample those data-
series that have survived for a long time. The long-
surviving data series would also tend to be
‘healthier’ and show average returns that are higher
than the perceived expected returns at historical
points in time. Investors might reasonably worry
about the risk of a crisis or catastrophe that can
wipe out the entire market overnight. And indeed, of
the 36 stock exchanges that operated at the early
1900s, more than one-half experienced significant
interruptions or were abolished outright up to the
current time. Hence, the equity premium might
include some bias if estimated by long time series of
data. Again, survivorship bias might be a source of
some errors in the estimation of the risk aversion
coefficient but it is unclear how much it contributes.

INTRODUCTION OF FINANCIAL
MARKET

What are the financial markets? If you are confused,

there is a good reason. That’s because financial
markets go by many terms, including capital
markets, Wall Street, even the markets. Some
experts even simply refer to it as the stock market,
even though they are referring to stocks, bonds and
commodities. Quite simply, that is what the financial
markets are - any type of financial transaction that
you can think of that helps businesses grow and
investors make money. Here is an overview of the
financial markets, from the simple to the complex.

Stock and stock investing

Stocks are shares of ownership of a public
corporation which are sold to investors to allow the
companies to raise a lot of cash at once. The
investors profit when the companies increase their
earnings which keeps the U.S. economy growing. It
is easy to buy stocks, but takes a lot of knowledge to
buy stocks in the right company.

What Are the Components of the Stock

Market?
To a lot of people, the Dow is the stock market.
However, the Dow, which is the nickname for the
Dow Jones Industrial Average, is just one component
among many. There is also the Dow Jones
Transportation Average and the Dow Jones Utilities
Average. The stocks that make up these averages
are traded on the world’s exchanges, two of which
include the New York Stock Exchange and the
NASDAQ.

What Are Mutual Funds?

Mutual funds give you the ability to buy a lot of
stocks at once. In a way this makes them an easier
tool to invest in than individual stocks. By reducing
stock market volatility, they have also had a calming
effect on the U.S. economy. Despite their benefits,
you still need to learn how to select a good mutual
fund.
What Is the Bond Market?
Generally, when stocks go up, bonds go down.
However, there are many different types of bonds,
including Treasury Bonds, corporate bonds, and
municipal bonds. Bonds also provide some of the
liquidity that helps keep the U.S. economy
lubricated. Their most important effect is on
mortgage interest rates.

What Are Commodities?

The most important commodity to the U.S. economy
is oil, and its price is determined in the commodities
futures market. What are futures? They are a way to
pay for something today that is delivered tomorrow,
which helps to remove some of the volatility in the
U.S. economy. However, futures also increase the
trader’s leverage by allowing him to borrow the
money to purchase the commodity. This can have a
huge impact on the stock market, and the U.S.
economy, if the trader guesses wrong.

What Are Hedge Funds?

Recently, hedge funds have increased in popularity
due to their supposed higher returns for high-end
investors. Since hedge funds invest heavily in
futures, some have argued they have decreased the
volatility of the stock market and therefore the U.S.
economy. However, in 1997 the world’s largest
hedge fund at the time, Long Term Capital
Management, practically brought down the U.S.
economy.
 BASIC TERMS

An asset is anything of durable value, that is,

anything that acts as a means to store value over
time. Real assets are assets in physical form (e.g.,
land, equipment, houses,...), including "human
capital" assets embodied in people (natural abilities,
learned skills, knowledge,..). Financial assets are
claims against real assets, either directly (e.g., stock
share equity claims) or indirectly (e.g., money
holdings, or claims to future income streams that
originate ultimately from real assets). Securities are
financial assets exchanged in auction and over-the-
counter markets (see below) whose distribution is
subject to legal requirements and restrictions (e.g.,
information disclosure requirements).

Lenders are people who have available funds in

excess of their desired expenditures that they are
attempting to loan out, and borrowers are people
who have a shortage of funds relative to their
desired expenditures who are seeking to obtain
loans. Borrowers attempt to obtain funds from
lenders by selling to lenders newly issued claims
against the borrowers' real assets, i.e., by selling the
lenders newly issued financial assets.

A financial market is a market in which financial

assets are traded. In addition to enabling exchange
of previously issued financial assets, financial
markets facilitate borrowing and lending by
facilitating the sale by newly issued financial assets.
Examples of financial markets include the New York
Stock Exchange (resale of previously issued stock
shares), the U.S. government bond market (resale of
previously issued bonds), and the U.S. Treasury bills
auction (sales of newly issued T-bills). A financial
institution is an institution whose primary source of
profits is through financial asset transactions.
Examples of such financial institutions include
discount brokers (e.g., Charles Schwab and
Associates), banks, insurance companies, and
complex multi-function financial institutions such as
Merrill Lynch.

MEANING OF FINANCIAL MARKET

A financial market is a mechanism that allows
people to easily buy and sell (trade) financial
securities (such as stocks and bonds), commodities
(such as precious metals or agricultural goods), and
other fungible items of value at low transaction costs
and at prices that reflect the efficient-market
hypothesis. Financial markets have evolved
significantly over several hundred years and are
undergoing constant innovation to improve liquidity.
Both general markets (where many commodities are
traded) and specialized markets (where only one
commodity is traded) exist. Markets work by placing
many interested buyers and sellers in one "place",
thus making it easier for them to find each other. An
economy which relies primarily on interactions
between buyers and sellers to allocate resources is
known as a market economy in contrast either to a
command economy or to a non-market economy
such as a gift economy.

In finance, financial markets facilitate –

 The raising of capital (in the capital markets);

 The transfer of risk (in the derivatives markets);
 International trade (in the currency markets)

and are used to match those who want capital to

those who have it. Typically a borrower issues a
receipt to the lender promising to pay back the
capital. These receipts are securities which may be
freely bought or sold. In return for lending money to
the borrower, the lender will expect some
compensation in the form of interest or dividends.

DEFINITION OF FINANCIAL MARKET

A financial market is a process that allows people to
easily buy and sell financial securities, commodities
and other fungible items of value at low transaction
costs and at prices that reflect efficient markets.

FUNCTIONS OF FINANCIAL MARKET

 Borrowin
g and
Lending

Price
Efficien determin
cy ation

FUNCTIONS
OF
FINANCIAL
MARKET
Informati
on
aggregati
Liquidit on and
y coordinat
ionnn
Risk
Sharing

Borrowing and Lending: Financial markets

permit the transfer of funds (purchasing power)
from one agent to another for either investment or
consumption purposes.

Price Determination: Financial markets

provide vehicles by which prices are set both for
newly issued financial assets and for the existing
stock of financial assets.

Information Aggregation and

Coordination: Financial markets act as
collectors and aggregators of information about
 financial asset values and the flow of funds from
lenders to borrowers.

Risk Sharing: Financial markets allow a

transfer of risk from those who undertake
investments to those who provide funds for those
investments.

Liquidity: Financial markets provide the holders

of financial assets with a chance to resell or
liquidate these assets.

Efficiency: Financial markets reduce transaction

costs and information costs.

MAJOR PLAYERS IN FINANCIAL MARKET

By definition, financial institutions are institutions
that participate in financial markets, i.e., in the
creation and/or exchange of financial assets. At
present in the United States, financial institutions
can be roughly classified into the following four
categories: "brokers;" "dealers;" "investment
bankers;" and "financial intermediaries."
 MAJOR
PALYERS
OF
FINANCIAL
MARKET

INVESTMENT FINANCIAL
BROKERS DEALERS BANKERS INTERMEDIARIES

Brokers:
A broker is a commissioned agent of a buyer (or
seller) who facilitates trade by locating a seller (or
buyer) to complete the desired transaction. A broker
does not take a position in the assets he or she
trades -- that is, the broker does not maintain
inventories in these assets. The profits of brokers
are determined by the commissions they charge to
the users of their services (the buyers, the sellers, or
both). Examples of brokers include real estate
brokers and stock brokers.

Diagrammatic Illustration of a Stock Broker:

Payment ----------------- Payment

------------>| |------------->
Stock | | Stock
Buyer | Stock Broker | Seller
<-------------|<----------------|<-------------
Stock | (Passed Thru) | Stock
Shares ----------------- Shares

Dealers:
Like brokers, dealers facilitate trade by matching
buyers with sellers of assets; they do not engage in
asset transformation. Unlike brokers, however, a
dealer can and does "take positions" (i.e., maintain
inventories) in the assets he or she trades that
permit the dealer to sell out of inventory rather than
always having to locate sellers to match every offer
to buy. Also, unlike brokers, dealers do not receive
sales commissions. Rather, dealers make profits by
buying assets at relatively low prices and reselling
them at relatively high prices (buy low - sell high).
The price at which a dealer offers to sell an asset
(the "asked price") minus the price at which a dealer
offers to buy an asset (the "bid price") is called the
bid-ask spread and represents the dealer's profit
margin on the asset exchange. Real-world examples
of dealers include car dealers, dealers in U.S.
government bonds, and NASDAQ stock dealers.

Diagrammatic Illustration of a Bond Dealer:

Payment ----------------- Payment

------------>| |------------->
Bond | Dealer | Bond
Buyer | | Seller
<-------------| Bond Inventory |<-------------
Bonds | | Bonds
-----------------

Investment Banks:
An investment bank assists in the initial sale of
newly issued securities (i.e., in IPOs = Initial Public
Offerings) by engaging in a number of different
activities:
  Advice: Advising corporations on whether they
should issue bonds or stock, and, for bond
issues, on the particular types of payment
schedules these securities should offer;
 Underwriting: Guaranteeing corporations a
price on the securities they offer, either
individually or by having several different
investment banks form a syndicate to
underwrite the issue jointly;
 Sales Assistance: Assisting in the sale of these
securities to the public.

Financial Intermediaries:
Unlike brokers, dealers, and investment banks,
financial intermediaries are financial institutions
that engage in financial asset transformation. That
is, financial intermediaries purchase one kind of
financial asset from borrowers -- generally some
kind of long-term loan contract whose terms are
adapted to the specific circumstances of the
borrower (e.g., a mortgage) -- and sell a different
kind of financial asset to savers, generally some kind
of relatively liquid claim against the financial
intermediary (e.g., a deposit account). In addition,
unlike brokers and dealers, financial intermediaries
typically hold financial assets as part of an
investment portfolio rather than as an inventory for
resale. In addition to making profits on their
investment portfolios, financial intermediaries make
profits by charging relatively high interest rates to
borrowers and paying relatively low interest rates to
savers.

Types of financial intermediaries include:

Depository Institutions (commercial banks, savings

and loan associations, mutual savings banks, credit
unions); Contractual Savings Institutions (life
insurance companies, fire and casualty insurance
companies, pension funds, government retirement
funds); and Investment Intermediaries (finance
companies, stock and bond mutual funds, money
market mutual funds).

Diagrammatic Example of a Financial

Intermediary: A Commercial Bank

Lending by B Borrowing by B

Deposited
------- Funds ------- funds -------
| |<............. | | <............. | |
| F |.............> | B | ..............> | H |
------- Loan ------- deposit -------
Contracts accounts

Loan contracts Deposit accounts

Issued by F to B issued by B to H
Are liabilities of F are liabilities of B
And assets of B and assets of H

NOTE: F=Firms, B=Commercial Bank, and

H=Households
Important Caution: These four types of financial
institutions are simplified idealized classifications,
and many actual financial institutions in the fast-
changing financial landscape today engage in
activities that overlap two or more of these
classifications, or even to some extent fall outside
these classifications. A prime example is Merrill
Lynch, which simultaneously acts as a broker, a
dealer (taking positions in certain stocks and bonds
it sells), a financial intermediary (e.g., through its
provision of mutual funds and CMA checkable
deposit accounts), and an investment banker.

What Types of Financial Market Structures Exist?

