Class 12 Economics Chapter 9: Money Market and Capital Market in India

Key concepts: Money Market and Capital Market in India

Financial market

A market where financial assets like bonds, stocks, derivatives, government securities and foreign currency are bought and sold. It has two parts: the money market and the capital market.

Money market

A market for lending and borrowing short term funds through near money instruments (trade bills, government securities, promissory notes) that are liquid, low risk and mature in one year or less.

Organized and unorganized sector

Organized: RBI, commercial banks, co-operative banks, DFIs and DFHI. Unorganized: indigenous bankers, money lenders and unregulated non-bank financial intermediaries (chit funds, Nidhi, loan companies).

Reserve Bank of India

India's central bank and the most important part of the money market. It issues notes, is banker to the government and to banks, guards foreign exchange reserves and controls credit.

Commercial banks

Profit seeking intermediaries that bring savers and investors together. Their main work is accepting deposits and giving loans; they also offer ancillary services and create credit.

Capital market

A market for long term funds, both equity and debt. It consists of the government securities market, industrial securities market (primary and secondary), DFIs and financial intermediaries.

Role and problems of the capital market

It mobilizes long term savings, provides equity capital and gives quick valuation. Problems: scams, insider trading and price rigging, weak debt market, falling regional trade, low informational efficiency.

Capital market reforms

SEBI (statutory powers in 1992), NSE (1992), screen based trading, Demat accounts (1996), ADRs and GDRs for global funds, and the Investor Education and Protection Fund (2001).

Quick revision: important points

• RBI: Hilton Young Commission, RBI Act 1934, began 1 April 1935, nationalized 1 January 1949.
• Minimum reserve system (1957): Rs 200 crore = Rs 115 crore gold + Rs 85 crore foreign currency and securities.
• Call money is borrowed for one day; notice money for more than a day up to 14 days.
• Quantitative controls: bank rate, open market operations, CRR, SLR. Qualitative: margins, rationing, moral suasion.
• IFCI (1948) was the first DFI; DFHI was set up in 1988 on the Vaghul Committee advice.
• Money market: short term funds; capital market: long term funds. Primary market = new issues; secondary = old issues.

Practice MCQs with answers

1. Financial markets consist of which two distinct markets?

   1. Primary market and secondary market
   2. Organized market and unorganized market
   3. Money market and capital market
   4. Bond market and share market
   Show answer

   Answer: C. Money market and capital market
   The financial market is divided into the money market (short term funds) and the capital market (long term funds).

2. Instruments of the money market are called near money because they mature in:

   1. One year or less
   2. Three to five years
   3. More than five years
   4. More than ten years
   Show answer

   Answer: A. One year or less
   Money market instruments are liquid, low risk and have a maturity of one year or less.

3. Which of these belongs to the unorganized sector of the money market?

   1. Co-operative banks
   2. Discount and Finance House of India
   3. Commercial banks
   4. Indigenous bankers
   Show answer

   Answer: D. Indigenous bankers
   Indigenous bankers, money lenders and unregulated non-bank financial intermediaries form the unorganized sector. The others are organized.

4. Which of these is a role of the capital market?

   1. Providing overdraft to current account holders
   2. Helping to fix a fair and quick value of shares and bonds
   3. Issuing currency notes
   4. Fixing the bank rate
   Show answer

   Answer: B. Helping to fix a fair and quick value of shares and bonds
   Capital market helps to determine the fair and quick value of both equity and debt instruments. The other options are functions of banks or the RBI.

5. The RBI has the sole right to issue currency notes of all denominations except:

   1. Ten rupee notes
   2. Five hundred rupee notes
   3. One rupee note and coins
   4. Hundred rupee notes
   Show answer

   Answer: C. One rupee note and coins
   The one rupee note and coins are issued by the government, not by the RBI.

All Class 12 Economics chapters

• Chapter 1: Introduction to Micro and Macro Economics
• Chapter 2: Utility Analysis
• Chapter 3A: Demand Analysis
• Chapter 3B: Elasticity of Demand
• Chapter 4: Supply Analysis
• Chapter 5: Forms of Market
• Chapter 6: Index Numbers
• Chapter 7: National Income
• Chapter 8: Public Finance in India
• Chapter 9: Money Market and Capital Market in India
• Chapter 10: Foreign Trade of India

Class 12 Economics notes: all chapters