Topic 4: Money and Banking

➢ What is money?
➢ Fiat money: Type of currency that has value
solely because the government or the
issuing authority declares it to be legal
tender and accepts it as a means of
payment for goods, services, and debts.
➢ Concept of money supply: It is a stock
concept. The total stock of money in
circulation among the public at particular
point of time is called money supply.
 Digital currency:
➢ Cryptocurrency: It is a digital currency that is
an alternative payment method created using
encryption methods.

Central Bank Digital Currency (CBDC):

➢ The benefits of cryptocurrencies include cheaper

and faster money transfers, as well as
decentralised systems that do not fail at a single
point.
➢ Cryptocurrency disadvantages include price
volatility, high energy consumption for mining
activities, and use in criminal activities.
RBI:

➢ The Reserve Bank of India was established

on April 1, 1935, in accordance with the
provisions of the Reserve Bank of India Act,
1934 based on the recommendation of Hilton
Young Commission Report (1926) with a
share capital of Rs. 5 crores.
➢ The Central Office of the Reserve Bank was
initially established in Kolkata but was
permanently moved to Mumbai in 1937.
➢ The Central Office is where the Governor sits
and where policies are formulated.
➢ Though originally privately owned, since its
nationalization in 1949, the Reserve Bank is
fully owned by the Government of India.
➢ The Reserve Bank of India is the highest
monetary authority of India.
➢ It also acts as the representative of the
Government in the International Monetary
Fund and represents the membership of
India.
Composition:

➢ The Reserve Bank's affairs are governed by

a central board of directors.
➢ The board is appointed by the Government
of India in keeping with the Reserve Bank
of India Act.
➢ They are appointed/nominated for a period
of four years.
Functions of RBI:
➢ Banker’s Bank: The RBI has extensive power
to control and supervise the commercial
banking system under the RBI Act, 1934 and
the Banking Regulation Act, 1949. Enables
banks to maintain their accounts with RBI for
statutory reserve requirements and
maintenance of transaction balances.
➢ Regulator: RBI is the regulator of the
Banking & Finance & Money Market.
➢ Custodian of foreign exchange reserves:
The RBI functions as the custodian and
manager of forex reserves, and operates
within the overall policy framework agreed
upon with the Government of India.
➢ Issue of Currency: RBI is the sole authority
for the issue of currency in India other than
one rupee notes and subsidiary coins, the
magnitude of which is relatively small. The RBI
is also called “Bank of Issue”.
➢ Controller of credit: Credit control is
generally considered to be the principal
function of the Central Bank. By making
frequent changes in monetary policy (like
CRR, SLR, Repo Rate and Reverse Repo
Rate), it ensures that the monetary system in
the economy functions according to the
nation’s needs and goals.
➢ Lender of last resort: Lender of the last
resort means “Central Bank (RBI) helps all the
commercial and other banks in times of
financial crises.
➢ Banker to the Govt. : RBI performs the
following functions:
● It accepts money, makes payments and also
carries out their exchange and remittances for
the Government.
● It makes loans and advances to the States and
local authorities.
● It also sells treasury bills to maintain liquidity in
the economy.
● It makes ways and means advances to the
Governments for 90 days.
● It acts as an adviser to the Government on all
monetary and banking matters.
Instruments of credit control:
➢ Quantitative credit control refers
to overall credit in the economy,
affecting all sectors of the economy
equally and without discrimination.
➢ Qualitative credit control refers
to selective credit control that
focuses on allocation of credit to
different sectors of the economy.
Quantitative instruments of credit control:
1. Bank rate:
➢ Bank Rate is the interest rate at which the
Reserve Bank of India (RBI) lends money to
domestic/commercial banks, usually in the
form of relatively short-term loans.
➢ Commercial banks are not required to keep any
collateral as security when borrowing at Bank
Rate.
➢ There is no repurchasing agreement and
obligation to repay on a particular date.
➢ Purpose: It is used as a tool for controlling
long-term inflation and influencing the overall
monetary policy.
2. Open Market Operation (OMO)
➢ Open Market Operations (OMO) is the
selling and purchase of government
securities and treasury bills by the RBI.
➢ Selling of G-Secs by RBI will reduce the
liquidity in the market and Buying of G-
Secs by RBI will increase the liquidity.
➢ All Scheduled Commercial Banks and
Financial institutions can participate in
OMO.
➢ The RBI has allowed even the retail
investors to invest in G-secs by opening
gilt accounts with the Central Bank.
3. Liquidity Adjustment facility:

