Page 302 - DMGT207_MANAGEMENT_OF_FINANCES

Unit 14: Capital Market and Financial Institutions

Objectives Notes

After studying this unit, you will be able to:
 Describe the capital and money market;

 Explain the role of primary and secondary market;
 Identify the different types of financial institutions;
 Discuss about various banking and non-banking financial companies in India;
 Describe the role of various financial regulators in India.

Introduction

Financial sector plays an indispensable role in the overall development of a country. Financial
Market is the interface between a large number of buyers and sellers of the financial products.
The prices of the products are fixed by the market forces of demand and supply within the
market itself.
The financial market promotes the savings of the economy, providing an effective channel for
transmitting the financial policies. Technically speaking, a financial market facilitates:
 The raising of capital (in the capital markets);
 The transfer of risk (in the derivatives markets);

 International trade (in the currency markets)
The most important constituent of financial sector is the financial institutions, which act as a
conduit for the transfer of resources from net savers to net borrowers, that is, from those who
spend less than their earnings to those who spend more than their earnings.
In this unit you will study about the structure, role and importance of capital market and
financial institutions in India.

14.1 Financial Market in India

A Financial Market can be defined as the market in which financial assets are created or transferred.
As against a real transaction that involves exchange of money for real goods or services, a
financial transaction involves creation or transfer of a financial asset. Financial Assets or Financial
Instruments represent a claim to the payment of a sum of money sometime in the future and/or
periodic payment in the form of interest or dividend.
Money Market: The money market is a wholesale debt market for low-risk, highly-liquid,
short-term instrument. Funds are available in this market for periods ranging from a single day
up to a year. This market is dominated mostly by government, banks and financial institutions.
Capital Market: The capital market is designed to finance the long-term investments. The
transactions taking place in this market will be for periods over a year.
Forex Market: The Forex market deals with the multi-currency requirements, which are met by
the exchange of currencies. Depending on the exchange rate that is applicable, the transfer of
funds takes place in this market. This is one of the most developed and integrated market across
the globe.

Credit Market: Credit market is a place where banks, FIs and NBFCs Purvey short, medium and
long-term loans to corporate and individuals.

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