Concept 1 · free preview
Financial markets: structure, segments and regulators
Understand
A financial market is any place or system where people with surplus money meet people who need money, and where financial claims — loans, bills, bonds, shares, currencies — are created and traded. It does four jobs: it moves savings to productive use, discovers prices (interest rates, share prices, exchange rates), gives liquidity (you can sell a claim before maturity), and cuts the cost of finding a counterparty. The most important split is by MATURITY. The money market deals in short-term funds, up to one year: call money, repo, treasury bills, commercial paper, certificates of deposit. Its job is liquidity — banks and companies balancing their day-to-day cash. The capital market deals in long-term funds, above one year: shares, bonds, debentures. Its job is financing investment — factories, roads, houses. The capital market has two stages. In the primary market, securities are issued for the first time and money goes to the issuer (an IPO, a government bond auction). In the secondary market, already-issued securities change hands between investors on stock exchanges or trading platforms; the issuer gets nothing, but the existence of a secondary market is what makes investors willing to buy in the primary market. Markets can also be organised (regulated institutions — banks, exchanges, NBFCs) or unorganised (moneylenders, indigenous bankers, pawnbrokers), whose high rates and lack of regulation are a key reason for financial-inclusion policy. Other segments are the foreign exchange market and the derivatives market (futures and options on shares, interest rates, currencies and commodities). Regulation follows the instrument. The RBI regulates the money market, the government securities market and the forex market (and derivatives on interest rates and currencies). SEBI regulates the securities market — shares, corporate bonds, mutual funds — and, since the Forward Markets Commission was merged into it in 2015, commodity derivatives too.
Rule
Money market: maturity up to 1 year; purpose — liquidity. Capital market: maturity above 1 year; purpose — long-term investment.
Primary market = new issues (money goes to issuer). Secondary market = trading of existing securities (money goes to the selling investor).
RBI regulates: money market, government securities, forex market, interest-rate and currency derivatives.
SEBI regulates: equity and corporate debt markets, stock exchanges, mutual funds, and commodity derivatives (after the FMC merger in 2015).
SEBI was set up as a non-statutory body on 12 April 1988 and became statutory under the SEBI Act, 1992 (in force from 30 January 1992).
Unorganised sector: moneylenders, indigenous bankers (e.g. Shroffs), pawnbrokers — outside formal regulation, high rates.
Government securities are traded mainly on NDS-OM, an RBI-owned electronic order-matching system run by CCIL.
Example
A textile company needs ₹50 crore for 2 months to pay suppliers before the festive season: it issues commercial paper in the money market. The same company needs ₹500 crore for a new plant that will pay back over 10 years: it issues shares or 7-year debentures in the capital market. When you later buy those shares from another investor on the NSE, that is the secondary market — the company receives nothing from that trade.
| Point | Money market | Capital market |
|---|---|---|
| Maturity | Up to 1 year | More than 1 year |
| Purpose | Short-term liquidity / working capital | Long-term investment / fixed capital |
| Instruments | Call money, repo, TREPS, T-bills, CP, CD | Shares, bonds, debentures, MF units |
| Main players | Banks, PDs, MFs, corporates, RBI | Companies, investors, FPIs, MFs, insurers |
| Main regulator | RBI | SEBI (G-secs: RBI) |
| Risk and return | Lower risk, lower return | Higher risk, higher potential return |
Common mistake
The money market has nothing to do with printing money — it is the market for short-term (≤ 1 year) funds.
Government securities are a capital-market instrument by maturity (dated G-secs) but are regulated by the RBI, not SEBI.
In a secondary-market trade, the issuing company does not receive money.
Commodity derivatives are regulated by SEBI, not the RBI or the Ministry of Consumer Affairs.
T-bills are money-market instruments; dated G-secs are capital-market instruments, though both are issued by the RBI for the Government.