Important Points you should know about Indian Financial System

Important Points you should know about Indian Financial System


The Financial system refers to the borrowing and lending of funds for the demand and supply of funds of all individuals institutions, companies and of the government. The Indian Financial System consists of two parts. Those are,

1. Indian Money Market and 
2. Indian Capital Market

Now let's have a brief review of them.

Money Market :

• Money Market is a Market for 'near money' or it is the market for borrowing and lending of short-term funds.

Instruments of Money Market

T-Bills or Treasury bills are the government bonds, which are used to raise funds form the money market.

• 91 Days Treasury Bills (T-Bills) used by the government to raise funds from the market for short periods nothing but short-term government bond.
• 182 Days T-bills introduced on the recommendation of Vaghul working gropus, are variable interest bills sold through fortnightly auctions. 
• 364 Days T-bills introduced on the recommendation of Vaghul working group. These are long dated bills, whose yields reflects the market conditions. 
• 14 Days T-bills introduced in April 1997 by the RBI at a discount rate equivalent to the rate of interest on Ways and Means Advance (WMA0 to the Government of India.
• Dated Government Securities are also type of Treasury bills recommended by Chakravarty Committee on Monetary System (1988). These are 5 year and 10 year maturity government securities sold on an auction basis.
• Certificate of Deposits : It is the certificate issued by bank / financial institute, who give funds on short-term basis. Commercial Banks are a saving certificate entitling the bearer to receive interest. The maturity of a CoD varies from 3 months to 1 years.
• Commercial Paper : It is an instrument to raise short-term funds by the corporate sector. It can be issued by a listed company with a working capital of almost 5 crore. The CP is issued in multiples of Rs. 25 lakh subject to a minimum issue of Rs. 1 crore. The maturity of CP is between 3 to 6 months.
• Money Market Index : It is an index, which helps investors to decide how much and where to invest in money market through providing information about prevailing market ratio.
• Bankers Acceptance Rate : It is the rate, at which the banker's acceptance is traded in secondary market.
• LIBOR / MIBOR : London Inter-Bank Offered Rate / Mumbai Inter-Bank Offered Rate is the interest rate, at which bank borrows funds from other banks.

Capital Market

• FM refers to all those institutions, which help the private and public enterprise to raise funds.
• In that money market deals with the provision of raising short-term fund with maturity less than 1 year.
• While capital market is concerned with provision of raising long-term funds of maturity 1 year or more.
• Capital market can be classified into Debt Market and Equity Market. 
• In Debt Market, a company can acquire funds only by incurring debt and lender is guaranteed of a fixed repayment e.g., bond.
• In Equity Market, funds can be raised without incurring debt those, who finance the enterprise by purchasing equity instrument like shares.