Chapter - 9
Money Market and Capital Market in India
Sr. No. | Name of Chapter |
| Economics |
1. | Choose the Correct Option | 5 Marks | |
2 | Complete the Correction | 5 Marks | |
3 | Give Economic Term | 5 Marks | |
4 | Find the Odd Word | 5 Marks | |
5 | Complete the following Statements | 5 Marks | |
6 | Assertion and Reasoning Questions | 5 Marks | |
7 | Identify and Explain the Concepts | 6 Marks | |
8 | Distinguish Between | 6 Marks | |
9 | Answer in Brief | 12 Marks | |
10 | State with Reasons, Do you Agree/ Disagree | 12 Marks | |
11 | Table, Diagram, Passage Based Questions | 8 Marks | |
12 | Answer in Detail | 16 Marks |
Q. 1. Complete the following statements :
1) Development financial institutions were established to .............
a) provide short term funds.
b) develop industry, agriculture and other key sectors.
c) regulate the money market.
d) regulate the capital market.
2) Money market faces shortage of funds due to ...........
a) inadequate savings.
b) growing demand for cash.
c) presence of unorganized sector.
d) financial mismanagement.
3) Individual investors have lost confidence in the capital market due to ...........
a) lack of financial instruments.
b) high transaction costs.
c) low returns.
d) financial scams.
4) Commercial banks act as intermediaries in the financial system to ...........
a) make profits
b) accelerate the country's economic growth.
c) mobilize the savings and allocating them to various sectors of the economy.
d) control the credit.
Q. 2. Complete the correlation :
1) Money market : Short term funds :: Capital Market : Long term funds
2) RBI : Central Bank :: SBI : Commercial Bank
3) Co-operative banks : Organized sector :: Indigenous bankers : Unorganized sector
4) Primary market : New issue :: Secondary market : Old issues
Q. 3. Find the odd word :
1) Types of Bank Accounts : Saving a/c, D-mat a/c, Recurring a/c, Current a/c
2) Unregulated Financial intermediates : Mutual fund, Nidhi, Chit fund, Loan Companies
3) Financial Assets : Bonds, Land, Govt. Securities, Derivatives
4) Quantitative Tools : Bank rate, Open market operations, Foreign Exchange rate, Variable reserve ratios
Q. 4. Assertion and Reasoning :
1) Assertion (A) : Money market economizes use of cash
Reasoning (R) : Money market deals with financial instruments that are close substitutes of money
Options : 1) (A) is True, but (R) is False
2) (A) is False, but (R) is True
3) Both (A) and (R) are True and (R) is the correct explanation of (A)
4) Both (A) and (R) are True and (R) is not the correct explanation of (A)
2) Assertion (A) : Regional stock exchanges have witnessed a sharp decline in the volume of trade.
Reasoning (R) : Investors prefer to trade in securities listed in premier stock exchanges like BSE, NSE etc.
Options : 1) (A) is True, but (R) is False
2) (A) is False, but (R) is True
3) Both (A) and (R) are True and (R) is the correct explanation of (A)
4) Both (A) and (R) are True and (R) is not the correct explanation of (A)
3) Assertion (A) : The unorganized sector of the money market lacks transparency.
Reasoning (R) : Activities of the unorganized sector are largely confined to rural areas.
Options : 1) (A) is True, but (R) is False
2) (A) is False, but (R) is True
3) Both (A) and (R) are True and (R) is the correct explanation of (A)
4) Both (A) and (R) are True and (R) is not the correct explanation of (A)
4) Assertion (A) : Foreign exchange management and control is undertaken by commercial banks.
Reasoning (R) : RBI has to maintain the official rate of exchange of rupee and ensure its
stability.
Options : 1) (A) is True, but (R) is False
2) (A) is False, but (R) is True
3) Both (A) and (R) are True and (R) is the correct explanation of (A)
4) Both (A) and (R) are True and (R) is not the correct explanation of (A)
Q. 5. Identify and explain the concepts from the given illustrations :
1) Raghu’s father regularly invests his money in stocks and bonds.
