Indian Economy Quiz: Capital Markets & Money Markets |19 Feb, 2021

Financial markets in every economy are having two separate segments today, one catering to the requirements of short-term funds and the other to the requirements of long-term funds.

· The short-term financial market is known as the money market, while the long-term financial market is known as the capital market.

· The money market fulfils the requirements of funds for the period upto 364 days (i.e., short term) while the capital market does the same for the period above 364 days (i.e., long term).

Source: TMH Ramesh Singh

Money market is the short-term financial market of an economy.

· In this market, money is traded between individuals or groups (i.e., financial institutions, banks, government, companies, etc.), who are either cash-surplus or cash-scarce.

· Trading is done on a rate known as discount rate which is determined by the market and guided by the availability of and demand for the cash in the day-to-day trading.

· The ‘repo rate’ of the time (announced by the RBI) works as the guiding rate for the current ‘discount rate’.

Source: TMH Ramesh Singh

The organized form of money market in India is just close to three decades old.

· However, its presence has been there, but restricted to the government only.

· It was the Chakravarthy Committee (1985) which, for the first time, underlined the need of an organized money market in the country and the Vahul Committee (1987) laid the blue print for its development.

Source: TMH Ramesh Singh

Indigenous bankers receive deposits and lend money in the capacity of an individual or private firm. There are, basically, four such bankers in the country functioning as non-homogenous groups:

· Gujarati Shroffs: They operate in Mumbai, Kolkata as well as in industrial, trading and port cities in the region.

· Multani or Shikarpuri Shroffs: They operate in Mumbai, Kolkata, Assam tea gardens and North Eastern India.

· Marwari Kayas: They operate mainly in Gujarat with a little bit of presence in Mumbai and Kolkata.

· Chettiars: They are active in Chennai and at the ports of southern India.

Source: TMH Ramesh Singh

Treasury Bills (TBs): This instrument of the money market though present since Independence got organized only in 1986. They are used by the Central Government to fulfil its short-term liquidity requirement up-to the period of 364 days. There developed five types of the TBs in due course of time:

· 14-day (Intermediate TBs)

· 14-day (Auctionable TBs)

· 91-day TBs

· 182-day TBs

· 364-day TBs

Out of the above five variants of the TBs, at present only the 91-day TBs, 182-day TBs and the 364-day TBs are issued by the government. The other two variants were discontinued in 2001.

Source: TMH Ramesh Singh

The Government of India, in consultation with the RBI, decided to issue a new short-term instrument, known as Cash Management Bills, since August 2009 to meet the temporary cash flow mismatches of the government.

· The Cash Management Bills are non-standard and discounted instruments issued for maturities less than 91 days.

· The CMBs have the generic character of Treasury Bills (issued at discount to the face value); are tradable and qualify for ready forward facility; investment in it is considered as an eligible investment in government securities by banks for SLR.

Source: TMH Ramesh Singh

The Herfindahl-Hirschman Index (HHI) is a common measure of market concentration and is used to determine market competitiveness, often pre- and post-Merger & Acquisition transactions.

· It is calculated by squaring the market share of each firm competing in a market and then summing the resulting numbers. It can range from close to zero to 10,000.

· Regulators use the HHI Index using the 50 largest companies in a particular industry to determine if that industry should be considered competitive or as close to being a monopoly.

Source: Investopedia

Currency Swap Arrangement is an arrangement, between two friendly countries, which have regular, substantial or increasing trade, to basically involve in trading in their own local currencies, where both pay for import and export trade, at the pre-determined rates of exchange, without bringing in third country currency like the US Dollar.

· In such arrangements no third country currency is involved, thereby eliminating the need to worry about exchange variations.

· The swap arrangement (in 2018) is an agreement between India and Japan to essentially exchange and re-exchange a maximum amount of USD 75 Billion for domestic currency, for the purpose of maintaining an appropriate level of balance of payments for meeting short-term deficiency in foreign exchange.

Source: The Hindu

The RBI has slapped restrictions on Punjab and Maharashtra Cooperative Bank Ltd (PMC Bank). It has also appointed an administrator and superseded its board of directors.

· The PMC had been placed under ‘directions’ of the Reserve Bank of India (RBI) for six months, after irregularities had been found in lending.

· The RBI has issued directions in exercise of powers vested in it under sub section (1) of Section 35 A of the Banking Regulation Act, 1949, read with Section 56 of the Banking Regulation Act, 1949 (AACS).

Source: The Hindu

Market Stabilization Scheme or MSS is a tool used by the Reserve Bank of India to suck out excess liquidity from the market through issue of securities like Treasury Bills, Dated Securities etc. on behalf of the government.

· The money raised under MSS is kept in a separate account called MSS Account and not parked in the government account or utilized to fund its expenditures.

· The Reserve Bank under Governor YV Reddy initiated the MSS scheme in 2004, to control the surge of US dollars in the Indian market; RBI started buying US dollars while pumping in rupee.

· This eventually led to over-supply of the domestic currency raising inflationary expectations. MSS was introduced to mop up this excess liquidity.

Source: TMH Ramesh Singh