The costs of collecting and aggregating
information determine, to a large extent, the
types of financial market structures that
emerge. These structures take four basic forms:

 Auction markets conducted through

brokers;
 Over-the-counter (OTC) markets
conducted through dealers;
 Organized Exchanges, such as the New
York Stock Exchange, which combine
auction and OTC market features.
Specifically, organized exchanges permit
buyers and sellers to trade with each other
in a centralized location, like an auction.
However, securities are traded on the floor
of the exchange with the help of specialist
traders who combine broker and dealer
functions. The specialists broker trades but
also stand ready to buy and sell stocks from
personal inventories if buy and sell orders
do not match up.
 Intermediation financial markets
conducted through financial intermediaries;

Financial markets taking the first three forms

are generally referred to as securities markets.
Some financial markets combine features from
more than one of these categories, so the
categories constitute only rough guidelines.

Auction Markets:
An auction market is some form of centralized
facility (or clearing house) by which buyers and
sellers, through their commissioned agents
(brokers), execute trades in an open and
competitive bidding process. The "centralized
facility" is not necessarily a place where buyers
and sellers physically meet. Rather, it is any
institution that provides buyers and sellers with
a centralized access to the bidding process. All
of the needed information about offers to buy
(bid prices) and offers to sell (asked prices) is
centralized in one location which is readily
accessible to all would-be buyers and sellers,
e.g., through a computer network. No private
exchanges between individual buyers and
sellers are made outside of the centralized
facility.

An auction market is typically a public market in

the sense that it open to all agents who wish to
participate. Auction markets can either be call
markets -- such as art auctions -- for which bid
and asked prices are all posted at one time, or
continuous markets -- such as stock exchanges
and real estate markets -- for which bid and
asked prices can be posted at any time the
market is open and exchanges take place on a
continual basis. Experimental economists have
devoted a tremendous amount of attention in
recent years to auction markets.

Many auction markets trade in relatively

homogeneous assets (e.g., Treasury bills, notes,
and bonds) to cut down on information costs.
Alternatively, some auction markets (e.g., in
second-hand jewellery, furniture, paintings etc.)
allow would-be buyers to inspect the goods to
be sold prior to the opening of the actual
bidding process. This inspection can take the
form of a warehouse tour, a catalogue issued
with pictures and descriptions of items to be
sold, or (in televised auctions) a time during
which assets are simply displayed one by one to
viewers prior to bidding.

Auction markets depend on participation for any

one type of asset not being too "thin." The costs
of collecting information about any one type of
asset are sunk costs independent of the volume
of trading in that asset. Consequently, auction
markets depend on volume to spread these costs
over a wide number of participants.

Over-the-Counter Markets:

An over-the-counter market has no centralized

mechanism or facility for trading. Instead, the
market is a public market consisting of a
number of dealers spread across a region, a
country, or indeed the world, who make the
market in some type of asset. That is, the
dealers themselves post bid and asked prices for
this asset and then stand ready to buy or sell
units of this asset with anyone who chooses to
trade at these posted prices. The dealers
provide customers more flexibility in trading
than brokers, because dealers can offset
imbalances in the demand and supply of assets
by trading out of their own accounts. Many well-
known common stocks are traded over-the-
counter in the United States through NASDAQ
(National Association of Secures Dealers'
Automated Quotation System).

Intermediation Financial Markets:

An intermediation financial market is a financial
market in which financial intermediaries help
transfer funds from savers to borrowers by
issuing certain types of financial assets to
savers and receiving other types of financial
assets from borrowers. The financial assets
issued to savers are claims against the financial
intermediaries, hence liabilities of the financial
intermediaries, whereas the financial assets
received from borrowers are claims against the
borrowers, hence assets of the financial
intermediaries.

Asymmetric Information in Financial

Markets
Asymmetric information in a market for goods,
services, or assets refers to differences
("asymmetries") between the information
available to buyers and the information
available to sellers. For example, in markets for
financial assets, asymmetric information may
arise between lenders (buyers of financial
assets) and borrowers (sellers of financial
assets).

Problems arising in markets due to asymmetric

information are typically divided into two basic
types: "adverse selection;" and "moral hazard."
This section explains these two types of
problems, using financial markets for concrete
illustration.

1. Adverse Selection
Adverse selection is a problem that arises for a
buyer of goods, services, or assets when the
buyer has difficulty assessing the quality of
these items in advance of purchase.

Consequently, adverse selection is a problem

that arises because of different ("asymmetric")
information between a buyer and a seller before
any purchase agreement takes place.

An Illustration of Adverse Selection in Loan

Markets:

In the context of a loan market, an adverse

selection problem arises if the contractual terms
that a lender sets in advance in an attempt to
protect himself against the consequences of
inadvertently lending to high risk borrowers
have the perverse effect of encouraging high
risk borrowers to self-select into the lender's
loan applicant pool while at the same time
encouraging low risk borrowers to self-select
out of this pool. In this case, the lender's pool of
loan applicants is adversely affected in the
sense that the average quality of borrowers in
the pool decreases.

Moral Hazard

Moral hazard is said to exist in a market if, after

the signing of a purchase agreement between
the buyer and seller of a good, service, or asset:

 the seller changes his or her behaviour in

such a way that the probabilities (risk
calculations) used by the buyer to
determine the terms of the purchase
agreement are no longer accurate;
  The buyer is only imperfectly able to
monitor (observe) this change in the seller's
behaviour.

For example, a moral hazard problem arises if,

after a lender purchases a loan contract from a
borrower, the borrower increases the risks
originally associated with the loan contract by
investing his borrowed funds in more risky
projects than he originally reported to the
lender.

CLASSIFICATION OF FINANCIAL
MARKET
 The capital market is the market for the
issue and trade of long-term securities.

 The money market is that of short-term

securities.

 The timing difference between the closing

of the transaction and the delivering of the
goods or settlement of the transaction

 The difference in certainty that the other

party will honour the transaction.
 ORGANISATION STRUCTURE OF
FINANCIAL MARKET

Deputy Governor

Executive general
manager market

Head of department Secretary

Senior deputy head Secretary

Treasury
operation Market operation Treasury
division division division

Deputy Head
Deputy Head Deputy Head

Reserves
Market research Market operation management
Assit. Head and
correspondent
banking
Trade Credit risk Asst head
settlement And
Asst. head compliance
Asst. head
 Management
support
Asst. head

The key functions of the Financial Markets

Department are:

 Implementing the Reserve Bank’s monetary

policy decisions. This entails refinancing the
banks' liquidity requirements through
repurchase transactions and other facilities
such as the averaging of cash reserves or
marginal lending, as well as managing liquidity
in the money market through open-market
operations such as debentures, longer-term
reverse repurchase transactions and foreign
currency swaps.
 Participating in the spot and forward foreign
exchange markets to service the foreign
exchange needs of the Reserve Bank and its
clients.
 Acting as funding agent of the government by
conducting bond and Treasury bills auctions,
participating in the formulation of debt
management strategies, conducting surveillance
over primary dealers in the bond market and
managing the investment portfolio of the
Corporation for Public Deposits (CPD).
 Facilitating the effective functioning of the
domestic financial markets through its
participation in these markets.
 Managing the Reserve Bank’s gold and foreign
exchange reserves.
 Maintaining correspondent banking
relationships by interacting with the Bank’s
counterparties, both domestic and foreign, to
 assist the Reserve Bank in achieving its goals.
An important aspect of this function is the
negotiation and administration of foreign loans
or credit lines, which the Bank may draw down
from time to time to augment its foreign
exchange reserves.
 Providing market information and analyses to
assist the Governors in their decision-making.
 Providing custody and settlement services to the
government and the banks.
 Managing the risk inherent in gold, foreign
exchange, refinancing and government funding
activities

TYPES OF FINANCIAL MARKET

 Equity market
 Money market
 Capital market
 Foreign exchange market

EQUITY MARKET

Equity market is a system through which company

shares are traded. The equity market offers
investors an opportunity to participate in a
company's success through an increase in its stock
price. With enhanced opportunity, however, the
equity market usually carries greater risk than debt
markets. The U.S. equity market focuses on the New
York Stock Exchange, with its large trading floor and
system of specialists. The other major component of
the U.S. equity market is the NASDAQ, a
computerized system of brokers/dealers with no
physical trading space. The U.S. equity market also
comprises trading on the American Stock Exchange,
regional stock exchanges, so-called ECNs.

MONEY MARKET

The money market is the global financial market

for short-term borrowing and lending. It provides
short-term liquidity funding for the global financial
system. The money market is where short-term
obligations such as Treasury bills, commercial paper
and bankers' acceptances are bought and sold. The
money market consists of financial institutions and
dealers in money or credit who wish to either
borrow or lend. Participants borrow and lend for
short periods of time, typically up to thirteen
months. Money market trades in short-term financial
instruments commonly called "paper." This contrasts
with the capital market for longer-term funding,
which is supplied by bonds and equity. In the United
States, federal, state and local governments all issue
paper to meet funding needs. States and local
governments issue municipal paper, while the US
Treasury issues Treasury bills to fund the US public
debt.

CAPITAL MARKET
The capital market is the market for securities,
where companies and governments can raise
longterm funds. It is a market in which money is lent
for periods longer than a year. The capital market
includes the stock market and the bond market.
Financial regulators, such as the U.S. Securities and
Exchange Commission (SEC), oversee the capital
markets in their designated countries to ensure that
investors are protected against fraud. The capital
markets consist of the primary market and the
secondary market. The primary markets are where
new stock and bonds issues are sold (underwriting)
to investors. The secondary markets are where
existing securities are sold and bought from one
investor or speculator to another, usually on an
exchange (e.g. the New York Stock Exchange).

FOREIGN EXCHANGE MARKET

The foreign exchange (currency, forex or FX)

market is where currency trading takes place. FX
transactions typically involve one party purchasing a
quantity of one currency in exchange for paying a
quantity of another. The FX market is one of the
largest and most liquid financial markets in the
world, and includes trading between large banks,
central banks, currency speculators, corporations,
governments, and other institutions. The average
daily volume in the global forex and related markets
is continuously growing. Traditional turnover was
reported to be over US$ 3.2 trillion in April 2007 by
the Bank for International Settlement. Since then,
the market has continued to grow. According to
Euro money's annual FX Poll, volumes grew a
further 41% between 2007 and 2008.
RESEARCH METHODOLOGY
 SOURCES OF DATA

RESEARCH
METHODOLGY

PRIMARY DATA SECONDARY

DATA

PRIMARY DATA
A primary source which is the initial material that is
collected during the research process. Primary data
is the data that the researcher is collecting
themselves using methods such as surveys, direct
observations, interviews, as well as logs(objective
data sources). Primary data is a reliable way to
collect data because the researcher will know where
it came from and how it was collected and analyzed
since they did it themselves.

SECONDARY DATA
Secondary sources on the other hand are sources
that are based upon the data that was collected from
the primary source. Secondary sources take the role
of analyzing, explaining, and combining the
information from the primary source with additional
information.
In this project we use the secondary data as well as
primary data it able to me learn about the financial
market and market condition and we collect the data
through the journals, books and the company
websites.

CHAPTERIZATION
CHAPTER 1

To analysis the financial market

 FINANCIAL MARKET ANALYSIS

Financial Market Analysis deals with the

performance of a particular financial market(s). The
performance of a financial market depends upon the
performance of the total number of securities that
are traded in that market. On a given day when the
market closes with the prices of most of its
securities on the higher side, then it could be said to
have performed well. This is reflected in a market
indicator called Index which tracks the performance
of some of the more popular and steady securities
that are traded in that particular financial market.

Some of the most famous securities market indexes

of the world are:
 Footsie – London financial market
 Dow Jones – New York financial market
 Hang Seng – Hong Kong financial market
 BSE Sensex – Mumbai financial market
 Nikkei – Tokyo financial market
 Nifty – Indian national financial market

The financial market index has become

particularly important in today’s market
economy, which is integrating very fast on a
global scale. Traders do not confine trading in
securities to just one or two markets in the
country of their origin but invest in a large
number of markets across the globe. With more
and more investment companies developing
global dimensions financial markets around the
world are integrating on a scale never imagined
before.

