Topic 3
🟢 Lite — Quick Review (1h–1d)
Rapid summary for last-minute revision before your exam.
- Money Market: Short-term funds market (< 1 year); instruments: Call money, T-bills (< 1 year), Commercial Paper (CP), Commercial Bills, Certificates of Deposit (CD)
- Capital Market: Long-term funds market (> 1 year); instruments: Equity shares, debentures/bonds, mutual funds, derivatives
- SEBI: Founded 1992; regulates capital markets; 3-tier system: Primary Market, Secondary Market, Market Intermediaries
- NSE (National Stock Exchange): 1992; first dematerialised exchange; Nifty 50 (benchmark index); owned by NSE Group
- BSE (Bombay Stock Exchange): 1875; oldest Asian stock exchange; Sensex (30 stocks); owned by BSE Ltd
- ⚡ Nifty has 50 stocks; Sensex has 30 stocks — frequently tested
🟡 Standard — Regular Study (2d–2mo)
Standard content for students with a few days to months.
Financial Markets in India
Financial markets are the backbone of any modern economy, enabling the flow of funds between savers and borrowers. For SBI PO, a thorough understanding of India’s money market, capital market, and regulatory structure is essential.
Classification of Financial Markets
By Maturity of Instruments:
- Money Market: Short-term (< 1 year) — liquidity management
- Capital Market: Long-term (> 1 year) — investment and capital formation
By Nature of Transaction:
- Primary Market: New securities issued (IPO, FPO, rights issue)
- Secondary Market: Trading in existing securities (stock exchanges)
Money Market
The money market deals in short-term funds and provides liquidity to the financial system. It is primarily an institutional market — banks and financial institutions are the main participants.
Key Money Market Instruments:
1. Call Money / Notice Money / Term Money
- Call Money: Overnight borrowing/lending (repaid on demand/next day)
- Notice Money: 2-14 days
- Term Money: 15 days to 1 year
- Participants: Banks only (interbank market); RBI prescribes limits
2. Treasury Bills (T-Bills)
Government of India short-term borrowing instruments.
Types:
- 91-day T-Bill: Most liquid; auctioned weekly
- 182-day T-Bill: Auctioned fortnightly
- 364-day T-Bill: Auctioned fortnightly
Discount Rate: Sold at discount to face value; interest = face - purchase price Example: ₹100 face value, 91-day T-Bill at 5% discount → price = ₹98.77; maturity = ₹100
Held by: Banks, FIIs, RBI (through open market operations)
3. Commercial Paper (CP)
Short-term unsecured promissory notes issued by large corporations to raise funds.
- Tenure: 7 days to 1 year (typically 30-90 days)
- Denomination: ₹5 lakh minimum
- Rating Mandatory: Credit rating required (indicates creditworthiness)
- Issue Price: Discounted (like T-bills)
4. Certificates of Deposit (CD)
Short-term borrowing by banks.
- Issued by: Commercial banks (CDs from RBI’s subsidiary — SIDBI/EXIM Bank are called Taxable Bonds)
- Tenure: 7 days to 1 year
- Denomination: ₹1 lakh minimum
- Transferable: Yes (unlike fixed deposits)
- Interest: Either discount or coupon form
5. Commercial Bills
Bills of exchange drawn by seller on buyer; discounted by banks.
- Seller draws bill → Buyer accepts → Seller discounts with bank → Buyer pays at maturity
Interbank Participation Certificates (IBPC)
- Banks can lend to other banks through IBPC with repoable securities
Repo and Reverse Repo
- Repo: Borrow short-term using securities as collateral
- Reverse Repo: Lend short-term using securities as collateral
- Rate is slightly above or below the repo rate
Capital Market
The capital market facilitates long-term investment and capital formation.
Primary Market (New Issues)
1. Initial Public Offering (IPO)
First-time public issue of shares by a company.
Process:
- Company appoints investment banker (lead manager)
- Draft Red Herring Prospectus (DRHP) filed with SEBI
- Roadshow to attract investors
- Issue opens; subscription period (3-7 days)
- Allotment; listing on exchange
Types of Issues:
- Fixed Price: Issue price announced in advance
- Book Building: Price discovered through bidder demand (band published, investors bid within band)
- Combined: Book building with a floor price
2. Follow-on Public Offer (FPO)
Companies already listed issue additional shares.