➢ Liquidity Adjustment Facility was

recommended by the Narasimhan
Committee on Banking Reforms and
was introduced by the RBI in 1998.
➢ It is a monetary policy tool used
largely by the Reserve Bank of India
(RBI) that controls the liquidity or
money supply in the economy.
➢ There are two main components of
Liquidity Adjustment Facility (LAF):
1. Repo Rate: It is the rate at which
the Reserve Bank of India (RBI) lends
to other banks.

2. Reverse Repo Rate: It is the rate at

which the Reserve Bank of India (RBI)
borrows from commercial banks.
4. Reserve requirement:

1. Statutory Liquidity Ratio (SLR): is the minimum

percentage of deposits (ie. Net Demand and Time
Liabilities (NDTL)) that a commercial bank must
keep with itself. This asset can be in the form of the
following: Cash, Gold valued at a price not
exceeding the current price, Government securities
and Treasury Bills.
➢ A bank is liable to pay a penalty to the Reserve
Bank of India if it fails to maintain the prescribed
SLR.
➢ As of December 2023, the SLR is at 18.00% of the
NDTL of the banks.
2. Cash Reserve Ratio (CRR) : is the minimum
percentage of total deposits (ie. NDTL) that a
commercial bank is required to retain as cash
reserves with the RBI.
➢ It has to be in the form of Cash. It is
applicable to all Scheduled commercial
banks.
➢ As of December 2023, the CRR is
maintained at 4.5%.
Qualitative Tools of Monetary Policy
1. Change in Marginal Requirement: minimum
percentage of collateral that borrowers must
provide to secure a loan, impacting their
borrowing capacity.
2. Regulation of Consumer Credit: Consumer
credit supply is regulated by the instalment of sale
and hire purchase of consumer goods.
Qualitative Tools of Monetary Policy
3. Rationing of Credit: The Reserve Bank of India
sets a credit limit for commercial banks. The quantity
of credit accessible to any commercial bank is limited.

4. Moral suasion: It refers to the RBI's

recommendations to commercial banks that aid in the
restraint of credit during inflationary periods.
History of banking:

➢ Banking refers to the umbrella of services

provided by financial institutions, such as
accepting deposits and providing loans. Banking
provides essential financial services like
depositing, lending, and asset protection to
support the economy.
➢ The first bank of India was the “Bank of
Hindustan”, established in 1770 and located in the
then Indian capital, Calcutta. However, this bank
failed to work and ceased operations in 1832.
History of banking:

➢ During the British rule in India, The East India

Company had established three banks: Bank of
Bengal, Bank of Bombay and Bank of Madras
and called them the Presidential Banks. These
three banks were later merged into one single
bank in 1921, which was called the “Imperial
Bank of India.”
➢ The Imperial Bank of India was later
nationalised in 1955 and was named The State
Bank of India, which is currently the largest
Public sector Bank.
Structure of banking system in India:
Commercial Banks
Schedule banks:

➢ Schedule banks are those that are

listed in the Second Schedule of the
RBI Act, 1934 and are regulated under
Banking regulation Act 1949.
➢ Scheduled banks enjoy certain benefits
such as financial assistance at bank
rate and repo rate, ability to obtain a
refinancing facility, Access to currency
storage facilities.
➢ They should meet the following requirements:
● a bank must have a paid-up capital and reserve
of at least Rs. 5 lakh and
● a bank must satisfy the Reserve Bank of India
(RBI) that its affairs are not conducted in a
manner that is detrimental to the interest of its
deposits.
➢ Scheduled commercial banks are categorised
into five different groups: State Bank of India,
Nationalised banks, Indian private banks,
Private sector foreign banks, Regional rural
banks.
Nationalised banks:

➢ Following the formation of the State

Bank of India in 1955, another 14 banks
were nationalised between 1969 and
1991. These were the banks with more
than 50 crores in national deposits.
➢ The 14 largest commercial banks were
nationalised by then-Prime Minister
Indira Gandhi in 1969.
➢ Another six banks were nationalised in
1980, bringing the total to twenty.
Private sector Indian banks:

➢ Banks major shares are held by

private stockholders.
➢ Even though these banks adhere to
the guidelines of the country's
central bank, they are free to
develop their financial strategies for
their customers.
Private sector foreign banks:

➢ International banks with headquarters and

branches in different countries are private
foreign banks. These banks need to follow the
rules and regulations given by home and host
countries. Presently, there are 46 foreign banks
in India, according to the Reserve Bank of India.
➢ Foreign banks do not provide credit cards, online
banking, or personal banking to Indian
customers.
Regional Rural Banks:

➢ The Regional Rural Banks (RRBs)were

established in 1975 under the provisions of
the Ordinance promulgated on 26th
September 1975 and Regional Rural Banks
Act, 1976.
➢ The goal is of ensuring adequate institutional
credit for agriculture and other rural sectors.
➢ The primary goal of Regional Rural Banks
was to end the rural debt culture and
close the credit gap that existed between
geographical regions.
➢ RRBs are jointly owned by GoI, the relevant
State Government, and Sponsor Banks; the
issued capital of an RRB is divided among
the owners in the proportions of 50%,
15%, and 35%, respectively.
➢ RRBs operate similarly to commercial
banks, albeit with a smaller geographical
reach for each of them. They are supervised
by NABARD.
➢ The Regional Rural Banks has a Priority
Sector Lending (PSL) target of 75% where
loans are lent to agricultural activities and
vulnerable sectors.
Cooperative banks
➢ A Cooperative bank is a financial entity that
is owned and operated by its members,
who are both the owners and customers of
the bank.
➢ In India, cooperative banks are governed
by the States Cooperative Societies Act.
➢ The Reserve Bank of India (RBI) also
regulates cooperative banks, which are
governed by the Banking Regulations Act
1949 and the Banking Laws (Co-operative
Societies) Act, 1955.
➢ Co-operative banks typically offer a wide
range of banking and financial services
to their members (loans, deposits,
banking accounts, etc).
➢ Cooperative banks are the primary
financiers of agricultural activities,
small-scale industries, and self-
employment.
➢ Cooperative banks operate on the
principle of "no profit, no loss."
Co-operative Banks can further be divided into the
following:
(i) Urban Cooperative Banks
➢ The term "Urban Co-operative Banks" refers to
primary cooperative banks in urban and semi-
urban areas.
➢ These banks primarily lent to small borrowers
and businesses centred on communities,
neighborhoods, and workplace groups.
➢ They primarily finance entrepreneurs, small
businesses, industries, and self-employment in
urban areas, as well as home purchases and
educational loans.
(ii) State Cooperative Banks
➢ A State Cooperative Bank is a federation of
the central cooperative bank that serves as
the state's custodian of the cooperative
banking structure.
➢ Co-operative banks in rural areas primarily
serve agricultural-based activities such as
farming, livestock, dairies, and hatcheries,
among others.
➢ They also give loans to small-scale
businesses, cottage industries, and self-
employment activities such as artisanship.
Development Banks:

➢ Development banks are financial institutions

that provide long-term credit for capital-
intensive investments with long payback
periods, such as urban infrastructure,
mining and heavy industry, and irrigation
systems.
Features of Development Bank:
➢ Unlike commercial banks, it does not accept public
deposits.
➢ Its primary goal is to promote economic development in
developing economies by encouraging investment and
entrepreneurial activity. It promotes new and small
businesses and seeks balanced regional growth.
➢ It provides financial assistance not only to private-sector
enterprises but also to public-sector enterprises.
➢ Its primary function is that of a gap-filler, filling in the
gaps in existing financial facilities.
➢ Its motivation is to serve the public good rather than to
make a profit. It works in the best interests of the country
as a whole.
Important Development Banks
SIDBI ● SIDBI, or the Small Industries Development Bank of India, was
founded in 1989.
● Serves as the primary financial institution for the promotion,
financing, and development of the Micro, Small, and Medium
Enterprise (MSME) sector
● In collaboration with commercial banks, it also enables the timely
flow of credit for working capital as well as term loans to Small
Scale Industries.
NABARD ● The National Bank for Agriculture and Rural Development
(NABARD) was founded in July 1982. Founded on the
Shivraman Committee's recommendation.
● Established to meet the credit needs of agriculture and rural
development.
● Envisioned as the national apex institution for the entire
rural credit system, providing supplemental funding to all
rural credit institutions and coordinating their operations.
Micro Units ➢ MUDRA was founded as a wholly owned subsidiary
Development of the Small Industries Development Bank of India
Refinance (SIDBI), with SIDBI contributing 100% of the
Agency capital.
(MUDRA) ➢ MUDRA would be in charge of developing and
Bank refinancing the micro-enterprise sector by assisting
finance institutions that lend to micro/small
business entities engaged in manufacturing,
trading, and service activities.
National ➢ The government took over the NHB from the RBI in
Housing 2019 after purchasing the entire stake for Rs.
Bank (NHB) 1,450 crores.
➢ It is the primary agency responsible for promoting
housing finance institutions at the regional and
local levels, as well as providing financial and other
assistance to such institutions.
➢ It is primarily in charge of registering and
supervising all Housing Finance Companies (HFCs)
Payment banks:

➢ A Payment Bank (PB) is similar to any other bank,

but it operates on a smaller scale and does not
involve any credit risk.
➢ The Payments Bank is proposed to be registered as a
public limited company under the Companies Act of
2013, and licenced under Section 22 of the Banking
Regulation Act of 1949.
➢ Acceptance of deposits, payments and remittance
services, internet banking, and acting as a business
correspondent for other banks are examples of some
of the activities.
➢ They are initially permitted to collect deposits of up
to Rs 1 lakh per individual.
➢ They can help with money transfers as well as sell
insurance and mutual funds. Furthermore, they can
only issue ATM/debit cards, not credit cards.
➢ They are not permitted to establish subsidiaries to
provide non-banking financial services. More
importantly, they are not permitted to engage in
any lending activities.
➢ They must keep a Cash Reserve Ratio (CRR).
➢ A minimum of 75% of its "demand deposit
balances" must be invested in Statutory Liquidity
Ratio (SLR) eligible Government securities/treasury
bills with maturities of up to one year.
➢ A payments bank must have a minimum paid-up
capital of Rs 100 crore.
Non-Performing Assets:

➢ Non-Performing Assets
(NPA) are loans and arrears
lent by banks or financial
institutions whose principal
and interests are delayed
beyond 90 days.
➢ In the case of agricultural
loans, NPAs are declared if
the interest and/or
instalment or principal
remain unpaid for two
harvest seasons. However,
this period should not be
longer than two years.
 Priority Sector Lending:

➢ Priority Sectors are those sectors that the

Government of India and Reserve Bank of
India consider as important for the
development of the basic needs of the
country and are to be given priority over
other sectors.
➢ Under priority sector lending, the banks are
mandated to encourage the growth of such
sectors with adequate and timely credit.
➢ Priority sector lending categories:
Agriculture, Micro, Small and Medium
Enterprises, Export Credit, Education,
Housing, Social Infrastructure, Renewable
Energy.
In India, the Central Bank’s function as the “lender of last resort” usually refers to which
of the following?

1. Lending to trade and industry bodies when they fail to borrow from other sources
2. Providing liquidity to the banks having a temporary crisis
3. Lending to governments to finance budgetary deficits

Select the correct answer using the code given below

a) 1 and 2
b) 2 only
c) 2 and 3
d) 3 only
If the RBI decides to adopt an expansionist monetary policy, which of the following would
it not do?

(1) Cut and optimize the Statutory Liquidity Ratio

(2) Cut the Bank Rate and Repo Rate

Select the correct answer using the code given below:

(a) Both 1 and 2
(b) 2 only
(c) 1 only
(d) Neither 1 nor 2
Which of the following is not included in the assets of a commercial bank in India?

(a) Advances

(b) Deposits

(c) Investments

(d) Money at call and short notice

Topic 5: Inflation
Inflation:
➢ Refers to the general increase in prices
of goods and services in an economy
over a period of time.
➢ It is the rate at which the purchasing
power of a currency decreases, leading
to a decline in the real value of money.
Types of inflation based on rate:

Based on rate of change in price level.