As a result, analysis of the financial markets has

become one of the main activities covering a very
large number of factors both within the market and
outside it. For instance, when the government of the
country where the market is located, announces a
new policy measure aimed at deregulating a
particularly stifling part of an industry segment, it
may have a positive impact on the financial market.
Financial market analysts cannot anticipate such
factors and therefore the impact of these factors do
not come under the main purview of financial market
analysis. However, most analysts do set aside some
space for the impact of extraneous factors on the
market and they do so in equal measure for both
positive as well as negative factors.

Financial market analysis has become a highly

specialized activity confined to select groups of
experts known as technical analysts. In most cases
they are professionally trained in financial analysis
and are reasonably familiar with the tools used to
analyze a particular market. In certain other cases
they are economists or veteran investors with a
special interest in financial market analysis and
market economics. The numbers of factors that
directly or indirectly impact the financial markets
are increasing rapidly with more analysts digging
deeper into the circumstances that influence
financial market behaviour. On the other hand, the
integration of information technology in market
analysis is increasingly meeting the challenge posed
by the complexities of financial market analysis.

Some of the most important types of analysis

affecting financial markets are:
 Fundamental Analysis
 Securities Market Analysis
 Securities Market Technical Analysis
 Index Momentum Analysis
 Securities Momentum Analysis
 Securities Chart Analysis
 Market Analysis
 Market Trend Indicators

FUNDAMENTAL ANALYSIS-
A method of evaluating a security by attempting
to measure its intrinsic value by examining
related economic, financial and other qualitative
and quantitative factors. Fundamental analysts
attempt to study everything that can affect
the security's value, including macroeconomic
factors (like the overall economy and industry
conditions) and individually specific factors
(like the financial condition and management of
companies).The end goal of performing
fundamental analysis is to produce a value that
an investor can compare with the security's
current price in hopes of figuring out what sort
of position to take with that security (under
 priced = buy, overpriced = sell or
short). Fundamental analysis is about using real
data to evaluate a security's value. Although
most analysts use fundamental analysis to value
stocks, this method of valuation can be used
for just about any type of security.

SECURITIES MARKET ANALYSIS-

The market grew by approximately 15%
Commoditisation is affecting the more established
sectors of the security market, and this process
will accelerate as a result of increasing pressure
from the big IT infrastructure vendors.
Commoditisation will be slow to blanket the entire
security market because of the many product types
within it, and the multitude of approaches to
delivering security. The dynamic nature of the threat
environment and business security needs means that
the industry will have to remain dynamic in
developing its offerings, and this will help to stave
off the dead hand of commoditisation. the growth in
revenues for managed security services was around
25% per year. It was notable that the range of
services grew, for example, to include vulnerability
analysis services
for merchants to satisfy the requirements of the
payment card industry. However, this sub-sector still
accounts for only a small proportion of security
spending. In future, the development of ‘cloud
based’ services in the service provider network will
open up new opportunities, particularly in the SME
sector.

SECURITIES MARKET TECHNICAL ANALYSIS

A technical analyst doesn't look at income

statements, balance sheets, company policies, or
anything fundamental about the company. Technical
analysis looks at the actual history of trading and the
price of a security or index. This is usually done in
the form of a chart. The financial product can be a
stock, future or an index,. The technical analyst
believes that securities move in trends. And these
trends continue until something happens to change
the trend. With trends, patterns and levels are
detectable. Sometimes the analysis is wrong.
However, in the overwhelming majority of instances,
it's extremely accurate. Technical analysis is stock
market research of price action over time and charts
are what an analyst works with as their primary
record of price action. Behind every price is an
investor who had a reason for buying or selling.
Traders generally act alone but often their weight of
numbers has a direct influence on short term prices.
Researching the stock market with charts and
technical indicators is the study of group behaviour
and sentiment. It is done with science and art. We
use science because we use mathematical formula,
computers and statistics. Charting is the study of
price action of a market itself as opposed to the
study of the goods in which a market deals.
Technical analysis is simply a different means of
using stock market research to arrive at the same
investment objectives.

INDEX MOMENTUM ANALYSIS

This indicator is interpreted in the same manner as

the RSI where readings below 30 are deemed to be
oversold and levels over 70 are deemed to be
overbought. The number of time periods used in the
dynamic momentum index decreases as volatility in
the underlying asset increases, making this indicator
more responsive to changing prices than the RSI.
SECURITIES MOMENTUM ANALYSIS

The Enhanced Quotes are designed to cut through

the clutter of fundamental and technical information
and provide Investors with a meaningful and
precise view into key indicators for publicly traded
companies, c/w AAT short term Analysis and
Momentum Indicators.

RECENT SITUATION IN FINANCIAL

MARKET

The last two days the stock market has recovered

some lost ground. On Friday, it recovered because of
the Fed action to reduce the discount rate. Much
was said about this but what does it really mean? It
means that banks can borrow money from the Fed at
a reasonable market rate that hopefully allows them
to invest and earn a profit. This helps with liquidity.
It does not, however, address the most fundamental
issues facing the market, unless it results in an
overall reduction in interest rates along the yield
curve.

Let me explain this. The basic problem with the

"subprime" crisis is that liberal lending standards
have resulted in large pools of assets that investors
of all sorts have purchased at relatively low spreads
over the market interest rates. This means that there
is a low risk premium built into those investments. If
in fact, the underlying mortgages have higher than
expected default rates, higher foreclosure rates, and
higher loss rates, the investors are not fairly
compensated and the investments in those bonds are
not worth what was paid for them. While we cannot
predict the future, it appears that this will in fact be
the case. Mortgage default rates are increasing, real
estate values are decreasing, and the likely result is
that more losses will accrue on those portfolios and
the bonds will be worth less than full value.

Now let's say that you are a Hedge fund. If you

purchased a lot of these bonds and in order to
increase the return on the equity put into your
Hedge fund, you leveraged those bonds by
borrowing against them, then the value of your
assets may be less relative to the debt you owe
against them. Then the value of the equity
investments in your fund can rapidly decline or
become zero.

So what would a Hedge fund manager or any other

holder of the bonds want to do? Sell them. The
problem is that the market now perceives the risk to
be a lot higher and so requires a higher return. That
means they have to buy the bonds at a lower price.
Consequently, the current holder of the bonds will
have to write them off at a loss.

While the Fed has provided liquidity to the holders

of these investments, allowing them to hold onto
them longer rather than fire selling them, this does
not affect the value of the actual investment in the
long run.

So until the market establishes a new value for all

these mortgage backed investments, we will not
know the extent of losses that various players will
incur. Only know this, there will be a steady stream
of loss announcements coming out of the financial
sector. We have not even begun to see these.

So how do you invest? Good question. The value of

stocks have fallen appreciably. So it may be time to
buy for the long term. On the other hand, the market
might react negatively to these earnings
announcements and stock values may suffer. The
overall economy is strong. The folks losing money
are the ones that should lose money. They provided
funds to a mortgage market without adequate risk
protection. Their losses will be someone else's gain.

My suggestion is that you expect more negative

reactions in the stock market for certain firms. This
will create some stock price volatility. Yet, in the
long run, the economy will produce positive returns
for most firms including financial firms. Virtually all
firms have been punished in the declining market,
yet some will not be that adversely affected. Pick
your investments. Know if you can stay in for the
long run or not. Evaluate the balance sheets of the
companies you have invested in to see what their
potential loss exposure is, and reallocate or not
based on your findings.

Neither over nor under estimate what the Fed can

do. If it can lower all interest rates, the value of
bonds will increase and losses will be minimized. But
the Fed can only control short term interest rates
and the policies it pursues can have additional
affects on the value of the dollar and future inflation,
which can turn long term interest rates the opposite
direction, reducing the value of long term bonds.
 CHAPTER -2
To analysis the money market and its
instruments
 WHAT IS MONEY MARKET

The money market is a mechanism that deals with

the lending and borrowing of short term funds. The
India Money Market has come of age in the past two
decades. In order to study the money market of
India in detail, we at first need to understand the
parameters around which the money market in India
revolves.

The slice of the financial market where instruments

with high liquidity and very short maturities are
traded is called money market. This is a generic
definition. Who uses money market? The players
who indulge in short term from several days to less
than a year. It is mainly used for borrowing and
lending over this short term. Due to the highly liquid
nature of the securities and short maturities, money
market is perceived as a safe place to lock in money.

The participants in the financial market perceive a

thin line, differentiating between the capital market
and the money market. In money market, there is
borrowing and lending for periods of a year or less.
Capital market refers to stock markets where the
common stocks are traded, and bond markets where
bonds are issued and traded. This is in sharp
contrast to money markets which provide short term
debt financing and investment. The major purpose of
financial markets is to transfer funds from lenders to
borrowers Financial market participants commonly
distinguish between the "capital market" and the
"money market," with the latter term generally
referring to borrowing and lending for periods of a
year or less. The United States money market is very
efficient in that it enables large sums of money to be
transferred quickly and at a low cost from one
economic unit (business, government, bank, etc.) to
another for relatively short periods of time. The need
for a money market arises because receipts of
economic units do not coincide with their
expenditures. These units can hold money balances
—that is, transactions balances in the form of
currency, demand deposits, or NOW accounts—to
insure that planned expenditures can be maintained
independently of cash receipts. Holding these
balances, however, involves a cost in the form of
foregone interest. minimize this cost, economic units
usually seek to hold the minimum money balances
required for day-today transactions. They
supplement these balances with holdings of money
market instruments that can be
Converted to cash quickly and at a relatively low
cost and that have low price risk due to their short
maturities. Economic units can also meet their short-
term cash demands by maintaining access to the
money market and raising funds there when
required. The money market encompasses a group
of short-term credit market instruments, futures
market instruments, and the Federal Reserve's
discount window.

MAJOR PLAYERS IN MONEY MARKET

 Commercial banks
 Governments
 Corporation
 Government-sponsored enterprise
 Money market mutual funds
 Future market exchange
  Brokers and dealers
 The federal reserve

How can I participate in the Money

Markets

Due to the large denominations that are traded in

the money markets, it is nearly impossible for most
individual investors to directly access this market
without using an intermediary.  Individuals can
enter into the money market through money market
mutual funds by opening a money market account at
a banking institution or even with a brokerage
company.  It is like setting up a checking account
which earns more interest than a traditional bank
account would.  You can write checks against it; add
funds and withdraws funds on demand.

The performance of the Indian Money Market

is heavily dependent on real interest rate that is the
interest rate that is inflation adjusted. Though the
money market is free from interest rate ceilings,
structural barriers and other institutional factors
can be held responsible for creating distortions in
India Money Market. Apart from the call market
rates, the other interest rates in the Indian Money
Market usually do not change in the short run.

It is due to this disparity between the opposite

forces that is prevalent in the money market in India
that a well defined income path cannot be traced.

Owing to the deregulation of the interest rate in the

early nineties following the economic reforms laid
down by the then finance minister Dr. Manmohan
Singh, studies concerning the behavior of interest
rate was restricted. However the liquidity of the
market makes its a good subject for empirical
research.

The Indian Money Market involves a wide range of

instruments. Here, maturities range from one day to
a year, issued by banks and corporates of various
sizes. The money market is also closely linked with
the Foreign Exchange Market through the process of
covered interest arbitrage in which the forward
premium acts as a bridge between domestic and
foreign interest rates.

To analyze the interest rates that characterize

the Indian Money Market, the following
elements need to be covered:
 The term structure of interest rate.
 The difference between domestic and
international interest rates
 The market structure differences between the
auction markets that clear continuously and the.
customer markets.
 The credit speed between instruments involving
similar maturity but diverse risk factor.