3. Rights Issue
Existing shareholders get right to buy additional shares (pro-rata basis).
4. Private Placement
Securities sold to select group (qualified institutional buyers, QIBs) rather than public.
Secondary Market
Stock Exchanges
NSE (National Stock Exchange):
- Established 1992; started operations 1994
- First exchange with electronic trading (screen-based)
- Nifty 50: Benchmark index (50 stocks)
- Nifty Bank: Index of banking stocks
- Owned by NSE Group; dematerialised (electronic) trading
BSE (Bombay Stock Exchange):
- Founded 1875; oldest stock exchange in Asia
- Sensex (Sensitive Index): 30 stocks (large-cap)
- Listed on BSE itself (first Indian company to list on its own exchange)
MCX (Multi Commodity Exchange): Commodity derivatives NCDEX (National Commodity and Derivatives Exchange): Agricultural commodities NSE IX (NSE International Exchange): For overseas investors
Market Indices
| Index | Exchange | Stocks | Type |
|---|---|---|---|
| Nifty 50 | NSE | 50 | Large-cap |
| Sensex | BSE | 30 | Large-cap |
| Nifty 100 | NSE | 100 | Broad market |
| Nifty 200 | NSE | 200 | Broad market |
| Nifty Bank | NSE | 12 | Sectoral |
Derivative Markets
Futures and Options
Futures: Agreement to buy/sell at a future date at a predetermined price Options: Right (not obligation) to buy (call) or sell (put) at a future date
- Stock Futures/Options: Individual stock derivatives
- Index Futures/Options: Nifty, Bank Nifty, Sensex derivatives
- Currency Derivatives: USD-INR, EUR-INR, etc.
- Interest Rate Futures: G-Sec futures
Market Participants
- FIIs (Foreign Institutional Investors): SEBI-registered foreign portfolio investors
- DIIs (Domestic Institutional Investors): Indian mutual funds, insurance companies, banks
- Retail Investors: Individual investors
- Speculators/Traders: Prop trading desks
Credit Rating Agencies in India
- CRISIL: First credit rating agency in India (1990); global operations
- ICRA (Investment Information Centre of India): Now part of Moody’s
- CARE Ratings: Major Indian rating agency
- India Ratings (Fitch): Part of Fitch Group
- Brickwork Ratings: Newer entrant
Rating Scale (highest to lowest investment grade): AAA → AA → A → BBB (investment grade) BB → B → CCC → CC → C → D (speculative grade)
🔴 Extended — Deep Study (3mo+)
Comprehensive coverage for students on a longer study timeline.
SEBI — Structure and Functions
Establishment
SEBI established on April 12, 1992, under SEBI Act, 1988 (became fully functional 1992).
SEBI’s Three-Tier Structure:
- Board Members: Chairoperson, members from RBI, Finance Ministry, legal experts
- Executive: Whole-time members for different divisions
- Office: Regional offices in Mumbai (HQ), Delhi, Chennai, Kolkata
SEBI’s Regulatory Functions:
- Capital Markets: Stock exchanges, brokers, sub-brokers
- Mutual Funds: Regulations, product approval
- Primary Market: IPO guidelines, disclosure norms
- Takeovers: SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
- Insider Trading: SEBI (Prohibition of Insider Trading) Regulations, 2015
Investor Protection
- SEBI Complaints and Redressal System (SCORES): Online portal for complaint handling
- Investor Grievance Redressal Committees
- Investor Awareness Programs
Market Capitalisation
- Market Capitalisation = Share price × Number of shares outstanding
- Free Float Market Capitalisation: Market cap excluding promoter holdings (more representative)
- NSE: World’s 10th largest by market cap (as of 2024)
- India’s market cap-to-GDP ratio (Buffett Indicator): ~100-120% (high growth market)
Dematerialisation (Demat)
- Shares held in electronic form (not physical share certificates)
- Depositories: NSDL (National Securities Depository Ltd) and CDSL (Central Depository Services Ltd)
- Depository Participants (DPs): Agents (banks, brokers) providing demat services
- Trading and Settlement: T+1 settlement cycle (since 2024, India moved from T+2 to T+1)
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