UPSC Notes / Indian Economy / Chapter 7
Chapter 7 of 15

Money Market and Capital Market

Short-term vs long-term financial markets — Treasury Bills, CPs, CDs on one side, and equity, bond markets and SEBI regulation on the other.

📖 ~13 min read 📊 Indian Economy

Introduction

Financial markets channel savings into productive investment, broadly split into the Money Market (short-term funds, up to one year) and the Capital Market (long-term funds — equity and debt) — each with distinct instruments, participants, and regulators.

Money Market — Key Instruments

InstrumentDescription
Treasury Bills (T-Bills)Short-term government borrowing instruments (91/182/364 days), issued at a discount to face value, considered virtually risk-free
Commercial Paper (CP)Unsecured short-term debt issued by creditworthy corporates to raise working capital funds directly from the market
Certificate of Deposit (CD)Short-term deposit instrument issued by banks, tradable in the secondary market
Call Money MarketExtremely short-term (overnight to 14-day) interbank lending/borrowing market, crucial for banks managing daily liquidity

Capital Market — Structure

Flowchart — Primary vs Secondary Market
Primary Market — new securities issued directly by companies (IPOs, FPOs) to raise fresh capital
Secondary Market — existing securities traded among investors (stock exchanges); does not raise new capital for the company, but provides liquidity and price discovery

Stock Exchanges

ExchangeEstablishedKey Index
Bombay Stock Exchange (BSE)1875 — Asia's oldest stock exchangeSENSEX (30 companies)
National Stock Exchange (NSE)1992 — introduced electronic/screen-based trading to IndiaNIFTY 50 (50 companies)

Securities and Exchange Board of India (SEBI)

  • Established in 1988; given statutory powers under the SEBI Act, 1992.
  • Key functions: Regulates stock exchanges and market intermediaries (brokers, merchant bankers), protects investor interests, prevents fraudulent/unfair trade practices (e.g., insider trading), and regulates the mutual fund industry.
  • Also regulates credit rating agencies and oversees corporate disclosure norms for listed companies.

Other Key Capital Market Participants

ParticipantRole
Foreign Portfolio Investors (FPIs)Overseas investors in Indian equity/debt markets without direct management control (distinguished from FDI)
Mutual FundsPool retail investor money to invest in diversified securities portfolios, regulated under SEBI (Mutual Funds) Regulations
Depositories (NSDL, CDSL)Hold securities in electronic (dematerialised/"demat") form, eliminating physical share certificates
💡 FDI vs FPI: Foreign Direct Investment (FDI) involves a lasting management interest/control (typically ≥10% equity stake) in an enterprise, while Foreign Portfolio Investment (FPI) is a passive financial investment in shares/bonds without management control — an important distinction for both Prelims and Mains.
✅ UPSC Focus: Money market instruments and their tenure · Primary vs secondary market distinction · BSE vs NSE and their flagship indices · SEBI's regulatory functions · FDI vs FPI conceptual difference.

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