MONEY MARKET UPDATES

G-sec Market: The benchmark 10-year security
6.05% GOI 2019 opened at Rs93.50 implying a yield
of 7.08% higher than previous close of 7.02%. The G-
sec market is expected to trade on a bearish note
tracking announcement of Auction Calendar on
Thursday.
RBI announced that Government would borrow
Rs2,41,000 crore in the first half of FY 2009-10. RBI
also announced it would purchase securities worth
Rs80,000 crore under Open Market Operations in
the first half of FY 2009-10. The G-sec yields are
likely to be rangebound between 7.00% - 7.20%.

Money market:

The Call rate and CBLO rate opened at 5.20% higher

than previous day’s high of 5.00%. The Money
Market rates are expected to harden tracking
concerns over liquidity in the system ahead of the
huge borrowing program.

Swap Market:

The 5Y OIS swap rate opened at 5.67% higher than

previous close of 5.59%. The OIS swap rates are
expected to harden tracking the movement in G-sec
yields.

Forex Market:

The INR opened at Rs50.88 against the USD,

depreciating from yesterday’s closing level of
Rs50.60. Rupee is expected to trade in the range of
50.65 – 51.00.

MONEY MARKET SCHEME

Money market schemes invest in short-term

(maturing within one year) interest bearing debt
instruments
These securities are highly liquid and provide safety
of investment, thus making money market schemes
the safest investment option when compared with
other mutual fund schemes. However, even money
market schemes are exposed to the interest rate
risk. The typical investment options for these funds
 include Treasury Bills (issued by governments),
Commercial papers (issued by companies) and
Certificates of Deposit (issued by banks).

MONEY MARKET OPERATION

MONEY MARKETS @
Volume Wtd.Avg.Rate Range
(One Leg)
A. Overnight Segment
 
(I+II+III) 73,915.24 4.09 2.10-4.75
     I. Call Money  
14,468.96 4.23 2.10-4.30
     II. CBLO  
36,198.70 3.93 3.85-4.18
     III. Market Repo  
23,247.58 4.26 3.95-4.75
B. Notice and Term
 
Money Segment
     I. Notice Money  
0.20 3.40 3.40-3.40
     II. Term Money  
180.00 - 6.80-9.10
RBI OPERATIONS

Amount Outstanding Rate

C. Standing Liquidity Facility Availed from RBI

6,437.08 5.50
of which
   
Special Refinance Facility*
4,946.55
D. Liquidity Adjustment Facility
     (i) Repo (1 Day)
0.00 5.50
  (14/15 days)#
920.00 5.50
  (1/ 2/ 3 month[s])^
1,040.00 5.50
     (ii) Reverse Repo (1 Day)
49,225.00 4.00
RESERVE POSITION @
E. Scheduled Commercial Bank's 17/01/2009 219,219.45
Cumulative Cash Balances with RBI as on
18/01/2009
   
  438,438.90
for the fortnight ending 30-01-2009      

@ Based on provisional Reserve Bank of India / Clearing Corporation of India Limited Data

- Not Applicable / No Transaction,

# under special term repo facility
^ under forex swap facility
*Under Section 17(3B) of the RBI Act 1934

MONEY MARKET FUTURE

Money market future share futures contracts based

on short-term interest rates. Futures contracts for
financial instruments are a relatively recent
innovation. Although futures markets have existed
over 100years in the United States, futures trading
was limited to contracts for agricultural and other
commodities before 1972. The introduction of
foreign currency futures that year by the newly
formed International Monetary Market (IMM)
division of the Chicago Mercantile Exchange (CME)
marked the advent of trading in
financial futures.
Four different futures contracts based on money
market interest rates are actively traded at present
date, the IMM has been the site of the most active
trading in money market futures. The three-month
U.S.
Treasury bill contract, introduced by the IMM in
1976, was the first futures contract based on short-
term interest rates. Three-month Eurodollar time
deposit futures, now one of the most actively traded
of all futures contracts, started trading in 1981.
More recently, both the CBT and the IMM
introduced futures contracts based on one-month
interest rates. The CBT listed its 30-day interest rate
futures contract in 1989, while the Chicago
Mercantile Exchange introduced a one-month LIBOR
futures contract in 1990.

Futures Contracts
Futures contracts traditionally have been
characterized as exchange-traded, standardized
agreements to buy or sell some underlying item on a
specified future date. For example, the buyer of a
Treasury bill futures contract—who is said to take on
a "long" futures position—commits to purchase a 13-
week Treasury bill with a face value of $1 million on
some specified future date at a price negotiated at
the time of the futures transaction; the seller—who
is said to take on a "short" position—agrees to
deliver the specified bill in accordance with the
terms of the contract. In contrast, a "cash" or "spot"
market transaction simultaneously prices and
transfers physical ownership of the item being
soldThe advent of cash-settled futures contracts
such as Eurodollar futures has rendered this
traditional definition overly restrictive, however,
because actual delivery never takes place with cash-
settled contracts. Instead, the buyer and seller
exchange payments based on changes in the price of
a specified underlying
item or the returns to an underlying security. For
example, parties to an IMM Eurodollar contract
exchange payments based on changes in market
interest rates for three-month Eurodollar deposits—
the underlying deposits are neither "bought" nor
"sold" on the contract maturity date. A more general
definition of a futures contract, therefore, is a
standardized, transferable agreement that provides
for the exchange of cash flows based on changes in
the market price of some commodity or returns to a
specified security. Futures contracts trade on
organized exchanges that determine standardized
specifications for traded contracts. All futures
contracts for a given item specify the same delivery
requirements and one of a limited number of
designated contract maturity dates, called
settlement dates. Each futures exchange has an
affiliated clearinghouse that records all transactions
and ensures that all buy and sell trades match. The
clearing organization also assures the financial
integrity of contracts
traded on the exchange by guaranteeing contract
performance and supervising the process of delivery
for contracts held to maturity.

Futures Exchanges

In addition to providing a physical facility where

trading takes place, a futures exchange determines
the specifications of traded contracts and regulates
trading practices. There are 13 futures exchanges in
the United States at present. The principal
exchanges are in Chicago and New York. Each
futures exchange is a corporate entity owned by its
members. The right to conduct transactions on the
floor of a futures exchange is limited to exchange
members, although trading privileges can be leased
to non members. Members have voting rights that
give them a voice in the management of the
exchange. Memberships, or "seats," can be bought
and sold: futures exchanges routinely make public
the most recent selling and current offer price for a
seat on the exchange. Trading takes place in
designated areas, known as "pits," on the floor of the
futures exchange through a system of open outcry in
which traders announce bids to buy and offers to sell
contracts. Traders on the floor of the exchangecan
be grouped into two broad categories: floor brokers
and floor traders. Floor brokers, also known as
commission brokers, execute orders for off-exchange
customers and other members. Some floor brokers
are employees of commission firms, known as
Futures Commission Merchants, while others are
independent operators who contract to execute
trades for brokerage firms.

Futures Commission Merchants

A Futures Commission Merchant (FCM) handles

orders to buy or sell
futures contracts from off-exchange customers. All
FCMs must be licensed by the Commodity Futures
Trading Commission (CFTC), which is the
government agency responsible for regulating
futures markets. An FCM can be a person or a firm.
Some FCMs are exchange members employing their
own floor brokers. FCMs that are not exchange
members must make arrangements with a member
to execute customer orders on their behalf.

Role of the Exchange Clearinghouse

Each futures exchange has an affiliated exchange

clearinghouse
whose purpose is to match and record all trades and
to guarantee contract performance. In most cases
the exchange clearinghouse is an independently
incorporated organization, but it can also be a
department of the exchange. The Board of Trade
Clearing Corporation, the CBT's clearinghouse, is a
separate corporation
affiliated with the exchange, while the CME Clearing
House Division is a department of the exchange.
Clearing member firms act as intermediaries
between traders on the floor of the exchange and the
clearinghouse. They assist in recording transactions
and assume responsibility for contract performance
on the part of floor traders and commission
merchants who are their customers. Although
clearing member firms are all members of the
exchange, not all exchange members are clearing
members. All transactions
taking place on the floor of the exchange must be
settled through a clearing member. Brokers or floor
traders not directly affiliated with a clearing
member must make arrangements with one to act as
a designated clearing agent. The clearinghouse
requires each clearing member firm to guarantee
contract performance for all of its customers. If a
clearing member's customer defaultson an
outstanding futures commitment, the clearinghouse
holds the clearing member responsible for any
resulting losses.

Margin Requirements
Margin deposits on futures contracts are often
mistakenly compared to stock margins. Despite the
similarity in terminology, however, futures margins
differ fundamentally from stock margins. Stock
margin refers to a down payment on the purchase of
an equity security on credit, and so represents funds
surrendered to gain physical possession of a
security. In contrast, a margin deposit on a
futures contract is a performance bond posted to
ensure that traders honor their contractual
obligations, and not a down payment on a credit
transaction. The value of a futures contract is zero to
both the buyer and the seller at the time it is
negotiated, so a futures transaction involves no
exchange of money at the outset. The practice of
collecting margin deposits dates back to the early
days of trading in time contracts, as the precursors
of futures contracts were then called. Before the
institution of margin requirements, traders
adversely affected by price movements frequently
defaulted on their contractual obligations, often
simply disappearing as the delivery date on their
contracts drew near. In response to these events,
futures
exchanges instituted a system of margin
requirements, and also began requiring traders to
recognize any gains or losses on their outstanding
futures commitments at the end of each trading
session through a daily settlement procedure known
as "marking to market."
 ROLE
OF
RESERVE BANK OF INDIA
(RBI)

HISTORY OF RESERVE BANK OF

INDIA
The Reserve Bank of India is the central bank of the
country. Central banks are a relatively recent
innovation and most central banks, as we know them
today, were established around the early twentieth
century.

The Reserve Bank of India was set up on the basis of

the recommendations of the Hilton Young
Commission. The Reserve Bank of India Act, 1934 (II
of 1934) provides the statutory basis of the
functioning of the Bank, which commenced
operations on April 1, 1935.

The Reserve Bank of India was set up on the basis of

the recommendations of the Royal Commission on
Indian Currency and Finance also known as the
Hilton-Young Commission.

HILTON YOUNG COMMISSION

 FIRST CENTRAL BOARD OF DIRECTOR

The Reserve Bank of India was set up as a Share Holders' Bank. The
Share Issue of the Bank offered in March, 1935 was the largest share
issue in India at the time. The matter was further compounded by the
conditions and restrictions imposed under the Act. These conditions
related to qualifications of the shareholders, the geographical
distribution and allotment of shares (to avoid concentration of shares
and to ensure that those holding the shares were fit and proper. To
simplify matters, Share Certificate Forms of the different registers
were printed in different colours. Despite the intricate and gigantic
nature of the task, it was carried out with great 'accuracy and
dispatch'.
 SHARE CERTIFICATES

A message sent by the Viceroy to the Governor, Osborne

Smith when the Reserve Bank of India commenced its
operations on 1st April, 1935

Message

OSBORNE SMITH GOVERNOR RESERVE BANK CALCUTTA.

FOLLOWING HAS BEEN RECEIVED FROM SECRETARY FOR YOU.
BEGINS, AS RESERVE BANK COMMENCES OPERATIONS TODAY I
TAKE OPPORTUNITY TO CONVEY YOU AND YOUR COLLEAGUES
ON THE BOARD MY MOST GOOD WISHES AND TO EXPRESS MY
CONFIDENCE THAT THIS GREAT UNDERTAKING WILL
CONTRIBUTE LARGELY TO THE ECONOMIC WELL BEING OF INDIA
AND OF ITS PEOPLE. PRIVATE SECRETARY VICEROY
 TELEGRAM

RBI COMMENCEMENT

The Reserve Bank of India was nationalised with effect from

1st January, 1949 on the basis of the Reserve Bank of India
(Transfer to Public Ownership) Act, 1948. All shares in the
capital of the Bank were deemed transferred to the Central
Government on payment of a suitable compensation. The
image is a newspaper clipping giving the views of Governor
CD Deshmukh, prior to nationalisation.
 RBI NATIONALISATION

RBI HISTORY

The Bank was constituted to

 Regulate the issue of banknotes
 Maintain reserves with a view to securing
monetary stability and
 To operate the credit and currency system of
the country to its advantage.

