(Sample Material) IAS PRE GS Online Coaching : Economic & Social Development - Money Market and Capital Market in India

Subject: Economic & Social Development
Topic: Money Market and Capital Market in India

Ques. 1 : What do you understand by Money Market?

Ans. Money market refers to lending and borrowing short term funds- funds with a maturity of less than one year. Banks and financial institutions (IDBI, LIC etc) are the main lenders and borrowers while individuals, companies, Government and others are the main borrowers. The informal market operates through small-scale money-lenders as well as others outside the RBI control.

Money market instruments broadly are: call money; bill market (both commercial bills and treasury bills) Certificates of Deposit (CD); Commercial paper (CP).

Ques. 2 : What is Call Money / Notice Money?

Ans. Call/Notice money is money borrowed or lent for a very short period. If the period is more than one day and upto 14 days it is called ‘Notice money’ otherwise the amount is known as Call money’. No collateral security is required to cover these transactions. The call market enables the banks and institutions to even out their day to day deficits and surpluses of money.

Commercial banks, Co-operative Banks, mutual funds, primary dealers and others are allowed to borrow and lend in this market. Interest rates in the call and notice money market are market determined.

Ques. 3 : What do you mean by Treasury Bills?

Ans. Treasury bills are short-term money market instruments, which are issued by the RBI on behalf of the GOI. The GOI uses these funds to meet its short-term financial requirements of the government. T-Bills are sovereign zero risk instruments. They are available in primary and secondary market, issued at a discount to face value i.e., investors may buy the T-bill at discount to face value of Rs. 100 and on maturity the face value of Rs. 100 is received by the investor.

There are T-Bills of 14 days, 91 days, 182 days and 364 days maturity. Minimum investment required in case of T-Bills is Rs 25,000.

A considerable part of the government’s borrowings takes place through T bills of various maturities. The usual investors in these instruments are banks, insurance companies and FIs.