➢ Creeping inflation: It refers to a

situation where the general price
level of goods and services in an
economy increases slowly but
consistently over time. The rate of
creeping inflation is usually in the
single digits, typically between 1%
to 3% annually.
➢ Walking inflation: When the rise
in prices is 3% to 10% in a year.
Types of inflation based on rate:

➢ Galloping inflation: It is defined by price

growth rates that are higher than
moderate (creeping) inflation but lower
than hyperinflation. In most cases,
galloping inflation is defined as a price
increase of 10%–100% each year.
➢ Hyperinflation: It is a term to describe
rapid, excessive, and out-of-control
general price increases in an economy. It
is typically measuring more than 50% per
month.
Types of inflation based on cause
➢ Demand pull inflation: This occurs when the
demand for goods and services exceeds their
supply, leading to increased prices.

Causes:
- Increased Consumer.
- Increased spending by Government
- Expansionary Monetary Policy
- Increase in demand for a country's exports
- A depreciating currency
➢ Cost push inflation: This type of inflation
results from increased production costs, such as
rising wages or the cost of raw materials.

Causes:
- Rising Wages
- Higher Raw Material Costs
- Supply Chain Disruptions
- Increased Taxes or Regulations
- Industrial disputes
Effects of inflation:

1. Redistribution of income and wealth:

- Debtors vs Creditors
- Producers vs Consumers: Usually the cost of production does not
rise as fast as the price of their product and so there is an artificial
margin of profit.
- Flexible income group vs Fixed income group
- Bond holders vs Bond issuers
2. Production and consumption
- Fall in demand of goods and services
- Shift in investments between sectors
- Curtail amount of production
Measures to control inflation:
1. Monetary measures:
- Credit control
- Demonetisation of currency
- Issue of New currency
2. Fiscal measures:
- Reduction in unnecessary expenditure
- Increase in direct taxes
- Decrease in indirect taxes
- Surplus budget
3. Trade measures: Liberal import policy,
strict export policy
4. Administrative measures: Price control,
Rationing of goods, Rational wage policy
Inflation cycle:
➢ Deflation: Opposite to inflation.
Persistent and appreciable fall in
general level of prices.
➢ Reflation: Action of government
to increase rate of inflation to
stimulate the economy.
➢ Disinflation: Rate of inflation at a
slower rate.
➢ Stagflation: It is an economic
phenomenon characterized by a
combination of stagnant economic
growth, high unemployment, and
high inflation.
Phillips Curve
➢ The Phillips curve
suggests there is
an inverse
relationship
between inflation
and
unemployment.
Consumer Price Index
➢ The Consumer Price Index (CPI) is a statistic used to
assess changes in the average price level of goods
and services purchased by households over time.
➢ In 2014, during the tenure of Raghuram Rajan as
the Governor of RBI, CPI was chosen as an inflation
indicator and policy making.
➢ The CPI basket comprises 448 items in rural and
460 items in urban.
➢ The National Statistical Office (NSO), Ministry of
Statistics and Programme Implementation (MoSPI)
releases the index.
What is retail inflation?

➢ Retail inflation tracked by the

Consumer Price Index (CPI)
measures the changes in
prices from a retail buyer's
perspective.

➢ Wholesale inflation on the

other hand is tracked by the
Wholesale Price Index (WPI),
measures inflation at the level
of producers.
Consumer Price Index:
➢ The Consumer Price Index
(CPI) is a statistic used to
assess changes in the average
price level of goods and
services purchased by
households over time.

➢ In 2014, during the tenure of

Raghuram Rajan as the
Governor of RBI, CPI was
chosen as an inflation indicator
and policy making.
➢ The CPI basket
comprises 448 items in
rural and 460 items in
urban.

➢ The National Statistical

Office (NSO), Ministry
of Statistics and
Programme
Implementation
(MoSPI) releases the
index.
Wholesale Price Index
➢ This rate of inflation is
commonly referred to as
headline inflation.
➢ The Office of Economic Advisor,
Ministry of Commerce and
Industry publishes the WPI.
➢ WPI displays the total price of a
commodity basket of 697
items.
CPI vs WPI comparison
CPI vs WPI comparison

Parameter CPI WPI

Meaning It reflects the average change It reflects changes in average

in prices paid by consumers at wholesale prices for goods sold
the retail level. in bulk.

Frequency of Publishing Monthly (14th of every month) Primary articles, fuel, and
power on a Weekly basis
(Generally Thursdays) Overall
index on monthly basis.

