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Indian Economic Policy

Notes 20.1.1 The Indian Capital Market
The Indian capital market is the market for long-term capital; it refers to all the facilities and institutional
arrangements for borrowing and lending “term funds”—medium-term and long-term funds. The
demand for long-term money capital comes predominantly from private and public manufacturing
industries, trading and transport units, etc and agriculture too requires some funds for long-term
purposes. The Central and State Governments raise substantial amounts from the capital market.
The supply of funds for the capital market comes largely from individual savers (they supply through
banks and insurance companies), corporate savers, commercial banks insurance companies, public
provident funds and other, specified agencies. The capital market in India can be classified into :
(a) Gilt-edged market or market for Government and semi-government securities;
(b) Industrial securities market;
(c) Development financial institutions; and
(d) Non-banking financial companies.
The gilt-edged securities market is the market for Government and semi-government securities which
carry fixed interest rates. The industrial securities market is the market for equities and debentures of
companies of the corporate sector. This market is further classified into (a) new issue markets for
raising fresh capital in the form of shares and debentures, (commonly referred to as primary market)
and (b) old issues market (or secondary market) for buying and selling shares and debentures of
existing companies—this market is commonly referred to as the stock market or stock exchange.
1. The Composition of the Indian Money Market
A money market is not a market for money but it is a market for “near money”; or it is the
market for lending and borrowing of short-term funds. It is the market where the short-term
surplus investible funds of banks and other financial institutions are demanded by borrowers
comprising individuals companies and the Government. Commercial banks are both suppliers
of funds in the money market and borrowers. The composition of the Indian money market is
given in Chart 2:
The Indian money market consists of two parts : the unorganised and the organised sectors.
The unorganised sector consists of indigenous bankers who pursue the banking business on
traditional lines and non-banking financial companies (NBFCs). The organised sector comprises
the Reserve Bank, the State Bank of India and its associate banks, the 20 nationalised banks and
private sector banks, both Indian and foreign.
The organised money market in India has a number of sub-markets such as the treasury bills
market, the commercial bills market and the inter-bank call money market.
The Indian money market is not a single homogeneous market but is composed of several sub-
markets, each one of which deals in a particular type of short term credit.
Call Money Market
One important sub-market of the Indian money market is the Call Money Market, which is the
market for very short-term funds. This market is also known as money at call and short notice.
This market has actually two segments, viz. (a) the call market or overnight market, and (b)
short notice market. The rate at which funds are borrowed and lent in this market is called the
call money rate.
Call money rates are market determined, i.e., by demand for and supply of short term funds.
The public sector banks account for about 80 per cent of the demand (that is, borrowings) and
foreign banks and Indian private sector banks account for the balance of 20 per cent of
borrowings. Non-banking financial institutions such as IDBI, LIC, GIC, etc enter the call money
market as lenders and supply up to 80 per cent of the short-term funds. The balance of 20
per cent of the funds is supplied by the banking system. While some banks operate both as lenders
and borrowers, others are either only borrowers or only lenders in the call money market.

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