Financial Terms, Money Markets & Capital Instruments
The financial market architecture constitutes the institutional conduit through which short-term liquidity and long-term investment capital are mobilized, priced, and allocated across economic sectors. The financial system is structurally bifurcated into the Money Market—dealing in highly liquid short-term debt instruments with maturities up to one year, regulated by the Reserve Bank of India—and the Capital Market—governing long-term equity and debt securities with maturities exceeding one year, regulated by the Securities and Exchange Board of India (SEBI). Key money market instruments include Treasury Bills (T-Bills issued in 91-day, 182-day, and 364-day tenors at a discount), Commercial Paper (CP), Certificates of Deposit (CD), Call and Notice Money, and Triparty Repo (TREPS). The capital market encompasses primary market underwriting mechanisms such as Initial Public Offerings (IPOs) supported by ASBA, and secondary market trading of equity shares, sovereign and corporate bonds, Masala bonds, American/Global Depository Receipts (ADRs/GDRs), Real Estate Investment Trusts (REITs), and Infrastructure Investment Trusts (InvITs). Modern financial risk management relies on structured derivatives—including forwards, futures, options, and interest rate swaps—settled through regulated depositories and clearing corporations.
Key Concepts & Examination Highlights
- Money Market refers to the wholesale financial market for short-term debt instruments and borrowing with a maturity period of up to one year (364 days), regulated primarily by the Reserve Bank of India.
- Capital Market refers to the financial market for long-term equity and debt securities with a maturity period exceeding one year, regulated in India by the Securities and Exchange Board of India (SEBI).
- Treasury Bills (T-Bills) are short-term promissory sovereign debt obligations issued by the RBI on behalf of the Government of India at a discount to face value and redeemed at par on maturity.
- Regular Treasury Bills in India are issued in three standard tenors: 91-day, 182-day, and 364-day, sold through periodic auctions conducted on the RBI's electronic platform.
- Cash Management Bills (CMBs) are non-standard, short-term money market instruments issued by the RBI to meet temporary cash flow mismatches of the Central Government with maturities of less than 91 days.
- State Governments in India do not issue Treasury Bills; they raise short-term liquidity through Ways and Means Advances (WMA) and long-term market debt through State Development Loans (SDLs).
- Commercial Paper (CP) is an unsecured money market promissory note issued by highly rated corporates, primary dealers, and financial institutions, introduced in India in 1990 following the Vaghul Committee recommendations.
- Commercial Paper can be issued in denominations of ₹5 lakh and multiples thereof, with a minimum maturity period of 7 days and a maximum maturity period of up to one year.
- Certificate of Deposit (CD) is a negotiable, unsecured money market term deposit receipt issued by Scheduled Commercial Banks and select All-India Financial Institutions, introduced in India in 1989.
- Certificates of Deposit can be issued for a minimum amount of ₹1 lakh and multiples thereof, with a minimum maturity of 7 days and maximum maturity of 1 year for commercial banks.
- Call Money refers to interbank borrowing and lending of unsecured funds for a single overnight duration (1 day).
- Notice Money refers to short-term interbank borrowing and lending of unsecured funds for periods ranging from 2 days to 14 days.
- Term Money refers to interbank borrowing and lending of unsecured funds for durations exceeding 14 days and up to one year.
- Triparty Repo (TREPS) is a repo contract where a neutral third party (such as the Clearing Corporation of India Limited - CCIL) acts as an intermediary between borrower and lender to handle collateral management, margining, and settlement.
- Collateralized Borrowing and Lending Obligation (CBLO), an instrument developed by CCIL in 2003 for money market borrowing backed by government securities, was replaced by Triparty Repo (TREPS) in November 2018.
- Ways and Means Advances (WMA) are temporary loan facilities provided by the RBI under Section 17(5) of the RBI Act, 1934, to Central and State Governments to bridge transient gaps between receipts and payments, repayable within 90 days.
- Special Drawing Facility (SDF) for State Governments is an advance provided by the RBI against the collateral of Government of India securities and Treasury Bills held by the state.
- Masala Bonds are rupee-denominated bonds issued by Indian corporate or sovereign entities in overseas capital markets to raise foreign capital without taking currency exchange risk, first issued by IFC in 2014.
- Dim Sum Bonds are bonds issued outside mainland China but denominated in Chinese Renminbi (Yuan), while Samurai Bonds are yen-denominated bonds issued in Tokyo by non-Japanese entities.
- Yankee Bonds are dollar-denominated bonds issued in the United States by foreign corporations or governments, regulated under US Securities Act requirements.
- Bulldog Bonds are sterling-denominated bonds issued in the United Kingdom by foreign corporations or sovereign governments.
- American Depository Receipts (ADRs) are negotiable dollar-denominated certificates issued by a US depository bank representing shares in a foreign company traded on US stock exchanges.
- Global Depository Receipts (GDRs) are negotiable certificates denominated in international currencies (such as USD or Euros) issued by international depository banks representing foreign shares traded globally outside the US.
- Indian Depository Receipts (IDRs) are rupee-denominated financial instruments issued by domestic Indian depositories enabling foreign companies to raise capital directly from the Indian equity market (e.g., Standard Chartered IDR).
- Real Estate Investment Trusts (REITs) are investment vehicles regulated under SEBI (REITs) Regulations, 2014, that pool investor funds to own, operate, and finance income-generating commercial real estate assets.