Source The CPI's item weights are The WPI's item weights are
based on average household based on production values.
expenditures gathered from
consumer expenditure
surveys.

Status of services Services are included in the Services are not included in
CPI (like housing, education, the WPI.
Headline vs Core inflation

➢ Headline Inflation is the measure of total inflation within

an economy. It includes price rise in food, fuel and all
other commodities.
➢ Core inflation, on the other hand, is a measure of
inflation that excludes certain volatile and temporary
factors from the calculation. Items typically excluded from
core inflation are food and energy prices, as these are
subject to sharp and unpredictable changes.
➢ The purpose of core inflation is to provide a clearer
picture of the underlying, long-term inflation trend in the
economy, as it excludes price changes in volatile items.
Inflation targeting

➢ It is a monetary policy framework in which a

country's central bank focuses solely on
keeping inflation within a certain range.
➢ In India, the Monetary Policy Framework
Agreement agreed between the RBI and the
government in 2015 established inflation
targeting.
➢ According to the provisions of the agreement,
RBI's principal goal will be to preserve price
stability while also pursuing growth.
➢ The RBI is mandated to maintain a rate of
inflation of 4% with a 2-percentage-point
deviation, i.e. inflation must be kept
between 2% and 6%.
➢ If consumer inflation is more than 6% or
less than 2% for three consecutive quarters
beginning in the 2015/16 fiscal year, the
central bank will be considered to have
missed its objective.
Monetary policy committee:

➢ The RBI Monetary Policy

Committee (MPC) is a statutory
body constituted under the RBI Act
of 1934 by the Central
Government.

➢ The RBI Monetary Policy

Committee (MPC) was established
based on the recommendation of
the Urjit Patel Committee.
➢ It was formed with the objective of
fixing the benchmark policy
interest rate in order to keep
inflation within a particular target
level.

➢ The RBI Monetary Policy

Committee (MPC) is a 6 member
committee.

➢ There are in total three internal

members and three external
experts.
Working of Monetary Policy Committee :
➢ The Monetary Policy Committee(MPC)
is required to meet at least four times
a year.
➢ The quorum required for the meeting
of the MPC is four members.
➢ Each member of the MPC has one vote,
and in the event of an equality of
votes, the Governor has a second or
casting vote.
➢ Once every six months, the Reserve
Bank is required to publish a document
called the Monetary Policy Report.
Previous year questions:
When inflation is a result of an increase in the price of factors of
production, the result is ________.

a. Stagflation
b. Cost-push inflation
c. Demand-pull inflation
d. None of the above
Consider the following statements :

(1) Inflation benefits the debtors.

(2) Inflation benefits the bond-holders.

Which of the statements given above is/are correct?

(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
The item with the maximum weightage in the Wholesale Price Index is
_______.

a. Food items
b. Manufactured products
c. Fuel and power
d. None of the above
Theme 6: Financial Markets
➢ A financial market is a system where it is engaged in collecting
money from the surplus units and lending to the deficit units.
1. Money market:
➢ It is part of broad financial markets in which highly liquid
and short term financial assets with maturity up to 1 year
are traded.
➢ It enables the raising of short-term funds to meet
temporary cash shortages and obligations.
➢ They are informal in nature and has no fixed place to buy
and sell these securities. Transactions can take place over
telephonic calls.
➢ The Reserve Bank of India (RBI), Commercial Banks, Non-
Banking Finance Companies, State Governments, Large
Corporate Houses, and Mutual Funds are the major
participants in the market.
Terms related to money market:

➢ Call money: Money lent or borrowed for 1 day.

It is an interbank market.
➢ Notice money: Money lent or borrowed for a
period of 2-14 days.
➢ Term money: Money lent or borrowed for 15
days to 1 year.
➢ Yield to maturity(YTM): Expected rate of return
on an existing security purchased from the
market.
Common money market instruments:
1. Call money: Call money, also known as "money
at call," is a short-term financial loan that must
be paid in full and immediately when the lender
demands it.
- Unlike a term loan, which has a fixed maturity
and payment schedule, call money does not
have to adhere to a set schedule, nor does the
lender have to provide any advance notice of
repayment.
- Call money allows banks to earn interest on
their excess funds, which is known as the call
money rate.
- The call money market is run by brokers who keep
in touch with the city's banks and connect the
borrowing and lending banks.
- Participants in the call money market include banks
and other entities designated by the RBI. Scheduled
commercial banks (excluding RRBs), co-operative
banks (other than Land Development Banks), and
Primary Dealers (PDs) can participate in the
call/notice money market as both borrowers and
lenders.
2. Treasury Bills: (Already dealt)