The Bank began its operations by taking over from

the Government the functions so far being
performed by the Controller of Currency and from
the Imperial Bank of India, the management of
Government accounts and public debt. The existing
currency offices at Calcutta, Bombay, Madras,
Rangoon, Karachi, Lahore and Cawnpore (Kanpur)
became branches of the Issue Department. Offices of
the Banking Department were established in
Calcutta, Bombay, Madras, Delhi and Rangoon.
Burma (Myanmar) seceded from the Indian Union in
1937 but the Reserve Bank continued to act as the
Central Bank for Burma till Japanese Occupation of
Burma and later upto April, 1947. After the partition
of India, the Reserve Bank served as the central
bank of Pakistan upto June 1948 when the State
Bank of Pakistan commenced operations. The Bank,
which was originally set up as a shareholder's bank,
was nationalised in 1949.

An interesting feature of the Reserve Bank of India

was that at its very inception, the Bank was seen as
playing a special role in the context of development,
especially Agriculture. When India commenced its
plan endeavours, the development role of the Bank
came into focus, especially in the sixties when the
Reserve Bank, in many ways, pioneered the concept
and practise of using finance to catalyse
development. The Bank was also instrumental in
institutional development and helped set up
insitutions like the Deposit Insurance and Credit
Guarantee Corporation of India, the Unit Trust of
India, the Industrial Development Bank of India, the
National Bank of Agriculture and Rural
Development, the Discount and Finance House of
India etc. to build the financial infrastructure of the
country.

With liberalisation, the Bank's focus has shifted back

to core central banking functions like Monetary
Policy, Bank Supervision and Regulation, and
Overseeing the Payments System and onto
developing the financial markets.

ESTABLISHEMENT

Reserve Bank of India was established on April 1,

1935 in accordance with the provisions of the
Reserve Bank of India Act, 1934. The Central Office
of the Reserve Bank was initially established in
Calcutta but was permanently moved to Mumbai in
1937. The Central Office is where the Governor sits
and where policies are formulated. Though originally
privately owned, since nationalisation in 1949, the
Reserve Bank is fully owned by the Government of
India.

PREAMBLE

The Preamble of the Reserve Bank of India describes

the basic functions of the Reserve Bank as to
regulate the issue of Bank Notes and keeping of
reserves with a view to securing monetary stability
in India and generally to operate the currency and
credit system of the country to its advantage.

CENTRAL BOARD
The Reserve Bank's affairs are governed by a central
board of directors. The board is appointed by the
Government of India in keeping with the Reserve
Bank of India Act.

 Appointed/nominated for a period of four years

 Constitution:
o Official Directors
 Full-time : Governor and not more than
four Deputy Governors
o Non-Official Directors
 Nominated by Government: ten
Directors from various fields and one
government Official
 Others: four Directors - one each from
four local boards

LOCAL BOARDS
  One each for the four regions of the country in
Mumbai, Calcutta, Chennai and New Delhi
 Membership
 consist of five members each
 appointed by the Central Government
 for a term of four years

Function: To advise the Central Board on local

matters and to represent territorial and economic
interests of local cooperative and indigenous banks;
to perform such other functions as delegated by
Central Board from time to time

FINANCIAL SUPERVISION

The Reserve Bank of India performs this function

under the guidance of the Board for Financial
Supervision (BFS). The Board was constituted in
November 1994 as a committee of the Central Board
of Directors of the Reserve Bank of India.

Objectives

Primary objective of BFS is to undertake

consolidated supervision of the financial sector
comprising commercial banks, financial institutions
and non-banking finance companies.

Constitution

The Board is constituted by co-opting four Directors

from the Central Board as members for a term of
two years and is chaired by the Governor. The
Deputy Governors of the Reserve Bank are ex-officio
members. One Deputy Governor, usually, the Deputy
Governor in charge of banking regulation and
supervision, is nominated as the Vice-Chairman of
the Board.
BFS Meeting

The Board is required to meet normally once every

month. It considers inspection reports and other
supervisory issues placed before it by the
supervisory departments.

BFS through the Audit Sub-Committee also aims at

upgrading the quality of the statutory audit and
internal audit functions in banks and financial
institutions. The audit sub-committee includes
Deputy Governor as the chairman and two Directors
of the Central Board as members.

The BFS oversees the functioning of Department of

Banking Supervision (DBS), Department of Non-
Banking Supervision (DNBS) and Financial
Institutions Division (FID) and gives directions on
the regulatory and supervisory issues.

Functions

Some of the initiatives taken by BFS include:

restructuring of the system of bank inspections

introduction of off-site surveillance,
strengthening of the role of statutory auditors
and
strengthening of the internal defences of
supervised institutions.

The Audit Sub-committee of BFS has reviewed the

current system of concurrent audit, norms of
empanelment and appointment of statutory auditors,
the quality and coverage of statutory audit reports,
and the important issue of greater transparency and
disclosure in the published accounts of supervised
institutions.
Current Focus

 supervision of financial institutions

 consolidated accounting
 legal issues in bank frauds
 divergence in assessments of non-performing
assets and
 supervisory rating model for banks.

LEGAL FRAMEWORK

Umbrella Acts

 Reserve Bank of India Act, 1934: governs the

Reserve Bank functions
 Banking Regulation Act, 1949: governs the
financial sector

Acts governing specific functions

 Public Debt Act, 1944/Government Securities

Act (Proposed): Governs government debt
market
 Securities Contract (Regulation) Act, 1956:
Regulates government securities market
 Indian Coinage Act, 1906:Governs currency and
coins
 Foreign Exchange Regulation Act, 1973/Foreign
Exchange Management Act, 1999: Governs
trade and foreign exchange market

Acts governing Banking Operations

  Companies Act, 1956:Governs banks as
companies
 Banking Companies (Acquisition and Transfer of
Undertakings) Act, 1970/1980: Relates to
nationalisation of banks
 Bankers' Books Evidence Act
 Banking Secrecy Act
 Negotiable Instruments Act, 1881

Acts governing Individual Institutions

 State Bank of India Act, 1954

 The Industrial Development Bank (Transfer of
Undertaking and Repeal) Act, 2003
 The Industrial Finance Corporation (Transfer of
Undertaking and Repeal) Act, 1993
 National Bank for Agriculture and Rural
Development Act
 National Housing Bank Act
 Deposit Insurance and Credit Guarantee
Corporation Act.

MAIN FUNCTIONS
Monetary Authority:

 Formulates, implements and monitors the

monetary policy.
 Objective: maintaining price stability and
ensuring adequate flow of credit to productive
sectors.

Regulator and supervisor of the financial

system:

 Prescribes broad parameters of banking

operations within which the country's banking
and financial system functions.
  Objective: maintain public confidence in the
system, protect depositors' interest and provide
cost-effective banking services to the public.

Manager of Foreign Exchange

 Manages the Foreign Exchange Management

Act, 1999.
 Objective: to facilitate external trade and
payment and promote orderly development and
maintenance of foreign exchange market in
India.

Issuer of currency:

 Issues and exchanges or destroys currency and

coins not fit for circulation.
 Objective: to give the public adequate quantity
of supplies of currency notes and coins and in
good quality.

Developmental role

 Performs a wide range of promotional functions

to support national objectives.

Related Functions

 Banker to the Government: performs merchant

banking function for the central and the state
governments; also acts as their banker.
 Banker to banks: maintains banking accounts of
all scheduled banks.

Offices
 Has 22 regional offices, most of them in state
capitals.
Training Establishments
Has six training establishments

 Three, namely, College of Agricultural Banking,

Bankers Training College and Reserve Bank of
India Staff College are part of the Reserve Bank
 Others are autonomous, such as, National
Institute for Bank Management, Indira Gandhi
Institute for Development Research (IGIDR),
Institute for Development and Research in
Banking Technology (IDRBT)

Subsidiaries
Fully owned: National Housing Bank(NHB), Deposit
Insurance and Credit Guarantee Corporation of
India(DICGC), Bharatiya Reserve Bank Note Mudran
Private Limited(BRBNMPL)

Majority stake: National Bank for Agriculture and

Rural Development (NABARD)
The Reserve Bank of India has recently divested its
stake in State Bank of India to the Government of
India.
INSTRUMENTS
OF
MONEY MARKET
 Commer
cial
paper

Certificat
e
of
deposit

Treasur
y bills

Call/
notice/
Instruments term
of money
Money
market
Repo/
reverse
repo

Bills
rediscou
ntin-g

Banker
acceptance
 COMMERCIAL PAPER
Commercial paper is an unsecured promissory
note with a fixed maturity of one to 270 days.
Commercial Paper is a money-market security issued
(sold) by large banks and corporations to get money
to meet short term debt obligations (for example,
payroll), and is only backed by an issuing bank or
corporation's promise to pay the face amount on the
maturity date specified on the note. Since it is not
backed by collateral, only firms with excellent credit
ratings from a recognized rating agency will be able
to sell their commercial paper at a reasonable price.
Commercial paper is usually sold at a discount from
face value, and carries shorter repayment dates than
bonds. The longer the maturity on a note, the higher
the interest rate the issuing institution must pay.
Interest rates fluctuate with market conditions, but
are typically lower than banks' rates

DEFINITION
 An investor deposits Rs.one crore in a company
for 6 months and gets a promissory note from
the company, this promissory note will be called
a commercial paper
 A commercial paper is a shot term unsecured
loan of fixed maturity, bearing interest or issued
at discount, given to a company in exchange for
a promissory note which is negotiable by
endorsement and delivery.

FEATURES
They are basically some features of the commercial
paper are as follows-:

Short – term instrument

Commercial paper is a short term money market

instrument in the form of a promissory note or in
dematerialised form and has fixed maturity.

Unsecured

The debts are unsecured.

Issued at discount or bear interest

Commercial papers bear interest at fixed rate.

Issued by banks, insurance and finance

companies etc.

Commercial paper can be issued directly by banks,

insurance or finance companies to investors. Issuing
organization can buy back the CP’s should there be
need.

High denomination

The minimum amount investible in commercial

paper is Rs 10 lakhs and any further amount in
multiples of rs. 5 lakhs.

Easy negotiability

Commercial paper can be easily negotiated by

endorsement and delivery.

Purchasers of C.P.S
CPS may be held by individuals banks, companies,
foreign financial institutions and non-resident
Indians.

RBI GUIDELINES ABOUT ISSUE OF

COMMERCIAL PAPERS
Qualifications of the issuing institutions

Only those institutions and companies can issue

commercial papers which satisfy the following
conditions

 Have a net tangible worth Rs. 4 crores

 Have a minimum current ratio of 1.33:1

 Have fund base working capital limit of Rs 5

crores or more

 Have debt servicing ratio closer to 2

 Are listed on a stock exchange

 Are subject to CAS discipline

 Have a credit rating of P2 from CRISIL, or A2

from ICRA

Amount of minimum investment

Commercial papers shall be issued for minimum

amount of Rs. 10 lakhs and in multiples of Rs. 5
lakhs thereafter.

Maturity period

Commercial papers shall be issued for a minimum

maturity period of 15 days and maximum period of
1 year.
 Total amount of issue

The aggregate amount shall not exceed 75% of the

issuers fund based working capital

Form of issue

Commercial paper shall be issued in the form of

promissory note with maturity after some definite
period. It can be issued in dematerialised form
also.

Who can invest

Investment in commercial papers can be made by

any individual bank, Indian companies, other
association persons and foreign financial
institutions. NRIs can invest on non- repatriation
basis.