Ans:
(A) Identified concept: Investment in Stock market.
Explanation of concept: Stock market is an important constituent of the capital market which is an association or organization in which stock, bonds, commodities, etc. are traded.
2) Sara makes a monthly contribution to a fund jointly created by her friends. The collected fund is then given to a chosen member through lucky draw.
3) Tina deposited a lumpsum amount of Rs. 50,000 in the bank for a period of one year.
4) ABC bank provides d-mat facility, safe deposit lockers, internet banking facilities to its customers.
Ans.
(A) Identified concept: Ancillary functions of commercial banks .
(B) Explanation of concept: Commercial banks provide many customer services to the customers. The function of providing these vices is called ancillary functions of commercial banks.
Q. 6. Distinguish between :
1) Money market and Capital market.
|
|
Money
Market |
Capital Market |
|
1) Meaning |
A type of
financial market in which short term finance is provided is called the money
market. |
A type of
financial market which the medium term and long term finance is provided is
called the capital market. |
|
(2)
Constituents |
The Reserve
Bank of India, commercial banks, co-operative banks, development financial
institutions, Discount and Finance House of India, Indigenous bankers, money
lenders, unregulated non-bank financial intermediaries, etc. are the
constituents of money market in India. |
Government
securities market, Industrial securities market, development financial
institutions. financial intermediaries. etc. are the constituents of capital
market in India. |
2) Demand deposit and Time deposit.
|
Time deposit |
Demand deposit |
|
Deposits that are repayable after a certain period of time
are known as time deposits or term deposits. |
Deposits that are withdrawable on demand are known as
demand deposits. |
|
Commercial banks provides more interest on time deposits. |
Commercial banks provides less interest on demand
deposits. |
|
Fixed deposits and Recurring deposits are the time
deposits. |
Saving deposits and Current deposits are the demand
deposits. |
3) Organized sector and Unorganized sector of money market.
|
|
Organized
Sector of Money Market |
Unorganized
Sector of Money Market |
|
(1) Meaning |
The sector
formed by the components of the money market that come under the direct
control and supervision of the Reserve Bank of India is the organized sector
of the money market. |
The sector
formed by the components of the money market that are not under the direct
control and supervision of the Reserve Bank of India is the unorganized
sector of the money market. |
|
(2) Rate of
Interest |
In the
organized sector of money market, financing is available to borrowers at
relatively low interest rates. |
In the
unorganized sector of money market, financing is available to borrowers at
relatively high interest rates. |
Q. 7. Answer the following :
1) Explain the problems faced by the money market in India.
Compared to advanced countries, the Indian money market is less developed in terms of volume and liquidity. Following points explain the problems of the Indian Money Market :
1) Dual Structure of the Money Market : Presence of both, the organized and unorganized sector in the money market leads to disintegration, lack of transparency and increased volatility. The unorganized markets lack co-ordination and do not come under the direct control and supervision of the RBI.
2) Lack of uniformity in the rates of interest : The money market comprises of various entities such as commercial banks, co-operative banks, non-bank finance companies, development finance institutions, investment companies etc. The category of borrowers is also different.
3) Shortage of funds : Money market faces shortage of funds due to inadequate savings. Low per capita income, poor banking habits among the people, indulgence in wasteful consumption, inadequate banking facilities in the rural areas etc. have also been responsible for the paucity of funds in the money market.
4) Seasonal fluctuations : Demand for funds varies as per the seasons. During the peak season, from October to June, finance is required on a large scale for various purposes such as trading in agricultural produce, investment in business activities etc. This results in wide fluctuations in the money market.
5) Lack of financial inclusion : Banking facilities in the country are still inadequate and inaccessible to the vulnerable groups such as the weaker sections and the low income groups. This shows lack of financial inclusion.
6) Delays in technological upgradation : Use of advanced technology is a prerequisite for the development and smooth functioning of financial markets. Delays in upgradation of technology hampers the working of the money market.
2) Explain the functions of commercial bank.