3. Cash Management Bill(CMB): Cash Management Bills (CMBs) are

short-term bills issued by the government to meet its immediate cash
requirements.
- A CMBs maturity can range from a few days to three months.
- The Treasury uses the funds raised through these issues to cover any
temporary cash shortfalls and to provide emergency funding.
- The RBI issues the bills on behalf of the government.
- CMBs are similar to Treasury Bills in that they are issued at a discount
and redeemed at face value at maturity. But with maturity period less
than 91 days.

4. Ways and Means Advances: (Already dealt)

5. Certificate of Deposit(CD): They are
issues by scheduled commercial banks and
certain financial institutions permitted by RBI
to raise short term funds.
- It is used by banks to meet its own short
term funds requirement.
- Certificates of Deposit (CDs) are money
market products with a maturity duration
ranging from seven days to one year for
commercial banks.

- Their working nature is similar to treasury

bills
6. Commercial paper(CP): It is a type of unsecured,
short-term debt instrument issued by corporations
that are commonly used to finance payroll, accounts
payable, and inventories, as well as meet other
short-term liabilities.
- Maturities on commercial paper typically last a few
days and rarely exceed 270 days.
- It is typically issued at a discount from face value,
reflecting market interest rates at the time.
- Most commercial paper maturities range from a
few weeks to months, with an average of around 30
days.
2. Capital Markets
➢ Capital markets are places where savings and
investments are channeled between suppliers of capital
and those in need of capital.
➢ Retail and institutional investors are examples of entities
with capital, while businesses, governments, and
individuals are examples of entities seeking capital.
➢ An institutional investor is an entity that makes
investments on behalf of someone else. Examples include
pension funds, mutual funds, insurance companies,
university endowments, and sovereign wealth funds.
➢ The Capital Market is divided into two sections- Primary
market and secondary market.
Primary markets:

➢ It is concerned with new securities that are

being issued for the first time.
➢ A primary market's primary function is to
facilitate the transfer of investible funds from
savers to entrepreneurs seeking to establish
new businesses or expand existing ones by
issuing securities for the first time.
➢ Banks, financial institutions, insurance
companies, mutual funds, and individuals
are among those who have invested in this
market.
Secondary Market:

➢ A secondary market is also referred to as a stock

market or stock exchange.
➢ It is a market for buying and selling existing
securities. It encourages existing investors to exit
and new investors to enter the market.
➢ It also makes existing securities more liquid and
marketable.
➢ It also contributes to economic growth by directing
funds toward the most productive investments via
the disinvestment and reinvestment process.
Primary Market Secondary Market

There is a sale of securities by new companies Existing shares are the only ones that can be
or further (new issues of securities to investors traded.
by existing companies).

The company sells securities directly to the Investors exchange ownership of existing
investor. securities. The company is not involved in any
way.

The primary market only allows for the The stock exchange allows for both the buying
purchase of securities; it does not allow for the and selling of securities.
sale of securities.

The company's management determines and Prices are determined by the securities demand
decides on prices. and supply.

It does not have any fixed geographic location. Located in specific locations.
Financial instruments in capital market:

1. Shares:
➢ They are the units of ownership of a given
company.
➢ Shareholders receive dividends(not interest)
as a return from the company.
➢ They also enjoy/suffer capital gains/losses at
the time of sale of shares.
2. Bonds:

➢ A bond is a loan to a company or government that

pays investors a fixed rate of return over a set period
of time.
➢ These bonds have a maturity date, and once that date
is reached, the issuing company is required to pay
back the amount to the investor as well as a portion
of the profit.
➢ Government Bonds are bonds issued by a country's
government at a fixed rate of interest. These bonds
are thought to be low-risk investments. Treasury Bills,
Municipal Bonds, Zero-coupon Bonds, and other types
of government bonds are examples.
➢ Bond yield is the effective return that it earns.
Some major bonds in India:

➢ Zero coupon bonds: A zero-coupon bond is one in which the

coupon rate is zero and the issuer is only required to repay the
principal amount to the investor.
➢ Municipal Bonds: A municipal bond or muni bond is a debt
instrument issued by municipal corporations or associated
bodies in India for the purpose of financing socio-economic
development projects.
➢ Inflation Indexed Bonds (IIBs): They are government-issued
bonds that guarantee a steady yield regardless of the amount of
inflation in the economy. Inflation-Indexed Bonds are designed
to provide a hedge and protect investors against
macroeconomic risks in a given economy.
Masala Bonds:

➢ Masala Bonds are rupee-denominated bonds issued

by Indian firms outside of India.
➢ They are debt products that aid in the raising of
funds in local currency from international investors.
These bonds can be issued by both the government
and private businesses.
➢ These bonds are available to investors from outside
India who want to invest in Indian assets.
➢ The goal of such bonds was to stimulate Indian
culture at the international platform as ‘masala’ is a
Hindi word for spices.
➢ The exchange rate risks are borne by the
investors as they are issued directly in Indian
rupees. A fall in rupee rates does not affect
the issuer of masala bonds.
➢ Maturity period for masala bonds raised to 50
million US Dollars should be 3 years and for
bonds raised above 50 million US Dollars, it
should be 5 years.
➢ Regional and multilateral financial institutions
where India is a member country can also
subscribe to these bonds.
Government Securities(G Secs):

➢ A Government Securities (G-Sec) are a marketable

instrument issued by the Central Government or
individual states. It recognizes the government's financial
obligations.
➢ G-Secs are government-issued debt instruments that
allow the government to borrow money.
➢ Treasury bills – short-term instruments that mature in 91
days, 182 days, or 364 days – and dated securities –
long-term instruments that mature between 5 and 40
years – are the two main kinds.
➢ They are known as Risk-free gilt-edged instruments.
➢ The Reserve Bank of India has allowed retail investors to
invest in G-Secs from November 2021.
Mutual funds:

➢ A mutual fund is a collection of money from people who

pool their money to invest in stocks, bonds, and other
short-term investments.
➢ Individuals and institutions both invest in mutual funds.
This fund is typically administered by a fund manager
who collects fees from investors in exchange for looking
after their investments.
➢ Mutual funds pool money from investors and use it to
purchase other securities, most commonly stocks and
bonds.
➢ The mutual fund company's worth is determined by the
performance of the securities it purchases.
Stock Exchange:

➢ Stock Exchange is a platform in which brokers and traders

can buy and sell securities with each other such as stocks,
bonds, etc.
➢ It makes available the prices of trading as important
information to the investors.
➢ According to the Securities Contract Regulation Act, 1956
stock exchanges are formed for regulating the business of
buying, selling, or dealing with various securities such as
shares and bonds.
➢ They form a part of the securities market globally and
therefore provide liquidity to the shareholders.
Bombay Stock Exchange:

➢ Bombay Stock Exchange (BSE) is India's first and

largest stock market and was founded in 1875 as
the Native Equity and Stockbroker Association.
➢ It is headquartered in Mumbai, India.
➢ BSE is one of the largest stock exchanges in the
world with approximately 6,000 listed companies.
➢ BSE is Asia's first stock exchange and also
includes a stock trading platform for small and
medium-sized enterprises (SMEs).
National Stock Exchange:

➢ The National Stock Exchange is the largest financial

market in India established in 1992.
➢ The Securities Contracts (Regulation) Act, 1956,
designated it as a stock exchange, and it began
operations in 1994.
➢ The NSE plays a vital role in the Indian financial
market by providing a platform for buying and
selling various financial instruments, including
equities (stocks), derivatives, bonds, exchange-
traded funds (ETFs), mutual funds.
➢ Companies can list their shares on the NSE,
allowing them to raise capital from the public.
With reference to the Indian economy, consider the following statements :
(1) Commercial Paper is a short-term unsecured promissory note.
(2) Certificate of Deposit is a long-term Instrument issued by RBI to a
corporation.
(3) ‘Call Money’ is short-term finance used for interbank transactions.
(4) “Zero-Coupon Bonds’ are the interest-bearing short-term bonds issued
by the Scheduled Commercial Banks to corporations.

Which of the statements given above is/are correct?

(a) 1 and 2 only
(b) 4 only
(c) 1 and 3 only
(d) 2, 3 and 4 only