Compliance of law

The companies issuing commercial papers have to

ensure that provisions of various statutes such as
Companies Act, Income Tax Act, and Negotiable
Instruments Act are complied with.

Issuing and paying agents

Only scheduled banks can act as an issuing and

paying agents.

ADVANTAGES
Simple to issue

Unlike issue of shares, issues of commercial papers

does not involve much formalities or documentation
between the issuers and the investors. Only a
promissory note is to be issued

Flexibilities

The issuers i.e. the company can issue commercial

papers with maturities tailors- made to its
requirements i.e. the period for which it needs
money

Borrowing at cheaper rates

A company of good reputation and credit standing

can obtain shot term funds through this method at
cheaper rates than borrowings from banks or
through other money markets instruments

Higher returns to investors

By investing through commercial papers investors

can earn higher rate of interest than through
investment in banks for short term

Creation of secondary market

Commercial papers issued in the form of promissory

notes are negotiable instruments and can be bought
and sold in the secondary market, this results in
transfer of funds from cash surplus entities to cash
deficient entities.

Lesser handling costs

As the commercial papers are issued for Rs. 10 lakhs

or more, accounts have to be kept for a new
investors only and not for a large number of small
investors as in the case of public deposits

LIMITATIONS

Structural rigidity such as credit rating

requirements, timings and terms of issue , maturity
range, high denomination and low interest rates
have hindered the development of commercial paper
market.

CERTIFICATE OF DEPOSITS
Certificates of Deposit (“CD”) were introduced in
1989 following the acceptance of the Vaghul
Working Group of Money Market. These are also
usance promissory notes issued at a discount to the
face value and transferable in demat form. They
attract stamp duty. CDs are issued by scheduled
commercial banks and it offers them an opportunity
to mobilise bulk resources for better fund
management. To the investors they offer better cash
management opportunity with market related yield
and high safety.
When an investors deposits a large sum( minimum
Rs. 10 lakhs) in a bank for short period and the bank
gives a promissory note in returns, it is called a
certificate of deposit or CD in short.
Definition
Certificates of deposits are marketable receipts of
funds in the form of promissory notes deposited in
banks for specified periods at a specified rate of
interest.
FEATURES AND RBI GUIDELINES

Issued by banks
CD’s are issued by banks or financial institutions
Period
These are issued for a period between 91 days to 1
year. Term lending institutions can issue CDs with
maturity periods 1 to 3 years.
Form
The receipts for deposits are in the form of
promissory notes. The debts are unsecured.
Transferability
CDs are freely transferable by endorsement and
delivery after a lock-in- period of 30 days from the
date of issue.
Interest
These are issued at discount or bear a fixed rate of
interest.
Minimum amount
The minimum size of an issue to a single investor
is Rs. 10 lakhs and in multiples of Rs. 5 lakhs
thereafter.
Who can issue CDs
All banks (except regional rural banks), IDBI,
ICICI, IFCI are all allowed to issue CDs without
any ceiling.
To whom issued
These can be issued to individuals, corporations,
companies, trust funds, associations and to NRI’s
on non- repatriation basis.
No buy back or loans
 Issuing banks can not buy back the CD’s before
maturity or grant loan against them.
Stamp duty
CD’s are subject to stamp duty.
CD’s are subject to CRA and SLR requirements.

ADVANTAGES
Simple to issue
CD’s are simple to issue, they do not require any
documentation.
Liquidity
CD’s offers maximum liquidity, they are easily
transferable.
Return
Investment in CD’s provide good return to investors
having short term surplus funds
Profitable employment of funds
From the point of view of banks CD’s provide them
avenues for short term gainful employment of funds.
CD can not be encashed before maturity date nor
loans granted against them.

LIMITATIONS
Though scheme of CD’s has been operation since
1989 it is yet to prove popular, it has remained
confined to less than fifty banks. The main reasons
for their unpopularity are:
Stamp duty
CD’s are subject to stamp duty which makes them
less attractive
Lack of secondary market
There is limited secondary market for CD’s inspite of
efforts of the Discount and Finance House of India.
CD holders get attractive returns on them and
therefore are reluctant to part with them before
maturity
Lock in period
CDs can not be negotiated before expiry of 30 days
from the date of issue, this restricts their
transferability.
 The money is tied along with the long maturity
period of the Certificate of Deposit. Huge
penalties are paid if one gets out of it before
maturity

SIMILARITIES BETWEEN CPs AND CDs

 Both are short term unsecured investment

 Both are issued in the form of promissory
notes or dematerialised form.
 Both are transferable by endorsement and
delivery.
 Both have to bear stamp duty.
 Practically all kinds of investors can invest
in them.

TREASURY BILLS
Treasury Bills are money market instruments to
finance the short term requirements of the
Government of India. These are discounted
securities and thus are issued at a discount to face
value. The return to the investor is the difference
between the maturity value and issue price.

Types Of Treasury Bills

There are different types of Treasury bills based on
the maturity period and utility of the issuance like,
ad-hoc Treasury bills, 3 months, 12months Treasury
bills etc. In India, at present, the Treasury Bills are
the 91-days and 364-days Treasury bills.

Benefits Of Investment In Treasury Bills

 No tax deducted at source
 Zero default risk being sovereign paper

 Highly liquid money market instrument

 Better returns especially in the short term

 Transparency

Simplified settlement

High degree of tradeability and active secondary

market facilitates meeting unplanned fund
requirements.

Features

Form
The treasury bills are issued in the form of
promissory note in physical form or by credit to
Subsidiary General Ledger (SGL) account or Gilt
account in dematerialised form.
Minimum Amount Of Bids Bids for treasury bills are
to be made for a minimum amount of Rs 25000/- only
and in multiples thereof.

Eligibility:
All entities registered in India like banks,
financial institutions, Primary Dealers, firms,
companies, corporate bodies, partnership firms,
institutions, mutual funds, Foreign Institutional
Investors, State Governments, Provident Funds,
trusts, research organisations, Nepal Rashtra
bank and even individuals are eligible to bid and
purchase Treasury bills.
Repayment
The treasury bills are repaid at par on the expiry of
their tenor at the office of the Reserve Bank of India,
Mumbai.
Availability
All the treasury Bills are highly liquid instruments
available both in the primary and secondary market.
Day Count
For treasury bills the day count is taken as 365 days
for a year.
Yield Calculation
The yield of a Treasury Bill is calculated as per the
following formula:

(100-P)*365*100

P*D

Wherein

Y= discounted yield
 P = price

D = date of maturity

Example
A cooperative bank wishes to buy 91 Days Treasury
Bill Maturing on Dec. 6, 2002 on Oct. 12, 2002. The
rate quoted by seller is Rs. 99.1489 per Rs. 100 face
values. The YTM can be calculated as following:
The days to maturity of Treasury bill are 55 (October
– 20 days, November – 30 days and December – 5
days)
YTM = (100-99.1489) x 365 x 100/(99.1489*55) =
5.70%
Similarly if the YTM is quoted by the seller price can
be calculated by inputting the price in above
formula.

Primary Market
In the primary market, treasury bills are issued by
auction technique.
CALENDAR OF AUCTION AS ANNOUNCED BY
RESERVE BANK OF INDIA FOR 2002-03
Treasur Notified Day of auction Day of
y Bill amount (Rs payment
crore)
91 day 500 Every Following
Wednesday Friday
364 day 1000 Wednesday to Following
coincide with Friday
reporting Friday

Salient Features Of The Auction Technique

  The auction of treasury bills is done only at
Reserve Bank of India, Mumbai.
 Bids are to be submitted on NDS by 2:30 PM on
Wednesday. If Wednesday happens to be a
holiday then bids are to submitted on Tuesday.

 Bids are submitted in terms of price per Rs 100.

For example, a bid for 91-day Treasury bill
auction could be for Rs 97.50.

 Auction committee of Reserve Bank of India

decides the cut-off price and results are
announced on the same day.

 Bids above the cut-off price receive full

allotment; bids at cut-off price may receive full
or partial allotment and bids below the cut-off
price are rejected.

Types Of Auctions

There are two types of auction for treasury bills:

→ Multiple Price Based or French Auction:

Under this method, all bids equal to or
above the cut-off price are accepted.
However, the bidder has to obtain the
treasury bills at the price quoted by him.
This method is followed in the case of
364days treasury bills and is valid only for
competitive bidders.
→ Uniform Price Based or Dutch auction:
Under this system, all the bids equal to or
above the cut-off price are accepted at the
cut- off level. However, unlike the Multiple
Price based method, the bidder obtains the
treasury bills at the cut-off price and not the
price quoted by him. This method is
 applicable in the case of 91 days treasury
bills only. The system of Dutch auction has
been done away with by the RBI wef
08.12.2002 for the 91 day treasury T Bill.

Secondary Market & Palyers

The major participants in the secondary market are
scheduled banks, financial Institutions, Primary
dealers, mutual funds, insurance companies and
corporate treasuries. Other entities like cooperative
and regional rural banks, educational and religious
trusts etc. have also begun investing their short
term funds in treasury bills.
Advantages
 Market related yields
 Ideal matching for funds management
particularly for short term tenors of less than 15
days

 Transparency in operations as the transactions

would be put through Reserve Bank of India’s
SGL or Client’s Gilt account only

 Two way quotes offered by primary dealers for

purchase and sale of treasury bills.

 Certainty in terms of availability, entry & exit

An Effective Cash Management Product

Treasury Bills are very useful instruments to deploy

short term surpluses depending upon the availability
and requirement. Even funds which are kept in
current accounts can be deployed in treasury bills to
maximise returns Banks do not pay any interest on
fixed deposits of less than 15 days,or balances
maintained in current accounts, whereas treasury
bills can be purchased for any number of days
depending on the requirements. This helps in
deployment of idle funds for very short periods as
well. Further, since every week there is a 91 days
treasury bills maturing and every fortnight a 364
days treasury bills maturing, one can purchase
treasury bills of different maturities as per
requirements so as to match with the respective
outflow of funds. At times when the liquidity in the
economy is tight, the returns on treasury bills are
much higher as compared to bank deposits even for
longer term. Besides, better yields and availability
for very short tenors, another important advantage
of treasury bills over bank deposits is that the
surplus cash can be invested depending upon the
staggered requirements.
Example :
Suppose party A has a surplus cash of Rs 200 crore
to be deployed in a project. However, it does not
require the funds at one go but requires them at
different points of time as detailed below:
Funds Available as on 1.1.2000 Rs. 200 crore
Deployment in a project Rs. 200 crore
As per the requirements
6.1.2000 Rs. 50 crore
13.1.200
Rs. 20 crore
0
02.2.200
Rs. 30 crore
0
08.2.200
Rs. 100 crore
0
Out of the above funds and the requirement
schedule, the party has following two options for
effective cash management of funds:
Option I
Invest the cash not required within 15 days in
bank deposits
The party can invest a total of Rs 130 crore only,
since the balance Rs 70 crores is required within the
first 15 days. Assuming a rate of return of 6% paid
on bank deposits for a period of 31 to 45 days, the
interest earned by the company works out to Rs 76
lacs approximately.
Option II
Invest in Treasury Bills of various maturities
depending on the funds requirements
The party can invest the entire Rs 200 crore in
treasury bills as treasury bills of even less than 15
days maturity are also available. The return to the
party by this deal works out to around Rs 125 lacs,
assuming returns on Treasury Bills in the range of
8% to 9% for the above periods.

Portfolio Management Strategies

Strategies for managing a portfolio can broadly be

classified as active or passive strategies.

Buy And Hold A buy and hold strategy can be

described as a passive strategy since the
Treasury bills once purchased, would be held till
its maturity. The salient features of this strategy
are:
Return is fixed or locked in at the time of
investment itself

The exposure to price variations due to

secondary market fluctuations is eliminated.

There is no risk of default on maturity.