1) Acceptance of deposits :Deposits constitute the main source of funds for commercial banks. Savings lead to the creation of deposits. Deposits are categorized as (i) Demand deposits and (ii) Time deposits.
i) Demand Deposits : Deposits that are withdrawable on demand are known as demand deposits. They are in the form of Current account and Savings account deposits.
* Current account is usually opened by businessmen, corporations, industrial houses, trusts etc. They are provided with overdraft facility. Overdraft means withdrawal in excess of the balance in the account.
* Savings account are operated by a large number of people, particularly the salaried class, small traders etc. who wish to save a part of their income with the bank.
ii) Time deposits : Deposits that are repayable after a certain period of time are known as time deposits. They are in the form of recurring deposits and fixed deposits.
* Recurring deposit refers to a deposit wherein a customer deposits a fixed amount at regular intervals for a specified period of time. x Fixed deposits refer to a lumpsum amount deposited by a customer for a specified period of time. Compared to all other deposits, fixed deposits carry a high rate of interest.
2) Providing loans and advances : Commercial banks mobilize savings and lend these funds to institutions and individuals for various purposes. Based on the tenure, loans include call loans, short term, medium term and long term loans. Longer the duration of the loans, greater will be the rate of interest. Besides this, banks also provide cash credit, overdraft facility as well as discount bills of exchange.
3) Ancillary functions : Commercial banks also provide a range of ancillary services such as transfer of funds, collection of money, making periodical payments on behalf of the customer, merchant banking, foreign exchange, safe deposit lockers, Demat facility, internet banking, mobile banking etc.
4) Credit Creation : Credit creation is an important function of commercial banks. Commercial banks are creators of credit. Demand and time deposits constitute the primary deposits of banks. After meeting the reserve requirements out of the net demand and time liabilities, the balance amount is used for giving loans. Thus, secondary deposits or ‘derivative deposits’ are created out of the loans given by the banks.
For instance, when the bank provides loan to its customer, the loan amount is credited into the bank account of the customer. The bank that receives the loan amount as a deposit, keeps aside a certain portion in the form of reserves. After meeting the reserve requirements, the bank lends the remaining amount. This procedure is followed by the entire banking system in the country, leading to creation of credit. In short, commercial banks create deposits out of the loans given thereby leading to credit creation.
3) Explain the role of capital market in India.
1) Mobilizes long term savings : There is an increasing demand for investment funds by industrial organizations and the government. But the availability of financial resources is insufficient to meet this growing demand. Capital market helps to mobilize long term savings from various section of the population through the sale of securities.
2) Provides equity capital : Capital market provides equity capital or share capital to entrepreneurs which could be used to purchase assets as well as fund business operations.
3) Operational efficiency : Capital market helps to achieve operational efficiency by lowering the transaction costs, simplifying transaction procedures, lowering settlement timings in purchase and sale of stocks.
4) Quick valuation : Capital market helps to determine a fair and quick value of both equity (shares) and debt (bonds, debentures) instruments.
5) Integration : Capital market leads to integration among real and financial sectors, equity and debt instruments, government and private sector, domestic and external funds etc.
4) Explain the problems of capital market in India.
Following points explain the problems faced by the Indian Capital Market :
1) Financial Scams : Increasing number of financial frauds have resulted in irreparable loss for the capital market. Besides this, it has also lead to public distrust and loss of confidence among the individual investors.
2) Insider trading and price manipulation : Insider trading means buying or selling of a security by someone who has access to non-public information or ‘unpublished information’ for personal benefit. Price manipulation or price rigging on the other hand means to simply raise the prices of shares through buying and selling of shares within certain individuals themselves for personal gains. Such illegal practices have also affected the smooth functioning of capital market.
3) Inadequate debt instruments : Debt instruments include bonds, debentures etc. There is not much trading in the debt securities due to narrow investor base, high cost of issuance, lack of accessibility to small and medium enterprises.
