Maharashtra Board Class 12 Economics Chapter 9 Money Market and Capital Market in India PDF Download

Money Market And Capital Market In India

Introduction

Finance is the backbone of an economy. Finance basically refers to the management of money. It includes funds needed by individuals, business houses and the Government for various purposes. Thus, finance is categorized as personal finance, corporate finance and public finance. The financial system of the country is responsible for the mobilization and allocation of funds. It helps in creation of wealth which is vital for the economic development of the country. The financial system in India comprises of financial institutions, financial markets, financial instruments and financial services.

This chapter deals exclusively with financial markets in India. Financial markets are an important component of the financial system.

Meaning Of Financial Market

Financial market refers to a market where sale and purchase of financial assets such as bonds, stocks, derivatives, government securities, foreign currency etc. is undertaken. Financial markets operate through banks, non-banking financial institutions, brokers, mutual funds, discount houses etc. Financial markets include two distinct markets i.e. the Money market and Capital market.

Teacher's Note

Finance helps people manage their money and save for the future. Just like your mother saves money in a bank for your education, businesses and the government also save and borrow money through financial markets.

Exam Trick

Remember: Money market = short time (like a daily wage worker). Capital market = long time (like buying a house). This helps you remember which market is for what purpose.

Points To Remember

Finance means managing money for individuals, businesses, and government.
Financial system has four main parts: institutions, markets, instruments, and services.
Money market deals with short-term funds (less than one year).
Capital market deals with long-term funds (more than one year).
Financial markets help the economy grow by moving money from savers to borrowers.

A) Money Market In India

Meaning

Money market is a market for lending and borrowing of short term funds. It is a market for "near money" i.e. short term instruments such as trade bills, government securities, promissory notes etc. Such instruments are highly liquid, less risky and easily marketable with a maturity period of one year or less than one year.

Some Financial Instruments

Bonds refer to debt instruments issued by companies or the government as a means of borrowing long term funds.

Equity shares refer to shares of a company held by an individual or a group.

Derivatives refer to a financial security which derives its value or price from the underlying assets such as bonds, stocks, currency, interest rates, commodities etc.

Government securities refer to debt instruments issued by a government with a promise of repayment at maturity.

Trade bills refer to bills of exchange drawn on and accepted by a trader (trade acceptance) in payment of goods.

Promissory note is a financial instrument that contains a written promise by one party to pay another party a definite sum of money, either on demand or at a specified future date.

Teacher's Note

Money market instruments are like short-term loans. When a shopkeeper needs money for a few months to buy goods, he borrows from the money market and pays it back when he sells the goods.

Exam Trick

Remember: Money market = near money = short time = less than one year. This simple phrase will help you remember what money market is about.

Points To Remember

Money market is for short-term funds (one year or less).
Money market instruments are safe and easy to sell quickly.
Bonds, government securities, and trade bills are types of money market instruments.
Money market helps borrowers get quick cash when needed.
Money market instruments give less interest than capital market instruments.

Structure Of Money Market In India

The money market in India is dichotomous by nature. It comprises of both, the organized sector as well as the unorganized sector. The organized sector includes the Reserve Bank of India (RBI), commercial banks, co-operative banks, development financial institutions, investment institutions and the Discount and Finance House of India (DFHI). The unorganized sector on the other hand, comprises of indigenous bankers, money lenders and unregulated non-bank financial intermediaries.

Money market centres in India are located at Mumbai, Delhi and Kolkata. However, Mumbai is the only active money market centre in India with money flowing in from all parts of the country.

1) Organized Sector

The organised sector of the money market consists of the Reserve Bank of India, commercial banks, co-operative banks, regulated financial intermediaries etc. Let us now discuss the organized sector of the money market in India.

a) Reserve Bank Of India (RBI)

Every country in the world has a Central Bank which is at the apex of the banking system. It is entrusted with the responsibility of regulating the money market in the country. Reserve Bank of India is the central bank of our country. RBI was set up on the basis of the recommendations of the Hilton Young Commission. The RBI Act of 1934 provides the statutory basis of the functions of the bank. RBI commenced its operations on 1st April, 1935 as a private shareholders' bank. RBI was nationalized on 1st January, 1949. It is the most important constituent of the money market.

Popular Definitions Of Central Bank

Dr. M. H. de Kock: "Central bank is one which constitutes the apex of the monetary and banking structure of the country."

Prof. W. A. Shaw: "Central bank is a bank which controls credit."

Functions Of Reserve Bank Of India

1) Issue Of Currency Notes: RBI has the sole right to issue currency notes of all denominations, except one rupee note and coins. As per the 'Minimum Reserve System' of 1957, RBI is required to maintain minimum gold and foreign exchange reserves of Rs 200 crores, out of which at least Rs 115 crores should be in gold and the remaining Rs 85 crores should be in terms of foreign currency and government securities.

2) Banker To The Government: RBI acts as a banker, agent and advisor to the Government. It transacts the business of both, the Central and State Governments. It accepts money as well as makes payments on behalf these Governments. It also undertakes the management of public debt. It advises the Government on a wide range of economic issues.

3) Banker's Bank: RBI exercises statutory control over the commercial banks. All scheduled banks are compulsorily required to maintain a certain minimum of cash reserves with the RBI against their demand and time liabilities. RBI provides financial assistance to banks in the form of discounting of eligible bills. Loans and advances are also provided against approved securities.

4) Custodian Of Foreign Exchange Reserves: RBI acts as a custodian of the country's foreign exchange reserves. It has to maintain the official rate of exchange of rupee as well as ensure its stability. RBI also undertakes to buy and sell the currencies of all the members of the International Monetary Fund (IMF).

5) Controller Of Credit: As a supreme banking authority of the country, RBI has the power to influence the volume of credit created by commercial banks. It also monitors the purpose or use of credit. Quantitative methods such as bank rate, open market operations, variable reserve ratios such as Cash Reserve Ratio (CRR), Statutory Liquid Ratio (SLR) etc. control the volume of credit created. Qualitative methods such as fixing margin requirements, credit rationing, moral suasion etc. regulate the purpose or use of credit.

6) Collection And Publication Of Data: RBI collects and compiles statistical information related to banking and other financial sectors of the economy.

7) Promotional And Developmental Functions: RBI also performs certain promotional and developmental functions such as extending banking services to semi-urban and rural areas, providing security to depositors, development of specialized institutions for agricultural credit, industrial finance etc.

8) Other Functions: RBI acts as a clearing house for settling the accounts between its member banks. As a lender of last resort, it also provides liquidity to banks experiencing financial difficulty.

Teacher's Note

RBI is like the captain of all banks in India. It controls money supply and keeps the banking system working smoothly, just like a traffic police controls traffic on the road.

Exam Trick

Remember: RBI = Reserve Bank of India = Central Bank = Controls all banks and money in India. Think of it as the bank of all banks, the most powerful bank in India.

Points To Remember

RBI is the central bank of India and was started on 1st April, 1935.
RBI has the right to print currency notes for India.
RBI controls and supervises all other banks in the country.
RBI acts as a banker to the government of India.
RBI helps keep the banking system safe and stable for everyone.

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