Buy And Trade
This strategy can also be described as an active
market strategy. The returns on this strategy are
higher than the buy and hold strategy as the yield
can be optimised by actively trading the treasury
bills in the secondary market before maturity.

Repo/ Reverse Repo

It is a transaction in which two parties agree to sell

and repurchase the same security. Under such an
agreement the seller sells specified securities with
an agreement to repurchase the same at a mutually
decided future date and a price. Similarly, the buyer
purchases the securities with an agreement to resell
the same to the seller on an agreed date in future at
a predetermined price. Such a transaction is called a
Repo when viewed from the prospective of the seller
of securities (the party acquiring fund) and Reverse
Repo when described from the point of view of the
supplier of funds. Thus, whether a given agreement
is termed as Repo or a Reverse Repo depends on
which party initiated the transaction.
The lender or buyer in a Repo is entitled to receive
compensation for use of funds provided to the
counterparty. Effectively the seller of the security
borrows money for a period of time (Repo period) at
a particular rate of interest mutually agreed with the
buyer of the security who has lent the funds to the
seller. The rate of interest agreed upon is called the
Repo rate. The Repo rate is negotiated by the
counterparties independently of the coupon rate or
rates of the underlying securities and is influenced
by overall money market conditions.
The Repo/Reverse Repo transaction can only be
done at Mumbai between parties approved by RBI
and in securities as approved by RBI (Treasury Bills,
Central/State Govt securities).
Uses of Repo

It helps banks to invest surplus cash

It helps investor achieve money market returns with
sovereign risk.
It helps borrower to raise funds at better rates
An SLR surplus and CRR deficit bank can use the
Repo deals as a convenient way of adjusting
SLR/CRR positions simultaneously.
RBI uses Repo and Reverse repo as instruments for
liquidity adjustment in the system.

Inter Corporate Deposits

For short term cash management of the rich

corporates, the company offers to borrow through
Inter corporate deposits. The company has P1+
credit rating (Highest Rating in its category) for an
amount of Rs. 250 crores.
The company offers two variables of the Inter
Corporate Deposits:
Fixed Rate ICD : the quantum/ rates/ term to
maturity of the ICD are negotitaed by the two
parties at the beginning of the contract and remains
same for the entire term of the ICD. As per the RBI
guidelines the minimum period of the ICD is 7 days
and can be extended to peiod of 1 year. The rates
are generally linked to Interbank Call Money Market
Rates.
Floating Rate ICD : Corporates interested in using
the daily volatility of the call money market are
offered Floating Rate ICD which may be
benchmarked/ linked to either NSE Overnight Call/
Reuters Overnight Call rates. The corporates are
also given Put/ Call option after 7 days for managing
their funds in the event of uncertainity of availability
of idle funds.
Bills Rediscounting

The bills rediscounting scheme was introduced by

RBI in November 1970 under which all licensed
scheduled commercial banks were eligible to
rediscount with RBI genuine trade bills arising out of
sale/ purchase of goods. In November 1981 RBI
stopped rediscounting bills but permitted banks to
rediscount the bills with one another as well as with
approved Financial institutions. To augment
facilities for this activity and also make a larger pool
of resources available, RBI has been progressively
enlarging the number of institutions eligible for bills
rediscounting including primary dealers.

Call/ Notice/ Term Money

Call money market is that part of the national money

market where the day to day surplus of funds, of
banks and primary dealers, are traded in.Call/
Notice/ term money market ranges between one day
to 15 days borrowing and considered as highly
liquid. Other key feature is that the borrowings are
unsecured and the interest rates are very volatile
depending on the demand and supply of the short
term surplus/ defeciency amongst the interbank
players.
The average daily turnover in the call money market
is around Rs. 12000-13000 cr every day and the
market is active between 9.30 to 2.30 every working
day and 9.30to 12.30 every Saturday
Banker's Acceptance

It is a short-term credit investment. It is guaranteed

by a bank to make payments. The Banker's
Acceptance is traded in the Secondary market. The
banker's acceptance is mostly used to finance
exports, imports and other transactions in goods.
The banker's acceptance need not be held till the
maturity date but the holder has the option to sell it
off in the secondary market whenever he finds it
suitable.

Euro Dollars

The Eurodollars are basically dollar- denominated

deposits that are held in banks outside the United
States. Since the Eurodollar market is free from any
stringent regulations, the banks can operate at
narrower margins as compared to the banks in U.S.
The Eurodollars are traded at very high
denominations and mature before six months. The
Eurodollar market is within the reach of large
institutions only and individual investors can access
it only through money market funds.
 CHAPTER 3
To study the defects of the money market
instruments
DEFECTS OF MONEY
MARKET
 Existence of unorgainsed money market
 Absence of integration

 Diversity in the many interest rates

 Seasonal shortage of funds

 Absence of well organised banking system

 Absence of a wide money market

Existence of unorganised money market

The organised money market developed and is

organised in modern lines. It consist of modern and
advanced financial institution like RBI, commercial
banks and co-operative banks. As against this, the
unorganised money market is the traditional market
doing business on traditional lines. It comprises
indigenous banks, moneylenders, merchants, etc.
the indigenous bankers follow their own rules and
practices of financing and banking. They are not
subject to the regulation and control of the Reserve
bank of India. As the result of this dichotomy, it is
extremely difficult for the RBI to have an effective
control on the money market.

absence of integration

The organised banking system and the indigenous

bankers have not been having any contact and
interaction with each other. At one time, each
section of the money market such as the SBI and its
subsidiaries, the other commercial banks confined
themselves to a particular class of business with no
contact with each other. However in recent years,
things have improved because of the efforts of the
RBI in adopting uniform rules and regulation.

Diversity in the many interest rates

Many rates of interest exist for the funds of same

duration. Also there is disparity in the interest rates
charged by different institution. For example call
rates, lending rates of commercial banks, hindi rates
differ widely from 1% to 12%. The basic reason for
the existence of too many different rates of interest
is the immobility of funds from one section of the
money market to another section.

Seasonal shortage of funds

During the busy season from November to June,

there is heavy demand for short term funds for
financing the movement of crops, seasonal activities
like sugar in particular and for financing the higher
tempo of economic activities in general. This result
in shortage of funds and subsequently shooting up of
the interest rate. But in the slack season from July to
October, an opposite situation emerges when
demand for funds and the rate of interest go sown
considerably.

Absence of well- organised banking system

Until recently, there were a few big banks in the

country and they were by and large concentrated in
the large towns and a few important mandi towns.
The country lacked a well- developed branch-
banking network. The rural and semi-urban parts of
the country did not have much of the banking
facilities. However, things have started changing
since 1969 after the nationalisation of the banks.

Absence of wide money market

Bill market forms a very small proportion of the

bank-finance in India as compared to western
countries. Such a market has not fully kept a large
amount of cash credit as the main form of borrowing
from banks rather than rediscounting bills of
exchange, defective and improper hundis, the
practice of cash transactions, etc.
 CHAPTER 4
To study the reforms of the money market

REFORMS/ SUGGESTION TO IMPROVE

MONEY MARKET
 Relaxation of interest rate regulation
 New treasury bills
  Discount and finance house of India Ltd.

 Introduction of new credit instruments

 Mutual funds extended to Pvt. Sector

Relaxation of interest rate regulation

Since 1988, interest rate regulation have been

relaxed. In Nov. 1991 the Narshimam Committee
Report recommendation was accepted. Interest
rates were further deregulated and banking and
financial institution were told to adopt market
related rates of interest. In the 2001 Union Budget,
interest rates were lowered so that lending would
become cheaper and in keeping with the world
interest rates.

New treasury bills

Apart from 90 days treasury bills, the RBI

introduced 182 days treasury bills and sold it
through auctions. In 1992, treasury bills of varying
maturities up to 364 days were introduced. These
long dated paper are for superior to assets and
investments which cannot be easily liquidated
without incurring heavy losses.

Discount and finance house of India Ltd.

The D.F.H. established in 1992 fills the long

standing need of discount house in India which will
buy bills and other short term paper from banks and
financial institutions. It has enabled banks to invest
their idle funds for the short periods in bill. The bank
can sell short term securities to D.F.H.I. and get
funds without disturbing their investments. The
D.F.H.I. is has been able to contribute to the overall
stability of the money market.
Introduction of new credit instruments

The banks and DFHI is have been permitted to raise

short term credit through Certificates of Deposits
(CDs). Longaries whose net worth is 5 crores and
whose shares are listed in the Stock Exchange are
permitted to introduce commercial papers of 3-6
months in order to raise credit. Banks are permitted
to borrow from other banks through Inter Bank
Participation credit can be availed by a bank for 91-
180 days.

Mutual funds extended to Pvt. Sector

Earlier only UTI was permitted to operate the

mutual funds scheme, however, today even the Pvt.
Sector are permitted to float mutual funds schemes,
e.g., Tatas & Birlas, Kottaris from the Pvt. Sector
have established good will amongst the investors.
Moreover , even banks like SBI, Indian Bank, Canara
Bank have entered the field of mutual funds.
 CHAPTER 5
To study the capital market and its
instruments
 CAPITAL MARKET
A capital market is a market where both government
and companies raise long term funds to trade
securities on the bond and the stock market. It
consists of both the primary market where new
issues are distributed among investors, and the
secondary markets where already existent securities
are traded.

In the capital market, mortgages, bonds, equities

and other such investment funds are traded. The
capital market also facilitates the procedure
whereby investors with excess funds can channel
them to investors in deficit.

The capital market provides both overnight and long

term funds and uses financial instruments with long
maturity periods. The following financial instruments
are traded in this market:
 Foreign exchange instruments
 Equity instruments
 Insurance instruments
 Credit market instruments
 Derivative instruments
 Hybrid instruments
Foreign Exchange Instruments
The principal foreign exchange instruments may be
classified as follows, roughly in order of importance:
Bank drafts, not drawn under letter of credit.

Mail transfers.

Commercial or trade drafts and drafts drawn under

letters of credit.

Traveller’s checks and letters of credit.

Postal money orders.

Express orders and bank post remittances.

Bank Drafts

For whatever the reason to pay for goods, for

securities, and so on Americans frequently need to
remit to foreigners under conditions which make
money orders generally undesirable. The amount
may be large, or the remitter may wish to send the
remittance in his own mail. In all these cases the
ordinary bank draft is a most convenient form of
remittance.

In this country, in purely domestic trade, we have

become so accustomed to making payments by
personal check that we may forget that in general
the personal check is not used in foreign trade. It is
true that in trade with Canada, Cuba, and Mexico,
payments are sometimes made by dollar checks
drawn by the buyer (i.e., debtor) on his own bank
account, just as in domestic trade. Usually, however,
the importer, or anyone else, wishing to remit to a
foreigner by check obtains from his bank a "bank
draft" drawn by it on one of its correspondents or
branches abroad.

Here, again, it should be noticed that an American

bank cannot sell a foreign-currency draft to its
customer unless:

(1) It has a correspondent bank or branch in that

foreign country; and (2) it makes arrangement to
reimburse the correspondent for the drawing.

It may, of course, have an adequate deposit in that

bank already; but if it does not, it must purchase
exchange in order to avoid an "open" or "uncovered"
position in the foreign currency involved. The bank
check reproduced is a "demand" draft.

That is, it is payable "at sight" (i.e., on presentation)

in London, and it will be sold to the buyer (or
remitter) at the current market rate

In contrast, equity instruments generally represent

ownership interests entitled to dividend payments,
when declared, but with no specific right to a return
on capital.

Within each of these two general categories, there

are a wide variety of rights, privileges, and
limitations that may be established by the issuing
company.

EQUITY INSTRUMENTS

Common stock is the most basic form of equity

instrument.   It represents an ownership interest in a
corporation, including an interest in earnings, that
translate into declared dividends, as well as an
interest in assets distributed upon dissolution.