4) Decline in the volume of trade : Regional stock exchanges have witnessed a sharp decline in the volume of trade because investors prefer to trade in securities listed in premier stock exchanges like BSE, NSE etc.
5) Lack of informational efficiency : A market is said to be informationally efficient if a company’s stock prices incorporate all the available information into the current prices. However, the stock market in India lacks informational efficiency compared to advanced countries
Q. 8. Answer in detail :
1) Explain the role of money market in India.
The following points outline the role of the money market in India :
1) Short-term requirements of borrowers : Money market provides reasonable access for meeting the short-term financial needs of the borrowers at realistic prices.
2) Liquidity Management : Money market is a dynamic market. It facilitates better management of liquidity and money in the economy by the monetary authorities. This, in turn, leads to economic stability and development of the country.
3) Portfolio Management : Money market deals with different types of financial instruments that are designed to suit the risk and return preferences of the investors. This enables the investors to hold a portfolio of different financial assets which in turn, helps in minimizing risk and maximizing returns.
4) Equilibrating mechanism : Through rational allocation of resources and mobilization of savings into investment channels, money market helps to establish equilibrium between the demand for and supply of short-term funds.
5) Financial requirements of the Government : Money market helps the Government to fulfil its short term financial requirements on the basis of Treasury Bills.
6) Implementation of Monetary policy : Monetary policy is implemented by the central bank. It aims at managing the quantity of money in order to meet the requirements of different sectors of the economy and to increase the pace of economic growth. A well-developed money market ensures successful implementation of the monetary policy. It guides the central bank in developing an appropriate interest policy.
7) Economizes the use of cash :Money market deals with various financial instruments that are close substitutes of money and not actual money. Thus, it economizes the use of cash.
8) Growth of Commerce, Industry and Trade: Money market facilitates discounting bills of exchange to local and international traders who are in urgent need of short-term funds. It also provides working capital for agriculture and small scale industries.
2) Explain the functions of RBI.
1) Issue of Currency Notes : RBI has the sole right to issue currency notes of all denominations, except one rupee note and coins. As per the ‘Minimum Reserve System’ of 1957, RBI is required to maintain minimum gold and foreign exchange reserves of Rs 200 crores, out of which at least Rs. 115 crores should be in gold and the remaining Rs. 85 crores should be in terms of foreign currency and government securities.
2) Banker to the Government : RBI acts as a banker, agent and advisor to the Government. It transacts the business of both, the Central and State Governments. It accepts money as well as makes payments on behalf these Governments. It also undertakes the management of public debt. It advises the Government on a wide range of economic issues.
3) Banker’s Bank : RBI exercises statutory control over the commercial banks. All scheduled banks are compulsorily required to maintain a certain minimum of cash reserves with the RBI against their demand and time liabilities. RBI provides financial assistance to banks in the form of discounting of eligible bills. Loans and advances are also provided against approved securities.
4) Custodian of Foreign Exchange Reserves : RBI acts as a custodian of the country’s foreign exchange reserves. It has to maintain the official rate of exchange of rupee as well as ensure its stability. RBI also undertakes to buy and sell the currencies of all the members of the International Monetary Fund (IMF).
5) Controller of Credit :As a supreme banking authority of the country, RBI has the power to influence the volume of credit created by commercial banks. It also monitors the purpose or use of credit. Quantitative methods such as bank rate, open market operations, variable reserve ratios such as Cash Reserve Ratio (CRR), Statutory Liquid Ratio (SLR) etc. control the volume of credit created. Qualitative methods such as fixing margin requirements, credit rationing, moral suasion etc. regulate the purpose or use of credit.
6) Collection and Publication of Data : RBI collects and compiles statistical information related to banking and other financial sectors of the economy.
7) Promotional and Developmental Functions : RBI also performs certain promotional and developmental functions such as extending banking services to semiurban and rural areas, providing security to depositors, development of specialized institutions for agricultural credit, industrial finance etc.
8) Other Functions : RBI acts as a clearing house for settling the accounts between its member banks. As a lender of last resort, it also provides liquidity to banks experiencing financial difficulty.
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