Financial Markets

Subject: Economy | Unit: Money & Banking | Topic: Financial Markets Exam: AP Group 2 (APPSC)

Introduction

Financial markets facilitate the transfer of funds from surplus units (savers) to deficit units (borrowers), enabling efficient allocation of capital in the economy. India's financial markets are divided into the money market (short-term, up to 1 year, regulated by RBI) and the capital market (long-term, over 1 year, regulated by SEBI). With India moving to T+1 settlement (January 2023), complete dematerialization of securities (2019), and the UPI revolution in payments, India's financial markets are among the most technologically advanced globally.

Economic Context

India's financial markets have evolved significantly since the 1991 reforms. The establishment of NSE (1992) introduced electronic trading, SEBI received statutory powers in 1992, NSDL (1996) and CDSL (1999) enabled dematerialized holding, and India achieved T+1 settlement in 2023 — among the first major economies to do so. BSE, established in 1875, is Asia's oldest stock exchange. The Sensex and Nifty 50 are the benchmark indices tracking market performance.

Core Content

Financial Markets — Structure

Financial Markets
├── Money Market (short-term, up to 1 year) — Regulated by RBI
│   ├── T-Bills
│   ├── Commercial Paper
│   ├── Certificate of Deposit
│   ├── Call Money
│   ├── TREPS (replaced CBLO)
│   └── Repo Agreements
│
└── Capital Market (long-term, over 1 year) — Regulated by SEBI
    ├── Primary Market (new issues: IPO, FPO, Rights Issue)
    └── Secondary Market (trading existing securities: BSE, NSE)

Money Market Instruments

Capital Market — Primary vs Secondary

Stock Exchanges

India has 7 recognized stock exchanges after derecognition of many regional exchanges.

SEBI (Securities and Exchange Board of India)

Capital Market Instruments

Depositories and Settlement

Market Regulation Concepts

AP Connection

• AP-headquartered companies listed on BSE/NSE contribute to state's economic visibility
• Visakhapatnam Steel Plant (RINL) is a prominent PSE with potential listing/disinvestment discussions
• AP state government raises funds through State Development Loans (SDLs) traded in the capital market
• AP Budget 2026-27 allocates Rs 48,698 crore in capital outlay, partly financed through market borrowings
• SEBI-regulated mutual funds invest in AP infrastructure bonds and state development loans
• Digital financial inclusion in AP through UPI (NPCI) supports government DBT programmes

Key Points Summary

1. Financial markets: money market (short-term, up to 1 year, RBI) and capital market (long-term, over 1 year, SEBI)
2. T-Bills: safest money market instrument; 91, 182, 364 day tenures; zero-coupon; min Rs 25,000
3. Commercial Paper: unsecured; 7 days to 1 year; net worth Rs 100 crore+ required
4. Call Money: interbank lending for 1-15 days; only scheduled banks and primary dealers
5. TREPS replaced CBLO from November 2018; collateralized via CCIL
6. BSE (1875): Asia's oldest stock exchange; Sensex (30 stocks, base 1978-79, value 100)
7. NSE (1992): introduced electronic trading; Nifty 50 (50 stocks, base 1995, value 1,000)
8. SEBI: established 1988, statutory powers 1992; quasi-legislative, quasi-judicial, quasi-executive powers
9. SEBI's mandate: protect investors, develop markets, regulate markets
10. Primary market: new issues (IPO, FPO); Secondary market: trading existing securities
11. Equity shares have voting rights; preference shares have fixed dividend but no voting rights
12. NSDL (1996) and CDSL (1999) are India's two depositories
13. All securities trading is in dematerialized form since 2019
14. India moved to T+1 settlement from January 2023
15. Circuit breakers trigger at 10%, 15%, 20% index movement
16. Insider trading is prohibited by SEBI
17. Mutual fund AUM exceeded Rs 65 lakh crore (2025)

Exam Strategy

Key Terms Glossary