Common stock may be voting or non-voting and may

be divided into classes with special voting privileges
assigned to each class.   However, common stock is
typically entitled to full voting rights, i.e., the right
to cast a vote in the election of directors of the
corporation.

Holders of common stock have the greatest

opportunity to share in a company's profitability
because of the unlimited potential for dividends,
appreciation in the value of their common stock, and
realization of liquidation proceeds.   However,
common stock holders also bear the greatest risk of
loss because they are generally subordinate to all
other creditors and preferred stock holders.

There are several advantages to a company that

issues common stock -- there is no obligation to
repay the amount invested, there is no obligation to
pay dividends (thereby enabling earnings to be
reinvested in the business as necessary), there is a
right bestowed upon investors to share in the growth
of the corporation, and investors are allowed the
opportunity to influence management through their
right to vote for directors.

Several disadvantages in issuing common voting

stock include -- a dilution of management's interest
in the corporation's growth, an increase in the
voting power of non-management stockholders, and
investors must bear the maximum risk of losing their
investment.

Preferred stock is another form of equity

instrument.   It represents a hybrid in the sense that
it is an equity interest with certain features
resembling debt.

Preferred stock has preference rights over common

stock with respect to dividends and liquidation
proceeds.   In other words, it has priority when
dividend payments and liquidating distributions are
made.   If desired, dividends can accrue at a pre-
established rate and can be paid on a cumulative
basis when cash flow permits.   Also, preferred stock
may be voting or non-voting or entitled to certain
redemption rights.

Several advantages to issuing preferred stock

include -- no dilution of management's interest in
corporate growth or in voting power (if non-voting
preferred stock is issued), and predictable dividend
payments and preferences upon liquidation (for
which investors may pay a premium).

Disadvantages include -- a subordination of

dividends to be paid on common stock and
limitations on the use of corporate funds to the
extent that pre-established dividend payments must
be made.

DERIVATIVE INSTRUMENTS

A derivative instrument (or simply derivative) is a

financial instrument which derives its value from the
value of some other financial instrument or variable.
For example, a stock option is a derivative because it
derives its value from the value of a stock. An
interest rate swap is a derivative because it derives
its value from one or more interest rate indices. The
value(s) from which a derivative derives its value is
called its underlier(s).

HYBRID INSTRUMENT

The term hybrid instrument is not precisely

defined. Generally, it is used to refer to financial
instruments that blend characteristics of debt and
equity markets. Convertible bonds are an example.
They are debt instruments that have an imbedded
option allowing the holder to exchange them for
shares of the issuing corporation's stock. For this
reason, their market prices tend to be influenced by
both interest rates as well as the issuer's stock price.
Another example would be a structured note linked
to some equity index. These take many forms.
Typical would be a five year note. It is a debt
instrument issued by a corporation or sovereign, but
instead of paying interest, it returns the greater of
The following are some of the main capital market
regulatory authorities:

 U.S. Securities and Exchange Commission

 Securities and Exchange Board of India
 Australian Securities and Investments
Commission
 Authority of Financial Markets (France)
 Canadian Securities Administrators
 Securities and Exchange Surveillance
Commission (Japan)

The stock market forms a major portion of the

capital market

Capital Market Assumptions

Asset allocation is one of the most important
decisions related to investment in the capital
market. There are a number of risk factors related to
these investments, and because of this appropriate
capital market analyses are necessary. There are
firms which provide capital market investment
solutions to investors, each making their own risk
and return calculations, or capital market
assumptions. These assumptions are followed
strictly when making suggestions to the clients
regarding the asset allocation. Many companies also
provide their clients with their capital market
assumptions so that the clients can evaluate their
own investment decisions.

Of course, capital market assumptions cannot be

permanent and thus need to be changed from time
to time. The market prices of different investment
instruments change very rapidly, and with this rapid
change the level of risk also changes. Different
consultation companies use different techniques to
get their perfect capital market assumptions.
However, most companies concentrate on valuations
because they can provide the most accurate capital
market assumptions for the future.

Other factors useful in making capital market

assumptions are the ratio between the price and
earning of the particular asset, the dividend yield,
the interest rates, and the growth rate of the assets.

Apart from the internal factors of the capital market,

there are also macroeconomic trends that are
related to making capital market assumptions. These
include the level of inflation, changes in the Gross
Domestic Product (GDP), and increases or decreases
in the unemployment rate. International external
factors related to the capital market which play a
major role in shaping capital market assumptions
too include taxation, foreign denominations, and
decisions of national regulators.

Role of Capital Market

The primary role of the capital market is to raise
long-term funds for governments, banks, and
corporations while providing a platform for the
trading of securities.

This fundraising is regulated by the performance of

the stock and bond markets within the capital
market. The member organizations of the capital
market may issue stocks and bonds in order to raise
funds. Investors can then invest in the capital
market by purchasing those stocks and bonds.

The capital market, however, is not without risk. It is

important for investors to understand market trends
before fully investing in the capital market. To that
end, there are various market indices available to
investors that reflect the present performance of the
market.
Regulation of the Capital Market

Every capital market in the world is monitored by

financial regulators and their respective governance
organization. The purpose of such regulation is to
protect investors from fraud and deception.
Financial regulatory bodies are also charged with
minimizing financial losses, issuing licenses to
financial service providers, and enforcing applicable
laws.
The Capital Market’s Influence on International
Trade
Capital market investment is no longer confined to
the boundaries of a single nation. Today’s
corporations and individuals are able, under some
regulation, to invest in the capital market of any
country in the world. Investment in foreign capital
markets has caused substantial enhancement to the
business of international trade.
The Primary and Secondary Markets
The capital market is also dependent on two sub-
markets – the primary market and the secondary
market. The primary market deals with newly issued
securities and is responsible for generating new
long-term capital. The secondary market handles the
trading of previously-issued securities, and must
remain highly liquid in nature because most of the
securities are sold by investors. A capital market
with high liquidity and high transparency is
predicated upon a secondary market with the same
qualities.

Capital Market Conditions

The capital market conditions are influenced by
the rise and fall of the stock market and bond
market. Other than the financial condition of the
economy, capital markets are also influenced by
various other external factors.

The capital market deals with the buying and selling

of securities including stocks and bonds. The capital
market conditions largely depend on the prices of
stocks and bonds. There are various risks involved in
the capital market investment that affect the capital
market conditions. The capital market risks, also
termed as systematic risks, can be either market
driven, industry driven or business driven. The risks
may affect the stock and bond prices gravely. The
capital market investors always need to be aware of
the various factors that affect the capital market
conditions.

The economists suggest that behavior of the capital

market also largely depends on the whims of the
investors. The investors may temporarily pull the
stock prices resulting over-reaction in the financial
market. The excessive optimism, or also known as
euphoria, may thus pull up the stock price unduly
high. On the other hand, excessive pessimism may
also drive the stock price to the lowest.

In order to improve the liquidity and transaction

feasibility, the capital markets undergo innovations
and experiments. The major contribution of the
capital markets to the financial markets is to raise
the capital. The corporations, companies, banks and
governments issue stocks and bonds in order to
raise funds. The capital market plays the base
market for this. The conditions of capital market
influence the overall condition of the financial
market. While the fluctuation of stocks and bonds
prices affect the conditions in capital market, the
vise versa is also true. Depending on the condition of
the capital market, the trading trends of the stock
markets and bond markets may also vary.

The capital markets may be either primary market

or secondary market. On one hand when the primary
market deals with the newly issued securities, the
secondary market trades the securities that have
already been issued. The overall market trend of
issuing the securities also affects the capital market
conditions heavily.

Capital Market Reform

Capital market reform enables the capital markets
to embrace new ideas and techniques affecting the
capital market. Capital market liberalization is one
such capital market reform that is adopted by
various countries to strengthen their economy.

A capital market is a place that handles the buying

and selling of the securities. This is the ideal place
where both the governments and companies can
raise their funds. The capital markets of all the
countries have undergone a number of reforms in
the history. Economic theories are made and
implemented to reform the functionalities of the
capital market. The prime objective behind all the
policies and reforms was obviously to strengthen the
capital market of a particular country as much as
possible.

It has been always a big question to the economists

whether to allow or not to allow the foreign
investments in the country. Packaged with both
advantages and disadvantages, the liberalization of
the capital markets has always been controversial.
In the 1980s and 1990s when the US Treasury and
International Monetary Fund (IMF) tried to push
world-wide capital-market liberalization, there had
been enormous opposition. Economists were not in
the support of free and unfettered markets.

Capital Market Regulations

Regulations are an absolute necessity in the face of
the growing importance of capital markets
throughout the world. The development of a market
economy is dependent on the development of the
capital market. The regulation of a capital market
involves the regulation of securities; these rules
enable the capital market to function more
efficiently and impartially.

A well regulated market has the potential to

encourage additional investors to partake, and
contribute in, furthering the development of the
economy.

The chief capital market regulatory authorities

worldwide are as follows:
 U.S. Securities and Exchange Commission
 Canadian Securities Administrators, Canada
 Australian Securities and Investments
Commission
 Securities and Exchange Commission, Pakistan
 Securities and Exchange Board of India
 Securities and Exchange Commission,
Bangladesh
 Securities and Exchange Surveillance
Commission

 Securities and Futures Commission, Hong Kong

 Financial Supervision Authority, Finland
 Financial Supervision Commission, Bulgaria
 Financial Services Authority, UK
 Comision Nacional del Mercado de Valores,
Spain
 Authority of Financial Markets

The United States Securities and Exchange

Commission (SEC), established in 1934, has the
responsibility of regulating and controlling the
securities industry/stock market, and enforcing the
federal securities laws.
Public companies have to keep in compliance with
the statutory requirements by submitting quarterly
and annual reports to the SEC; companies involved
in fraudulent activities are brought to task.

These submitted reports are essential, as investors

require them in order to make crucial decisions
before investing in the capital market.

The Canadian Securities Administrators (CSA) is

responsible for the development of the Canadian
Securities Regulatory System and regulates the
capital market of Canada, protecting investors from
fraudulent and nefarious activities. The CSA looks to
establish a just, clear and dependable capital market
system.
 FINDINGS

 The main important factor is to provide the

better services and good quality of products to
deal the different kinds of the customer.

 The major role of RBI and SEBI in the monetary

policy, financial market, capital market and
other markets.

 There is a limited market in India for long- term

bills also. This market has come into being with
the introduction of the Bills Rediscounting
Scheme by the IOBI, SIOBI etc. For the purpose
of rediscounting bills arising out of the sale of
machinery on deferred payment basis.

 Flexible of interest rates

 Lack of security

 Concentration of economic power

  Lack of introduction of instruments

 Lack of financial institution

CONCLUSION

A financial market is a mechanism that allows

people to easily buy and sell (trade) financial
securities (such as stocks and bonds), commodities
(such as precious metals or agricultural goods), and
other fungible items of value at low transaction
costs.

The money market is a vibrant market, affecting our

everyday lives.  As the short-term market for money,
money changes hands in a short time frame and the
players in the market have to be alert to changes, up
to date with news and innovative with strategies and
products.

The RBI has still a long way to go before it can be

called an autonomous central bank, the signing of
agreements between the Bank and the GOI is only a
beginning in the process of attaining autonomy.
Banks have a special place in the Indian financial
system, and it is not in the interest of the
effectiveness of monetary policy to allow their role to
be undermined.

It has wide powers to issue rules, regulations, and

guidelines in respect of both the primary and
secondary securities markets, a wide variety of
intermediaries operating in these, market, viz..,
brokers, merchant bankers, underwriters, bankers
to issues etc., and their certain financial institutions
such as mutual funds.

BIBLIOGRAPHY

BOOKS

Financial Institutions and market (L.M Bhole)

Financial market Operations

Instruments Of Monetary And Credit Controls

WEBSITES

www.eagertrader.com

www.rbi.org.in

www.capitalmarket.com

www.financialmarket.com

MAGZINES
Economic times

Times of India

Hindustan times