- Infrastructure Investment Trusts (InvITs) are collective investment schemes regulated by SEBI that pool money from institutional and individual investors to invest directly in revenue-generating infrastructure assets (such as toll roads and power grids).
- Sovereign Green Bonds (SGrBs) are sovereign debt instruments issued by the Government of India whose proceeds are dedicated exclusively to public sector projects that reduce carbon intensity and advance ecological sustainability.
- Zero-Coupon Bonds (Deep Discount Bonds) are debt securities that do not pay periodic interest (coupons) but are issued at a substantial discount to face value and redeemed at full par value at maturity.
- Inflation-Indexed Bonds (IIBs) are bonds where the principal and coupon interest payments are indexed to inflation benchmarks (such as WPI or CPI) to shield investors from eroding purchasing power.
- Municipal Bonds (Muni Bonds) are debt securities issued by urban local bodies (ULBs) and municipal corporations to finance urban infrastructure projects like water supply and bridges (e.g., Ahmedabad Municipal Corporation in 1998).
- Convertible Debentures are debt instruments that grant the holder an option to convert their debt holding into equity shares of the issuing company after a specified duration at a predetermined price.
- Debenture Redemption Reserve (DRR) is a statutory reserve that Indian companies issuing debentures are required to create out of profits under Section 71 of the Companies Act, 2013, to protect debenture-holders.
- Depositories Act, 1996, established the legal framework for paperless scripless electronic holding and transfer of securities in India through registered Central Depositories.
- National Securities Depository Limited (NSDL), established in August 1996 and sponsored by IDBI, UTI, and NSE, was the first electronic securities depository established in India.
- Central Depository Services (India) Limited (CDSL), established in February 1999 and promoted by the Bombay Stock Exchange (BSE) and leading banks, is India's second major securities depository.
- International Securities Identification Number (ISIN) is a 12-character alphanumeric code that uniquely identifies a specific security across global financial markets, with Indian securities carrying the prefix 'IN'.
- Application Supported by Blocked Amount (ASBA) is an application mechanism mandated by SEBI for IPOs and rights issues where the application money remains blocked in the investor's bank account until allotment is finalized.
- Initial Public Offering (IPO) is the process by which an unlisted private corporation offers its shares to the public for the first time to raise equity capital and list on stock exchanges.
- Follow-on Public Offering (FPO) is the issuance of additional shares to the public by a company that is already listed on a stock exchange.
- Book Building is a price-discovery mechanism where an issuing company offers securities within a predetermined price band (floor price and cap price) and invites bids from investors to determine the issue price.
- Qualified Institutional Buyers (QIBs) are institutional investors—such as mutual funds, foreign portfolio investors (FPIs), scheduled commercial banks, and insurance companies—perceived to possess financial expertise to invest in capital markets.
- Anchor Investors are qualified institutional buyers who apply for shares in an IPO for a minimum value of ₹10 crore, allotted shares one day prior to the public issue opening to build retail and market confidence.
- Credit Rating Agencies (CRAs) in India—including CRISIL (1987), ICRA (1991), CARE (1993), and India Ratings—are statutorily regulated and supervised by SEBI under the SEBI (Credit Rating Agencies) Regulations, 1999.
- Participatory Notes (P-Notes or Offshore Derivative Instruments - ODIs) are offshore derivative instruments issued by registered FPIs to overseas investors wishing to invest in Indian securities without registering with SEBI.
- A Call Option is a financial derivative contract giving the buyer the right, but not the obligation, to purchase an underlying asset at a specified strike price on or before a specified expiration date.
- A Put Option is a financial derivative contract giving the buyer the right, but not the obligation, to sell an underlying asset at a specified strike price on or before a specified expiration date.
- Credit Default Swap (CDS) is a financial derivative contract where the buyer makes regular payments to the seller in exchange for protection against a credit event or default on an underlying debt instrument.
- Haircut in financial transactions refers to the percentage reduction deducted from the market value of an asset when it is pledged as collateral for a secured loan to buffer against price volatility.
- Duration (Macaulay Duration) measures the weighted average time (in years) required for an investor to recover the true price of a bond through its cash flows (coupons and principal).
- Yield to Maturity (YTM) is the total annual rate of return anticipated on a bond if the bond is held until its final maturity date, assuming all coupon payments are reinvested at the same rate.
Sample Solved Questions & Concept Explanations
8 Verified Concept QuestionsWhat is the standard rate at which the RBI is prepared to buy or rediscount bills of exchange or other commercial paper eligible for purchase called?
The outright purchase and sale of Government Securities in the open market by the RBI to inject or absorb rupee liquidity is known by which term?
Which landmark committee formed in 1991 laid the blueprint for financial sector reforms and deregulation in Indian banking?
Under the Prompt Corrective Action (PCA) framework revised by the RBI, which three key performance parameters trigger regulatory restrictions on weak banks?
Under Basel III framework, the Liquidity Coverage Ratio (LCR) requires banks to hold sufficient High-Quality Liquid Assets (HQLA) to survive an acute stress scenario for how many days?
Effective 1 October 2019, which external benchmark was mandated by the RBI for banks to link all new floating-rate personal/retail and MSME loans?
What is the range of the Countercyclical Capital Buffer (CCCB) prescribed under Basel III norms to restrict excessive credit growth during economic expansions?
What is the statutory spread between the Standing Deposit Facility (SDF) rate and the Marginal Standing Facility (MSF) rate around the Policy Repo Rate in RBI's asymmetric LAF corridor?