Classification of Financial Markets MBA.

Management of Financial Institutions and Services

1. Classification of Financial Markets Money Market & Capital Market, Money Market Functions, Organisation & Instruments, Role of Central Bank

2. Classification of Financial Markets Financial markets can be broadly classified into two categories: 1. **Money Market**: Deals with short-term funds and instruments (less than a year). • Provides liquidity to businesses, governments, and financial institutions. • Short-term instruments include Treasury Bills, Repurchase Agreements, and Commercial Papers. 2. **Capital Market**: Deals with long-term funds and instruments (more than a year). • Involves the issuance and trading of stocks, bonds, and other long-term securities. • Includes both primary markets (new issues) and secondary markets (existing securities).

3. Money Market – Functions The primary functions of the money market are: 1. **Providing Liquidity**: Ensures sufficient liquidity in the economy by allowing institutions to borrow and lend short-term funds. 2. **Interest Rate Stabilization**: Helps stabilize interest rates through the supply and demand for short-term funds. 3. **Facilitating Monetary Policy**: The central bank uses the money market to implement monetary policy by controlling money supply and interest rates. 4. **Short-term Investment and Financing**: Provides investors and financial institutions with opportunities to invest or raise short-term capital.

4. Money Market – Organisation The key organizations involved in the money market include: 1. **Reserve Bank of India (RBI)**: Acts as the central bank and regulator, managing liquidity in the economy. 2. **Commercial Banks**: Provide short-term loans and accept short-term deposits from individuals and institutions. 3. **Financial Institutions**: Non-bank financial companies (NBFCs) provide short-term lending and borrowing services. 4. **Government**: The government issues short-term debt instruments such as Treasury Bills (T-bills) for liquidity management. 5. **Corporations**: Issue Commercial Papers (CPs) to raise short-term funds from the market.

5. Money Market Instruments The major instruments in the money market include: 1. **Treasury Bills (T-bills)**: Short-term government securities issued at a discount to face value. 2. **Repurchase Agreements (Repo)**: Short-term borrowing arrangements involving the sale of securities with a commitment to repurchase them. 3. **Commercial Paper (CP)**: Short-term unsecured debt issued by corporations to meet working capital needs. 4. **Certificates of Deposit (CD)**: Time deposits offered by banks with a fixed maturity period and interest rate. 5. **Call Money**: Short-term loans with a maturity period of one day, usually used by banks to meet reserve requirements.

6. Role of Central Bank in Money Market The central bank plays a crucial role in regulating and managing the money market. Key roles include: 1. **Monetary Policy Implementation**: The central bank controls interest rates, money supply, and liquidity through operations in the money market. 2. **Liquidity Management**: Uses tools like repo and reverse repo to inject or absorb liquidity in the banking system. 3. **Discount Rate**: Determines the interest rate at which commercial banks can borrow short-term funds from the central bank. 4. **Stabilizing Money Market Rates**: The central bank can intervene in the money market to stabilize short-term interest rates and ensure financial stability. 5. **Open Market Operations (OMO)**: Involves buying and selling government securities to manage liquidity and control inflation.

7. Conclusion The money market is vital for ensuring liquidity and stability in the financial system. It facilitates short-term borrowing and lending, and the central bank plays an essential role in regulating this market. Through various instruments and policies, the money market supports economic growth, financial stability, and the implementation of monetary policy.